Get Busy Living or Get Busy Dying

Get Busy Living or Get Busy Dying

Hollis Walker: This is Away from the Noise, a podcast for financial advisors and their clients.

Hello, this is Hollis Walker with Jan Blakeley Holman, director of advisor education at Thornburg Investment Management. Welcome back. Thanks for joining us for another episode of away from the noise. Hi, Jan, how are you doing?

Jan Blakeley Holman: Doing great. Hollis. How are you?

Hollis Walker: Well, I’m good. What do you been doing this summer?

Jan Blakeley Holman: Sweating like everyone else. It’s been a hot one. It’s either hot or raining. As you know, Hollis, I live in Minnesota. And recently, I was at one of our 10,000 lakes, where I witnessed one of my favorite lake phenomena. I don’t know what it’s called, so I’ll describe it to you. When it’s beginning to rain on one side of the lake, let’s say the lake side that’s away from you, the rain starts to move toward you across the lake. And there’s some point where there’s like a curtain of rain that separates the area where it’s raining, from the area you’re in, where it’s not raining. And that curtain moves toward you, until finally, it’s passed over you and it’s raining where you are. Now, for some strange reason, I saw that as a metaphor for aging.

Hollis Walker: Okay.

Jan Blakeley Holman: Specifically, how we manage risk as we age. Now, I don’t want anyone to worry that I just can’t sit at the lake and relax without thinking about work or investment related metaphors. It struck me that when we begin our careers and families, we worry about the risk that our life isn’t going to be as long as we’d like. We think about the concept of premature death. We have choices on how we can manage that risk. We can choose life insurance as an employee benefit, for example. We make sure our beneficiary designations are in order. And if we choose, we can buy life insurance over and above the amount offered by our employers. The point is, we want to make sure that there’s something for the people we love if our life is too short. Let’s say that side of our lives, is the side where it’s not raining. At some point, we get older, to the point where the curtain of rain crosses over us. And in fact, now instead of worrying that our lives will be too short, we have to focus on the risk that we will live too long.

Hollis Walker: Wait, how can you live too long?

Jan Blakeley Holman: Too long than you can financially handle.

Hollis Walker: Okay, got it.

Jan Blakeley Holman: Even though we could have seen that change in our lives, most of us are surprised when the rain hits us when we become aware that now the risk we have to manage is the risk of outliving our money.

Hollis Walker: I’m with you on this Jan, my mother is 95 years old. And she has already lived longer than all of her adult relatives, her parents or grandparents or aunts and uncles. And the thought that she might outlive her life savings is rather daunting, frankly. One of my friend’s mothers lived to be 103.

Jan Blakeley Holman: Well, Hollis, as you’re aware, my mother will be celebrating her 99th birthday in a couple of weeks. And as I watch this taking place, I’m also looking at the balance of her investment accounts. And it is dropping dramatically. In some ways, the financial risks of living too long are more dangerous than the risks that a life will be too short. One of the most important reasons I’m saying that is because many people are reluctant to take the steps to ensure—and I don’t mean that with an “I”, I mean it with an “E”, ok—to ensure that they have planned for the possibility they will live a very long time. That’s a problem. Because the cost of caring for someone who lives a long time can be exceptionally high. As in the case of my mother, she really needs a companion, but we pay that companion or those companions as much as we would pay someone if they were helping her bathe and helping her walk and all those types of things. The costs are so high in fact that it’s often possible for a family that has $5 million in assets set aside to cover expenses for aging parents, that they could have their assets wiped out by those unexpected expenses and longevity. I’ve seen several friends who are paying more than $250,000 a year to cover the cost of caring for their loved ones. And that’s particularly true where families have parents who live 100 or more years. When that happens, something else happens, the family legacy evaporates.

Hollis Walker: That’s depressing.

Jan Blakeley Holman: The life insurance industry has actually gotten much more creative with its offerings on long-term care. But long-term care insurance in and of itself is still very costly. And in many cases, the coverage isn’t high enough to cover those monthly expenses.

Hollis Walker: Right. And I know from personal experience, that accessing that insurance can be harder than people know, most people don’t pay a lot of attention to the fine print when they’re buying an insurance policy.

Jan Blakeley Holman: Right. I mean, even if a person is healthy, healthy, healthy, but takes an antidepressant, that can be a reason for them not to be approved for long term care insurance.

Hollis Walker: Who knew?

Jan Blakeley Holman: There’s also the belief many consumers have that they don’t need long term care insurance or any planning like that, because they know that the family has a multimillion-dollar nest stake. They don’t know though, how quickly the money goes when the person is getting round the clock companionship or care. So, here’s my advice to listeners Hollis. If you or someone in your family may live too long, develop a strategy to pay for their expenses as they age. Be aware of the fact that they have now crossed through that curtain of rain on the lake where it doesn’t matter that the possibility is they’ll die too early. Now, the focus needs to be on how do we keep them financially supported and comfortable as they age. With my mother turning 99 I’m very aware of the risks that poses for my children. I bought long-term care policy many, many years ago. But even that isn’t going to cover the full amount that it could cost per month. So how am I going to put together a plan that doesn’t bankrupt my kids. You know Hollis, I’m sure you’ve seen the Shawshank Redemption.

Hollis Walker: Great movie.

Jan Blakeley Holman: I probably watched it 10 or more times every time it’s on and I see it when I’m going by, I’ll stop and watch it. One of the lines that sticks with me is the one Andy says to Red: “Get busy living or get busy dying.”

Hollis Walker: Wow, I think I want to print that out and put it on my mirror so I can look at it and ponder it every day. Thanks, Jan. Let’s move on. It’s time for the part of our podcast called Ask Jan. Here’s a letter from a listener.

Dear Jan, I’ve been an investor for years. But I’ve never understood why I should choose anything other than index investing. I see that Thornburg’s investment strategies are managed by portfolio managers. So you probably agree with that approach. What are your thoughts on active management? Signed, Indiana Indexer.

Jan Blakeley Holman: Well, dear Indiana Indexer. First of all, indexing can happen in the other 49 states too. I do agree with active management, Hollis. Not just because it’s the method Thornburg’s experts employ to manage our over $41 billion¹. I’ve always believed in active management. One of the reasons is because I don’t believe that the theory that supports indexing stands up anymore. But let’s talk about indexing a little bit. A few years ago, Warren Buffett said this about indexing. What could be more advantageous in an intellectual contest, whether it be chess, bridge, or stock selection, then to have opponents who have been taught that thinking is a waste of energy. Now, there’s no reason to think that one of the most successful professional investors known for identifying undervalued stocks would like indexing. Passive investing or indexing is totally at odds with the way that Warren Buffett approaches things.

Hollis Walker: Okay, Jan, so tell us about the theory.

Jan Blakeley Holman: One of the most famous theories that supports the case for indexing was one put forth by Eugene Fama in 1970. He was at the University of Chicago, and he introduced something called the Efficient Market Hypothesis, EMH. And in that theory, he had a number of tenets that he believed what caused someone not to choose active investing. Let me review those and tell you if in fact they hold up anymore. His first tenet is that investors make rational decisions. In the 1990s, a psychologist by the name of Keith Stanovich, at the University of Toronto coined a term called dysrationalia. And dysrationalia was characterized by an inability to think and behave rationally, despite having adequate intelligence. Investor dysrationalia exists because people act on their emotions and their psychology instead of acting rationally. So I’m sorry, Dr. Fama. I don’t think that one works anymore.

Hollis Walker: Is there more?

Jan Blakeley Holman: The second tenet is financial markets are efficient.

Hollis Walker: Really?

Jan Blakeley Holman: Well, let me add to that, the third tenet, okay. Fama said that securities prices reflect all available information. Now, the market would be efficient, if in fact, everybody had the same information. But let me give you a quote from the Scientific American of a couple of years ago, where they said that, in 2016, humankind produced as much data as it had in the entire history of the species through 2015.

Hollis Walker: Wow my head is swimming just thinking about that.

Jan Blakeley Holman: So how can prices reflect all available information?

Hollis Walker: Because none of us has all available information?

Jan Blakeley Holman: Absolutely.

Hollis Walker: And we’re not rational either, as you just told us.

Jan Blakeley Holman: That’s right. So we got some issues here. Now, Dr. Fama is a genius. I am not a Nobel Laureate. He is. But the case I’m making is that there is room for more than indexing. Let me give you his last two tenets of his theory. There are no transactions costs. Well, that’s interesting, because in 1970, people paid commissions to buy and sell securities. There were transactions costs. So I guess when you create a theory, of course, me not being a scientist, and I’ve never created a theory, or an economist, of course, me not being an economist, who’s never created a theory, I don’t know, if you just put things in there that you kind of wish were true, that aren’t really true. Anyway, in 1970, you paid commissions for securities. If you bought mutual funds, you paid an 8.5% load, as we call it, and I’m telling you, when I was a broker, I loved selling mutual funds.

Hollis Walker: I bet.

Jan Blakeley Holman: Big commissions in those. But in some cases, based on where we are today, Fama was prescient.

Hollis Walker: How so?

Jan Blakeley Holman: Well, there aren’t commissions anymore to trade securities. Commissions have gone away. Now, there are costs of owning securities, maybe you work with a financial advisor who charges a fee for assets under management. And then there are also mutual fund management fees that people who own mutual funds pay. But for all intents and purposes, we really don’t pay transaction fees anymore for securities. And then finally, his last tenet is it is impossible to outperform the market.

Hollis Walker: Hmm, how do you feel about that one?

Jan Blakeley Holman: I think we better go to Omaha.

Hollis Walker: And talk to Warren?

Jan Blakeley Holman: That’s right, have lunch with Warren at the local lunch place, because that man has made what, billions and billions of dollars identifying securities that have in fact outperformed the market.

Hollis Walker: You know, they have great steaks in Omaha, and they come with sides of spaghetti sauce, spaghetti and spaghetti sauce.

Jan Blakeley Holman: That sounds like a heavy meal.

Hollis Walker: Well, right now in the summer, but in the winter, it’s perfect.

Jan Blakeley Holman: Right. And then you go take a nap?

Hollis Walker: Right.

Jan Blakeley Holman: All of that said Hollis, there is a place for indexing, just as there is a place for active management. My point is that investors need to remember it’s never all or nothing. Diversification means diversifying the types of investments you own and diversifying the style of investing that identifies the securities you own.

Hollis Walker: Okay, Jan, that’s all the time that we have today. Bye Warren! You’ve been listening to Away from the Noise with me your host Hollis Walker and Jan Blakeley Holman, director of advisor education at Thornburg Investment Management. If you’d like to hear more episodes of Away from the Noise, you can find us on Apple, Spotify, Google podcasts or your favorite audio provider, or by visiting us at thornburg.com/podcasts. Jan can also be found on LinkedIn. If you like us, subscribe, share us on social media and leave us a review. Until next time, thanks for listening.

This podcast is for informational purposes only, and should not be relied upon as investment, legal, accounting, or tax advice. It is not intended to predict the performance of any investment or market, and is not a recommendation, offer, or solicitation to buy or sell any security or product, or adopt any investment strategy. Past performance is not an indication of future performance. Investing involves risk including possible loss of the money you invest. Consult your investment advisor before making any investment decisions. The information contained herein has been obtained from sources believed to be reliable. However, Thornburg Investment Management makes no representations or guarantees as to the accuracy or completeness of the information and has no obligation to provide any updates or changes. The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management. This podcast is for your personal and non-commercial use only. You may not use it in any other manner without the prior written consent of Thornburg Investment Management. Thank you for listening.

Important Information

This podcast is for informational purposes only and should not be relied upon as investment, legal, accounting or tax advice. It is not intended to predict the performance of any investment or market, and is not a recommendation, offer or solicitation to buy or sell any security or product, or adopt any investment strategy. Past performance is not an indication of future performance. Investing involves risk including possible loss of the money you invest. Consult your investment advisor before making any investment decisions.

The information contained herein has been obtained from sources believed to be reliable. However, Thornburg Investment Management makes no representations or guarantees as to the accuracy or completeness of the information and has no obligation to provide any updates or changes.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

This podcast is only for your personal and noncommercial use. You may not use it in any other manner without prior written consent from Thornburg Investment Management.

¹ $40.8 billion in assets under management and $1 billion in assets under advisement as of June 30, 2023