Don’t get your financial advice from Tim Walz
Your crash course on investing
There’s been a viral news story going around about VP candidate Tim Walz celebrating his perceived everyman qualities: he owns no real estate, no stocks, no bonds; he just has his teacher’s pension.
Putting aside the politics entirely… is this a good financial role model for everyday Americans?
Absolutely not! Unlike the apocryphal days of old, you don’t need to be a mustachioed Monopoly man to participate in the stock market. You just need a few dollars and a few minutes of time. Not only is it easy, it’s basically necessary.
Why? There are two hard truths they don’t teach in school:
Unless you’re one of the 8% of Americans who receive a government pension, you will likely not be able to afford retirement—unless you save your own money. (Social Security only pays an average of $21,000 per year to folks over 65, and economists estimate that by the time our generation is retired, that amount will be much lower, perhaps even $0.)
You need to save much more than you think, because of inflation. (Inflation means that things get more expensive over time.) For example, if you save $100 today, in 30 years, it will likely only be able to buy you $40 worth of stuff.
But, don’t despair! There’s a solution to deal with these hard truths: investing.
Simply put, investing means saving money in a way that will earn you more money. If you’ve ever earned interest in a bank account, then you’ve invested! You saved your money there, and those savings earned you more money (in interest, that the bank paid you).
In general, the best investment for the long-term (i.e., retirement) is the stock market. Stocks are pieces of a company. The prices of stocks go up and down seemingly erratically every day; they are “volatile”. However, they would be much less volatile if you could somehow invest in all stocks (some from every public company) at once—if you could be diversified, and tie your wealth to the overall prosperity of the total stock market…
…and, thanks to index funds, you can! An index fund is a big group of stocks. For example, the S&P 500 tracks the 500 largest public companies in the US. Index funds typically function as a weighted average of the total stock market.
Sounds great, but are these index funds prohibitively expensive? No! (You may be thinking of “hedge funds,” which are typically only accessible to extremely wealthy investors.) Some index funds cost less than 5 basis points, meaning <0.05% of your assets annually (and have $0 in transaction fees).
That is quite amazing, and unique to our times. I was recently wondering, if we had to pick the “7 wonders” of the modern world, what would they be? My top three contenders: Wikipedia (orders of magnitude more knowledge than the Library of Alexandria ever contained!), supermarkets (you can buy any food your heart desires!), and… low-cost index funds. John Bogle, who started the company Vanguard, pioneered index funds in the 1970s, making them accessible to the average American worker via radically low fees. (We John Bogle fans are often referred to as Bogleheads.)
If we project forward the average growth of the total stock market over the past 150+ years of data (readily available thanks to Yale economist Rob Shiller), $100 invested today would be worth $1,750 in 30 years. After accounting for inflation, it’s lower—$760—but still, that’s 7 times as much as you put in.1
In other words, retirement is affordable to the average American, as long as you start saving when you’re relatively young, save regularly, and invest that saved money into a low-cost index fund. Plus, there are tax benefits available for these savings (IRAs and 401ks—a topic I would love to nerd out on more, another time).
Why does the stock market grow?
Prosperity! The American economy grows, and thanks to modern financial technology, you can benefit from what the corporate executives and the Monopoly men on Wall Street are doing just like everyone else.
So, don’t wait for other taxpayers to fund your retirement. (Fun fact: Tim Walz’s pension is invested in… the stock market! 50% of the Minnesota Teachers Retirement Association portfolio is in public equities.)
As someone like Coach Walz would say: “Don’t sit on the sidelines!” Participate. You can go to Fidelity.com, BlackRock.com, Vanguard.com (my personal recommendation), or another company’s website, and open a retirement account today.
…and perhaps it would have been better for the Minnesota teachers—and teachers everywhere—to be teaching us this in school in addition to social studies.
P.S. Tim Walz also apparently does not own a house… should you? See here.
There is a lot more nuance here that I don’t have the space to add, such as why, over the long-term, the riskiness of this type of investment almost—but not entirely!—dissipates. (In my forthcoming book, I devote a whole chapter to this.) I think most people shy away from teaching the basics of investing for this reason: there is so much that could be explained, that it becomes difficult to distill down to something you can learn step-by-step. I did my best here; I’d rather you learn something than nothing!
But sometimes I am wrong. And even if I am right, before making an important financial decision, you should consult a finance professional; for a tax decision, consult a tax professional; for legal advice, consult a lawyer (and your conscience). In other words, please don’t sue me. k thanks.
Thank you as always!