The path to higher FP professional stature:

Spread goal-focused investment education
to the modest-wealth majority
facing retirement poverty

We keep seeing stories about the retirement crisis that are very sad. But it’s also a huge opportunity to raise financial planning’s professional stature and public respect, by doing good:

Find ways to spread goal-focused investment education and guidance
to the modest-wealth majority!

In our system of financial education of the public, there’s a giant hole in the middle. Wealthier people at the top have access to the best financial planners, and those at the bottom are offered financial literacy. But those in the middle, with modest savings they want to invest most prudently in hopes of avoiding retirement poverty, are left in a forest of (a) financial wolves and (b) droppings from university single-year theory of “expected return” and “risk” designed for financial and academic interests.

What the modest-wealth majority need most is guidance toward one simple principle:

Don’t be diverted to short-sighted single-year “return and risk.”
Focus on prospects for your future needs and goals.

The idea of making investment choices based on comparison in a pair of technical measures of individual-year return-rate probability, labeled “expected return” and “risk,” comes from modern portfolio theory. But in a paper published shortly after he received a Nobel Prize for originating that theory, Professor Harry Markowitz wrote that for individual investors, that is not the right approach. Further analysis is required using simulation to assess and compare investment choices for the purpose, the investor’s future dollar needs and goals.

More recently, Boston University Professor Zvi Bodie, coauthor of the dominant university investment textbook, issued a similar warning. In an approving review of a Bodie-coauthored book for individual investors, Bodie colleague Wharton Professor Kent Smetters said they consider making investment choices according to modern portfolio theory “terribly naïve,” a “simpleton procedure.” Instead, investment choice should be based on a “goal-based approach.”

These warnings from professors Markowitz and Bodie are certainly right. Modern portfolio theory’s investment comparison, in single-year technical measures labeled “expected return” and “risk,” ignores the investor’s future dollar goals. It omits dollars, years, and compounding along the way. It’s investing triple-blind. An investor can’t see which investments offer best prospects for his future, or how much to save and invest, or the terrible long-term growth-smothering effects of financial industry fees.

And it’s taught with dreadfully misleading labels. “Expected return” is not expected! The longer you hold an investment, the further below “expected” its result is expected to be! 

Yet for over two decades, university investment education has flooded the nation with the teaching that investment choice should be based on comparing investments in “expected return” and “risk.”

Financial planners, there must be ways we can extend the modest-wealth majority something better. It’s the best thing we can do, for the people, the nation, and the stature of the profession.

Dick Purcell