Right Forecast by Schiff, Wrong Plan?

Peter Schiff predicted a collapse of the U.S. financial system. The bust-up he didn’t foresee was the one that made mincemeat of investors who took his advice in 2008.

Mr. Schiff’s Darien, Conn., broker-dealer firm, Euro Pacific Capital Inc., advised its clients to bet that the dollar would weaken significantly and that foreign stocks would outpace their U.S. peers. Instead, the dollar advanced against most currencies, magnifying the losses from foreign stocks Mr. Schiff steered his investors into.

Investors open accounts at Euro Pacific to take advantage of Mr. Schiff’s investment advice, which generally involves shunning investments in dollars. Individual returns can vary. Some investors may like gold-mining stocks, while others prefer energy-focused stocks.

Most had one thing in common last year: heavy losses. A number of investors said their Euro Pacific portfolios lost 50% or more in 2008, worse than the 38% drop in the Standard & Poor’s 500-stock index last year. People familiar with the firm say that hardly any securities recommended by Euro Pacific brokers gained ground in 2008.

Such losses came as something of a surprise. Mr. Schiff’s prescient call for the collapse of the U.S. housing market and the weakening of the financial system helped him gain fame as an economic guru and savvy investor who promised shelter from the financial storm.

In his 2007 book, “Crash Proof: How to Profit from the Coming Economic Collapse,” he recommends that investors pile into gold, commodities and overseas stocks that spit out steady dividends.

When global markets were soaring, many Euro Pacific investors’ accounts experienced strong performance. For several years, investors saw returns in excess of 20% a year as foreign stocks and commodities surged, according to people familiar with the firm.

In 2008, investors nervous about the state of the U.S. economy who were impressed by Mr. Schiff’s track record poured money into Euro Pacific, nearly doubling the number of accounts to 16,000. But many did so at the worst time possible, much like investors who piled into Internet stocks as the dot-com bubble peaked.

Mr. Schiff, 45 years old, says the downturn in his strategy is a short-term setback. He argues that it is only a matter of time before the dollar collapses, pressured by massive government bailouts, triggering outsize returns for his investors.

I think the dollar is going to get destroyed,” he says. Investors with the staying power to wait out what he sees as a temporary phase of irrational confidence in the dollar will reap huge rewards, he argues.

Mr. Schiff is still riding high on his housing-market call. This week, he spoke at a global competitiveness conference in Riyadh, Saudi Arabia, alongside former heads of state, prime ministers and American gold-medal swimmer Michael Phelps. He is the subject of more than 3,000 YouTube videos, including one called “Peter Schiff Was Right.”

His admirers even created Web sites supporting a possible run for the U.S. Senate in 2010. Mr. Schiff, who was economic adviser to Republican presidential candidate Ron Paul in 2008, says he has no plans to run for the Senate but “anything’s possible.”

Critics say Mr. Schiff’s strategy is much riskier and more aggressive than many investors realize. David Yeske, managing director of Yeske Buie, a Vienna, Va., money manager, says Mr. Schiff’s investment strategy was a focused bet on a single outcome, rather than risk management for investors looking to protect assets from an economic collapse. “He’s a speculator; he thinks he can see the future,” says Mr. Yeske, former chairman of the Financial Planning Association. “That’s not really risk control.”

One of Mr. Schiff’s biggest forecasts was that many overseas economies would “decouple” from the U.S., gaining strength even as the American economy struggled. Instead, overseas stock markets plunged as much or more than U.S. stocks in 2008 as the global economy skidded. Prices for commodities also tanked, torpedoing another favorite investment theme of Mr. Schiff’s. After last year’s losses, his firm has about $845 million in assets.

Early last year, Richard De Gennaro, a retired Harvard University librarian, put $100,000, about 15% of his assets, into a Euro Pacific account that included Canadian Oil Sands Trust, which focuses on crude-oil projects in Canada, and the India Capital Growth Fund, which holds investments in companies that do business in India.

Both investments took big hits in 2008, compounded by the fact that the Canadian dollar and the Indian rupee fell 18% and 19%, respectively, against the U.S. dollar. The 83-year-old retiree’s account is now worth about $37,000, a 63% plunge. Mr. Schiff “goes around saying that he was right,” says Mr. De Gennaro. “He was right about one thing and wrong about everything else.”

Among investors who turned to Mr. Schiff’s firm just as his strategy began to falter, Brian Kullberg, a design engineer in Portland, Ore., says he started to worry about the state of the U.S. economy in early 2008. He put $70,000 into a Euro Pacific account, hoping it would benefit as the U.S. economy and the dollar weakened. By late January 2009, his investment had shrunk to about $25,000.

“It’s curious,” says one longtime client of Mr. Schiff’s who works in finance. “His thesis of how things are going to collapse and crumble and fall apart isn’t effectively executed in [my] account.” The account, which is largely invested in gold, mining and infrastructure stocks from Canada to Australia, was down roughly 35% last year, the client estimates. The Australian dollar weakened 19% against the U.S. dollar in 2008.

Mr. Schiff says one year’s poor performance doesn’t prove he was wrong. He has admitted in notes to clients that his investment thesis hasn’t performed as expected, particularly with respect to the U.S. dollar. But he holds fast to his convictions and has been telling investors to scoop up a number of depressed stocks.

Some clients are inclined to agree. “The decoupling he talked about has not happened,” says Barbara Hearst, a clothing entrepreneur who splits her time between Charleston, S.C., and Bridgehampton, N.Y., and has invested with Mr. Schiff since 2000. But “longer term or medium term, I don’t discount what Peter says.”

Live on one income

Years ago, my soon-to-be husband shared his vision for us as we prepared to merge our lives and finances: Live on one income as a married couple and save the second income. Our shared financial goal served as a guiding principle and foundation for future financial health and nimbleness.

Together, we vowed to pay all debts (minus our mortgage) within the first four years of our marriage. We followed our debt-payment plan religiously. The release from debt payments and modest living translated to a comfortable lifestyle based on one salary. We earmarked the other salary for savings.

Strong savings paved the way for career flexibility. Living modestly also empowered us to resign from companies with cultures contrary to our values and explore new options without fear of a diminished standard of living. Most important, we value passing on the lessons and benefits of financial freedom to our teenage daughter.

Don’t trust people who ask for money upfront

In 1978, I was in college and needed a summer job. The advertisement said a marketing company was seeking young people to be part of a catalog photo shoot. It was a lucrative offer and I applied. I went to an interview and was offered a job; however, first I’d have to do a test shoot because I didn’t have a photo résumé. This would cost about $1,000 and I would have to pay for it in cash. It was a big investment for a college student back then.

I asked my father, and his words of wisdom still stick with me today. “They don’t want you—they want your money. The people you meet in life who genuinely want to help you don’t ask for money upfront.” He was right. There was no lucrative catalog photo shoot. The company was a sham, set up temporarily to fleece college students out of their savings.

I became a Wall Street broker in the late 1980s. At broker boot-camp, I learned to connect with clients, push the firm’s high front-loaded commission products, and sell the sizzle—not the steak. It was a sleazy technique where we got big upfront commission checks, and good luck to the clients. My father’s words rang in my ears—those who genuinely want to help don’t ask for money upfront. I left the brokerage industry in 1999 and started my first adviser firm. Today, in my encore career, I offer people unbiased counsel through an hourly-fee for advice model.

Investment products that pay brokers big commissions continue to be sold in the industry. My best financial advice to you is to avoid these products and follow John Bogle’s sage advice, “In investing, you get what you don’t pay for.”

Don’t sweat the small stuff

Macroeconomist Alan Blinder once told me what to do if you are buying anything somewhat complicated and unfamiliar that is under $500. He goes to Consumer Reports, decides if he wants something in the high, medium or low price end. Then, he chooses the top-rated product in that category. That’s it. This is an economist’s version of “don’t sweat the small stuff.” In our jargon, the marginal benefit of spending a lot of time pondering and shopping around is low, and the marginal cost of time (and even fear of missing out, or FOMO) is fixed.

Not a borrower be

“Buy few, but buy the best you can afford.” So said my grandfather over 35 years ago. His advice is more timely than ever.

Start with “buy few, but buy the best.” Six small words; one life-altering concept. What I learned from my grandfather is that a handful of things—thoughtfully selected, and diligently cared for over the years—creates a sense of deep satisfaction. Each time you see, touch or use these items you think, “Ahhh, I have made a good choice and feel content.” It’s much deeper than simply quality over quantity. It’s a way to repeatedly appreciate what you have vs. that which you do not. The same goes for experiences.

And then there is, “you can afford.” Three powerful words. A life of financial freedom. What I learned from my grandfather was that if you can’t pay cash, you can’t afford it. With debt increasingly easier to access, subsequent generations are now tempted to buy exactly what they want, whenever they want. But not only is funding a lifestyle you can’t truly afford via debt expensive, it robs us of lasting joy.

So when you “buy few, but buy the best you can afford,” you set yourself up to experience contentment today and solid financial footing tomorrow.

Invest 2% of your income in you

When we think about investments, we often direct our attention to categories such as stocks, bonds and real estate. What we often don’t think about is our most valuable asset: our ability to earn an income and to make that income grow faster.

Almost 20 years ago, I met a successful business owner who gave me a simple lesson: Invest 2% of everything you earn annually back into your ability to grow your income.

What does this mean exactly? Investing in you is like diversifying your portfolio of investments. You might take a chance and invest in that side hustle you think could be a business. Take a training course or advanced education that could further your current career. Invest in a personal coach who could improve your business performance. It could mean investing in an exercise or nutrition program that could give you more stamina every day to accomplish more.

It’s the best advice I’ve ever received—and I do it every single year.

Be prepared for the unexpected

My father taught me the importance of planning for unexpected emergencies or opportunities. When I was 10 years old, my aunt passed away. She left behind four children and didn’t have life insurance. My dad paid for her funeral because he knew my uncle and his family were experiencing emotional and financial trauma.

He later explained to me that just because you don’t plan for unfortunate events it doesn’t mean they won’t happen. As an adult, that lesson led me to focus on the value of building up an emergency fund and getting life insurance to give me financial peace of mind, which is priceless. I sleep better at night knowing that we have planned for the unexpected.

The actions of my father, who had emigrated from Taiwan in the 1960s with only $17 and the clothes on his back, also showed me how to approach difficult financial topics in a calm and respectful manner. He didn’t lecture or question why my uncle didn’t have life insurance. My father believed it was appropriate to help family in need without judgment.


Don’t depend on somebody else for money

Early in my childhood, I witnessed how devastating life could be for women who were not empowered through financial education. My grandmother remained in an abusive relationship. When I was old enough to ask why, my grandmother explained that she stayed because she believed there was no other choice, as she lacked the financial stability to change her situation.

From then on, my mother insisted that I should never rely on someone else for money. That advice and experience led me to change my major in college and drove me into the finance field.

Unfortunately, my grandmother is not alone. This kind of financial dependency, and its accompanying fear and disempowerment, still exists today. About 56% of married women allow their husbands to make all of the long-term financial decisions, according to a 2018 report from UBS. Moreover, if couples divorce, women need more than a 30% increase in income to maintain the same standard of living they had prior to the divorce, and typically they never fully recover from the financial consequences of divorce, according to the Gender Differences in the Consequences of Divorce. On the other hand, men’s standard of living tends to increase by 10% after divorce. Proving why my grandmother chose to stay.

So having women educate themselves on their personal finances and understanding what’s in their portfolios is crucial for their self-confidence and relationships.

Be smart about probabilities

I read former Treasury Secretary Robert Rubin’s book “In an Uncertain World” in the mid-2000s, and it had an outsize impact on how I view finance and the economy. In his book, Mr. Rubin championed the practice of assigning probabilities to “relevant events” and then making decisions accordingly. Put differently, it isn’t a question of what will happen, but rather the chances that various outcomes will occur. (Bob so appreciated uncertainty that he once counseled me to never use the word “ensure” in my writing, because one could never ensure anything.)

This type of thinking changes everything. Questions like “Will the stock market rise?” or “Will the Fed raise rates?” are essentially meaningless. Of course, no one knows the answers for sure, but you can make the right decisions over time if you get the relative probabilities correct.

When it comes to my personal finance, probabilistic thinking doesn’t mean that I’ll bet everything on the most likely outcome—it means I try to account for uncertainty. For instance, I tend to save a lot, but not because I think I’ll definitely live to old age. I save because I know there is about a one in five chance my wife or I will live into our late 90s, and I want us to be prepared in case we do. And when it comes to investing, I am a staunch believer in diversification, but not always in a conventional way. Investing in both stocks and bonds is important, but I also want to be protected in case Congress drastically changes tax laws or the value of my house plummets. Will these things happen? I don’t know. And that’s the point.

Follow a formula for retirement saving

Even though my work has always been focused on longevity and how retirement is being reinvented, the need to plan for it financially wasn’t always on my own—or my husband’s—radar screen. (We both surely recognize the irony of that.) Of course, we saved and invested for a rainy day.

But early on in our marriage, we had the attitude that putting all of our energy and resources into our startup was the smart move. If we did that right, all would be good.

Not only weren’t we saving for retirement but, like many couples, we didn’t even have a clue how much we would need or how to determine it. It took a serious sit-down with our accountant—and his advice—to scare us into saving specifically for our retirement.

He gave us a simple formula to follow: Figure out how much you think you’ll be spending annually and multiply that by 35. And that’s how much your nest egg should be when you retire.

We immediately made some serious—and somewhat painful—changes in our lifestyle and moved saving for retirement up our priority list. Little by little, we have been able to chip away at our goal. You don’t have to have this particular formula, but having a simple one to follow was the key that unlocked our ability to plan for a financially secure retirement.

Always take a positive, long-term view

Maintain a positive and optimistic view of the long-term prospects of the stock market. This advice was given to me when I was an intern in college by my employer at the time. His opinion was that there will always be something to worry about—interest rates, market valuations, political unrest, geopolitics issues, etc.—as well as perma-bear pundits and naysayers providing reasons to leave the market or not invest in the first place.

A good example of this wisdom is what happened in the wake of the Brexit vote on June 23, 2016. Approval of Brexit caught markets by surprise and two days after the vote the S&P 500 was down more than 5%. By early July of the same year, however, the S&P 500 had fully recovered. Market timing is dangerous and best left to day traders and those with crystal balls. The basic lesson is that those investors who stay optimistic about the market and disciplined in their investment approach will come out ahead over time.

I was so taken by this advice that I started investing in the stock market as soon as I got out of college and I have never stopped—nor have I ever regretted it. Committing to this approach allows me to ignore the emotional impact of the daily noise of the market. And it is probably the best piece of financial advice that I impart to my clients years later.

Don’t be a copycat

Don’t mimic the investments and trades of others just because they appear to know something. You don’t know their own situation—and they don’t know yours. I received this advice from the chief investment officer of the employer I had my first year out of college.

Unfortunately, I didn’t heed to his advice during the financial crisis as several senior employees bought into a few financial companies. Without doing any personal analysis, I bought in my own accounts because those employees seemed to have such high conviction that it was a good idea. Lesson learned.

This advice doesn’t just apply to financial professionals. People often want to make an investment based on a recommendation from a famous investor or fund manager. It’s easy to feel informed after listening to an intelligent manager make a convincing argument in support of a recent investment. But it’s important to remember their objectives are different than your objectives. And while it’s common for fund managers to share their most recent ideas, it’s unlikely you will know when that manager changes his or her mind about a position.

Wait to buy that starter home

One of the best pieces of financial advice I have received was to rent a place to live instead of buying a place to live unless I was certain I would not move for at least five years. In American society, there seems to be the belief that there is some inherent nobility in owning real estate and something inherently wrong with renting a home. The false belief that often permeates is that buying a place to live is a great idea and renting a place to live is silly because when you own your own home, you are able to build equity.

I took the advice to heart when I accepted a job offer in graduate school. I knew nothing about the area and decided to rent until I got to know the job and the area better. While I quickly grew to love the job and the area, I realized that my ultimate goal was to find a teaching job in my hometown of Louisville, Ky., so I continued to rent an apartment. Although I ended up staying in that job for more than five years, which is typically the break-even point for the buy vs. rent decision, I am glad I decided to rent because the local real-estate market was very weak when I left my job. In addition, my wife and I were expecting our first baby and it was nice to not have to deal with the stress and hassle of trying to sell a piece of real estate in another city.

While it is true that you can build equity if you own your own home, the amount of equity that you are able to accumulate during the first few years of ownership is relatively small, especially if the property is financed with a 30-year mortgage. For instance, if someone purchases a $250,000 home, makes a $50,000 down payment, and finances the remainder with a 30-year fixed-rate mortgage with a 4% interest rate (roughly the current rate for a 30-year mortgage), the monthly payment for principal and interest would be $954.83. When the first monthly payment is made, $666.67 would go toward interest and only $288.16 would go toward paying down the mortgage.

This moderate buildup of equity during the early years of a mortgage can be quickly erased by the high transaction costs associated with selling a property, especially if the property is sold a few years after it is purchased.

Let the job find you

In the mid-1980s, during the summer between my junior and senior year of college, I was—like many students right now—in a panic. How would I find the perfect job for me? Sure, I worked summers to help pay for school. But with just one year left until graduation, I was an English major in search of a career track.

That was when my mother, Shirley, gave me the best piece of financial and career advice: “Let the job find you,” she said. “Put yourself out there, and it will happen.”

To be clear, my mother was a doer; she didn’t mean that I should lie around on the couch and wait for career karma to strike. Instead, she wanted me to stop stressing out and trying to pinpoint some abstract career passion, and just keep an open mind. If I rigorously pursued all options, that great job would happen, and likely in a field I’d never even thought of.

Shirley recognized what I still believe is true: Humanities majors can do almost anything. She also knew that I was doing the legwork writing letters to alumni from my college who were working in a range of fields. (Shout-out to my father, Harold, who had the great idea for me to find leads in the alumni magazine.) Before long, I got a call from Joel Davis, a publisher who had launched a magazine for pioneering personal-finance guru Sylvia Porter. That call led to a career in journalism and financial-literacy advocacy—a path I never could have anticipated. Now who says mother isn’t always right?

Investors are predictably irrational

The best investment advice I’ve received came from a book that wasn’t even about investing. That book, “Predictably Irrational” by Dan Ariely, delves into our irrational behavior and how it is predictable.

As if the fates chose to demonstrate its premise, stocks plunged shortly after the book was published. Predictably, investors panicked and sold their stocks just when they were on sale. In fact, The Wall Street Journal noted advisers behaved irrationally as well, having little cash and bonds at the market high but then loading up as stocks bottomed and the recovery began. Advisers failed to fight predictably irrational instincts. as I suspect most will during the next plunge.

I’ve since had many conversations with Dr. Ariely, the James B. Duke professor of psychology and behavioral economics at Duke University. We’ve discussed the fear and greed driving investor behavior and why Daniel Kahneman’s Nobel Prize-winning work on prospect theory argues for a more conservative portfolio. That’s because we get twice as much pain from losses as we do pleasure from gains. More-conservative investing now may make it less difficult to buy after a plunge, when stocks are actually on sale.

I too have developed a theory—that is, that behaving contrary to our irrational instincts can boost risk-adjusted returns. How has it worked? My calculations reveal that between Dec. 31, 1999, and Dec. 31, 2018, a moderate 60% stock portfolio rebalanced twice a year bested the buy-and-hold by nearly 18 percentage points. Rebalancing goes against our instincts by requiring us to buy what has caused us the most pain and sell what gave us pleasure.

Ignore the advice

The best financial advice I ever received was from me. I told myself to ignore the advice of others.

Research has shown that time and time again, the best education that deeply modifies your behavior and actions originates from personal experience. The apprehension and intensity when you push the button or submit a form to make an investment or allocate your assets is hard to forget. Consequently the results of that action, be they good or bad, are forever etched in your mind and behaviors.

Without question, over the years people have proffered different suggestions about the financial basics—value of long-term investing, diversification and the like—or tactical “winners” regarding specific stocks or asset classes. However, most of these were forgotten quickly. Although we will never know, I’m pretty confident if I had followed all those suggestions and “winners” I would not be better off today.

There is still no better substitute for that well-trodden phrase from growing-up to “do your homework” if you want to give yourself a gift that will serve you well in your finances and beyond.


What We’ve Learned About Target-Date Funds, 10 Years Later

A decade after target-date funds were damaged during the financial crisis, they have re-emerged bigger than ever as retirement investments. But they still have vulnerabilities.

“While 2010 target-date funds had been gradually shifting their allocations toward bonds, as they were designed to do, many were still holding 50% equity or more when the 2008 financial crisis hit,” says Nicole Tanenbaum, chief investment strategist at Chequers Financial Management, a financial-planning firm in San Francisco.

“The funds were down less than the stock market during the crash, thanks to their bond component, but the performance still took many retirement-ready individuals by surprise as they watched their portfolio losses balloon into double-digit territory,” she says.

.. A big factor in that growth was Obama-era legislation that encouraged employers to automatically enroll new employees in retirement plans and use target-date funds as the default for those who don’t choose their own investments. Previously, investors who were inattentive—a notorious problem with workplace retirement plans—simply accumulated cash, which doesn’t provide enough growth to build a nest egg that will last for decades.

It’s certainly a good thing” to use TDFs as the default, says Dennis Shirshikov, financial analyst at FitSmallBusiness.com, an advice service for small-business owners and managers. “This has brought a great deal of consistency to a retirement portfolio, especially since most investors with a 401(k) do not manage their investment actively.”

.. The biggest player is Vanguard Group with about $381 billion in TDF assets in 2017, 34% of the market, Morningstar says. Fidelity Investments had a 20.5% share, and the third-biggest player, T. Rowe Price ,TROW +0.27% had a 14.9% share.
.. Retirement experts have mixed views about TDFs’ value in a portfolio. Most say TDFs are better than not investing at all, or putting retirement savings in cash, but the funds can’t take into account each investor’s unique situation. Two investors the same age would get the same fund, even if they have different needs due to dependents, availability of other assets, life expectancy and risk tolerance.“In an attempt to simplify planning and saving for retirement—certainly a noble endeavor—the entire concept of target-date funds likely is a bridge too far,” Prof. Johnson says. “Individuals are unique, and one parameter, the anticipated retirement date, cannot and should not dictate the appropriate asset-allocation mix and the change in that mix over time.”

Retirement experts have mixed views about TDFs’ value in a portfolio. Most say TDFs are better than not investing at all, or putting retirement savings in cash, but the funds can’t take into account each investor’s unique situation. Two investors the same age would get the same fund, even if they have different needs due to dependents, availability of other assets, life expectancy and risk tolerance.

Another concern: The automatic investing strategy ignores changing conditions. Patrick R. McDowell, investment analyst at Arbor Wealth Management in Miramar Beach, Fla., says low bond yields in recent years have reduced TDF income after the target date, and increased the risk of losses on bondholdings if rates rise. (Higher rates hurt bond values because investors favor newer bonds that pay more.)

What’s more, he says, stocks and bonds have often moved in tandem in recent years, reducing the benefit from diversification, which assumes one asset goes up when the other falls.

..  He says he often recommends investors nearing retirement leave the target-date fund and buy a mix of stock and stable-value funds—which contain bonds insured against loss and are designed to preserve capital while generating returns similar to a fixed-income investment—to reduce danger from a potential market plunge.

.. Advisers also urge investors to examine the TDF’s “glide path”—its investing policy for shifting from stocks to bonds over time—and pick one that suits their willingness to take risk. Some fund companies provide more than one glide path to the same date, ranging from aggressive paths that rely more on stocks to conservative ones heavier on bonds.

“To” funds are designed to hit their final mix at the target date, often with little or nothing in stocks. They work best for investors who want safety because they expect to cash out or switch to another investment at the target date.

Why Foreigners Love Vladimir Putin’s Bond Market

Russian elections highlight the strange economic attraction investors have shown for the country’s financial markets

Nonresidents now hold one-third of domestic government bonds, compared with barely any six years ago.

.. And Russian bonds still look attractive, with a 10-year yield of just under 7%, while inflation has fallen well below the central bank’s 4% target. Conservative economic policy was part of the reason for Standard & Poor’s to upgrade Russia to investment-grade status in February.

But Russia needs change too. And here, continuity in leadership is part of the problem. The economy has emerged from recession and grew 1.5% in 2017, but much faster growth may be tricky: The central bank itself says structural reform is needed to boost growth beyond 1.5% to 2%. Russia’s population is shrinking and aging. Productivity is poor and state involvement in the economy is high.