Archive for August, 2012

Niall Ferguson (R)

August 31, 2012

The Decline of U.S. Financial Dominance

We believe in having a long term perspective on WEALTHTRACK and helping our viewers and ourselves build financial security to last a lifetime. But sometimes it is necessary to step back even further and think beyond a lifetime, in terms of centuries, to really grasp the era we are living in. That is what we are doing this week as we revisit a timeless interview from last year with British historian Niall Ferguson. According to Ferguson, we are living through one of those seismic epochal shifts that require rethinking the old rules, including our investment ones.

Read MoreFerguson is one of those rare individuals who has the intellectual and educational fire power to tackle such a broad sweep of history. And as you will see in a moment, he also has the gift of gab to bring it alive. A professor of history at Harvard, Senior Research Fellow at Oxford and a Senior Fellow at the Hoover Institution at Stanford University, Ferguson is the author of numerous articles and columns, a recent one became the cover story of Newsweek.  He has also authored several books, including The Ascent Of Money and more recently Civilization: Civilization: The West and the Rest
. Both were turned into PBS specials.
Continue Reading »

Niall Ferguson (R) Transcript 8/31/12 #910

August 31, 2012

WEALTHTRACK Transcript #910- 8/31/12

CONSUELO MACK: This week on WEALTHTRACK, renowned financial historian Niall Ferguson examines the fault lines of 500 years of Western dominance to see where it is failing and where it needs shoring up. Professor, columnist and best-selling author Niall Ferguson on the earthshaking shift of economic power from west to east is next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this Labor Day edition of WEALTHTRACK. I’m Consuelo Mack. We believe in having a long term perspective on WEALTHTRACK and helping our viewers and ourselves build financial security to last a lifetime. But sometimes it is necessary to step back even further and think beyond a lifetime, in terms of centuries, to really grasp the era we are living in. That is what we are doing this week as we revisit a timeless interview from last year with British historian Niall Ferguson. According to Ferguson, we are living through one of those seismic epochal shifts that require rethinking the old rules, including our investment ones.

Ferguson is one of those rare individuals who has the intellectual and educational fire power to tackle such a broad sweep of history. And as you will see in a moment, he also has the gift of gab to bring it alive. A professor of history at Harvard, Senior Research Fellow at Oxford and a Senior Fellow at the Hoover Institution at Stanford University, Ferguson is the author of numerous articles and columns, a recent one became the cover story of Newsweek.  He has also authored several books, including The Ascent Of Money and more recently Civilization: The West And The Rest. Both were turned into PBS specials.

Over the past 500 plus years, the West- Europe and later the United States- came to dominate the world stage, economically, politically and militarily. As these charts illustrate, as of 1500, the so called motherlands of Europe- Austria, Belgium, France, Germany, Italy, Netherlands, Portugal, Spain, Russia and the United Kingdom – had a mere 10% of the world’s territory, only 16% of the world’s population, but even then  contributed 43% of world GDP.  By 1913, the dominance of the west was overwhelming. The motherlands, which now included the United States, had expanded their economic and political might to 58% of the globe’s territory, 57% of its population, and a stunning 79% of the world’s economic output, or GDP.

Fast forward to today and you will see how much that is changing. According to the IMF, the contribution of the U.S. and the Eurozone as a share of world GDP has been declining- remember it was nearly 80% in 1913- to less than 45% currently and falling, while the contribution of China is soaring- China recently passed japan as the world’s second largest economy- and India’s share is slowly rising.

Is this shift inevitable and unstoppable? What does it mean for us as investors? I asked Ferguson to start from the beginning- how the west achieved its position of dominance in the first place.

NIALL FERGUSON: Well, it is an amazing story, actually, because if you’d gone on a world tour, say, back in 1411- you know, let’s turn the clock back 600 years- you would not have predicted that tiny, nasty little warring kingdoms in Western Europe would take over the world. I mean, you’d have been much more impressed by Ming China, or by the rising Ottoman Empire. And if you’d gone to London, you’d have thought, ugh- a sort of small, smelly, plague-ridden, and constantly fighting with one another. I mean, the West Europeans did not look like the future world leaders.

And the story of pretty much 500 years, from the mid-15th century until our time was the story of Western ascendance. The great Oriental empires languished. Per capita GDP in China basically didn’t grow throughout the entire Ming period, essentially flat lined. And then it actually declined in the Ching era. Whereas, Europe had a series of extraordinary revolutions that propelled it into a position of world dominance, and then its most successful colony in North America, which became the United States, then became the biggest economy in the world. Why? That is a really interesting question.

CONSUELO MACK: That is a very interesting question. And you have some really interesting answers, and you have this neat little device, you call them the killer apps.  But talk about the killer apps that the West developed, and then we’ll find out why we are now losing those killer apps.

NIALL FERGUSON: Well, I wanted to try and explain this great divergence that means, just to give you an illustration, by the 1970s, the average American is roughly 30 times richer than the average Chinese was, whereas, you know, in 1600, there was no real difference.  And the answer is that there were these killer applications, these institutional innovations that only the West had. Let me rattle them off, just because six is a lot. Number one: competition. The idea that, in the political and economic sphere, there shouldn’t be monopolies on power. There shouldn’t be just one emperor who controls the whole of Europe, economically and politically. Europe’s very fragmented, and not only is it fragmented between multiple states, within these states, there are lots of competing institutions. The very first modern corporation is the corporation of the City of London. And the king of England really doesn’t control it. So that’s number one. Competition.  And out of that, you get capitalism, and ultimately, democracy.

Number two is the scientific revolution. Everything that we associate with the great breakthroughs of the 17th century, Newton’s laws of motion, is a Western discovery.  There is absolutely no contribution to the scientific revolution from outside the Western world. So that’s the second pretty crucial killer application.

CONSUELO MACK: Why, Niall? Why? I mean, why was that the case?

NIALL FERGUSON: Well, the printing press is banned in the Ottoman Empire. You can’t actually ask questions in a Muslim empire about the will of God, because that’s inscrutable, and it’s sacrilegious to try to work out the laws of motion that govern the movements of the planets. In Europe, the church tried to restrain Galileo when he observed, for example, that the planets are not ordered as the church had taught, and the world is not at the center of the universe, but the church wasn’t powerful enough; where it actually was possible for the clergy to silence those who wanted to explore optics and the laws of astronomy in the Eastern world. So, the scientific revolution’s a really crucial killer application. It’s a killer application literally, because once you understand the laws of motion, your artillery becomes accurate. Simple as that. Benjamin Robbins writes a book about gunnery. From then on, Western guns basically hit the target. And, if you don’t know the laws of motion, it’s just luck if you hit the target. So that’s number two.

Number three is private property rights as the basis for the rule of law. Now, we usually think democracy is the killer application of the West. I think democracy’s a luxury good that you can have once you have the rule of law, and secure private property rights, and once representative government, on the basis of that system, is well-established. So, I would say the killer app, which is very successful in the United States, is the idea that the citizen who’s free is free partly because he or she- or mainly he, actually- is a property owner. That’s John Locke’s killer app. And it’s hugely successful. And by the way, they don’t have that in South America. Settled by Europeans, but completely different in its social and economic structure. I’ll rattle off the other three quickly, because they’re simpler. Four is just modern medicine.

CONSUELO MACK: Modern medicine.

NIALL FERGUSON: You know, if you can double human life expectancy and make people healthy, not surprisingly, you’re going to do better than everybody else. And that’s really the story of the late 19th century. The consumer society. Why have an industrial revolution, which is all about making loads of clothes really cheaply, if people don’t want to have loads of clothes? Now, the fact that the wardrobe of our teenage children are bulging with clothes tells you practically all you need to know about why the Industrial Revolution happened. It happened because a consumer society had already arisen in the 18th century, which the Industrial Revolution satisfied, and continues to satisfy. It looks like the human appetite for clothes is almost infinitely elastic. And, you know, you …

CONSUELO MACK: No question about that.

NIALL FERGUSON: It’s interesting that that’s true, because the human appetite for a lot of other things isn’t. The Dutch East India Company was in the spice trade, and the British East India Company was in the textile trade. And guess which did better? Because there’s only so many cloves that you can really get through. But clothes, that’s a different matter.

Finally, the work ethic. Western people work longer hours. They worked harder. And that really is one of the key reasons that the West forged ahead. Max Weber claimed, I think wrongly, that this was to do with Protestantism. But, you know, on close inspection, many people in the West who weren’t Protestants had the work ethic. Jews, for example. But the work ethic definitely was a part of the story. These are the six killer applications, and I can’t think of a better explanation for Western predominance than those six things.

CONSUELO MACK: All right. So, 500 years in. We have basically applied those killer apps, we’ve gotten to where we’ve gotten, which was dominating the rest of the world. The rest, as you say. And largely, when you’re talking about the rest, you’re also focusing on Asia and China, right? In particular?

NIALL FERGUSON: But not just Asia and China. I mean, South America is, you know, essentially–

CONSUELO MACK: Africa, certainly, the Middle East. All right.

NIALL FERGUSON:  –subordinate. Africa’s colonized. I mean, if you’d just look at the world 100 years ago, you know, 1911, something like 80% of global GDP goes to about 11 empires. And those empires are Western-run empires. And most of the spoils, most of the income, goes to the imperial metropol. Not to the periphery. Not to the colonial periphery. So the world of 100 years ago, is incredibly unfair. It’s amazingly skewed in favor of the West.

CONSUELO MACK: So, what’s changed? And does it mean the West decline and, you know, the East ascendancy? Or does it mean that we just slow down, and the East is just growing faster?

NIALL FERGUSON: Well, we are living through extraordinary change. After 500 years of pretty steady Western ascendancy, in the space of just three decades, in our lifetimes, the gap has started to close, and has closed very, very rapidly. In the late 1970s, as I think I said, the average American, 30 times richer than the average Chinese. Today, it’s more like a factor of five. So that’s an amazing …

CONSUELO MACK: Rapidly. Right.

NIALL FERGUSON: –compression. And it’s continuing, because China’s economy is growing at about 10 percent per annum, and it has been doing so since the late ‘70s when Deng Xiaoping’s reforms began. And, the West has slowed down. And the financial crisis has really accelerated this process, by I think fundamentally shifting the growth path down of the United States, and indeed, of Europe, because much of the growth that we saw in the run-up to 2007 was based on leverage. And that game is over. The American household just can not propel itself to the shopping mall with plastic and refinancing deals. So, I think we are witnessing a profound change in the global balance of power. If you add up the GDP of the People’s Republic of China, Taiwan and Hong Kong- let’s call it Greater China …

CONSUELO MACK: So, Greater China, you call it. Right.

NIALL FERGUSON: Which, by the way, the Chinese do already. It’s 90% of U.S. GDP already.


NIALL FERGUSON: China is very close to being the world’s biggest manufacturer, probably will be in the next couple of years. China’s gross domestic product will probably overtake that of the United States within the next decade. So, this is an amazing transformation. The U.S. has been the biggest economy in the world since 1872. At no point in the Cold War did the Soviet Union get even close to closing the gap. China’s about to do it, on our watch, after 500 years, when the West dominated the rest. And the reason is really simple. Those six killer applications that I described to you, well, they downloaded them.  It was open access.

CONSUELO MACK: Private property?

NIALL FERUGSON: The private property is the exception to the rule in China, but if you look at the rest of the rest, if you look at India or Brazil, it’s very straightforward. It’s a story in which private property rights are getting more and more important. I recently asked a bunch of Indian CEOs, “Is the rule of law a reality in India? And, you know, if we got into a legal dispute after I’ve invested in your company and we went to law, would I have a reasonable chance of redress?” And the answer was yes. So China’s un …

CONSUELO MACK: So, that’s the British rule of law, which was transferred to India, right?

NIALL FERGUSON: Yeah. I mean, one reason that India is in a different place from China is that it was directly ruled by the British for nearly two centuries, and that meant that many of the institutions of the West were imposed on India. But in many ways, I’m more impressed by what’s happened more recently, since India embarked on economic reform in 1991, where, essentially, the killer apps, including the consumer society, including modern science and modern medicine, these things have been downloaded voluntarily, because Asians realized that the only way that they could compete with the West was ultimately to adopt Western institutions.

By the way, this process began a long time ago. Japan started to do this in the Meiji era, in the late 19th century. But it’s taken until our lifetimes for the really big Asian economies to get it, and to download these killer apps. You mentioned the big exception, and that is that China clearly does not want killer app number three. Private property rights, rule of law. And ultimately, representative government.  Their view is, it’s an Asian fusion world, where you can order some things on the Western menu, but other things you want to have from the Asian menu. That is, I think, the Chinese model. And the big question for the next 10 or 20 years is, can they get away with it? Can they have a sustainable growth model in which they don’t move in the direction of representative government, and in which private property rights are not as secure as they are in the Western world?

CONSUELO MACK: And your answer to that question?

NIALL FERGUSON: Well, my answer to the question is a two-fold one. Number one, it could go wrong for China, depending on how big a role the state continues to play in economic life. If they carry on with the very aggressive privatization that we’ve seen, and I think they probably will, China is going to become economically a freer society. And I think ultimately, that means it will become politically a freer society. I don’t think the monopoly of power of the Communist Party is really compatible with a truly free market economy. I think ultimately, that just won’t be sustainable. But the second part of the answer is, what do we do? Do we remain true to the killer applications? Do we really believe in the achievements of Western civilization?

CONSUELO MACK: Right, do we, the West.

NIALL FERGUSON: Or do we cop out? And we, the West, I think, have a dilemma here. Because many of the things that made the West great, we no longer really believe in them. Or at least, we don’t take seriously those achievements of the past 500 years. We don’t even teach them.

CONSUELO MACK: We’re taking them for granted.

NIALL FERGUSON: Yeah. Of course. Because it’s all around us. People are used to it. We take economic and political freedom completely for granted. Now, take the work ethic. See, one of the most interesting things that I try to show in the work that I’ve done that’s going to be published as a book called Civilization later this year, is that we don’t actually work as hard or as long as we used to.

CONSUELO MACK: Well actually, the numbers of hours worked in this country are down to 1995 levels- that was one statistic I saw- with a larger population. So, what does that tell you?

NIALL FERGUSON: Right. And that is following a European path. In Europe, what you saw, really from the 1970s, was that the rest of Europe converged on the Italian standard of really quite a short working year, in terms of numbers of hours worked per year. Whereas Asia is now significantly above. I mean, South Koreans work way more than people in the West. That’s just part of it. Then you look at education attainment. They work harder in school. I mean, they work way harder. You can see that in their attainment in mathematics, at age 14. They’re far ahead of most English-speaking countries.

CONSUELO MACK: In math skills. I mean, it was …


CONSUELO MACK: That was, I think, one of the most distressing statistics that we’ve all seen in a long time, is how far the U.S. has fallen in educational attainment. And that, to you, is alarming, and also basically a very bad omen for the future, right?

NIALL FERGUSON: Well, if the scientific revolution is one of the killer apps, then how are we going to be the leading force in science if we consistently fail to educate people at high school to a level comparable with Japan, South Korea and parts of China? I mean, that’s a simple no-brainer question. We have a problem. Now, it’s easy at this point to be dismissive, say, of Chinese research and development, or of all the patents that the Chinese apply for, many of which are granted.

CONSUELO MACK: We call them patents. Right.

NIALL FERGUSON: Patents. I’m sorry. I’m speaking British English. Correction. For viewers watching this in the United States, patents. But the Chinese patents are increasing in quality. The research and development is getting better. Just look at the way in which Chinese scientific papers get referenced. More and more than previously, they are premiere players in the global science game. And the way that they’re investing in scientific education means that that can only grow. They are going to overtake Germany, in terms of patents granted, really soon. Now, the Germans can’t believe that when you tell them, but it’s true.

So, I think we’re seeing a very, very fundamental shift, not just in terms of quantity, because of course, with a huge population of more than a billion, yeah, China’s a big economy, just in terms of raw numbers. But this is a quality story. The quality of education, the quality of science, and the quality, actually, of innovation. That’s really going to be the key. And I think once you give those six killer applications, or in the case of China, five of them, to these huge Asian societies, with their hunger, I mean, it’s a real hunger to work, then it seems to me almost unstoppable that the world is going to tilt back to where it was 600 years ago when it was the East that really dominated the rest.

CONSUELO MACK: From an investment point of view, do we invest in the growth of the rest? I mean, is that basically our best way, at least, you know, to get some momentum going in portfolios, or–

NIALL FERGUSON: Well, you know, beware. There’s been a great run for emerging markets, right through this financial crisis.

CONSUELO MACK: There has been.

NIALL FERGUSON: You did a lot better– if you’d bought Brazil in early 2007, or really almost any South American economy, you did a lot better than if you sat tight in the United States or in Europe. But there’s a danger there. There’s an old joke, which I’m fond of, which is that they’re called emerging markets because they’re where emergencies happen. And we’ve just seen, right across North Africa and the Middle East, what emergencies are like. And these emergencies commonly happen when, for example, food prices double. One of the unintended consequences, not only of the emerging markets boom, but also of massive monetary stimulus by the Fed, has been a huge increase in commodity prices, right across the board. Hardly any commodities have not gone up in price, by significant amounts, since early 2009.

CONSUELO MACK: Now, Ben Bernanke would look at you and say, “QE2 had nothing to do with this, and fiscal stimulus had nothing to do with this.” That in fact, what it is is that you’ve got a drought in China. You know, or you have, you know, tremendous demand from China, and that the rising consumer class needs more commodities, and therefore it’s a matter of just supply and demand. It has nothing to do with what the U.S. has done. You disagree.

NIALL FERGUSON: I do disagree, profoundly. Because, of course weather has played a part, and so has soaring demand in Asia. But those two things are not a sufficient explanation for the doubling of the price of wheat in the last year. You have to ask yourself what is happening on the monetary side. And the answer is that the Fed is acting, and has been throughout the crisis, as the central bank of the world. I mean, that is a proven fact. The Fed itself injected liquidity not just into the United States, but into the European system. And banks were lining up from all over the world to be bailed by the Fed, and they were.

CONSUELO MACK: And the dollar is the reserve currency, and there are a lot of dollars out there.

NIALL FERGUSON: Right. If China is intervening on a scale that gives is reserves close to $3 trillion, there’s no way that you can sterilize all of that intervention. In other words, there’s no way you can prevent that accumulation of reserves from having some impact on your domestic money supply. And credit growth in China is crazy. It’s off the charts.  And that, of course, is a very substantial cause of inflation in China. So it’s not just about the failure of a wheat crop, which, by the way, is really an anticipated problem. It hasn’t really struck home yet. So, I think we need to recognize the extent to which liquidity has been injected by the Fed into the global monetary system.

And let me just give you an example. When a major financial institution- I won’t name any names- any of the big Wall Street players, is getting money from the Fed, what is it doing with that money? Is it, A, parking it in nice, safe Treasuries, or B, is it putting it into commodity funds? The answer is B. The commodity funds have been the major source of action in financial markets for the last six to 12 months. There’s been a huge expansion in the number of financial instruments related to commodity indices. So the notion that there’s no connection from the monetary policy of the Fed to commodity price spikes is a fairy story that we should not believe.

CONSUELO MACK: So there, Fed Chairman Bernanke. So the fact that we do have these rising commodity prices, number one, from an investment point of view, is the opportunity over in commodities? I mean, what’s your take on …

NIALL FERGUSON: Well, I think– yeah.

CONSUELO MACK: Is it a bubble in commodity markets?

NIALL FERGUSON: It’s close to being a bubble. I think there’s a real risk there. I mean, I was recently at a big conference of mining companies, and the mood in the room was like the dotcom boom of the late ‘90s. It was really euphoric.

CONSUELO MACK: Just euphoria.

NIALL FERGUSON: Not to say irrationally exuberant. And I think there’s a reason why this could be close to the peak for these markets, and it goes back to this problem of inflation in China. The Chinese are very nervous when they see enormous crowds in the streets of major cities, because they remember Tiananmen Square in 1989, and they know that one of the reasons things blew up in 1989 was in fact that inflation got out of control. Now, they do not want a repeat of that. That is their number one priority. No disorder. So I think we’re going to see more monetary tightening in China, as we go forward this year, than most people currently expect. There’s been, of course, interest rate hikes, tightening and reserve requirements, but it’s actually been too little. Relative to the inflation rate, China’s basically offering a negative real rate. Now, they have got to do something about that, if they want to avoid the nightmare of Cairo-like developments in major Chinese cities. So I think they hit the brakes, and that’s the point at which the commodity markets really start to cool down.

CONSUELO MACK: And it can happen.

NIALL FERGUSON: Yeah.  It wouldn’t take much. I mean, given that China’s such an engine of growth, such a huge engine of demand, whether you’re an Australian iron ore exporter, or whether you’re a Brazilian agricultural exporter, China has been a huge source of demand for almost all commodity markets, right the way through the crisis. And I would say we might be quite close to an inflection point there.

CONSUELO MACK: So, one investment for a long-term diversified portfolio. The last one that you made on WEALTHTRACK, which was in early 2008, was a company called Baidu, the Chinese equivalent of Google, which has quadrupled since then. So, congratulations, Niall. Only historians have recommendations that quadruple. So, what will you have us all own some of in a long-term diversified portfolio today?

NIALL FERGUSON: I think my trade right now is short commodities. And I wouldn’t say that was a trade for a four-year time horizon. But in the short run, I would not want to be in the wrong side of a real shift in the commodity market. So that is the trade that I would put on today, this year.

CONSUELO MACK: Niall Ferguson, with your new book, Civilization: The West and the Rest.  I look forward to reading it.

NIALL FERGUSON: Thanks very much.

CONSUELO MACK: Shorting commodities turned out to be a brilliant trade. I taped the interview with Ferguson in February of last year. Since then, commodity prices from copper to oil have fallen and did so in an especially dramatic fashion after Niall’s call.

Next week we will have an exclusive sit down with a global Financial Thought Leader and a seasoned investment strategist. John Lipsky, the former first deputy managing director of the IMF will join Nick Sargen, Chief Investment Strategist at Fort Washington Investment Advisors to talk about the turmoil in Europe and the slowdown in China- what to expect and how to invest. Until then, to watch this program again, please go to our website, to see it as a podcast or streaming video. You can also see previous episodes, and check out our guests’ One Investment picks and my Actions Points. Thank you for watching. Have a great Labor Day weekend and make the week ahead a profitable and a productive one.

Erin Botsford (R) Transcript 8/24/12 #909

August 24, 2012

WEALTHTRACK Transcript #909- 8/24/12

CONSUELO MACK: This week on WEALTHTRACK, running the retirement marathon at your own pace without running out of money. Financial planner and author of The Big Retirement Risk, Erin Botsford, has a training strategy to make sure your investments match your lifestyle along the way, next on Consuelo Mack WEALTHTRACK.

Hello and welcome to this edition of WEALTHTRACK. I’m Consuelo Mack. This week on WEALTHTRACK we are focusing on avoiding every retiree’s nightmare- running out of money in retirement- and achieving every retiree’s dream of having a comfortable retirement. For many Americans, the nightmare appears to be a distinct possibility and the dream just that: a pipe dream.

Pessimism about retirement prospects is rampant. According to the annual “Retirement Confidence Survey” put out by the Employee Benefit Research Institute, workers are about as pessimistic as they have ever been in the two decades since the survey began. More than a quarter of workers say they are “not at all confident” about having enough money for retirement. And the percentage of workers feeling “very confident” about a comfortable retirement is near record lows. Although Americans spend less overall as they get older, they spend more on healthcare. And increasing numbers of older workers and retirees say they are cutting back on that to save money. One in five older Americans report actions such as switching to generic drugs and reducing dosages, while nearly as many are skipping or postponing doctor appointments.

This week’s WEALTHTRACK guest wants to reverse those trends and has some novel, but common sense approaches to do so. She is Erin Botsford, founder and CEO of the financial planning firm The Botsford Group and author of the new book, The Big Retirement Risk: Running Out Of Money Before You Run Out Of Time. Botsford believes traditional financial planning models no longer work with the new realities of retirement. Instead she has devised what she calls lifestyle driven investing: matching different investments with specific life style needs and goals. Botsford’s dedication to financial self sufficiency and independence started way too young, with a childhood tragedy. I asked her to tell us what happened.

ERIN BOTSFORD: When I was 11, my dad died, and he left my mother with six children and a $10,000 life insurance policy. And I always like to add that my father was a highly educated man. He had a PhD in Psychology. But he had borrowed against his teacher’s pension plan because he was going out to fulfill his dream, which was to build a clinic in San Diego for early childhood education. So we moved out to San Diego, he borrowed against the pension, moved to San Diego, and within six months he died. And he left my mother with the $10,000 policy and six kids. So I always tell people we went from middle-class to food stamps overnight, but the truth is, food stamps didn’t exist back then, so that’s not exactly right. It was worse than that.

Where things got a little interesting for me was, when I was 16, I was on my way to work at McDonald’s, my first real job. And it was the day after Thanksgiving, and I was involved in a very bad car accident. And I hit a guy on a motorcycle, and he was killed. And unfortunately, I was charged with involuntary manslaughter by the State of California, and when my mother and I met with an attorney- because when you’re charged with a crime, you have to defend yourself- it was a very interesting meeting because my mother was very honest about our financial situation. And so after hearing that, he said to my mother, “Well, Mrs. McGowan, this is purely a matter of economics. If your daughter will plead guilty to these charges, I’ll be happy to enter the plea at no cost to you, and she’ll just get whatever sentence the State of California hands down. But if she wants to defend herself it’s going to cost you a lot of money.” Well, money was not a resource that we had. So she picked up her purse, thanked him and said, “Well, thank you very much, she’ll just plead guilty.”

Well, pleading with my mother and I said, “Please don’t make me plead guilty to killing this man. Mommy, it was an accident, I’m a good girl.” And she looked at me and she said ten words that forever changed my life, and these were the words, she said, “Honey, I’m so sorry. We have no money, and therefore we have no choice.” And I always tell people that was the day that I learned money buys you choices.

So we got home, and fortunately my older brother, Tim said, “Mother, we can’t let her plead guilty” and so he suggested that my mother take a second mortgage out against her house. Because she’d done one good thing; she’d bought a house in Southern California, it had appreciated in value. And so we took a second mortgage against the house and we paid for my defense and we found that, in fact, I didn’t hit him; he was actually going well over the speed limit, he hit me. And so the charges were dropped against me. The judge threw the case out and said, “Take this little girl home, she’s been through enough.”

We got through all the legal battles, and then by the time I was 20, I had saved $22,000.  And people say, wow, that’s really good. Well, the truth is I went on the “Wheel of Fortune” and I won. So I took $3,000 and I started investing. I put $3,000 in a townhouse. I went with a partner of mine and we bought a condo in San Diego County. And that worked out okay. And I gave the other $19,000 to a stock broker and he lost all of it for me. So by the time I was 22, I had learned so many incredible lessons. I’d had a college education in the School of Hard Knocks.

CONSUELO MACK: Here you are, you’ve got a terrific book, and you are helping people avoid the pitfalls and really some of the tragedies that you and your family have gone through. So you are very critical of traditional financial planning models. As a result of what you’ve been through, but also as a result of clients who come to you and who are in worse financial shape than they should be. So what’s wrong with the current approach to financial planning?

ERIN BOTSFORD: Well, the big thing that’s wrong is nothing has changed, when in fact, everything has changed. So the traditional models, the traditional planning, for some reason is always based on a premise that the stock market, the financial markets, are always going to go up. And you know what? Everything works out just hunky-dory if that’s the case, right? You can do almost anything and not fail. The problem is, if you do any research, you find out that more than likely, because of the 77 million baby boomers that are going over the hill, they’re the ones that have driven this economy. Well, I don’t think that’s that way it’s going to be.

I think that we’re going to have very flat, choppy markets. We could even have some down markets. And so I wrote this book because I started studying this 16 years ago, and saw there was going to be a time, just based on this huge demographic trend, there was going to be a time that came along that if people continued to invest the way they had been, retirees were going to risk running out of money. I said to my husband when the book launched a month ago, I said, “I’m on a mission to save the retirements of 77 million people.” And my husband said, “Really?”

CONSUELO MACK: So for the 77 million people in the baby boomer generation, of which I am one, I think it’s something like, 47% of us, and it’s possibly even higher than that, it’s expected that we will not be able to, in fact, fund our retirement. Or our health insurance costs, or underwrite health insurance costs. Isn’t it too late for most of us to save ourselves?

ERIN BOTSFORD: Well, no, I don’t think so. And there was one lesson I learned from my father, even though I was very young when he died.

CONSUELO MACK: Eleven, right.

ERIN BOTSFORD: He said something that has always stuck with me, and he would say to you, “Consuelo, the next ten years are going to go by. Right? The question is, what are you going to have to show for it?” So unless you’re planning to die in eight years, I mean, we have no choice but to address things. This is the way life is now, okay? Regardless of where you’ve come from, what happened in 2008, this is now. And so deal with it. And so my book is entirely, the whole idea is empower yourself and take responsibility for your own outcome. Relying on what Congress is going to do, relying on what a pension is going to do, I mean, my husband flies for a major airline and his pension was just cut. I mean, the good news is we never relied on it. But there’s a lot of people, and I think gone are the days of the idea of self-reliance. And I think we need to get back to kind of more back to basics.

CONSUELO MACK: So how should we reframe? And this is part of the book as well, The Big Retirement Risk: Running Out Of Money Before You Run Out Of Time, is to reframe how we think about our retirement and our investments. So tell us how we should think about our retirement and our investments.

ERIN BOTSFORD: The question is, it’s all about cash flow. So what I have seen in my practice, what most people want, if they had their dream, is that the day after they retire, or the month after they retire, a check similar to what they were earning from their company would come into their bank account, right?

CONSUELO MACK: Right, it’s all about income is what you say. It’s not about the dollar amount, it’s about income.

ERIN BOTSFORD: Income. So what I focus on is, beginning with the end in mind, what are you doing putting your money in things? It’s kind of like the idea of buying condos in Florida to flip them, right? How many people got caught up in there? So what are you doing? You’re putting your money in ETFs and mutual funds and things, and the idea, so what’s the plan? Now, if you put in $100,000 and it grows to $200,000, then what? What’s the plan? How do you create an income stream?


ERIN BOTSFORD: If, only. Or what if your magic number is a million dollars, and it’s July 2008 and you’ve got $990,000 and you’re three months away from putting in your papers and retiring, and then the market crashes and you’ve got 40% less; then what? Well, you focused on the wrong things. And so I’m very much all about creating cash flow, and income streams, and focusing on that. And later on we’ll get into my house of security. I try and make it so simple for people, because it doesn’t have to be rocket science.

CONSUELO MACK: So in this day and age of really diminished income, I mean, does that model, does your model still work? Because basically the income that we’re getting is historically low, and kind of like zero, I mean, essentially if you’re in the safest, your CDs and money market accounts or whatever, you’re not getting any income.

ERIN BOTSFORD: I describe as if we’re going down a grocery store and you’re going down the potato chip aisle, you know? And it’s the Wall Street potato chip aisle and they all have the same stuff. Well, I think if you start looking outside the box, and you go to a less traditional format, you go to an independent advisor, you do your own research, we’re finding income products that are paying, three, four, five, six, seven, eight, nine percent. But you’re not going to find those going down that potato chip aisle of the traditional mainstream Wall Street firms. You’re just not going to find it.

CONSUELO MACK: So we’ll go into that a little bit later, but let’s talk about the house that you want us to build. And I know that you have what you call ‘lifestyle-driven investing.’


CONSUELO MACK: And so tell us about like what lifestyle-driven investing is. You know, how does it work?

ERIN BOTSFORD: Okay, now think about those words: lifestyle-driven investing. I want my investments to drive my lifestyle, or I want my lifestyle to be supported by my investments. That’s why I’ve trademarked it. Okay, so the house of security, it’s so simple. You form a foundation. And with your foundation, you look at what are my needs, okay? What are my real needs? Now, I call needs your nonnegotiable items. You have a need for housing, or shelter, food. You want to be able to pay your electric bill and your health insurance. And what are those nonnegotiable items? Create a plan.

And you know, the funny thing about that is, those items are usually not as high as you might think. Your house may be paid for. You know, sometimes social security will actually fund your real-life needs. The problem is, everybody says, well, I want what I used to make, and you lump those all, everything’s a need. Well, you go up from the foundation, the needs, you go up into wants.

CONSUELO MACK: So let’s start with the needs, and those, as you said, the nonnegotiables. Food and shelter I get, utility bill, whatever it is. But health insurance. Now, of course once you hit 60, whatever it is, 62, 65, you get Medicare. But you’re saying that a health insurance is one of those nonnegotiable needs, and you need to plan for that. So what kind of health insurance should we be planning for that we think the government’s going to take care of?

ERIN BOTSFORD: There’s not a one-size-fits-all answer, unfortunately. But clearly, if you lose your health, and what typically happens is there are two spouses; one of the spouses gets an illness, right? And if you don’t have proper health insurance, or, and I want to talk about long-term care insurance later on, too, sometimes the entire family, all of their net worth and all of their resources are exhausted taking care of the first spouse, and yet they die anyway. And it leaves the surviving spouse with nothing. So as we get older, it’s just a fact of life, our bodies just wear out, and so I think health insurance has to be right up there. It’s a nonnegotiable item. If you can get it for free, great. But otherwise you need to pay for it. It’s a need, yes.

CONSUELO MACK: So you were taking us up- so that’s kind of the basement level, right? That’s the foundation.

ERIN BOTSFORD: And so I want to go back a little bit and say with the needs, the nonnegotiable items, the whole point of lifestyle-driven investing is you fund those with income sources that are also safe, predictable or guaranteed. Right? And so that you fund those, you want to make sure those come in, no matter what. As you go up the hierarchy, now the wants. Generally speaking, dining out, Internet, cable TV and those kind of things, we always have the discussion about our manicures and pedicures needs or wants.  And those can be funded with other items. Things that are maybe a little more risky, but not super-risky.

Then you go up the hierarchy to likes. And likes are how we define them; you can define them any way you want to. And on our website, we have some worksheets that people can print out. In fact, I had a couple that went to Colorado over the holidays, and since there was no snow, they came back and told me they spent nine hours going through these worksheets and arguing about what a need and a want was.

CONSUELO MACK: Or certainly the wants and the likes can really be, so why did you separate those, the wants and the likes?

ERIN BOTSFORD: Well, the likes are- let’s say you’ve got your needs and your wants, that’s basically your lifestyle. Okay? You’ve got that covered. A like is taking all the grandkids on the Disney cruise. It’s buying a second home. It’s buying the boat, the RV. So sometimes a like will be things like the down payment on the condo at Park City. So the down payment may come out. Sometimes it’s lump sums. Now, once you have that condo in Park City, then you probably want to make sure you can afford the expenses, and so you would put the expenses down here. So really, all it is, is a framework for having a discussion that not all expenses are created equal. I think the traditional planning says, oh what do you want, how much do you want? And then they put it all into a big pie chart and they allocate it among a bunch of stuff, and they take a four percent withdrawal, and either you get it all or you don’t get anything. And I just think things need to go back down to basics. Let’s rethink things a little bit because not all expenses are created equal.

CONSUELO MACK: The fourth level, you know, the top floor, is defined your wishes. So what are wishes? I mean, are those complete fantasies?

ERIN BOTSFORD: No. I define wishes in the book as those are legacy desires, really. And so on Maslow’s hierarchy, those are sort of how would you like your family, how would you like to leave, if there’s leftovers. The other thing, too, is it’s extra cash flow. I mean, there are a lot of people out there that can fund their needs, their wants, their likes. So their wishes are: if I have extra money, how would I want to spend it? And you know, how would I want to invest it? So you can be very risky on those things because it’s not something that you’re going to need to pay your day-to-day expenses.

CONSUELO MACK: And what actually fascinating, that number one, this foundation, this financial foundation that you’re building in your book, I mean, is a very useful way to approach this, and it’s very manageable and it does create really terrific discussion points among families, that’s for sure. But also what I really appreciate is the fact that you match your investments to these different levels, which I think is so interesting. And that really is different. Let’s talk about the needs, the nonnegotiables. I mean, you mentioned one thing is that, for instance, you could apply your social security benefits to your needs.

ERIN BOTSFORD: Sure, sure.

CONSUELO MACK: That’s the one guarantee that we have. That all of us have, who have worked, who are married to someone who’s worked. So what are the other investments that could fund, that we should look at as funding our needs?

ERIN BOTSFORD: Well, it just varies from time to time and place to place, and that’s why in the book, I try not to talk a lot about the specifics of the investments. Because what I want you to do is look for behavioral characteristics. Okay?

CONSUELO MACK: Behavioral characteristics.

ERIN BOTSFORD: Of the investments.

CONSUELO MACK: Of the investments, right.

ERIN BOTSFORD: So here’s the behavioral characteristic. To fund a need, it must produce an income, either now or in the future. I want that income to have one of these words: it must be either safe, predictable or guaranteed. Now there’s only two things that you can use guaranteed: you can use Treasuries or annuities. Some are good, some are bad. There are things that are predictable- how about there are people out there and they’re planning for their retirement and they’ve built a portfolio of dividend-paying stocks. You can find dividend-paying stocks that have paid a consistent dividend every single quarter for the last ten years, and who raise the dividend every single year for the last ten years. There’s really good quality companies. And it’s a good time to be buying that. Now, again, as long as those dividends are predictable, you can put that in there.

CONSUELO MACK: So let me just stop you here, because what’s so interesting about that is, again, your focus is not on the dollar amount of the stocks that you’ve invested in. It’s about the predictability of the income, and it’s the income stream. Which makes you look at that investment class, because people now say stocks are very risky. They can go down. But in fact, if your Johnson & Johnson stock, or your Proctor & Gamble, which have paid dividends for 30 years and they’ve increased their dividends every year, that you’re still getting the income. So that’s what you’re saying, that’s a really important emphasis.

ERIN BOTSFORD: Very big distinction, yes, yes. It’s just a different way to frame and look at things. And if you’re constantly looking at your balance sheet, because that’s what the magic number, that’s what people have been looking at, what’s your net worth? And I say that’s really secondary to is that income consistent, stable and predictable.

CONSUELO MACK: All right, so your wants, what kind of investment characteristics do you want to fund your wants?

ERIN BOTSFORD: The type of investment that we talk about in the book, we call them ‘hybrid investments.’ And they have characteristics- some of the characteristics of a need, but not all. So for instance, a hybrid investment, it may produce an income, but you could never say that income was safe, predictable or guaranteed. So things like master limited partnerships, non-traded real estate investment trusts, equipment leasing programs, business development companies. There are things out there that are probably not down the mainstream highway, but they’re out there, and they do produce income. The big key on those hybrids is that you put small amounts of money. You put $50,000 in ten of these different programs instead of $500,000 in one.

CONSUELO MACK: So you’re spreading your risk.

ERIN BOTSFORD: Because they’re not safe, predictable or guaranteed, but they do tend to pay much larger income than the lifestyle, for the needs.

CONSUELO MACK: Right, so next category, in the financial house that we’re building, is your likes. So what kind of investments are appropriate for funding your likes?

ERIN BOTSFORD: Well, you know, and again, we try and just look at characteristics. And likes are things that, if it happens, it’s great. So that’s where, to me, it’s like that’s where you take your risk. And then that’s your ETFs, your mutual funds, your privately owned real estate. And so if those things pay off, and again, stay diversified on those things, if you can have a home run and you double your money, then you get to take the kids on that vacation, or the Disney cruise or whatever you choose to take them on.

CONSUELO MACK: So this is so interesting. Because you’re saying ETFs, mutual funds. Now, when you use those categories, most other financial planners would say that is the core of your investment portfolio.

ERIN BOTSFORD: Yes, that’s what’s wrong.

CONSUELO MACK: And you’re saying no.

ERIN BOTSFORD: No. Because think about it. Which of those things didn’t go down 40% in value? And the problem is not the ETFs. Because think about it, you could have a bond ETF. And if you can say that bond ETF pays off predictable income, okay, then you could use it for one of the other categories. But just as a general overview, to just get a big bucketful of ETFs, and the problem is not the ETF, it’s trying to create your future taking a four or five percent withdrawal from this basketful of stuff that doesn’t have any defined income that comes off of it, I think is a recipe for disaster. And I think the big problem is, you could have a money manager, you could have an advisor who consistently beats the market. And you can still run out of money.

So think about it: if the market went down 40% but your ETF portfolio only went down 30%, well, your advisor did a good job, right? They beat the market. I always tell people, how many 30% declines in the market back-to-back does it take to run out of money?  I mean, not so many.

CONSUELO MACK: One Investment for a long-term diversified portfolio, what should we all have as part of our financial plan?

ERIN BOTSFORD: I would say long-term care. And it’s really overlooked, because nobody likes buying insurance of any kind. People that don’t have a lot of money, they need long-term care, because if they do have an illness that requires them to be in a nursing home, or skilled nursing at their house, guess where that funding’s going to come from?  Their investment account. So you can pay $5,000 a year, or you can pay $65,000 a year out of your portfolio. I mean, it’s just good leverage.

CONSUELO MACK: So long-term care insurance is something that we all should have.

ERIN BOTSFORD: Yes, and I always tell people, quit fighting it. Because nobody wants it until they can’t have it, of course, so. Until they can’t qualify.

CONSUELO MACK: So, Erin Botsford, thank you so much for joining us on WEALTHTRACK, and your book, The Big Retirement Risk, Running Out Of Money Before You Run Out Of Money, is a terrific resource. And we really appreciate your coming on and talking about it, and your life’s work.

ERIN BOTSFORD: Well, thank you very much for having me.

CONSUELO MACK: At the conclusion of every WEALTHTRACK, we try to leave you with one suggestion to help you build and protect your wealth over the long term. This week’s Action Point is: read Erin Botsford’s book, The Big Retirement Risk: Running Out Of Money Before You Run Out Of Time.

There have been literally thousands of books written about retirement planning- what’s different and refreshing about Botsford’s approach, what she calls lifestyle driven investing, is that it helps you redefine retirement planning and personalize the solutions. As she learned the hard way, from a very early age, money buys you choices. Her book helps you control the choices you make in order of their necessity and priority in your life and then helps you match different investments to pay for them. A novel, common sense approach for this new normal and volatile age we are living in.

I hope you can join us next week. We are going to revisit our interview with thought-provoking British historian Niall Ferguson about his latest book, Civilization: The West and the Rest. What does the seismic shift in world power mean for us as people and investors? If you want to see previous shows and find past One Investment and Action Point recommendations, go to our website, And that concludes this edition of WEALTHTRACK. Thank you for watching and make the week ahead a profitable and a productive one.


August 10, 2012
  • Seek passive management
  • Look at ETFs and index funds

Watch this Episode

Back to Top