Advice to help the rich get richer

Tyler Cowen reviews a recent book, “Lifecyle Investing,” by Ian Ayres and Barry Nalebuff, two professors of management at Yale. The book recommends that young adults take out loans from lenders like Sambla to buy stocks and then hold these stocks for many years to prepare for retirement.

What I’m wondering is: What’s the goal of writing this sort of book? The main audience has got to be young adults (and their parents) who are already pretty well fixed, financially. Students at Yale, for example. And the book must be intended for people who are already beyond the standard recommendations of personal-investment books (pay off your credit card debt, don’t waste so much money on restaurant meals and fancy clothes, buy 1 used car instead of 2 new ones, etc). Basically it sounds like they’re talking to people who have a lot of money but want to make sure that they retire rich rather than merely middle-class.

I can’t say that I’m morally opposed to helping the rich get richer. After all, I’m not out there lobbying to cut my own salary, and I teach at Columbia, where I have no problem encouraging students to go into well-paying jobs in applied statistics.

But I can’t really see what would motivate somebody to write a whole book on helping rich kids prepare for retirement. I can see how people might want to buy such a book, and how it might make economic sense to publish it, and how it could get reviewed in the New York Times, but who’d care enough about the topic to write the book in the first place? There must be something I’m missing here. (The book might sell well but I can’t imagine it will make the authors rich, so I doubt it’s simply a financial motivation. It’s also hard for me to believe they’re planning to use this book as a foundation for a lucrative consulting business, although maybe that’s what they’re thinking.)

P.S. I’m surprised that Cowen didn’t remark on this aspect of the Ayres and Nalebuff book–although some of his commenters did. Perhaps as an economist he is thinking of this as a purely technical problem without questioning the larger goals.

P.P.S. Just to be clear on this: I’m not saying that it’s morally wrong to give financial advice to rich people (or even to “rich kids,” which somehow sounds even worse). The question is why would two intellectually able economists, who can study anything they want, bother to write a book on the topic? (And, yes, you could ask why I am bothering to write a blog entry on the question. But I have a good answer to that, which is that it was bugging me, and a blog entry is the perfect vehicle for writing about something that bugs you.)

35 thoughts on “Advice to help the rich get richer

  1. If stocks have reliably higher long-term rate or return, why not borrow to invest in them? this is massively counterintuitive advice — well worth thinking through.

    it pits some pretty fundamental assumptions of economists against an almost unanimous conventional wisdom and general practice. if you're interested in the economics of investment, and general practice is massively at odds with widely accepted theory, why wouldn't you want to figure out which embodies most sense?

  2. Patronage? well those intellectually able individuals who wrote books on the defense of the divine right of kings certainly were ;-)


  3. Chris: I can understand that this could be an intellectually interesting topic and worth an article. But an entire book?

  4. The book might really only have an article's worth of thinking in it! (I haven't seen a copy myself.) But if these 2 enjoy thinking about these things for fun/profit in their own lives, and if someone was willing to offer, say, a hundred thousand dollar advance, it may well have seemed worth their while – it is not, I agree, how I choose which book to write, but it is a common process to bounce half a dozen ideas off an agent and see which one sounds most like a marketable book proposal! But Andrew, really you and I are just hopelessly noncommercial in our tastes…

  5. Jenny:

    Good point. I hadn't thought of the idea that someone might have asked them to write the book. Indeed, if someone offered me $100k to expand an existing article into a little book, I'd probably do it.

    Still, there's something funny about people debating the merits of the book's argument without reflecting on the silliness of it all.

  6. I think the only ones to get richer are the authors, the banks, and the stock brokers.

    I believe that borrowing to invest long term in the stock market only looks good considering _the multi-year average_. But a single market downturn can moot years of profits. Years later, you cannot recover the losses from your stock broker, pleading for what you are due based on the averaged multi-year return rate.

    So, at least the authors are being ethical by targeting readers who will be able to recover from the losses.

    If the authors ran the Monte-Carlo simulations, and did not just cherry-pick a favorable span of time, but also considered the affect of some likely and significant downturns (likely because we are considering a timespan from before entering college all the way past retirement), then I would consider funding such an instrument for my own daughter. But my current understanding leaves me underwhelmed by the recommendation.

  7. This problem has been bugging me for a while. It seems like stock investment is a timing game, even for those like myself who practices buy and hold. Assume I want to retire with $x, and I allocate money to stocks accordingly using long-term average returns as a guide. Then, around the time I retire, the stock market suffers a 50-year decline. The long-term average will not help me; I don't have time to recover; I couldn't go back in time to reallocate. Market crashes becoming more and more frequent scare me.

  8. We're not even out of the first downturn from over-leveraging, and we're already planting the seeds for the next? Everything really does move faster in the modern economy. I personally can't understanding sacrificing a semi-guaranteed comfortable retirement for a toss-up between luxury and poverty, but I guess we all have our priorities.

    As for why you'd write a book on the topic, you write about what you know. If you're well off searching for the path to wealth, it makes sense to write about it. I suspect they've thought long and hard about how much to leverage their own wealth and now want to share their conclusions. It's easy to get sucked into obsessing over the growth of your money, I know I get a kick watching my mortgage shrink.

  9. uh professor, perhaps they were motivated by the counter-intuitive findings from their research and wanted to share that with the world. You know, just like what 'real' academics do.

    stick to the stats the social commentary is weak.

  10. Bob: Writing an academic and even a popular article about the topic made sense to me–as you say, we all want to share our ideas with the world. What baffled me was that they went to the trouble of writing an advice-style book about it, and also that thoughtful people such as Tyler Cowen and Robert Shiller (who endorsed the book) didn't comment on the pointlessness of the ultimate goal.

    P.S. It's funny how "professor" is so often used as an insult. I guess it's just a word that's inherently subject to irony.

  11. Kaiser:

    I haven't read the book but I assume they get around your problem by recommending that you withdraw your savings gradually over the years rather than keeping it all in stocks until the day you retire.

  12. I posted a comment on MR earlier basically pointing out that it doesn't make sense that stocks are safer in the long run than the short run, and pointing to Japan as an example.

    In fact, if enough people started levering up their stock investments without regard to the current price level, this would create a bubble, and those who invested at the top may not be able to recoup their losses for a long time (although the book apparently claims this is not a problem, according to the product description… I have not read it yet). This is why their claims of back-testing the idea is silly: the strategy would change the price levels.

  13. The book might help young folks with middle-class income (e.g. engineers) reach financial independence earlier and/or enable them to better weather turbulent labour markets.

    You ask: "What's the goal of writing this sort of book?" It may be similar to the goal of writing a book like _Advanced Marathoning_ (a book written for people who've already run a marathon, which is more than most people ever do). One could as reasonably ask what's the point in writing a book to help those folks train to go faster – after all, they probably already get more exercise than most.

  14. If we assume that they are giving good advice then I think it applies to a fair portion of the U.S. population. When I think about the things intelligent people write books about this doesn't strike me as particularly uninteresting or lacking in expected social value.

  15. Andrew: maybe I'm the intended reader of this book. I can totally see someone argue I should pull my money out earlier. But that just shifts the timing, what if the planned time to pull out includes a big market crash, that would really do me in. I basically need to have most of the nest egg pulled out before the crash but there is no way to predict when it will hit. Can normal people buy insurance for financial disasters?

  16. Kaiser: I dunno, at this point we're going well away from any of my expertise. I did email Ian Ayres (with whom I've corresponded before) to ask him his thoughts on all this, so maybe he'll read down this far in the comments and answer your question–or maybe it's all in the book!

  17. Kaiser: it seems to me the safest strategy for your shares would be to plan pull your money out 10y, say, before you want to retire. If the market is in a downturn, delay for a wee bit to let the market recover and then pull it out.

  18. Seth: Writing a book is a way for some people to make a living, but I can't imagine that this is the case for Ayres and Nalebuff. I imagine that they're bringing in much more each year from their salaries at the Yale school of management than this book will earn them in its lifetime.

  19. Ayres now gets nice speaking fees, due to his Freakonomics gig. This book can lead to more notoriety.

    He's a lawyer taking a prima facie position. It doesn't have to be right, just advancing the interests of his client (himself, in this case).

    You want good financial advice? Read John Bogle.

  20. Speaking of John Bogle, he was recently interviewed on a PBS show and reminded people of the rule of thumb (which he follows and I follow) that the percentage of your portfolio that is invested in bonds should be approximately equal to your age (the rest in stocks). Combined with annual rebalancing of the portfolio to keep that percentage current, the net effect is to reduce the volatility of the portfolio as you approach retirement and avoid the "now I want to retire but the market is low and I can't" dilemma. Notice that at age 70 you would still have 30% in stocks by this rule of thumb. That's important because over the long haul (even if not the past 10 years) stocks are needed in your portfolio to hedge atainst inflation. Notice also that the annual rebalancing will cause you to sell stocks when they are high and buy them when they are low, exactly the behavior you want, and very different from the behavior that the average investor has (buy high, sell low).

    However, the rule can be broken to some degree when the investor is young, say less than 45-50. Overweighting in stocks would not be a bad thing in that case, so long as the investor pays attention to this rule of thumb as retirement approaches.

    The same approach can be used when saving for kids' college. The difference is that the period of time is shorter, so the rule of thumb should be somewhat different. This is how we put our kids through college.

    Finally, dollar cost averaging: Buy mutual funds in a set amount every month regardless of where you think the market is. You'll buy more shares when the market is down, and the average cost of the shares will be less than if you try to time the market, which most people cannot do successfully. I encourage the students in my honors class to start a Roth IRA as soon as they can, invested in index funds. (I suggest that if their parents can afford it, they should match the money put into the IRA at some ratio. This is a way to transfer wealth from the older to the younger generation in a way that will avoid some estate tax. We do this as well. The estate tax comes back in full force next year unless Congress does something about it.) There is no reason why, if the stock market continues to perform as in the past (not guaranteed!) that a person who starts investing in a Roth IRA in her 20s could not expect to have a portfolio of well over $1 million at retirement, following those rules and with current contribution limits.

    Very finally, I think the idea of borrowing money to invest is looney.

  21. Products are solutions to problems and my dad used to say that the problem of the rich is money.

    As the distribution of wealth shifts presumable the vendors shift as well.

    If the problem your interested in is the distribution of wealth, then a question to ask of any business model is it part of the solution.

    Books of this kind are always the loss leader used to create increased awareness in the customer base, so when the problem arises the author comes to mind.

    Encouraging the client to borrow to fund investments increases the amount under management and hence the fees, nothing looney about that if your the investment advisor.

    Maybe the authors want to be Bernie Madoff?

  22. Andrew Gelman: The link is at Yale-SOM, but did you read the first sentence in the page? (I am inferring that your response is to dispute my assertion. If not, my whole response here is not responsive).

    "Ian Ayres is a professor at Yale Law School and a specialist in contract law."

    it does not say anywhere in the page you link to that he is a professor of management.

  23. Marcel: Not that this really matters to the main discussion, but . . . if a guy is listed under Faculty in the Yale school of management page, and if he describes himself as "Professor, Yale School of Management," then, yes, I think it's fair to characterize him as a "professor of management at Yale."

  24. I have a one sheet (front and back) advice sheet that I hand out to my students in my honors class. It is virtually the same as what Dilbert's garbage man advises. It is a dumb and simple plan, and it works, if you can stick to the plan.

    Thanks, Bob, for the pointer.

    Note to Ben Hyde: Sure, if your goal is to make the investment advisor rich, borrowing money to invest might not be looney. Kind of a strange loss function, though.

    But if your goal is to have a comfortable retirement and achieve other goals for yourself, borrowing money to invest is looney. In my opinion, of course.

  25. Kaiser, your example is exactly the reason for slowly reducing the risk your portfolio is exposed to over time. you're not supposed to buy-and-hold a basket of stocks, you're supposed to start with a basket of stocks and slowly through time convert to something that is much more a basket of bonds.

    there are 'target date retirement funds' which do this "automatically" if you trust their algorithm.

  26. I haven't yet, but I could definitely see myself reading this book. I could definitely see myself writing a similar book as well. I identify with the target audience, maybe the authors do as well. Much of the finance literature is written with much less expertise than these authors have with the pre-req guidelines you mentioned, and how many times can you say pay off your credit cards?

    I guess I'm mostly curious about what really irks you about the book. It seems like you concede that the book could help people (or at least the authors believe it to be so), but most books written don't help anyone. Freakonomics, which was an enjoyable read, didn't help me in any meaningful fashion. I know a bit more about baby names, but it won't make me any richer. Which is the more futile effort?

    It seems like your main motivation is if you're going to spend your some significant part of your energy helping people, it shouldn't be people who aren't or won't be too rich. Now if you aren't helping other people, if you are either working for personal motives such as financially or to get your ideas out, then it's perfectly reasonable if your book doesn't help anybody.

    My guess is you should think of motivation as multi-dimensional rather than single dimensional. While some write purely for financial motivation or to share their ideas, some books are a combination of many factors. I like to help people (even well-off ones), I like money, I like being heard when I think I'm write, I especially like it when most people think I'm wrong, I'm good at writing books, perhaps, I even enjoy it…voila a book.

  27. On MR a commenter says someone read "Mortgage Your Retirement" the 2005 article on which this book is based and got someone $200k in debt. Apparently, the authors comment on it in the book and explain how he was doing it wrong (didn't verify this). Maybe they thought they needed a book to explain the procedure and all the caveats along with it. There are a lot of ways to screw up buying stocks on margin. Maybe they felt it was more socially responsible to get a book out there with all the i's dotted and t's crossed.

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