Taking Stock of Stocks - Podcast Transcript

December 2005

The following transcript is for the podcast entitled “Taking Stock of Stocks.”

Welcome to the PACT America podcast.

I'd like to talk about the stock market again.

But before I begin, I need to make the following disclaimer. I am not now nor have I ever been a licensed financial advisor. The material in this podcast is to be used for academic purposes only; please consult with a licensed professional before making any financial decisions. Thank you.

You know, if you look at some of my other podcasts, or just some of the stuff that I've been writing on the website, it would be easy to assume that I'm somehow against the stock market.

Well that's not really true. You know, I was involved with trading for a few years. I traded stocks, options, futures, and combinations thereof. So I'm not against the stock market.

But one of the... I don't know... You could call it one of the rules of investing is, “Never invest money that you can't afford to lose.” You know, you just don't want to be putting money into the stock market that you can't afford to lose. And I think that just goes against the whole idea of Social Security, because Social Security is supposed to be the safety net. It's supposed to be that core benefit that no matter what else happens, you're always going to have Social Security.

So, I mean it just goes against the whole principle of the program to start investing in the stock market. Social Security was invented around a time in the Great Depression, and what was that brought on by? You know, a crash in the stock market.

So let's try to learn from the past, and let's try to... I don't know... stay focused here.

You know, and if you want a private stock account, get a private stock account! Get an IRA, like a Roth IRA, and that stands for Individual Retirement Account. You know, there are plenty of options out there right now.

The President's proposal called for directing one-third of Social Security taxes into a private account. Well right now, the total Social Security contribution is 12.4% of annual wages, so one-third of that is about 4.1%. You know, if you want a private stock account, get a private stock account. Start saving 4.1% of your money; put it in this stock account. If you get a Roth IRA, there are even several advantages, so you know, you can have your own little private account. But let's not try to force this on everybody.

And they say, “Well, you wouldn't have to invest in stocks, you could just invest in bonds.” Yeah, but here's the problem. Let's say you've got somebody who starts investing in these stocks, and their portfolio doesn't do too good. You know, they don't do very well with their investments. So is the government just going to let them starve?

Are we just going to say, “Uh oh, tough luck, you're out.” I mean, it's not going to happen. So even if somebody does a bad job of managing their investments, you know that the government is going to pick up the tab. So what's the point, you know? It's just going to be more expensive for the taxpayers in the long run.

You know, and as I've said previously, it's all about the transition. In order to get these private accounts, we would need to borrow that money from the national debt, or against the national debt. So your stock returns are going to have to be adjusted for that cost of the debt. So if the debt costs 4.5% and your stocks return 6% in a year, you've got to subtract that 4.5% interest, and now you've only made 1.5%. It doesn't make any sense, you know?

And somehow people have the idea that they're actually going to have control over this private stock account. Not exactly. I mean, you'll have a couple of choices, but don't think to yourself that you're going to be able to choose any stock that you want.

This thing is largely modeled after the Thrift Savings Plan--that's the plan that's available to government workers. I think they've got five or six choices like a government series, which is mostly just invested in government bonds. Then there's like a fixed income, that's... I think that's invested in various bonds, maybe some corporate bonds, and maybe also some dividend producing stocks, I'm not sure. And then there's like a major stock fund, a common stock fund. Then there's maybe like a small cap fund.

So five or six choices. But don't think that you're going to be able to invest in anything that you want; the government is not just going to give you that control.

And I guess what I'm trying to say about the stock market is that if you look forward, with all the pension liabilities that some of these bigger companies have, and just the fact that our economy has grown so large already. You know, it just can't keep doubling and tripling in growth in future years.

We've kind of reached a point where it's like wealth is going to start being redistributed, you know? You might have smaller companies that rise up, especially when you look at some of these older, more established companies; they're the ones with the big pension liabilities. So I think in future years, it's going to be a great opportunity for some of these smaller cap stocks, some of these newer companies that don't have pension liabilities, to come in and steal a lot of market share.

Because if you start adjusting these big corporations, or these established corporations, adjusting their profit margins for all of these pension liabilities, you know, that makes it a lot easier for a new company to come in and compete.

So the stock market as a whole, you know, just the total index or the total stock market, in my opinion, is not going to do very well in future years. You're going to have a lot of bigger companies or a lot of older companies that are going to do poorly, even some mid-sized companies that are going to do poorly, and then you're going to have a lot of newer companies that really do quite well.

But to try to get that encompassed in some sort of Social Security program, it's not going to happen. You know, because just the nature of this program, it's so huge that you're going to need to create these mutual funds that are invested in a broad market portfolio. You know, you're going to have to spread all of this Social Security money out, because it's just going to be trillions and trillions of dollars. And it's just going to be a poor investment; it's just not a very good opportunity for people.

So if you want a private account, get a private account. Go get an IRA, go get or start investing more in a 401(k) or something like that. But don't try to do it with Social Security, because it's a bad idea, and it's not going to work.

(pause)

And I think I've pretty much talked about everything I want to talk about, so I'll call it a podcast.

This is Adam Florzak keeping it real.