Larry Swedro

Swedroe: Value Premium Lives!

Re-posted from Swedroe: Value Premium Lives!

There has been much debate about the “death” of the value premium. Those making the case it has disappeared believe the publication of research on the premium has led to cash flows, which in turn have eliminated it.

They point to the last 10 calendar years of data, during which the value premium was slightly negative, at -0.8%. The value premium (HML, or high minus low) is the annual average return on high book-to-market ratio (value) stocks minus the annual average return on low book-to-market ratio (growth) stocks.

Before taking a deeper dive into the data, it’s important to note that all factor premiums, including market beta, have experienced long periods of negative returns. The following table, covering the period 1927 through 2017, shows the odds (expressed as a percentage) of a negative premium over a given time frame. Data in the table is from the Fama/French Data Library.

1-Year 3-Year 5-Year 10-Year 20-Year
Market Beta 34 24 18 9 3
Size 41 34 30 23 15
Value 37 28 22 14 6
Momentum 28 16 10 3 0


No matter the horizon, the value premium has been almost as persistent as the market beta premium. Even the market beta premium has been negative in 9% of 10-year periods and in 3% of 20-year periods.

Changing Regimes

Investors who know their financial history understand that what we might call “regime change,” with value underperforming for a fairly long time, is to be expected. In fact, even though the value premium has been quite large and persistent over the long term, it has been highly volatile. According to Ken French’s data, the annual standard deviation of the premium, at 12.9%, is 2.6 times the size of the 4.8% annual premium itself (for the period 1927 through 2017).

While 10 years may seem like an eternity to most investors (even institutional investors fire managers after a few years of underperformance), it can be nothing more than noise. Having to remain disciplined over such long periods is perhaps why Warren Buffett famously said that investing is simple, but not easy.

As Andrew Berkin and I point out in our book, “Your Complete Guide to Factor-Based Investing,” investors should have confidence in the value premium because it has been persistent across long periods of time and various economic regimes and has been pervasive around the globe and across asset classes. In addition to stocks, a value premium has existed in bonds, commodities and currencies (in other words, buying what is cheap has outperformed buying what is expensive).

Furthermore, the value premium has been robust to various definitions, not just the price-to-book (P/B) measure, or HML, popularized by Fama and French. Indeed, the premium is also found when using other value metrics, such as price-to-earnings (P/E), price-to-cash flow (P/CF), price-to sales (P/S), price-to-earnings before interest, taxes, depreciation and amortization (P/EBITDA), price-to-dividend (P/D) and price to almost anything—however it’s measured, cheap has outperformed expensive.

With that in mind, we can look at the size of the value premium for the 10-year period ending 2017 against some of those other metrics (all data is from Ken French’s website). While the value premium was negative by P/CF (-1.2%) and slightly negative by P/B, it was actually positive using P/E (1.2%) and P/D (0.6%)—so, on average, about zero.

Before moving on, it’s important to note many have questioned the sole use of P/B as the best value metric, especially in an age when many assets are now intellectual capital that often don’t appear on balance sheets (externally acquired intangibles do appear on balance sheets).

Reasons not to believe P/B—or for that matter, any single metric—is the superior measure of value include the fact that one metric could work better than others do for some industries, and various metrics have provided the highest premium in different economic regimes. That is why many practitioners and mutual fund families now use multiple metrics, which I believe can provide a diversification benefit.

Value’s Performance

Having covered that ground, let’s go to our trusty videotape and see how value performed outside the U.S. If value is “dead,” we should find confirming evidence in other markets.

The following table—again, using data from Ken French’s website—shows the premium for the 10 years from 2008 through 2017 in international developed markets.


2008-2017 Average Annual Premium (%)
Int’l B/M 1.9
Int’l E/P 4.1
Int’l CF/P 2.5
Int’l D/P 3.1


No matter which metric I use, there was a value premium in developed international markets. This result actually surprised me, because research shows value stocks are more exposed to economic cycle risks—they perform best in periods of stronger economic growth because they become less risky. While the last 10 years saw the slowest economic recovery in the post-World War II era, economic growth has been even more anemic in the non-U.S. developed world.

Having shown the value premium in international markets has been fairly similar to historical levels, I can also examine live results.

Specifically, I’ll compare the returns of the passively managed, structured international value funds my firm uses with those of marketlike ETFs in three asset classes. Data is from Morningstar and covers the 10-year period ending May 4, 2018. (Full disclosure: My firm, Buckingham Strategic Wealth, recommends Dimensional funds in constructing client portfolios.)


Funds 1-Yr Return
International Large
iShares MSCI EAFE ETF (EFA) 2.25%
DFA International Value Portfolio III (DFVIX) 2.20%
International Small
iShares MSCI EAFE Small-Cap ETF (SCZ) 6.05%
DFA International Small Value (DISVX) 5.89%
Emerging Markets
iShares MSCI Emerging Markets ETF (EEM) 1.29%
DFA Emerging Markets Value (DFEVX) 1.66%

Note: Dimensional’s international strategies include Canada; EAFE indexes do not.


The average return of the three ETFs was 3.20%. The average return of the three Dimensional value funds was 3.25%. Thus, while there was a value premium, compound returns were no better (as the roughly 2-3% higher annual volatility of value stocks negatively affected their compound returns), but no worse, either.

One way to look at the results is that, over one of the worst 10-year periods for the performance of value stocks, value investors were not “penalized” for their strategic decisions. Another is to believe the value premium is dead.


My view is that there is a large body of evidence demonstrating logical, risk-based explanations for the value premium. While cash flows can shrink premiums, risk-based premiums cannot be arbitraged away. On the other hand, it’s possible to arbitrage away behavioral-based premiums, such as momentum (though limits to arbitrage often prevent this from occurring).

Among the risk-based explanations for the premium are that value stocks contain a distress (default) factor, have more irreversible capital, have higher volatility of earnings and dividends, are much riskier than growth stocks in bad economic times, have higher uncertainty of cash flow, and, as previously mentioned, are more sensitive to bad economic news.

Given these risk-based explanations, it is hard to believe the value premium can be arbitraged away. With that understanding, let’s consider whether cash flows have eliminated the premium.

Relative Valuations

If, as many people believe, the publication of findings on the value premium has led to cash flows that have caused it to disappear, we should have seen massive outperformance in value stocks as investors purchased those equities and sold growth stocks.

Yet the last 10 years have witnessed the reverse in terms of performance. In addition, if cash flows had eliminated the premium, the buying of “undervalued” value stocks and selling of “overvalued” growth stocks should have led to a reduction in the valuation spreads between value stocks and growth stocks.

I happen to have kept a table from a seminar Dimensional gave in 2000. It shows that, at the end of 1994, the P/B ratio of large growth stocks was 2.1 times as big as the P/B ratio of large value stocks.

Using Morningstar data, as of May 3, 2018, the iShares S&P 500 Growth ETF (IVW) had a P/B ratio of 4.7, and the iShares S&P 500 Value ETF (IVE) had a P/B ratio of just 2.0—the spread has actually widened from 2.1 to 2.4. Thus, value stocks are cheaper today, relative to growth stocks, than they were shortly after Fama and French published their famous research.

We can also look at the P/E metric. In 1994, according to the Dimensional table, the ratio of the P/E in large growth stocks relative to the P/E in large value stocks was 1.5. As of May 3, 2018, and again using Morningstar data, IVW had a P/E ratio of 20.0, and IVE had a P/E ratio 14.4. Thus, the ratio, at 1.4, was almost unchanged. There’s no evidence here that cash flows have eliminated the premium.

We see similar results when we look at small stocks. The Dimensional data shows that, at the end of 1994, the P/B of the CRSP 9-10 (microcaps) was 1.5 times as large as the P/B of small value stocks. Using Dimensional data, and the firm’s microcap fund (DFSCX) for microcaps and its small value fund (DFSVX) for small value stocks, as of April 30, 2018, the ratio of the funds’ respective P/B metrics was the same 1.5 (1.9÷1.3). When we look at P/E, again, the results are similar. At the end of 1994, the ratio of those funds’ respective P/E metrics was 1.2; it is now the same 1.2 (20.2÷16.3). Again, I see no evidence that cash flows have eliminated the premium.

Using data from Ken French’s website, we also see similar results when we look at the period starting in 2008. In 2008, the ratio of the P/B of U.S. growth stocks (4.8) to U.S. value stocks (1.1) was 4.4. By the end of 2017, the ratio had increased to 5.3 (6.3÷1.2), the opposite of what you would expect if cash flows had eliminated the premium.


Based on the logical, risk-based explanations for the value premium, and the lack of evidence pointing to shrinking valuation spreads, my conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative. If periods such as these did not occur, there would be no risk, and no risk premium. This is true of all risky investments, including stocks (and thus the market beta premium).

The bottom line is that, at least in my opinion, it’s hard to conclude the value premium is dead. Being able to stay the course during long periods of relative underperformance is what led Warren Buffett to assert that successful investing has a lot more to do with temperament (meaning discipline and patience) than intellect.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

Teresa Staker
Teresa Staker
Administrative Assistant
p // 801-494-6047
Retirement Plan with glasses

Are You Making These 4 Major 401K Mistakes?

Re-posted from Are you Making these 4 Major 401K Mistakes?

If you’re lucky enough to have access to an employer-sponsored 401(k), you should know that you have a great opportunity to accumulate a bundle in time for retirement. That’s because 401(k)s allow you to contribute much more on an annual basis than IRAs. The current yearly limits are $18,500 for workers under 50 and $24,500 for those 50 and over. By comparison, IRAs max out at $5,500 and $6,500 a year, respectively.

Still, having a 401(k) will only get you so far if you don’t manage it wisely. With that in mind, here are a few major mistakes you should make every effort to avoid.

1. Not contributing enough to snag your employer’s match

One benefit of having a 401(k) is the opportunity to build wealth not just with your own money but your employer’s as well. In fact, 92% of companies that offer a 401(k) also match worker contributions to some degree. But to get that money, you’ll need to contribute money of your own. Unfortunately, an estimated 25% of workers don’t put in enough to capitalize fully on their employers’ matching dollars, and are thus leaving a collective $24 billion on the table each year.

If you’re not getting your employer match, you’re kissing free money goodbye — so don’t let that continue. Figure out how much you need to put into your 401(k) to get that match, and cut corners in your budget to make up for a slightly smaller paycheck. Otherwise, you’ll miss out on not just your company match itself, but the potential to invest it and grow it into a larger sum over time.

2. Not increasing your contributions year after year

Many workers get a raise year after year. If you’re one of them, then you’re doing yourself a major disservice by not sticking that extra money into your 401(k) before it shows up in your paychecks.

Think about it: Unless your expenses go up drastically from year to year, you can probably get by without that additional money. So, if you arrange to have it land in your 401(k) from the start, you won’t come to miss it.

3. Sticking with your plan’s default investment 

When you first sign up for a 401(k), you’ll be automatically invested in your plan’s default option until you select your own investments. That default option is usually a target date fund, and while that may be a good choice for some workers, it’s not necessarily the best choice for you.

Target date funds are designed to grow increasingly conservative as their associated milestones near. For example, if you invest in a target date fund for retirement over a 30-year period, you’ll generally start out with a more aggressive investment mix and will shift toward safer assets as that period winds down.

The problem with target date funds is that they don’t necessarily provide the best returns on investment, nor is your 401(k)’s default target date fund designed to align with your specific strategy or tolerance for risk. A better bet, therefore, is to review your plan’s investment options and choose those that are more likely to help you meet your goals. Keep in mind that you may, after reviewing your choices, decide to stick with that default fund, and that’s fine. Just don’t make the mistake of not exploring alternatives first.

4. Not paying attention to investment fees

Of the various investments you’ll get to choose from in your 401(k), some are bound to be more expensive than others. But if you don’t pay attention to fees, you could end up losing thousands upon thousands of dollars in your lifetime without being any the wiser. The funds in your 401(k) are required to disclose their associated fees, so take a look at those numbers and aim to keep them as low as possible without compromising on returns. You can generally pull this off by sticking mostly to index funds, which are passively managed and don’t have the same costs as actively managed mutual funds.

Participating in a 401(k) plan is a great way to set yourself up for a comfortable retirement. Avoiding these mistakes will help you make the most of that plan, leaving you with a higher ending balance by the time your golden years eventually roll around.

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Teresa Staker
Teresa Staker
Administrative Assistant
p // 801-494-6047

3rd Quarter 2017

The markets proved, once again, just how unpredictable they can be. Despite geopolitical turbulence abroad and political change at home, capital markets, overall, remained quite strong — from the Dow Jones crossing the 23,000 mark for the first time in history to many of the equity markets having positive returns this quarter. This resiliency reminds us that the markets’ movements cannot be accurately predicted, nor should their ups and downs come as a surprise.

The way in which the markets’ directions, yet again, did not sync with common expectations or predictions only further affirms our philosophy and the work we do — why we focus on designing a plan that withstands the test of time.

You may notice that your report this quarter features a slightly different look. We are moving to an exciting new technology platform, and this quarter’s report was generated using our new system. The new format closely replicates what you have traditionally received in the past, but you may notice a few differences. We’re confident you’ll find the report’s format familiar, but please reach out to us if you have any questions.

What’s most important is how our new technology system will allow us to communicate with you in more innovative, effective ways moving forward. It is our goal that, by the end of the next quarter, we will fulfill a long-held dream: the ability to share with you more timely and detailed information than what you’ve received in the traditional, paper-based quarterly report. You will soon be invited to a secure online portal where you can access financial information that is updated daily and benefit from some new, dynamic reporting features. We look forward to sharing more about how you can start using this portal in the coming weeks.  If you prefer to continue receiving your reports in print, please let us know.  We are continually looking for ways and methods to keep you informed of your investments in a way that you are most comfortable with.

As always, it is a pleasure to serve you. We appreciate your continued trust, and we’re excited to soon provide you with a more robust, enhanced method for sharing the information you value most.

Teresa Staker
Teresa Staker
Administrative Assistant
p // 801-494-6047

9 Reasons Investors Love Vanguard & DFA Funds

*** June 2015 article with information worth repeating***

Reposted from

Wow. Vanguard had tremendous growth in 2014. An intake of $214.5 billion last year pushed this fund giant’s total assets to $3.1 trillion as of December 31, 2014. That growth represents a 56% increase for Vanguard compared to 2013. Early this year, they passed State Street Global Advisors as the second-largest exchange-traded fund provider as they close in on the top dog BlackRock.

Dimensional Fund Advisors (Dimensional or DFA funds for short) is another fund company that has been experiencing strong inflows. DFA funds added nearly $28 billion in assets in 2014, which was the third highest dollar amount of inflows last year, trailing only Vanguard and JPMorgan Chase.

That type of growth is doubly impressive because Dimensional Fund Advisors flies under the radar of many investors. Last year’s growth, however (not to mention a relatively steady inflow of assets since its 1981 founding), makes it clear that investors are attracted to DFA. What explains its rising-rock-star appeal, given its (yawn) nerdy tagline, “putting financial science to work”? Maybe it’s the firm’s laser-like focus and steadfast approach to applying academic research into the factors or “dimensions” that are expected to generate long-term wealth – fads and fashions be damned. For this blogger, anyway, it’s hard not to prefer that level of discipline to the usual frenzy involved in active stock picking and reactionary market timing.

Then again, Vanguard’s index and exchange-traded funds are no flashes in the pan either, also built on an investment strategy of substance. Admittedly, it can be confusing at a glance to understand how these two similar, but different fund companies compare. Let’s take a closer look at nine characteristics that help differentiate them from the crowd … and from each other.


Reason 1

Both trust the market knows best.

Yes, we are all brilliant, of course. However, when you consider that in 2014 alone there were some 60 million daily worldwide trades representing more than $300 billion dollars, it may be wise to embrace market pricing instead of trying to outguess the market. Vast, real-time, electronic information makes the market a highly effective price-setting machine. Trying to consistently outguess 60 million of your fellow investors is not unlike expecting to find enough single needles to outweigh an entire haystack, and to succeed at it over and over again.

In contrast, if you invested $1 in 1927 in a U.S. large-cap index fund and let it ride, your investment would have grown to $3,955 by 2014. Not bad. Vanguard and Dimensional alike prefer to invest in market “haystacks,” albeit with some procedural differences in how the assets get bailed, so to speak.

Electronic Market


Reason 2

Both minimize trading.

Trades cost money, in both overt and clandestine ways. By trading according to plan rather than trying to time the market or jump into “hot” segments, both fund companies are well-positioned to trade less often. Since trading is expensive, we can expect lower costs with reduced drag on performance if we trade less often.

The DFA Difference

Beyond just reducing trades by avoiding market-timing or trend-chasing, DFA’s structured trading strategy is part of its secret sauce. Actually, it’s not such a secret: When it comes to trading, a trader who is in less of a rush to buy or sell can usually command better prices than one who is in a rush or under pressure to trade. By being more patient than an index fund manager can be and a market-timing manager chooses to be, Dimensional has developed a solid track record for minimizing the trading costs involved in capturing the asset class returns they are seeking.

Moreover, DFA takes it one step further and offers its funds through select financial advisors who have demonstrated a similar level of patience. The result? Less frenetic trading and even net inflows during times of market panic. For example, during the 2008-2009 market panic, most funds experienced massive redemptions, which wreaks havoc on a mutual fund management. However, DFA funds actually had net inflows during that time, and was able to put that new cash to work and buy securities at bargain basement prices. (This is a mutual fund manager’s dream!)

Patient Investing

Reason 3

Neither firm tries to guess what asset class will outperform.

Vanguard and DFA offer funds with “style purity.” They invest in the asset class they say they will–small-cap value for example–and stay there. They aren’t making any kind of tactical bets that one asset class will perform better than the other.

The chart below says it all. Each column is the year, and each colored square is a separate asset class. Follow one color, such as “red” (the S&P 500), year by year. Look how much it bounces around! The performance of each asset class each year is anyone’s guess.


Callan Periodic Table

Reason 4

They don’t keep betting on the horse that won the last race.

Another common investment mistake is to chase stocks that have been on a recent winning streak and/or abandon recent underdogs. This continues to happen, despite the volume of evidence that past performance does not inform us about future returns.

Both Vanguard and DFA do not make “bets” on individual stock performance. They simply hold a large basket of stocks that fall into their well-defined criteria (in DFA’s case) or follow a published index (in Vanguard’s case).

The DFA Difference

DFA does not invest in public indexes like most of Vanguard’s index funds. The problem with public indexes is, well, they are public; everyone knows when a public index will change (and how it will change). Stocks tend to rise when it’s announced they will be included in a public index, and index funds will buy that stock on the effective date at the higher price.

This forces the index funds to “buy high,” which is exactly the opposite of what investors should do. It’s why Dimensional can afford to trade more patiently, as described above.

Here’s a nice visual to explain the concept:

Index REconstruction

Reason 5

Both firms make “going global” easy.

Only about half of the global market’s capital is in the United States. That leaves a big opportunity set outside our borders. Moreover, many of those other countries respond differently to economic forces, which has many benefits to investors (a portfolio of investments that “zig” while others “zag” can actually increase return and lower risk).

Both firms offer funds that cover broad sectors of foreign markets, so you can easily stay globally diversified.

The DFA Difference

DFA offers foreign funds (and even emerging market funds) with higher “tilts” towards small-cap and value stocks, which have historically been a source of higher long-term returns. They also “tilt” towards companies that have exhibited higher profitability. As an asset class, these stocks also have a history of higher returns.

Global Investment Diversification

Reason 6

They help to manage your emotions.

When you are well diversified, both domestically and in foreign markets, you reduce the risk of any one investment taking a nosedive, which can be unnerving and cause you to panic if you are over-concentrated in that investment. With many of Vanguard and DFA’s funds holding thousands of individual securities, the impact of a few dogs isn’t going to hurt as much. You aren’t as likely to panic sell when you have a global back-up plan.

Take a breath. Talk to your advisor. Don’t react emotionally to a buy high and sell low outcome.

Investor emotions

Reason 7

Both firms help you to see beyond the headlines.

We are bombarded daily with catchy headlines about economic facts that seem to be on the verge of derailing our investment strategy. It’s easy to get swept into the hoopla about rising (or falling) oil prices, currency fluctuations, or political tensions in other countries. By participating in the market according to a disciplined, evidence-based process, turning to fund managers who help you accomplish that, it’s easier to take comfort in the fact that you are a long-term investor with a well-diversified global investment strategy.

Financial News

Reason 8

They help you focus on the real drivers of returns.

Many investors believe the factors that affect their returns are stock picking and market timing. In reality, the bulk of your returns are actually driven by how you decide to split your money between stocks and bonds. (Well, another huge determinant is your ability to stay the course once you build your sensible portfolio, without succumbing to your human behavioral biases, but that’s a subject for another post, such as this one.)


  • Stocks have historically offered a higher long-term return compared to bonds, but are more volatile.
  • Smaller companies have historically performed better than larger companies.
  • Value stocks have historically done better than growth companies (think WalMart vs. Groupon).
  • High-profitability companies have historically performed better than low-profitability companies.


  • Longer-term bonds have historically had higher yields compared to shorter-term bonds.
  • Lower credit quality (“junkier bonds”) have historically had higher yields compared to higher credit quality bonds.

This is an important decision, so work with your advisor to design a suitable portfolio based on these core drivers of returns.

The DFA Difference

DFA regularly and closely collaborates with academic scholars, some of whom have been awarded Nobel prizes for identifying these factors or “dimensions” of higher expected returns. As such, they have been particularly early, strong and ongoing proponents of this sort of factor-based or evidence-based investing.

DFA Financial Researchers

Reason 9

These firms help you focus on what you can control.

One of the few things you can control in investing is your costs. Both firms offer funds at significantly lower costs than many of their actively managed peers. They also offer a more disciplined approach to knowing what your own fund investments contain, so that it’s easier for you (especially with the support of an evidence-based advisor) to build and maintain a portfolio that you can stick with through thick and thin in your quest to build personal wealth. By minimizing the angst and second-guessing involved when you’re not sure just what is contained within your holdings, your own overall costs can be minimized as well.

You are in the busiest (and most profitable) time of your life. Working long hours. Struggling to figure out the best investments for your retirement. (Time, what time?) Why not work with a financial advisor who can help you clarify your goals and develop and plan to reach those goals?

An advisor will help you focus on factors you control — asset allocation, structuring a portfolio that takes into account the real drivers of expected returns and your ability to handle risk, broad diversification, low expenses, low trading costs and tax minimization.

DFA Financial Control


Both Vanguard and DFA offer low-fee funds that operate on the principle that the market is an effective, information-processing machine that is nearly impossible to outguess.

DFA takes it one step further with some distinct tactics and also allowing for “tilting” towards areas of higher expected returns like smaller stocks, value stocks and higher profitability stocks.

The growth of these firms shows that investors are waking up to the reality that investment success is about capturing global market returns and keeping costs low, not about hunting down the next “rock star” money managers.

Teresa Staker
Teresa Staker
Administrative Assistant
p // 801-494-6047
Change Jar

Investment Strategy 2nd Qtr 2016

For several years, we have experienced historically low interest rates, and for some time, the markets have expected these rates to begin rising. While such expectations get priced into current yields, markets provide no certainty that interest rates will rise at any particular time. Britain’s decision to leave the European Union only adds to the uncertainty.

When the Federal Reserve increases short-term target rates, as it did in December for the first time since 2006, there should be no expectation of an increase in all interest rates. In fact, interest rates across the yield curve have declined in 2016. The yields on five- and 10-year U.S. Treasury bonds are now at 1.0 percent and 1.5 percent, respectively, after starting the year at 1.76 percent and 2.27 percent. Global bond yields have also retreated to near historic lows. There are now 10 countries with negative five-year yields on their government debt, and more than $10 trillion of sovereign debt outstanding carries a negative yield.

Given the possible continuation of this low-yield environment, what is the benefit of fixed income in your portfolio? It’s a reasonable question, but expected return is never the only factor to consider when deciding which asset classes to include in your portfolio. Managing risk is also a key consideration, and high-quality fixed income is one of the best diversifiers of equity risk. Fixed income’s function is to provide stability by reducing total portfolio volatility.

When considering an asset class for your portfolio, it’s important to examine its volatility and how it correlates with other assets in the portfolio. When two assets are negatively correlated, it means that when one asset class has returns above its average, the second asset class will tend to have returns below its average. It is this negative correlation that provides diversification benefits. When looking at equities and fixed income, for example, we see that the monthly correlation of five-year Treasuries and the S&P 500 was negative (–0.33) over the past five years (as of May 2016).

Thanks to its diversification benefits, high-quality fixed income can help you better weather the ups and downs of the markets. So while fixed income may not currently be reaping large yields, it does play an important role in your financial plan.


Squire Wealth Advisors


BAM_ALLIANCE_logo_community_color - Blank - Adjusted

Teresa Staker
Teresa Staker
Administrative Assistant
p // 801-494-6047

Why a Millennial Prefers to Save

Why a Millennial Prefers to Save

Saving has a very positive connotation. You can save a life. In sports, you can save a game. A very admirable goal is to save the world.

However, I’ve heard many financial professionals lament how younger generations (millennials, specifically) don’t save enough money and, in turn, fail to appreciate the value of a dollar. To the extent it helps reform that opinion, here are three of the main reasons that I, a millennial, choose to save.

Future kids – Breaking news: College is expensive and student loans are out of control. But remind yourself what a college degree (and perhaps even further education) means in terms of earning power in future years. I don’t plan on having children any time soon, but when a private university over four years could cost upward of $200,000, it’s better to be prepared.

Enjoyment – In a lot of ways, saving is about opportunity cost and how much you value the pleasure of the concert/game/gadget today versus income in the future. Fortunately (or unfortunately, depending on your point of view), I have seen way too many charts and graphs showing the benefits of patient investing for the long term. It might not be the sexy thing to do right now, but my age and long-term outlook allow me to consider taking advantage of a 100 percent equity portfolio. There will come a time when, nearing retirement, I can no longer do that – and neither will you.

Social Security – I’m not a pessimistic person (although the Flyers and Eagles are pushing me there quickly), but I believe Social Security may look vastly different in 40 years. I don’t have a pension, and I have no idea how much help the government will give me when I decide to stop working. That means I’ll likely have to rely more on my personal savings, whether that’s through an employer-sponsored retirement plan (think 401(k) contributions), an IRA or a traditional investment account. The two easiest ways to combat issues related to disappearing future income are to work longer and save more. I can only do the latter for now.

Yes, saving is important. But I also subscribe to the motto of, “Do what makes you happy.” These ideas (saving and happiness) do NOT have to be mutually exclusive. If your happiness comes from buying material things, go right ahead. As long as you have enough cash to support your lifestyle, you are helping drive the American economic engine to the forefront of the world. If you find value in creating a safety net for retirement, or even in retiring earlier, saving may bring the happiness you seek.

While overspending is a natural downfall of the former philosophy, I would argue that underestimating the future benefits of saving (or a lack of knowledge regarding them) plays a large role in the decision to spend too much in the present. Happiness is hard to quantify because it is a feeling. Future benefits are equally as hard to quantify because they are based on your utility curve of happiness/consumption (if I may get a bit technical).

Not many people I know go around thinking about their marginal utility curve. But it doesn’t have to be that complicated. Simply being more informed about the benefits of saving in dollar terms will go a long way toward pushing people to adopt a long-term attitude. For example, see the chart below.

Thrive Graph

Assuming a geometric average return of 9.6 percent, starting to save $5,000 a year at age 25 instead of putting it off until you turn 30 turns into almost an additional $750,000 over a lifetime. Now, I know that not every 25-year-old, likely near the beginning of their earning potential, will be able to sock away $5,000 a year. The point is that the benefits from saving early, in whatever amount you can, compound over time.

Suddenly, I’ve found, the urge to save gets a bit stronger.

Matt Spezialetti, Portfolio Advisor, Herbein Wealth Management

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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2016, The BAM ALLIANCE

Teresa Staker
Teresa Staker
Administrative Assistant
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