Larry Fink, chairman and chief executive of BlackRock, the largest asset manager in the world, is issuing a clarion call: Americans are too timid about investing for retirement, and we're headed for the rocks.
Somewhere along the way — maybe it was the bank bailouts; the housing crisis; the long, slow recovery from the Internet bubble — Americans, typically a bold and enterprising lot, lost their appetite for risk. Those of us who are lucky enough to have jobs and are saving aren't quite to the point of stuffing our mattresses — but we're close. Fink notes that bank deposits hit $10 trillion at the end of 2011, up sharply from $6 trillion in 2004.
And now Fink, whose firm manages more than $3.5 trillion, says that not only are Americans not saving enough, but also they are investing what they do tuck away in assets that return too little. Ultimately, he argues that investing in cash or bonds that seem prudent and safe will exact a high cost: the inability to grow a sufficient retirement nest egg fast enough.
Earlier this year, the firm launched its "Investing for a New World" initiative encouraging people to push aside what it portrays as unwarranted fear about equities at a time when valuations are compelling by historical averages.
Fink talked recently about the initiative and why now is not the time to be gun-shy when it comes to investing for retirement.
BlackRock recently launched the "Investing for a New World" initiative. Why is this on your mind right now?
Some of it is just spending many years running money and asking yourself, "Why such behavior? Why are we seeing everyone so risk-averse?" It's not like we just wanted to come up with a catchy ad campaign.
Much of it has to do with traveling around the world, talking to clients, who are all asking, "What do I do with my money?" Clients worldwide are struggling with low rates. They're frightened. Everyone is sitting on more money in cash and bonds than ever before.
Even high-net-worth investors?
It's everybody — sovereign wealth funds, retail, institutional, from the Middle East to Asia to Europe to the United States.
We want to alert people, especially families managing defined-contribution plans (like 401(k)s) and individual retirement accounts themselves. They have derisked so dramatically that they are not going to achieve the pool of savings that will meet their needs during retirement. I'm the co-chair of NYU Langone Medical Center, and between my role at the hospital and President Obama's health-care bill, it's very clear to me how much we're preoccupied with extending our lives. We are all going to live longer. But what are we doing about having the ability to afford that extension of life? Sitting in 2 percent bonds, one will never achieve the proper nest egg, and it's going to fall on the government, which no one is talking about yet.
For people who want to put their money to work more effectively, what advice do you have?
Warren Buffett's done a pretty good job, and you know what he's doing? Focusing on long-term, high-quality companies with good management. There's nothing special about what Buffett does, but he does it really well. He focuses on the long term, on great-quality companies, with a payday over 10 and 20 years.
Horizons are important. You have to start thinking about what you can earn in returns over 20 years and not worry about the monthly, quarterly and annual returns as much. One thing we have to help everyone understand is the importance of compounding. If you look at a chart of investments that have a return of 5 percent, and what your nest egg is over 30 years, or a return of 2 percent, we're talking about a dramatically different amount. If you put all your money in cash and bonds earning 2 percent, you will not have enough money. And it doesn't matter how much you're allocating, unless you're allocating 20 to 30 percent of your disposable income, which most people can't afford; they won't be able to live.
So there are ways to earn returns that are probably a little more frightening because you're not accustomed to volatility. But equities are cheap by any historical measure. Over a 20-to-30-year horizon, in almost every study, equities are a good asset class. They have been a bad asset class for the past 10 years. That's why I like them now.
Are there particular sectors or regions investors should focus on if they want to get more exposure to equities now?
There are very easy strategies to look at. We love dividend stocks. Because you're getting that high coupon from that dividend, dividend-paying stocks have less volatility than the rest of the stock market, about 70 percent of the volatility of the typical equity market.
We believe that clients who want to get into equities but are nervous about how to allocate should think about ETFs or some strategies that are more betalike, ones that mimic an index.
BlackRock also believes that buying diversification with a more global portfolio over a long cycle is good.
Which goes back to your emphasis on stock valuations.
Look at the historical prices of stocks. When you think about the Internet bubble — P/E (price-earnings) ratios were 80, 90, at unsustainable levels. If you're able to buy equities as a universe at 12-ish times earnings, that represents some long-term good investments. Equities have been so battered down by all these investor fears, and they have done so poorly, it means that valuations are cheaper and cheaper and cheaper. And corporations are sitting on a trillion and a half dollars in cash.
Are there CEOs or companies showing the type of long-term thinking required to shift that horizon?
Yes, tons of them. You look at DuPont — what a fabulous company. It's heavily oriented in global agriculture. Or McDonald's. A few years ago, people thought it lost its footing. However, the company has done fabulously well growing that franchise.
Agriculture and farming is a great theme. As the middle class grows worldwide, people eat more meals. People are going from two to three meals a day, going from carbs to protein, which requires more grains to grow. And we're losing arable land every year. Agriculture as a long-term macro theme to me is a no-brainer. How do you take advantage of it? You invest in great U.S. companies that are heavily involved in agriculture: Caterpillar, DuPont, Monsanto. Another thing that's clear is that you can invest in the emerging world by investing in U.S. companies. Our companies are global.