For almost 50 years, “The Price is Right” followed a repetitive and reliable script. But, in a viral YouTube video from 2007, a man makes it through the daily game-show gauntlet and to a memorable Showcase Showdown. “Barker’s Beauties” dramatically reveal a trio of prizes, including a living room set, a 42-inch TV, and two matching Kawasaki motorcycles. “This showcase can be yours if the price is right!” exclaims the announcer as the studio audience wildly applauds.
“What is your bid?” asks acclaimed “Happy Gilmore” actor and former Naval Aviator Bob Barker.
“You mean on everything?” He pauses to assess the three prizes. “Phew . . . I’ll bid . . . two hundred fifty thousand dollars.”
That’s right. $250,000. He bid a quarter of a million dollars on a second-rate couch, rear-projection TV, and two lousy motorcycles. The bid is so egregious that a mortified Bob Barker refuses to accept it, “Two hundred fifty THOUSAND? Think about that now . . .” he stalls as the horrified audience prompts the confused contestant towards an only slightly less egregious $60,000 final bid.
Actual retail price? $20,685.
The cringe-worthy video is more tragic than funny. The infamous contestant is a Navy sailor in uniform. By my own admittedly mediocre mental gymnastics his bid was off by about 1,200 percent. He should have stuck with “Plinko.”
We Have Met the Enemy and He is Us
On 1 January 2018, the Department of Defense implemented the “Blended Retirement System” (BRS) to all new enlistees. The policy change maintains a strong pension for the 20 percent of service members who reach retirement while providing a matching 401k system (Thrift Savings Plan) for the 80 percent who serve for less time. Sailors with fewer than 12 years of service are grandfathered into the tradition 20-year “cliff vesting” pension system but were allotted a one-year window to “opt in” to the new matching BRS. That window closes on New Year’s Eve 2018.
The military instituted all the appropriate nudges, default settings, and mandatory training. However, with the volatility and instability of the 2018 stock market, those actions were not sufficient. The timing of the policy’s implementation could not have been worse. The federal government parachuted an ill-prepared active duty force into the decade’s most volatile Wall Street battlefield.
The policy is not the problem. Veterans’ groups, the Pentagon, and Congress all endorsed pension modernization. The implementation timing also is fine. Though painful, if a plan is dollar-cost averaging with a 30-year horizon, corrections and crashes are unique buying opportunities and, in a morbid way, something to look forward to. The problem with implementing the BRS in 2018 is behavioral risk created by increased volatility and exacerbated by a predisposition for poor financial decision-making. The “Price is Right” sailor may be extreme, but he is not unique.
The personal characteristics that create successful warfighters are counterproductive for long-term investment success. Bias toward action, aversion to passivity, and personal ambition all are enemies of long-term investment strategy. It is ingrained in the U.S. psyche that hard work pays off and nobody would want his or her strategy described as “passive.” Nobody’s life goals should be average performance, but as an investor, the strikeouts hurt more than the home runs help. It is counterintuitive: If a person bats .300, they won’t win the batting title, but if they do it for 20 straight seasons their career average will get them into Cooperstown. Average performance over an extended period produces outstanding results.
The instincts that make a great SEAL, aviator, or sailor create a mental model subconsciously encouraging investors to buy high and sell low. Warren Buffet made a $1 million bet that no investor could beat the S&P over a ten-year period. As he collected his winnings (and donated them to charity) he described the lesson learned in his annual letter to shareholders. “Stick with big, ‘easy’ decisions and eschew activity,” he wrote. Great advice for investing, poor advice for warfighting. I wouldn’t follow the “Oracle of Omaha” into battle, but he seems to be doing pretty well for himself with investing.
Staying the course in a passive low-fee index fund with annual average returns over two decades will produce stellar returns. So what is the plan for the continued volatility and pending bear market? Do nothing. That’s the plan.
Sustained Average Performance: TSP and the Great Recession
It is not possible to predict the future, but a model of the Blended Retirement System can be created to calculate the returns if an enlistee and ensign stayed the course 20 years ago. Notably, their career would have coincided with the rockiest financial times since the 1930s. It began at the height of the Internet bubble, weathered the 9/11 crash, the housing crisis, and the great recession, but also riding the 28 percent gain in 2003, 25 percent in 2009 and the 15, 32, and 12 percent boom time in 2012, 2013, and 2014.
So how did these hypothetical warrior investors do? An E1 in 1999 who saved 5 percent of his or salary with a 5 percent government match for 20 years would have $193,913 in an index fund that tracked the S&P. Should he or she not invest another dime, with 9 percent rate of return they would hit a million bucks right around his or her 60th birthday. An officer commissioned in 1999 with the same savings rate would be sitting on $363,592, on pace for $2.8 million by his or her 65th birthday.* They also both would make it to the 20-year “cliff-vesting” point and retire with full medical benefits and an inflation-adjusted pretax pension of $2,100 and $3,508 per-month, respectively.
Figure 1
Also, these theoretical patriots from 1999 did pretty well for themselves month to month. Historically, military expectations are a comparatively low salary pared with exceptional benefits including a tax-free housing allowance and medical care. After the 2001 terrorist attacks, U.S. wages plateaued, but as a small percentage of the nation bore the brunt of the longest war in U.S. history, military compensation went up. An E5 made 10 percent less than the median American in 2000, but by 2011 they were making 10 percent more. The most recent jobs report indicated a national wage increase of 3.1 percent, slightly higher than the 2019 military pay raise of 2.6 percent, but for now even excluding housing cost and medical insurance, an E5 is making an above average U.S. salary. It’s not that service members are “keeping up with the Joneses.” It’s just that in the last 15 years, the Joneses got poor.
Figure 2
Mind Your Helm, Stay the Course
The investment strategy for new sailors is clear. Don’t overthink it, and save at least 5 percent in TSP. The policy strategies for the Navy are not as clear-cut, but there are things sailors can do to maintain a stable force. DoD should extend the window to “opt in” to the new program indefinitely. The window was created to protect sailors grandfathered into the legacy system, but that was before the market scared away potential investors who won’t make it to 20 years. DoD should disclose saving rate statistics publicly. While uncouth to talk about money, a realistic discussion 401k accounts can adjust expectations and continue “nudging” sailors towards responsible decision-making. Similar to the currently required obligations when a service member declines life insurance, commanding officers should notify spouses upon sailors “opting out” of any BRS investment opportunities below the matching fund threshold.
For service members: If you are for sure, 100 percent getting out of the Navy, “opt in” to the BRS right now. Unless the policy is changed as recommended, you need to do it before 31 December 2018. Save 5 percent of your salary (at least) and get an overnight 5 percent pay raise with matching funds. Even if you wind up staying in, you will still do fine as long as you stick with the plan over your entire career. If you need inspiration, Google the believers of the “FIRE” lifestyle (Financial Independence Retire Early.)
Understand the “Rule of 72.” If you take the interest you earn and divide the percentage into 72 that is how long, in years, it will take your money to double. If you have $100,000 when you’re 30, at a 7 percent annual rate you will have $200,000 when you’re 40, $400,000 when you’re 50, $800,000 when you’re 60 and $1.6 million when you’re 70. It’s just a math problem. If you start saving at 45 instead of 25 you need to save ten times more money to have the same nest egg. Don’t get me wrong, you could still buy Mega Millions tickets when the jackpot is $1.6 billion, but understand you can also get rich the old fashioned way. It will just take a little longer.
Take out your green notebook and black government-issue pen that probably just exploded in your new type III cammies and write this down. If an actual bear is coming you should run. If a bear market is coming you should stay. Stop checking your accounts, quit smoking, and start exercising because you are buying stocks low and will someday sell high and you’ll want to live a long and lucrative life.
And most importantly, if you are going on the “Price is Right,” don’t wear your uniform and maybe watch the show once or twice.
*(Figure 1 based on historic pay charts, enlistment at age 18 and commission at age 22, a reasonably upwardly mobile career trajectory, and actual S&P returns)
