Intelledgement, L.L.C.

Intelligently hedged investment

Why Dilbert™ does not want you to hire Intelledgement

“Good plan!”

— Dilbert’s sarcastic comment concerning Wally’s impulse to quit his job and sell “items” on eBay because “people like items”

You have to be smart to be funny, and Scott Adams—creator of the Dilbert comic strip—is most definitely one of the funniest people alive today. In his 2002 book, Dilbert and the Way of the Weasel, Adams outlined his nine-point “Unified Theory of Everything Financial”:

In case you’re wondering, we are quoting this because it is smart, not because it is funny. In my licensed investment advisor representative opinion, this is a good plan. Indeed, it is better than what folks actually do, in general, planfully or otherwise. If most Americans followed Adams’ plan, this country would be much better financial shape. And if you decide to follow Adams’ plan, and need help with something special, we will be happy to provide you with fee-based advice, or refer you to a specialist, secure in the knowledge that both you and the USA are better off for your decision.

The “Unified Theory of Everything Financial” in action

Let’s take a closer look at Adams’ plan.

First of all, historically speaking—that is, over the last century—the annual return on investment (ROI) for the stock market is about 8%, for real estate it is about 6%, and for bonds it’s about 4%. Thus, let’s say at the age of 19 you decided to follow Adams’ plan, investing let’s say, $3,000 of accumulated summer earnings and relatives’ gifts to start a new Roth IRA. You go on to add token sums each year during college, then gradually increasing to the 2008-and-after maximum IRA contribution of $5000. 70% of your money goes into an S&P 500 index fund (e.g., a mutual fund that bought every stock in the S&P 500 so as to replicate the ROI of that index over time) and 30% into a bond fund. The chart below shows what would happen presuming you obtained the historical average ROI of 8%/4% (for stocks/bonds) on your money over the next 40 years.

YearContribution     1 JanIncome   31 DecTotal ROI
2011$3,000$     3,000$       204 $     3,204   7%
2012$   500$     3,704$       253 $     3,957 13%
2013$   500$     4,457$       305 $     4,762 19%
2014$   500$     5,262$       362 $     5,624 25%
2015$   500$     6,124$       422 $     6,546 31%
2016$1,000$     7,546$       521 $     8,068 34%
2017$1,000$     9,068$       628 $     9,696 39%
2018$1,500$   11,196$       776 $   11,972 41%
2019$1,500$   13,472$       935 $   14,407 44%
2020$2,000$   16,407$   1,141 $   17,548 46%
2021$2,000$   19,548$   1,158 $   20,909 49%
2022$3,000$   23,909$   1,666 $   25,575 50%
2023$3,000$   28,575$   1,993 $   30,568 53%
2024$4,000$   34,568$   2,413 $   36,981 54%
2025$4,000$   40,981$   2,864 $   43,844 57%
2026$5,000$   48,844$   3,416 $   52,261 58%
2027$5,000$   57,261$   4,010 $   61,271 61%
2028$5,000$   66,271$   4,648 $   70,919 65%
2029$5,000$   75,919$   5,334 $   81,252 69%
2030$5,000$   86,252$   6,071 $   92,323 74%
2031$5,000$   97,323$   5,941 $104,186 80%
2032$5,000$109,186$   7,715 $116,901 86%
2033$5,000$121,901$   8,632 $130,533 92%
2034$5,000$135,533$   9,618 $145,151 99%
2035$5,000$150,151$10,678 $160,829 106%
2036$5,000$165,829$11,819 $177,647 114%
2037$5,000$182,647$13,046 $195,694 122%
2038$5,000$200,694$14,367 $215,061 131%
2039$5,000$220,061$15,789 $235,851 141%
2040$5,000$240,851$17,320 $258,170 151%
2041$5,000$263,170$18,968 $282,138 161%
2042$5,000$287,138$20,741 $307,879 172%
2043$5,000$312,879$22,652 $335,531 184%
2044$5,000$340,531$24,709 $365,240 197%
2045$5,000$370,240$26,924 $397,164 210%
2046$5,000$402,164$29,310 $431,474 224%
2047$5,000$436,474$31,880 $468,354 239%
2048$5,000$473,354$34,649 $508,003 255%
2049$5,000$513,003$37,632 $550,636 272%
2050$5,000$555,636$40,847 $596,482 290%

Of course, in real in real life, some years you would do way better than 8% (S&P 500 lit things up to the tune of +34% in 1995) and some years you would do scarily worse (S&P 500 lost money for three years running in 2000-2001-2002). And just because the stock market has a 8% compounded annual growth rate (CAGR) for the past 100 years does not guarantee it will duplicate that for the next 40, of course. But presuming it does, lo and behold, four decades later, you are the proud owner of a brokerage accout with a net worth of $600,000, and capable of generating $45,000-to-$50,000 of income per year!

To get there, you contributed a total of $153,000 of savings over 40 years (an average of under $4,000 per year) while your investments earned $443,482. Nice work! (Contributing less than $4,000 may sound unambitious, but remember you also need to be allocating some of your savings for buying a house, your kids’ education, and some for health and other unplanned expenses.)

Better still, the 8% your S&P 500 index fund money earned beat 80% of all professionally managed mutual stock funds—did you know that on average each year, four out of every five professionally managed mutual funds lose to the market?—and thus most of your friends who agonized over selecting those pros and then counted on them to “beat the market” ended up eating your dust. Sweet!

Adams’ conclusion: fire and forget!

And this is the crux of why Adams’ response to any notion you might have to “improve” on his program would most likely be a sarcastic “Good plan!” He would tell you that anyone trying to sell you an improvement—an annuity, a whole life policy, a stock picking service or full-service broker, etcetera—has about an 80% chance of leaving you worse off…although you taking that advice has a 100% chance of making her money.

We agree with Adams’ argument with respect to most adjustments you might make to his plan…although of course we will tell you that our services are the exception which prove the rule! Well…you need to be the judge of that. However, we are not sanguine that a fire-and-forget missile is likely to find the optimal path through the investment storm clouds we see on the horizon (to say nothing of those we anticipate beyond it). We believe that some judicious navigation will considerably enhance your ROI…and may save you from some very unpleasant surprises!