I’ve seen the term “Traditional Finance” or “TradFi” thrown around quite a bit lately referring to the government approved, and financial industrial complex recommended methods of managing your personal finances, saving for future expenses, and planning for retirement.

In the context of large purchases and saving and planning for retirement this typically consists of contributing to your 401(k) up to the employer match and maxing out your Roth IRA coupled with buying “term and investing the difference”.  This will be supported by Monte Carlo simulations and fancy proprietary software showing the odds of success of your “customized” financial plan, that looks like everyone else’s.

I believe it is deceptive to call this method of saving and planning for retirement “traditional”.  The word tradition gives it an air of legitimacy and age that isn’t there – implying that this is the way things have always been done, passed down from generation to generation.  Not only is this an appeal to tradition fallacy, arguing that it must be the best way because it is “traditional”, but it is based on a false premise.

This is not the traditional way.  There is an older way to plan for retirement and save for large expenses and finance your life.  Consider the history.   “TradFi” wasn’t passed down to us or our parents.  This was created in our lifetime, or parent’s lifetime for the younger readers. 

• 1997 Taxpayer Relief Act- Roth IRAs were created
• 1996 Small Business Job Protection Act  – Savings Incentive Match Plan for Employees (SIMPLE) IRA created
• 1978 Revenue Act – Simplified Employee Pension (SEP) IRA created
• 1982 Revenue Act – Internal Revenue Code (IRC) section 403(b) expanded to church employees.
• 1978 Revenue Act – IRC Section 401(k) added to the IRC
• 1961 Revenue Act – IRC Section 403(b) expanded to public education employees
• 1958 Revenue Act – IRC Section 403(b) was added to the IRS Internal Revenue Code for certain non-profit employees

This is barely over one generation old.  What did people use to plan for retirement and save for large expenses prior to 1958?

Passive income when someone could no longer work came primarily from pensions (subject for another day), followed by Cash Value Life Insurance Policies and Annuities (another product offered by Life Insurance companies).  After these, individuals used personal savings accounts, CDs and the like.  Stocks and mutual funds were used but to nowhere near the extent they are relied upon today.  They were the top of the financial pyramid, not the base.

So why did things change?  Well, it wasn’t an organic transition.   First, we need to understand that the stock market exists to allocate capital.  Capitalists want to allocate capital for economic growth and prosperity.  Mercantilists want to allocate capital for personal gain and enrichment.  Our government and financial sector have been dominated by mercantilism for well over 100 years.  Much of what is accused of capitalism is in fact mercantilism.

We also need to realize stocks are valued by supply and demand.  If there is high demand for shares of Tesla, or Apple, the price goes up.  If no one wants to buy shares of Budweiser, the price goes down.  This is why a company with only $1 million in assets can be valued at $100 million on the market – speculation.  And then when the overvaluation is realized, the CEO can sell his shares first making a handsome profit while the investors (largely through mutual funds) lose their money.

We also need to recognize that in every stock transaction, there is a buyer and a seller.  Both participants believe their decision to buy or sell is the most profitable.  The seller would not sell if he thought the price would still go up substantially.  And the buyer would not want to buy if he thought the shares would lose 97% of their value.

Created in 1978, 401(k)s didn’t really begin to be used until the early-mid 1980s. In 1981 interest rates peaked at about 20%. Americans didn’t have the funds to contribute to these plans. From here they began to drop to about 5% by the mid-1980s.  What did this do to the average American’s spendable income?  It left more money in his pocket.  Money for luxuries but also money for saving and planning for retirement.  Remember Willie Sutton’s law (BYOB Page 29)?  (wherever capital is accumulated, someone will try to steal it).  The financial industrial complex wanted access to this newly available capital.

As rates dropped, large investment firms advertised their mutual funds and began providing 401(k) management to corporations as employee benefits. The companies are the client/customer of the investment firm. The employees are just the funding source. But it was also a benefit to the company – the 401(k) funds contributed by employees can be invested back into the company by purchasing their own stock!

This increase in available funds combined with employers pushing employees to defined contribution plans (ex: 401(k)) over defined benefit plans (pensions), and investment firms advertising their mutual funds, all while the government gives it a tax “advantaged” status.  This sharply increased the demand for stocks, which in turn drastically increased stock prices.  The Austrian Business Cycle boom played out exactly as it would be predicted.  As well as the subsequent bust with the dot com bubble in 2000.

I don’t see anything “traditional” about the stock market, 401(k)s, Roth IRAs and giving up control of your capital to these things and hoping it will succeed.   I believe a more accurate label is “conventional finance” – conforming to established practice, in accordance with general agreement, use, or practice.  You don’t even own the shares in your 401(k) or roth or other mutual funds. As former SEC director Erick Sirri stated, shares are held in “fungible bulk…there are no specific shares directly owned by the underlying beneficial owner”; instead brokers’ customers own rights in the brokers’ interests. According to Sirri, investors acquire a right to sue a broker, but do not own specific shares. (Wayne Jett, Fruits of Graft, p 378)

Now, consider that from 1994-2016 global stocks produced an average return of 7.3%.  If you remove the top 10% from the data the returns drop to 2.9%.  Remove the top 25% and average return goes down to -5.2%   Also consider that from 1990-2009 1.3% of stocks were responsible for producing all of the gain above that of treasury bills (short term bonds).

So what is truly Traditional Finance?  Taking control of the banking function in your life.  Using a properly structured whole life insurance policy to save for large expenses, emergencies and plan for passive income may not be conventional today but it is Traditional.

As Nelson Nash said – “When you know what is going on, you’ll know what to do”.

If you’re ready to break out of the conventional financial advice, or just want to learn more, click to book a free call today.

Semper Reformanda

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