Ben Stein on Wall Street's immorality
and boomers' doom

By Jason Chow
Globe Investor Magazine, September 18, 2008
Photography by Tibor Kolley/The Globe and Mail

Ben Stein is a renaissance man, though an ornery one. Over the past year, the economist-turned-lawyer-turned-actor/comedian/financial columnist has been critical of just about everyone. He's come down hard on educators for denying creationism, on hedge funds for the credit mess, and on American baby boomers for not saving enough for retirement. Jason Chow talks to him about financial stocks, ETFs and savings rates.

What's your call on the markets?

I think they're cheap. If you buy now, in 20 years you'll be very happy you did. I don't like everything in the U.S. markets now, but I do like index funds. I like buying the 500 largest companies in the U.S. And though financial stocks here have been slammed this past year, I think they're due for a substantial recovery in the next 10 years. If I'm buying with a 10-year horizon, I'm buying those. You don't even have to pick. Just buy the index.

But markets are still slipping. What's going on?

Speculators. The one giant super-factor that might fundamentally drive down the market would be a war between Iran and Israel. The hazard right now is not the price of oil. That's already been factored in by the market. War is the more frightening possibility. We'd have drastically higher oil prices, and shortages.

Financial stocks have gone down because of scandals and mismanagement in subprime lending. What needs to be done there?

We need more regulation. We need, in particular, rules for non-banks, the highly leveraged entities that raise money by securitizing instruments and loans. They are so large at this ­­point that they rival banks in size, and they're virtually unregulated.

Also, what we really need-and I hate to say this because it sounds so naive-is a moral awakening on Wall Street. They need to know they're not just there to make some quick money.

Are there any moral models to follow?

No. We have one supermodel, maybe, and that would be Warren Buffett, but even he's a speculator.

What should investors be doing now?

Be widely diversified. Figure out what you need to save and put one-third of it in the S&P 500 index fund, one-third into the developed-world indexes-something that includes Canada-and one-third in emerging markets. You might also add in some real estate investment trusts. Canada has some incredible REITs.

You keep mentioning index funds. Do you prefer ETFs over other securities?

I don't like managed funds. By and large, index funds outperform the average fund, and their fees are extremely small.

In that case, why are mutual funds still around?

Good question. It has to do with superior marketing and what I call the lottery effect of human personality. Most funds don't beat the indexes, but there are always a few funds that wildly outperform, and people will buy funds with the same mentality as buying a lottery ticket.

Lately, you've been proselytizing a lot about retirement saving. Why?

People need to prepare more for the period between when they stop working and when they stop breathing. I want them to save in annuities, index funds, foreign markets, emerging markets, domestic big caps and small caps. And I want them to save a lot more than they are. But most of all, I want them to just have a plan. People need a plan to figure out what they need.

How big is the problem?

In the U.S., between 30% and 40% of baby boomers are drastically unprepared for retirement. These people have zero savings. It's just so very important that we don't live out our final days in fear. It's an awful way to live.