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Friday, July 25, 2014

It’s time to stop the bleeding

Stephen Kelley

Not long ago, I was watching a movie about a time not so long past. In it, a man had become ill with some kind of dread disease, and as we would today, they sent for the doctor. After taking a look at the guy (one wonders what the doctor was looking for), the doctor pronounced that he needed to be bled, and so he pulled some kind of dirty-looking medieval contraption out of his bag, adjusted a knob or two, wrapped a tourniquet around his arm, gave him a stick to squeeze, and WHACK! The next thing you knew blood was dripping into a rather ornate drainage pan.

I don’t know what happened to the poor guy, because I was intrigued by this whole bloodletting thing and started to read about it on the internet. I learned a few things. ...

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Not long ago, I was watching a movie about a time not so long past. In it, a man had become ill with some kind of dread disease, and as we would today, they sent for the doctor. After taking a look at the guy (one wonders what the doctor was looking for), the doctor pronounced that he needed to be bled, and so he pulled some kind of dirty-looking medieval contraption out of his bag, adjusted a knob or two, wrapped a tourniquet around his arm, gave him a stick to squeeze, and WHACK! The next thing you knew blood was dripping into a rather ornate drainage pan.

I don’t know what happened to the poor guy, because I was intrigued by this whole bloodletting thing and started to read about it on the internet. I learned a few things.

Bloodletting was modeled on the process of menstruation. Hippocrates, the father of the Hippocratic Oath to which all physicians must swear, believed that menstruation functioned to “purge women of bad humors.” It was later solidified into medical practice by the Greek physician Galen, during the time of the Roman Empire, after he discovered that not only veins but arteries carried blood, not air as previously believed. Galen created a complex system of the amount of blood to drain from a patient based on age, constitution, season, weather and location. This became accepted practice and persisted for more than 2,000 years.

As early as the 1100s, bloodletting began to be questioned. The church officially ruled it “abhorrent,” leading to the advent of the “barber-surgeon,” since monks, the traditional bloodletters, were no longer permitted to engage in it. Indeed, the red and white barber pole signifies their role in the practice: red for blood, white for the tourniquet, and the pole signifying the stick or rod the patient would grasp. Yet even though mounting evidence showed bloodletting to be ineffective and indeed even harmful, it took almost three centuries, until the end of the 19th century, for it to fall out of disfavor. It was used for literally everything, from influenza (the very combination that killed George Washington) to broken bones, gunshot, headache, back ache, reducing menstrual flow, cancer, pneumonia, and anything else you can think of.

It’s happening again, only this time in the retirement planning world. Thirty-five years ago, the nation abandoned defined-benefits retirement plans in favor of the defined-contribution plan. Under a defined benefits plan, a retiree would know exactly what his or her income was. Whenever you spoke to someone about their retirement plan, they could immediately quote you a percentage of salary as their pension benefit.

Today, people have no idea what their benefit will be. Since 1980, we have been conditioned to watch not the income we would receive, but the size of the pile of money we could accumulate. Rather than income and guarantees, it all became about rates of return. Unfortunately, just as bloodletting had nothing to do with curing influenza, or even a broken leg, rates of return have little if anything to do with income planning.

I know this sounds contrary to everything you believe. After all, the idea of germs and bacteria as the source of disease in the 17th Century would have been as plausible as the iPhone. Nevertheless, truth is truth, and those who can grasp it will prosper, while those who cannot will be left to perish from curable diseases. In order to understand what I mean, consider for a moment what you really want from your income money. Most people I talk to are looking for dependability, predictability, safety, access, regular payouts, inflation protection and income streams they cannot outlive. Which of those, in a world where rates of return are based on risk, have anything to do with rate of return? Safety? Dependability? Predictability? Guaranteed income for life? How in the world is gambling in the stock market ever going to deliver any of those?

In a recent report published in the Harvard Business Review, Robert C. Merton, Nobel Laureate and the School of Management Distinguished Professor of Finance at the MIT Sloan School of Management, stated the following when discussing today’s defined contribution plans:

“The seeds of an investment crisis have been sown. The only way to avoid a catastrophe is for plan participants, professionals, and regulators to shift the mind-set and metrics from asset value to income.”

In other words, it’s time to stop the bleeding.

Stephen Kelley is president of Safety First Financial Planners. He can be reached at steve@safety1
stfp.com. His website is www.safety
firstfinancialplanners.com.