Morningstar - Fall 2019 - 10

Dispatches

That Old Demon Debt
Easy money
is an addiction we
must curtail.
PHILLIPS CURVE

Don Phillips

This issue of Morningstar magazine details
the many changes in the bond market since the
financial crisis, but one constant remains:
Debt is big business.
My colleagues articulate the many benefits
of debt and its role in our society elsewhere in this
issue, but I'd like to offer an alternative take
and explore the dangers of debt from a financial
planning perspective. In doing so, I'm taking the
minority position in our society. The forces
encouraging people to take on debt are powerful-
our universities, the real estate industry,
bankers, and auto manufacturers, to name just
a few. Consume today; no need to worry about
the payment until tomorrow. It's a loud and
constant refrain. The voices speaking against debt
are a small squadron of financial advisors
who are easily drowned out. But these small
voices carry words of great wisdom.
Smart money minds understand the enormous
cost of debt. Famed money manager John
Templeton was so opposed to it that he counseled
individuals to never take on any debt at all.
Even when buying a house, Templeton argued for
saving until one could pay the full purchase
price. Can you imagine how much lower house
prices would be if everyone took that advice?
Paying in cash makes one much more priceconscious. Without debt, the real estate profession
would be far less lucrative. Without debt,
our universities would never have gotten away
with the egregious price increases of recent
decades. But what has enriched our schools has
crippled a generation of students with debt
that will sharply curtail their career choices and

Morningstar Fall 2019

their retirement security. And the overspending
of generations of politicians now poses a dire
threat to the health of debt-addicted municipalities
like my city of Chicago.

investments. Debt is dangerous. And government
policies that underwrite indebtedness, such
as tax breaks for mortgages, tempt us to court
that danger.

It's time to think of debt along the same lines
as we are now looking at the opioid crisis.
Today, we see the role that pharmaceutical
companies, drug distributors, physician incentives,
and lax regulation play in this grievous
problem. We're beginning to hold these parties
responsible for the damage they have done.
Shouldn't we look at the bankers, the predatory
lenders, the overcharging university and housing
industries, and government policies that
encourage indebtedness with a similarly skeptical
eye? Debt, like drugs, offers an immediate
high, but comes with a heavy hangover and the
risk of overdose, as seen by individuals
who were highly leveraged at the onset of the
financial crisis.

It's time that we recognize that those encouraging
easy money, like the drug dealer promising
instant pleasure, are not always acting in our best
interest. Like medication, debt offers some
benefits and when used prudently can be lifeenhancing, but our society relies far too heavily on
both drugs and debt. We've rendered many
antibiotics ineffective by overprescribing them, and
we've addicted countless souls to painkillers
through overuse. Similarly, we saddle our youth
with student debt, forcing them to toil in
careers that aren't right for them and to delay
retirement saving. We then entice them with credit
cards upon graduation, encouraging still
greater consumption. Is this really the good life,
or does the cost outweigh the benefit?

In a healthier world, debt merchants would
play a far lesser role in our lives.

In the absence of leverage, the financial crisis-
the worst so far of our lifetime-was
unpleasant but survivable. Indeed, 401(k) account
balances returned to their precrisis highs
within just a few short years. They did so by
observing a handful of prudent investing principles.
First and foremost, these plans do not allow
leverage. Moreover, they are diversified across
multiple securities and asset classes. They
are often automatically rebalanced, and
participants generally did not flee to cash at the
bottom and instead continued to make additional
contributions throughout the downturn.
With such prudence, the storm was weathered.
But prudence would have been undermined
had these plans been leveraged as many
individuals were with their houses or real estate

In a healthier world, debt merchants would
play a far lesser role in our lives. Debt would not
be the massive business that it has become.
It's time we view the actions of the debt industry
not with gratitude for the high, but with scorn
for the hangover. For a lost generation of
debt-laden scholars, for owners of houses that
are well beyond their means, and for those
individuals whose indebtedness threatens their
retirement possibilities, the change can't
come soon enough. Join the chorus of wise
financial advisors and make debt a much smaller
part of your life and the lives of your clients.
The going up ain't worth the coming down. K
Don Phillips is a managing director with Morningstar. He is
a member of the editorial board of Morningstar magazine.

Morningstar - Fall 2019

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