As the largest asset manager, BlackRock has more than $3 trillion in assets under management — more than the Federal Reserve and more than the GDP of some small countries — and is on a new campaign to get money moving once again in the world. BlackRock CEO Larry Fink has been getting out the message about the challenges and opportunities of taking action with your money, rather than sitting on the sidelines. He says keeping money in cash and money markets is costing you more than you think. Our interview follows, edited for clarity and length.
By Jerome Favre,, Bloomberg News
Larry Fink: Whatever you need to retire, "You're not going to earn that with zero interest in cash."
By Jerome Favre,, Bloomberg News
Larry Fink: Whatever you need to retire, "You're not going to earn that with zero interest in cash."
Q: People have been afraid to take risk and have poured money into safe cash accounts, money market accounts and low-yielding bonds. Why is that so bad?
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A: If you're focusing on your retirement, the compounding effect to get to the proper nest egg is very important. If you're 35 or 45 years old and you're earning zero interest because you have it in cash, it gives you a deeper hole to build your nest egg in the future. If you're trying to build a nest egg for retirement, you have to ask yourself, can you afford the cost of earning zero, and what does that mean over the course of 30 years? And if your horizon is truly 30 years, why are you worried about daily volatility or the noise of oil prices and other daily ups and downs? If you believe that the world is going to be operating, and will be larger in 30 years, you'd better start focusing on the cost of earning zero in money. There is a big cost to earning zero interest on your money.
Q: How should folks invest money that is sitting in a money market account?
A: You have to have a much longer-term viewpoint. First, you have to change your guidepost. Ask yourself, how much money do I need when I retire? You have to have a strong belief, if you're in good health, that you will live to probably your mid-80s. And if you're a couple who are in your 60s and in good health, statistically, one of the two of you will live to 92. So you need adequacy in your nest egg when you retire to meet those financial needs as you live longer. People today are preoccupied in trying to live a better, longer life. They may be exercising more, taking vitamins, having regular examinations. We do that because we want to live longer. We're so preoccupied with finding a lifestyle that allows us to live longer and more successfully, but we don't take that same horizon when we invest for our retirement. What I'm trying to suggest is once you start to say, I need X dollars in retirement, then you work backwards. You're not going to earn that with zero interest in cash. You're going to need some form of returns, and there are areas where you can earn 4%, 5%, 6% type of returns over a course of a long time, and that's generally shares of dividend-paying companies and other forms of credit such as high-yield and other products that will give you a higher return than cash. So if you needed, let's say, $40,000 pretax to live by or $55,000 pretax to live by, work backwards. Depending on your life, your age, how much money do you need to put away? What type of return do you need to earn to build that nest egg? And I think too few people are focusing on that.
Q: Are the best returns in stocks?
A: I'm not against bonds or annuities if you are willing to put more of your current income into an annuity. If you put it into an annuity or some form of bonds, you're just going to have to put more of your disposable income away. If you don't have that much disposable income to put away now, then look at different alternatives such as stocks.
Q: So you're not against bonds and you like annuities, but you prefer, in terms of getting income, putting money into dividend-paying companies so that you get a stream of income.
A: Or make an overt statement and instead of right now allocating, let's say 7% or 8% of my disposable income into my retirement, you could say I want to take less risk and stay in bonds, but in doing so with a lower return, you're probably going to have to contribute 10% or 12% of your disposable income. You're going to have to forsake consumption today for earning a bigger nest egg tomorrow. So it's a trade-off.
Q: What about the fundamentals supporting the stock market? How is the economy doing?
A: Globally, it's mixed. I don't think it's a groundswell of improvement worldwide, but there's incremental improvement in different regions of the world.
The U.S. is improving faster than other parts of the world. Whether it was the bank stress tests and Europe working on their stress test last year and this year, it allowed us to have a little more dynamic flexibility in our economy, and so we're starting to see more growth. For the first time in a year or so, we're starting to see some job improvement, and this is related to a slow but consistent growth in corporate earnings and over $1 trillion in cash on balance sheets. Corporations are starting to put some of that money to work in terms of employment and maybe even factories.
Q: One of the issues for the economy recently has been the price of oil. Do you worry that can derail an economic recovery?
A: No question oil could, like it did last year, drag on our economy and slow things down. But the oil situation will be a bigger problem for Europe than the U.S., because the dollar is stronger vs. the euro than it has been. What I'm worried about is if oil stays at this price or goes higher.
Q: Is Europe still a big problem?
A: One of the reasons we've seen stability in Europe has a lot to do with the liquidity that the European Central Bank has provided to the European banks, and that has stabilized the markets quite significantly. If oil prices remain this high and you see higher inflation in Europe, you will see the ECB having less flexibility in trying to stimulate the economy. What (ECB President Mario) Draghi has done has stabilized Europe. The problems now are the new governments of Spain and Italy, specifically, which have created some very stern austerity programs to balance their budgets, and those programs are creating a weakness in the euro community. Spain and Italy will have recessionary numbers this year.
The real key is once they stabilize their financing, can they stabilize their economies in the latter part of 2012 into 2013 to navigate their economies to be a growth economy again? And that's the big question that we don't have the answers yet.
Bartiromo is anchor of CNBC's Closing Bell and anchor and managing editor of the nationally syndicated Wall Street Journal Report with Maria Bartiromo. On Twitter: @mariabartiromo. To see previous columns, go to Bartiromo.usatoday.com.
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