Viewing entries tagged
asset allocation

Why Taking Risk In Retirement Just Makes Sense


Did you use the terms "risk," "retirement," and "just makes sense" all in the same sentence?

I think you might have lost your mind. 

Well as it turns out, neither I, nor many others have lost their mind on the notion that you may actually fare better by increasing your commitment to stocks gradually through your retirement years.  

Confused yet?  We thought so, let me explain:

As it turns out, the most problematic "time zone"  for retired investors tends to come in the early years immediately after retirement. In the parlance of investment decision making, this problem is grounded in what's known as sequence risk, the potential for the early years of your retirement to be the worst years in the market. (Think, "what if I had retired in 2007-2008?")  Obviously, the decline in market values would not have been a good way to kick off the retirement party now would it. 

No, it would not have. 

What research shows is that there are more or less, three core strategies that one can consider when looking at retirement as it relates to the "how much money should I invest/keep invested in stocks?"

  • Own more stocks now and less as time goes on
  • Own the same amount of stocks now and tomorrow (this works better than the first one)
  • Own less stocks now and more over time (this actually works the best)

So this takes us back to the fact that if you had 70% of your portfolio in stocks just prior to and at retirement, cutting that back to let's say 40% for five or six years might not be a bad idea. With the understanding of course that at some point shortly after that fifth or sixth year, we're going to move that 40% to 45%, then 47% then 50% and so on.  Can you "cap out" at some point?  The research doesn't really say, but I'd suppose that you could, you might get back to your original 70% and stand pat.

So Why Does This Work?

I'd guess that there's a substantive number of mathematical reasons why it works (and there are) but we're not writing our own research paper on the matter. 

I think that viewing the issue at a distance there are some simple conclusions that most anyone could draw; 

1. the decreased allocation to stocks early on, protects against the stock market declines extracting too much value of your total assets just after retirement when you'd be the most vulnerable to steep declines; 

2. the de-emphasis of "bonds and cash" over time allows you to have more money at risk, which means more money poised for growth rather than income

3. the allocation to equities over the long term enabled your assets to better keep pace with inflation

4. good years typically happen more than bad years when taken over an extended time horizon, so your profits build as you moved through time, taking advantage of compounding

5. you were able to pursue more of a "total return" strategy; which meant that you removed your focus from "income" per se, to "cash flow"

This will mean that we'll have to reframe retirement investing from "growth assets today, but less growth assets tomorrow.." to "less growth assets today and more growth assets tomorrow!"

Counterintuitive to be sure and hence, it will escape use by but a few. 

And, for the record, the less counterintuitive bet, "less risk today and less risk over time"; isn't working and there's already "real people" math to substantiate that. It's one of the reasons that retirement in America winds up so poorly funded. 

Sometimes, things just aren't what they seem.  

Better you adjust and choose a new course of action. 

Kick the Losers To The Curb

No doubt that as the capital markets start out 2014 either moving down or barely managing to tread water, our thoughts normally turn to "what do I own right now that I probably shouldn't?" I can hear the trades taking place even as I write this blog. 

But venting out the old in favor of the new may not be the best option that you have at your disposal. 

We always tend to pay and invest too much credibility in short term data.  And, that disconnect is off at more than one level.  If we have "long-term" goals then why wouldn't we match that with a view based on long-term data instead. 


In a recent blog post, Behavior Gap expert Carl Richards formulates a cogent argument for continued diversification based on the principal that what was once performing well, will one day not be and likewise, what was once not performing well, will one day be doing just that. 

In a seminal book on Asset Allocation, portfolio manager and financial advisor Roger Gibson noted that on average, your portfolio should at least be aligned in a manner consistent with overall global asset distribution. So, whether your emerging market stock or bond funds are performing well or not, they deserve a place among a well diversified portfolio and that level of representation in your portfolio should match your risk propensity and tolerance. While I don't think that emerging markets should dominate, surely they should be represented in your holdings and at a level consistent with your risk tolerance. 

My best bet would be this; if we look at past successful "investors" or "portfolios" or "Clients" we're going to find two things that really account for much of their long-term success; 

1. They tend to stay the course and invest more in a sound process than short-term data, and; 

2. They do the things that most people are not willing to do, they put money in when markets are declining and frankly, that means your betting on your losers, not getting rid of them

It's hard to argue that for many 401k plans are viewed as their most successful investment.  But can we tell why that's the case?

For many, it's their only savings plan, I get that, but that's not necessarily what makes it the most successful. I'll offer a counter claim to the success; 

1. Because contributions are made out of each payroll period, money goes in no matter what, and; 

2. Because investment options are so damn hard to discern for the average investor they're more likely to just stick with the allocation that they chose when they started and not monkey around with it all that much

That captures two important initiatives; 

1. Doing what most people won't do (making contributions to investments in declining markets) and; 

2. Staying the course

As an advisor I understand more than most the desire to avoid market declines and feel that we can side step adversity and it's easy to be fooled that we can.  Let me give you a real story to support that. 

A few years ago, we had a Client that demanded that they go to all cash during the very end of the 2008 decline. No matter what we did we couldn't convince them that staying the course was their best option. So, we agreed in the end that we'd move them to cash. That was the easy part; getting out is always the easy part. 

What we struggled with was getting them back in.  It never, to their way of thinking, seemed like the right time to put the money back in the market. They missed the first 11% of the run up that followed the rebound that started in 2009.  When we finally were able to convince them to get back to fully invested, we asked the following question?

"If, by getting out of the market we prevented a 3% decline and missed an 11% run up on the other side, didn't we effectively make avoiding a 3% loss into an 8% loss?"

We did. But you can't believe how hard it was for us to convince our Client of that fact. To their way of thinking, they avoided a loss.  Math would indicate that exactly the opposite occurred, they created a larger one. 

If the value of diversification is real, which it is, then one other factor remains immutably true about your winners, your losers and investing in general; 

"If they don't ring a bell to tell you when to get out, they sure as hell don't ring one to tell you to get back in....."

Change your way of thinking...your losers aren't your losers, they're your "just not making money now" assets.

"Ruse" of Thumb

First off, I think that "Rules of Thumb" should be renamed to "Ruse of Thumb" and with good reason, all we need do is look at the dictionary definition of the word "ruse."

ruse (noun) an action intended to deceive someone; a trick; Eleanor tried to think of a ruse to get Paul out of the house.

And that's pretty much what a "rule of thumb" is in most instances, a deception. In personal finance it is at least. 

Shortcuts are short lived. 

Shortcuts are short lived. 

How do "rules/rues of thumb deceive you you ask? Well, the deception lies in their simplicity and seemingly accurate, global application as "policy." 

Here's some popular examples of "rules/ruse of thumbs:  

"when you retire, subtract your age from the number 100, the answer will tell you how much of your portfolio should be investsed in stocks"

"you need 10x your income in life insurance"

"cash is king"

And there are many more. Part of the deception lies in the fact that the "ruse of thumb" leads you to believe that it's an effective substitute for work. You don't have to analyze anything, do any research, consider personal circumstances (either actual or uknown) you just simply pull the "ruse of thumb" out of your toolkit and whamo! You're done. 

The problem is that largely, "rues of thumb" aren't true. They're widely enough touted and largely enough quoted to make you think that they're true and that they represent mainstream thinking, when in fact they are neither true or mainstream thinking. Since they are deceptively simple they are almost always foisted upon the uninformed by someone who will directly benefit by the application of them. 

And yet, "ruse of thumb" do have mass appeal for sure. Why? Because the majority of the population would rather take the easy answer to it's questions, rather than to ask the tough questions. We're hard wired for "fight" or "flight" so our brains like simple solutions, going back to the day when, in sum and substance, there were only two answers, run like hell or fight to the death

In his article; "Should You Seek Yield For Retirement Income," David Loper of Wealthcare Capital explains in susinct terms why the popular and oft used "ruse of thumb" that when you retire, you should invest alter or arrange your investments in such a way so that it maximizes your post retirement income. 

For sure, many who will read this article will resolve that it just can't be that way. Many investors will contend that they're doing just that, seeking yield and they're doing just fine. They've got friends that are doing it and have done it and they're doing just fine too. Like most "ruse" it seems like a logical tact to take. (For the record, I've got a few friends who still smoke, still eat badly and never get a medical exam. For the record, they're fine too, at least for now.) But in the longer view, it's clearly not the right method.  

Digging in and doing the hard work of planning a financial policy grounded in research, thoughtful conversation and deliberate strategy selection isn't as easy as pulling out your "ruse of thumb." Planning however is infinently less likely to fail and in reality, cheaper for most. And, planning is a cheaper option in absolute terms, both today and tomorrow. 

Are Fund Managers Ever Worth The Cost?

The answer is, no, they're not. And there's tons of research to back it up. 

The answer is, no, they're not. And there's tons of research to back it up. 

One of our core beliefs is that investors should always pay attention to the expenses of their investments. Every dollar needlessly spent chasing returns is a dollar that should be in your pocket not someone else's.

Reducing the money that you have at work by paying costs that don't directly result in bottom line benefits to you will hurt your chances of meeting your long-term goals.

A strategic decision for every investor is the passive v. active decision and this is where one decision can save a lot of money over time. And, because we're talking about expenses, the savings are a sure thing.

In theory, investors pay for active management because a manager will use their skill in security selection to outperform and index such as the S&P 500. Well, the cost of trading, research and such all raise your bottom line costs, perhaps to an unconscionable level.  

Does this additional cost result in additional returns? No, according to in this recent article "Market Pros Had a Bad Year, So Why Not Buy and Index Fund?"

Are you paying too much for your current investment program? Want to find out for certain if you are or not? Use our Connet With Us form to let us know, we'll contact you to arrange a mutually convenient time to meet. Our evaluation is done on a no-cost, no-obligation basis.