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investment decisions

Be very aware.

A recent survey conducted by Rebalance IRA found that 46% of Baby Boomers don't understand that they're paying fees on the investments in their 401k account. 

When you dig a bit deeper into the numbers, those that do not understand that they're paying something for their investment accounts are a bit scary.  Only 4% of the respondents believe that they're paying more than 2%.  

If we're talking about your typical 401k, largely invested in actively managed mutual fund offerings the 4% who believe that they're paying more than 2% are off by about another 2% when you take manager expense ratios and undisclosed trading costs into account. 

For the record, these costs along with restrictions on what investments you can own (your investment offerings are generally dictated by the plan) are the main reasons why a rollover of your retirement plan when you leave work is an optimal idea. 

The survey goes on to say that the average fees were about 1.5% (that doesn't include undisclosed trading costs which are generally about equal to a funds expense ratio), among smaller plans, the average is 2.5% or has high as 3.86%.  

And what about performance? The typical respondent believes that his/her account went up in value by about 5.2%, yet target benchmark indices were up about 9.5% meaning that the average respondent underperformed the market by over 4%. I'm sure that the fees that were paid had something to do with the material underperformance of their investments.  And yet, as is often typical, the average respondent said that they were happy with their under performing by about 100%. My sense here is that most Boomers relate returns to bank interest rates and 5.2% certainly sounds good when you compare it to what you earned on a savings account. 

The additional feedback from respondents centered on savings rates and other factors. Rebalance IRA found that 28% of respondents aren't actually saving for retirement and 66% said that they are either very anxious or somewhat anxious about their readiness to retire.

Bottom line, most people make (and have continued to make) fundamentally flawed investment and retirement decisions. 

Thankfully, the Client's of my firm are NOT among them.

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. 

I'll have Vanilla please.....

Ahhh yes, the draw of all those flavors....almost too hard to pass up isn't it.

I'd archived a blog post from Abnormal Returns that came out right after the first of the year because it was prescient. It's actually a post I could have linked off of in early January in any year from 1979 when I started in the personal finance game till this year. Were I so inclined (and I might be) I could use it in January each year from here till the day the good Lord sees fit to take me from this planet, that's how good it is. 


"Choosing Simplicity In The New Year" is a gem. It lays out for investors some pretty simple and straight forward metrics to follow that will in fact, hold the vast majority of us in good stead.  In it's unabashed simplicity It reminds me of the Progresso Soup commercial where the first order of the day is, "eat the soup!"

I'm particularly moved today to write on this particular topic because I've been working lately with a Client who commented to me over the Christmas break that he didn't find our "strategy" to be changing very much over time. At point of fact there were about seven "satellite" asset classes that moved in and out of his portfolio over the last few years, all at a profit and all almost perfectly timed. We were lucky. Throughout that period we did hold pretty tight to our core allocation of stock and bond ETF's. 

We've also rebalanced his portfolio as anyone should and we rebalance more or less at our regular intervals, twice each year lest we, as Vanguard noted in their research, offset the value of rebalancing in transaction costs.

Choosing simplicity though for many is akin to picking Vanilla at Baskin Robbins. It's hard when you're tempted by so many other things. But here's the thing, Vanilla works!!

As quoted in the Abnormal Returns blog post;

"The risks of trying to avoid the risks (of the 60/40 portfolio) are greater than the risks themselves," Mr. Kinniry said. 

You see, the elegance in Vanilla lies not only in the essence of it's simplicity but in the time honored ability of it's more oft than not perpetual satisfaction. We've long argued for the notion that investing should be two things, [a] based on funding goals and [b] fun. Ok, well it should at least not be stressful. Look, I'm going to bet you a dish of vanilla that if you can't achieve a goal with a basket of equity and bond ETF's your problem's not your investments it's the goal your aiming for! Take another Abnormal Returns quote from their blog, this one by Jame Picerno at the Capital Spectator; 

"The lesson for most folks is that broad diversification across asset classes and periodic rebalancing of those assets, will capture average to above average returns on a fairly reliable basis through time. The flip side of this lesson is that trying too hard in money management boosts the odds of ending up with high-priced mediocrity, or worse."

The immutable point is likely nestled in the final paragraph of the Abnormal Returns blog post. It notes a truism that's as reliable as Vanilla is good. That at some point in any year, any month, any week, any lifetime there will come a point when simple looks stupid. Either the stock market will soar and any bond holdings, or emerging market equity will look like an anchor or there'll be a correction in the market and owning any stocks will seem like passing on the Cherry Garcia in favor of Vanilla Bean was just a woefully bad choice, all things being equal. To add to that there will come a point when "doing nothing" is actually the most "doing" you could be "doing." (I still to this day struggle with why actively deciding to stay the course doesn't count as a decision. Imagine if you woke up every day and dutifully announced to your partner that "I've decided to stay with you...." Is this more of a commitment because you utter it than it is because you feel safe enough to not have to?)

So let's keep it simple.

  1. Set reasonable goals 
  2. Calculate what you have to have, save and earn to reach it
  3. Understand your willingness/ability to accept risk
  4. Build a block of money to meet that goal at that risk
  5. Vanilla

And let us know how we can help.

Gamma Raise

Almost since the beginning, the issue has been one largely centered around money.

Most prospective financial planning or wealth management clients want to know, "what do I get for what I pay?" It's a normal question the answer to which has been anything but easy.  I believe and hold fast to the premise that planning makes everything better, no matter what endeavor you're about to embark on. In my field, the "better" has largely been "intrinsic" factors, better decision making, few miscues, less emotional reaction and knee-jerk moves and a life designed on purpose. I still hold those factors as critically important. As Dwight Eisenhower said; "the plan is nothing; planning is everything." 

But now, David Blanchett, CFA, CFP®, Head of Retirement Research at Morningstar Investment Management and Paul Kaplan, Ph.D., CFA, Director of Research for Morningstar Canada have put dollars on the table. In their recent paper, Alpha, Beta and Now...Gamma have attempted to show the true dollar value of planning it, as opposed to chancing it. 

The authors looked at five factors that are typical in a client/advisor engagement;

  • Total Wealth Asset Allocation
  • Dynamic Withdrawal Strategy
  • Annuity Allocation
  • Asset Allocation and Withdrawal Sourcing
  • Liability-Relative Optimization
New 1.82.png

What they've concluded is that throughout retirement, the estimated "return" as a result of these five factors is about 1.82% per year additional return. That's a lot of money. 

So, there it is, the "intrinsic" and cash.  For the record, Blanchett and Kaplan aren't the first to put a dollar value on it. Dalbar has reminded us each year that the return of the typical investor lags the return on the market by not just a little, but by a lot.

As the debate on Entitlement Reform continues, can we finally admit that linking Social Security increases via the CPI, "Linked-CPI" or "CPI-e" isn't the heart of the matter. You see when you don't ever open the "retirement" box until retirement, it's not hard to imagine your surprise at what you find. 

If Blanchett and Kaplan are right, what we need to do is to find out how we take steps to increase the likelihood that the typical American won't give away 1.82% a year throughout retirement because they didn't plan for it in advance. 

I have a new tax loop-hole. Let's make paying a fiduciary for advice a tax credit or itemized deduction.  The fewer people we have struggling and relying on the entitlement system the better off we'll be and the cheaper it will be in the long-run for the government.

How About You Don't Go With The Flow...Probably A Much Better Idea

I always have lots to read. And, thankfully between some web apps like Pocket and Evernote, I pretty much can scan the various online magainze articles I get (about 100 a week) and "clip and post" stuff to the web for reading on my iPad or my iPhone. 

Ignore the noise and choose your own path. Stick with your long-term plan.

Ignore the noise and choose your own path. Stick with your long-term plan.

I tend not to get too deep into these articles, a quick scan, find a few keywords and "see" a theme for what the article is about all the initial effort I put in. If it feels right, clipped or pocketed, it's saved.

I tend not to get too deep into these articles, a quick scan, find a few keywords and "see" a theme for what the article is about all the initial effort I put in. If it feels right, clipped or pocketed, it's saved. 

Well I happend to come across the article titled "Hefty Redemptions In Mutual Funds"  that appeard in Financial Planning Magazine last week, and it was only that I had been using another article in a conversation with a client that this particular article or portion of it, jumped out at me: 

"Once again, U.S. equity funds took the brunt of the most recent drubbing, losing an estimated $3.08 billion in outflows, a sharp reversal from the previous week’s $906 million inflow. The outflow was less than half the huge $7.2 billion outflow the week ended May 23...."

Really? We're still at it huh? Still believing in tooth fairies and elves it seems. Do we really think that all this fernetic activity is how we're going to get ahead? Boy, Wall Street has got you sold on trading. 

Here's the immutable reality out there for all the folks that believe it's "TIMING THE MARKET" that makes money when every piece of research within reason will tell you it's "TIME IN THE MARKET" that wins the day; you're not going anywhere by getting in and getting out. Oh I know, you'll look at the week you weren't in and say that you avoided the 8% drop, but won't count the 12% you lost the following week when you hadn't gotten back in on time as a loss. That's not math, that's convenience. By the way, I prefer to think of my Hyundai Sonata as a Porsche 911 Turbo. (It's not by the way, no matter how much I think it is. And, avoiding and 8% drop followed by missing a 12% gain is a 12% loss.)

When will we learn that strategy most times involve doing absolutely nothing except sticking to a plan?

I can hear Wall Street's cash register ringing even as I write doesn't make anybody money except the traders. 

Why You Really Didn't Blow Your Chance To Retire.

In a May 2nd, post on Motley Fool @msnbc. com, the authors try to convince us that we've missed a huge opportunity, perhaps a once in a life time opportunity, to provide for our financial futures because we were under allocated to stocks and/or didn't contribute enough to our retirement plan.

It's not about THE economy, it's about YOUR economy. 

It's not about THE economy, it's about YOUR economy. 

In a May 2nd, post on Motley Fool @msnbc. com, the authors try to convince us that we've missed a huge opportunity, perhaps a once in a life time opportunity, to provide for our financial futures because we were under allocated to stocks and/or didn't contribute enough to our retirement plan.

As is often the case, the authors help us understand the error of our ways by noting that we need to be fixated on making the most amount of money that we can on any day, at any given moment and in any given market. AND, true to form, they manage to provide us with some (suspect) remedies which, as you might imagine, play perfectly into "creating transactions" game which keeps Wall Street running. If you missed your best chance to create a sustainable retirement, you can fix it by simply [a] contributing more to your retirement plan and [b] picking some bullet proof stocks. Wait a minute, there are bullet proof stocks? Oh, ok, there are lists of bullet proof stocks (and funds, and UIT's and bond funds, and hedge funds, and can't miss land deals) but not actually any bullet proof stocks, just lists of them.

Ironic that the one salient theme would actually work, to monitor what you pay for your investments because overpaying results in almost guaranteed returns, even made the list. Odd that the one metric that might actually ensure that you make some progress came in third. That's sort of like telling Titanic travelers that they should [a] buy some floaties, or; [b] buy some long underwear and lastly, stay home. They're all good recommendations but an appreciative re-order of those recommendations seesms in order to me.
Amazing it is that you can write an article about the fall of someone elses retirement and never mention either RISK or GOALS? How exactly does that work?

Lest we forget, 2008 came about in world where RISK and GOALS weren't important. Greed was.
When you're "success" is measured in whether or not your greed was satisfied any successes you have will be short lived.

You'll blow your chance at retirement if you can't define what it is or how much it will cost.

As noted many times in my blogs; if you don't know what it will cost, you can't tell how much it will take to fund it. No amount of contribution will ever be "right" unless you know how much you need and no "investment selection" will ever be right until you know the rate of return you need to fund your goals.
If pension plans can take too much risk and wind up either overfunded or under-funded, why can't you?