Viewing entries tagged
investment policy

Where Ease of Use and Disaster Meet

We've written before about "rules of thumb" and their imminently fallible future.  It appears that one of the most widely used "rules of thumb" may take a dive.

I'm thinking "maybe" not because there's a mathematicians chance that this often used "rule of thumb" actually works, but I say "maybe" because it'll be interesting to see if the public ever finds out. 

Target Date Funds....

Oh these are a help right. Here's the premise; 

a. Lay people can't do very well picking their own investment allocations (this is something that we know to be true and is widely supported by research)

b. You can purchase or invest in a fund that will take care of all that for you, AND;

c. It will automatically adjust the percentage of stocks vs. bonds that you own as you get older so that you're experiencing the lowest risk (i.e., owning the least amount of stocks) as you get older and experiencing the highest amount of risk (i.e, owning the most amount of stocks) as you're at your youngest. 

auto pilot

Think of it, on "auto pilot", all you've ever asked for. When you're young and your earnings are highest and you can afford the most aggressive portfolio and then, without even so much as a question or concern, an automated tilt to the conservative side of the table just as incomes drop, reliance on portfolio income increases and age sets in.

Problem doesn't work, and frankly, research indicates it never did. 

It was just a ruse from the mutual fund industry that you bought and paid for likely with a fair amount of your retirement nest egg, but hey, who needs more money, you or Wall Street?

Intuitively, consider the matter: 

a. you start out with the smallest amount of money invested in the most profitable asset class, stocks.....

b. overtime, you accumulate more money as you move toward a lower yielding option, a blend of stocks and bonds, then....

c. you wind up with the most amount of money at the exact time that you're in the poorest yielding asset class of the bunch....bonds dating doesn't sound quite that interesting when you explain it that way does it?

Well, once again, Wall Street's and the actively managed mutual fund industry would conveniently like to not let the "math" cloud the issue. 

Here's a typical Wall Street spin you can try.........

If you're ever in an elevator that cuts loose from it's cables and starts plummeting to the ground, all you need do is to jump in the air just prior to impact to save your soul. Seems to make sense right?  For 95% of the "trip" you're not even actually falling are you? I mean you're standing on the floor of a "fixed" object so a good hardy "jump" at just the right moment only puts your feet about three feet off the floor which means that if you only went up three feet, you'd only come down three feet right?

Sounds plausible. It's not.  But again it sounds plausible....if you ignore the math. (P.S. if you've ever watched Myth Busters you know how the elevator story plays out.)

Bottom line is that gimmicks can get a big tailwind, especially when they're sold as something that's so obviously awesome. 

But let's not forget, "bad" ideas always need to be sold

So if you're a "target" date investor, check and make sure that the target's not on your nest egg. 

Why It's Getting Harder to Succeed at Retirement Than You Might Think

Ever have the feeling that you're being overtaken by something and there's nothing that you can do about it?  Well, here it comes again.

Forty years ago, this was how most people felt about inflation. Prices were going up faster than we could increase our income or accumulate the capital to meet the challenge of ever increasing prices. It seemed useless at times, the price increases were staggering. 

Well her comes healthcare costs, rounding the quarter mile poll!

According to a recent study by HealthView a research organization for health care issues, in just 10 years, 98% of an average couple's Social Security Benefits will be needed just to cover healthcare costs, and in 20 years the cost of health care can be expected to exceed benefits in collected by most Social Security recipients in total. 

And, I'll be that your social security benefits getting "lapped" by health care is more a certainty than California Chrome's chances of winning/not winning the triple crown. 

Even if only in our minds eye we had anticipated that Social Security benefits would have covered a fair portion of post retirement expenditures, what will happen now that those dollars will have to be committed to offsetting only health care costs?   What stresses does that put on how your money is invested for your golden years?  We can assume the impact will be significant. Seems that in addition to "health care reform" we might have benefited just as much from "health care costs" reform.  Odd that I noted today as I was listening to the morning news at 4:00 AM that the U.S. ranks at the bottom of developed nations in the quality of health care. 

As an aside, does anyone find it a bit concerning that we're probably at the top of the list in cost and the bottom in quality?  

Hmmmmm.......seems that the future continues to dispense a plethora of questions that all seem to have a commonality to them.  The commonality would be that the quality of your life  in retirement hangs in the balance. 

Call me crazy but I don't think that this one you want to figure out on your own.

Can we get a Greek update over here?

So, whatever happend to Greece?

Can you remember when seemingly for weeks at a time, all the financial buzz was about the sovereign debt default of a country with the economic prowess of something less than the State of Indiana?

FLASH! Wall Street found something(s) more compelling to use to scare you into trading your accounts....the fiscal cliff.  But wait, we solved that one.  Ok, the how about Sequestration. Oh, wait, that didn't pan out either, but not to worry we've got a budget battle looming so that'll be next.

See, it's much easier to scare with you stuff that's close to home than something half a world away. 

Having been through all the market tumults since the late 1970's I can tell you that our most successful Clients are the ones who never got scared, never got out and never stopped putting money in.  You know why many investors feel like their 401k plan is their best investment (ok, let's ignore for a second that for many it's their ONLY investment)? Because payroll deduction ensures that they'll keep funding their future no matter what happens to Greece or Indiana, even if they do monkey around with their investment mix (P.S., that seldom helps).

So, when the domestic scare tactics abate, don't be surprised if you're taken back to the plight in Europe or the developing markets or some other short term problem that "requires your immediate attention."

Warren Buffet, clearly one of the world's most successful investors said something to the effect of the way to build significant value in the stock market is to buy good companies and keep them. Ever wonder why Cramer has a TV show but not Buffet?

Because it's kinda hard to scare someone with a buy and hold strategy.

Wall Street wouldn't like a show like that.

But you would.

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.

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. 

Do We Know We Don't Know?

It's a really good question and one which, evidentally, most people get wrong most of the time. 

Mostly, no, we don't. We think that we can define our future, yet fail to actually do it. Knowing how to do it isn't really doing it. 

Mostly, no, we don't. We think that we can define our future, yet fail to actually do it. Knowing how to do it isn't really doing it. 

The good news (sort of) is that the people that get it wrong are a lot more of the people than you think. 

We've been pursuing passive investment strategies now for more than a few years, knowing that we do in fact know. 

I love it when an article concludes with the comment: "Finally, it's my experience that the vast majority of investors don't even know what their returns have been relative to appropriate benchmarks. One reason is that Wall Street doesn't want you to know- if you did, you might stop making it rich. Another might be that the truth would be too painful, so investors themselves don't want to know. But you should know. Without such information, there is no way to know if your strategy is working."

In this great article, "On Magical Thinking and Investing" Larry Swedroe hits all the high notes. 

Read "On Magical Thinking And Investing" here.