Hurray! We’re all living longer!

The good news: life expectancy in the U.S. increased by 50% during the 20th century. The bad news: we’ll all need a good deal more money during retirement.

The average 65 year old man can expect to live to age 84. The average 65 year old woman: 87. When you think of couple living off their retirement income, there is a 50% chance that one spouse will make it to 95. That means that most people should have 30 years of retirement planned (assuming they retire at age 65–not necessarily a valid assumption).

This makes a focus on long term returns more important than ever. Specifically, the conventional view of retiring with a conservative portfolio of bonds is probably not the way to go. We’ll all need the growth and inflation protection of stocks to keep from running out of money.

It also means the most conservative period of investing is probably right before and after retirement. A large setback in your portfolio right before or after retirement may be very difficult to recover from.

That is why many advisers are recommending high stock portfolios in your early years, low stock allocations close to and right after retirement, and than increasing that stock allocation as you get older. 

We simply need the growth and inflation protection that only stocks can offer to build wealth early and then sustain us into old age. But it also means you may want to reduce that stock allocation right before and after retirement.

Longer lives are great. But, to make it great, we’re going to have to plan for longer lives.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Hurray! We’re all living longer!

Planning to work in retirement?

Two-thirds of workers plan to work in retirement, mostly because they know they haven’t saved enough to support their current standard of living. In reality, less than one-quarter of those in retirement work for pay (WSJ, no subscription required). 

There is a big disconnect between those who think they can work in retirement and those who actually succeed in doing so.

Why? The three big reasons are health crises, layoffs and ageism. If you are unhealthy, you can’t work. If you get fired and can’t get a new job, then there’s no paycheck. If you are too old to do the job or employers simply won’t hire someone your age, then employment won’t fill your spending gap.

Working in retirement seems like a great idea. It keeps you mentally and physically active. The evidence shows that those who keep working show less cognitive decline. Most who work in retirement do it because they enjoy it, not because they need it to cover their spending.

The bad news is that retirees find it hard to find employment or remain employed.

The good news is that most retirees learn to get by on a lower standard of living. Studies show that such retirees are happier and less stressed than they expected to be.

If you’d prefer to avoid the “getting by” solution, then the best thing to do is save more for retirement rather than planning to work.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Planning to work in retirement?

How should you pull your money in retirement?

How you withdraw your money in retirement can have a big impact on how long your money lasts (or how much you can withdraw each year).

The conventional wisdom espoused by Vanguard, Fidelity, etc. is to pull the money from your taxable account first, then from tax deferred accounts (Roth IRA, traditional IRA).

Unfortunately, things aren’t that simple. By withdrawing your money in a more tax-efficient manner, the money can last 4, 5, even 6 years longer (or last the same amount of time with higher withdrawals).

This issue has been highlighted by many, but in particular in a recent article in the Financial Analysts Journal (subscription required).

Instead of pulling all your money from your taxable account first and then moving on to tax-deferred accounts after the taxable account is depleted, the money will last longer if you withdraw money from a traditional IRA up to the 15% tax bracket limit, then pull the rest from you taxable account each year. 

Even more time can be gained by transferring dollars from your tax deferred account (traditional IRA) to your Roth IRA each year to generate not too much taxes while also maximizing  tax exempt benefits of the Roth IRA.

More time still can be gained by transferring dollars from your tax deferred account to two Roth accounts and then recharacterizing the one that has lower gains (or greater loses) each year back to the tax deferred account.

These strategies are too complex to explain here in detail (I’d be happy to send the article to anyone who requests it, but I must warn you it is a technical and dry academic paper). Also, some of these strategies may seem too complex or troublesome to implement, but that does not diminish their benefits.

It is vitally important to save enough for retirement, but it is also important to consider how you will withdraw your money in retirement to make sure the money serves you best.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

How should you pull your money in retirement?

Frugality for Fortune

When most think of building a fortune, they think of starting a business, taking a big gamble, or getting wildly lucky.

The reality is that building a fortune is easily accessible to anyone willing to live within their means, save diligently, and invest wisely.

The Millionaire Next Door illustrates this point well. So did a recent article in the Wall Street Journal (subscription required).

Ronald Read recently passes away at the age of 92 with $8 million in investments and saving. Did he start a business, take a big gamble or get wildly lucky? Nope.

He “displayed remarkable frugality and patience–which gave him many years of compounded growth.” “He lived modestly, working as a maintenance worker and janitor at a J.C. Penney store after a long stint at a service station….”

“Those who knew him talk of how he at times used safety pins to hold his coat together and sometimes parked his 2007 Toyota Yaris far from where he was going to avoid having to feed the parking meter.”

This isn’t quite the 1% popularly portrayed in the media. This was a normal guy who worked, saved and invested.

“Mr. Read owned at least 95 stocks at the time of his death, many of which he had held for years, if not decades.” Not really day trading.

His holdings were “spread across a variety of sectors, including railroads, utility companies, banks, health care, telecom and consumer products. He avoided technology stocks.” He invested in things he understood after doing his own research.

“Friends say he typically bought shares of companies he was familiar with and those that paid hefty dividends. When dividend checks came in the mail, he plowed the money back into more shares….”

No six-figure income. No internet start-up. Just living within his means, saving consistently, investing after doing his homework. Being patient, being frugal, thinking long term.

Financial success doesn’t require lots of luck or risk taking. Just simple strategies implemented consistently. 

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Frugality for Fortune

The big benefits of boosting your savings–even by small amounts!

Everyone knows they need to save more for retirement. But most don’t because they think they can’t afford it.

The reality is that even small boosts in savings can have large impacts over the fullness of time.

A Wall Street Journal article and a report by Fidelity Investments makes this point clear: even boosting your savings by 1% will have a meaningful impact on your retirement income.

It’s more fun to focus on getting higher returns, but the most potent force in anyone’s retirement plan is their own willingness to save.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

The big benefits of boosting your savings–even by small amounts!

In defense of active investment management

The idea of picking an investment manager instead of investing in an index fund has been taking a beating, lately.

Under the assumption that investors can weather the market’s ups and downs without becoming euphoric or panicking, and assuming that most of them can’t tell a good from a poor investment manager, the case is growing that most people should invest in an index fund and watch better results roll in.

That case has a lot of validity, but it’s important to listen to the other side of the argument, too, in order to pick the right choice for you–the individual.

After all, we don’t all buy GM cars, or buy Apple computers, or eat at McDonald’s. Some people prefer other options. It all depends on what you want to accomplish, how much work you want to put into it, and what your abilities are.

With that in mind, I highly recommend an article by William Smead of Smead Capital Management titled, The Demise of Active Management is Greatly Exaggerated.

Not surprisingly, Smead is an active investment manager who is talking his book (just like most passive/index investors), but he has some interesting points to make and some thought-provoking data to go along with it.

Smead points out that quite a bit of academic data supports the case for investing in parts of the market that aren’t always priced correctly. He highlights that investments in businesses with low debt, high and sustainable profitability, and overall stability can do remarkably better than an index investment. 

Also, index funds market weight their holdings, which means they own too much of the things that investors love best right before they go off the cliff, and not enough of things most investors hate right before they take off–just think about 2000 or 2008. There are other methods for assembling portfolios that work better over the long run.

I’m not trying to make a complete case for active investing, here, but I am trying to point out the other side of the argument. Naive investors may think the case is closed and everyone should be a passive/index investor, when in reality it depends on your preferences and abilities.

Most may be incapable of beating the market, but not all. Most may be unable to pick managers who do better than an index fund, but not all. Most may not want to put the time and effort into doing better than average, but not all. 

Just as most–but not all–people love to eat at McDonald’s, most–but not all–people should probably be passive/index investors. The key is deciding which group you are a member of and thinking clearly about your options.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

In defense of active investment management

Is stock picking dead?

Is it time to throw in the towel on stock picking (active investing)? Should everyone become an index investor (passive investing)?

As Vanguard Group, the king of passive investing, approaches $3 trillion in assets under management, and as mounting evidence shows that most investors should buy cheap index funds instead of trying to pick market-beating money managers, it’s a good time to ask the question: is stock picking dead (Jason Zweig asks just this question in The Decline and Fall of Fund Managers in the Wall Street Journal, today).

To advocates of passive investing, there is simply no argument. The average return of the average investor is average minus fees. Therefore, to maximize returns, most people should buy cheap index funds to minimize fees. 

The evidence fully supports this view. Investors do a terrible job of picking money managers and timing the market. They would be better off just buying an index fund with low costs.

Most money managers lose to the market. Many who do win over 3, 5, even 10 year periods do it by luck that isn’t repeated over the following 3, 5, or 10 years. Given that, the average investor is unlikely to successfully figure that out going forward.

Do some money managers beat the market? Yes. Do most of them do it by luck and not skill? Yes. Do any money managers do it by skill and over the long run? Yes. Are they almost impossible to pick ahead of time? For the vast majority of people, yes.

The money managers who do beat the market are unusually intelligent, think long term, are fiercely independent, and align their interests with their clients. Because most investors don’t look for those things (they tend to look at past performance or for friendly people), and most money managers don’t possess those traits, most investors should buy low cost index funds.

Suppose everyone invested in index funds? Would that make everything right in the world? The problem then would be that without anyone analyzing and pricing individual securities, securities markets useful function, price discovery, wouldn’t happen. That would be bad because markets need effective pricing to work.

But, how many people need to be picking stocks to still have securities markets perform their price discovery function? No one knows the answer precisely, but it is not zero. Someone needs to analyze and price securities, or markets wouldn’t work. But, the number of people doing this doesn’t need to be as great as it is now (an article in the Financial Analysts Journal (not free) by Charlie Ellis, points this out).

So stock picking isn’t dead, it just doesn’t need to be done by as many analysts and portfolio managers as are currently doing it.

Is passive investing the right choice for most investors? Yes. Does that mean stock picking is dead? Definitely not.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Is stock picking dead?

Show me your numbers

Most investors don’t really know how they are doing.

One reason is that many investment advisers don’t report their performance. Jason Zweig pointed this out in a Wall Street Journal article this past weekend.

Another reason is that most investors don’t know what the numbers mean. Are the numbers reported before fees or after fees? Do the numbers include contributions and withdrawals, or are they time-weighted to remove that impact (investment advisers shouldn’t get credit for your deposits)? Is performance compared against a relevant benchmark? Many advisers would prefer to keep their clients in the dark, otherwise such clients would know how poorly they are doing.

Even more investors don’t really want to know how they are doing. It’s kind of like deciding to step on the scale–or not–after the holidays. Do you really want to know how much weight you’ve put on?

But, not reporting, not understanding, and not looking won’t change the underlying reality. Reaching your financial goals is too important to play ostrich.

Make sure your investment adviser reports their performance accurately. Such results should comply with industry standards, include fees, adjust for deposits/withdrawals, and be compared to a relevant benchmark. 

If you don’t understand the numbers, ask questions. Evasive answers should raise red flags in you mind. Clear descriptions should give you comfort.

If you want peace of mind, you need to know where you are going and whether you are getting there. With investing, accurate reporting is not a nice-to-have, but a necessity.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Show me your numbers

Past performance is not an indicator of future results

Every money manager must say that past performance is not an indicator of future results, but most investors ignore this warning.

In fact, most investors–individual and professionals alike–use past performance to choose money managers.

That’s a big mistake.

S&P Dow Jones recently reported on why: investment performance is rarely persistent. Put differently, past performance really doesn’t tell you much about future returns.

How bad are the numbers? Out of the 687 mutual funds that were in the top one-quarter in March 2012, only 3.8% were there again two years later (purely random results would have indicated 6.25% would have remained).  

Out of the 1,372 mutual funds that were in the top one-half in March 2012 , only 18.7% were there two years later (purely random results would have indicated 25% would have remained).

Just because a money manager beats the market in one period does not mean they will in the following period. In fact, it is much more likely they won’t.

Over 5 years, the numbers are even more stark. Out of 715 mutual funds in the top one-quarter in March 2010, only 0.3% were there again four years later (purely random: 0.4%). 

Out of 1,431 mutual funds in the top-half of in March 2010, only 4.5% were there again four years later (purely random: 6.25%).

Does that mean that no one can beat the market? No. Does it mean it is very hard for someone to do so? Yes. It is even harder to tell the difference between those who can do it persistently and those who can’t.

Investors who use past performance to chose money managers are taking a huge risk.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Past performance is not an indicator of future results

The stock market could jump up or tank this summer, be prepared

Will the market drop this summer? Does it matter? Yes, and no.

The hardest thing about investing is dealing with emotional swings. People really want the market to go up and never go down, but wishing won’t make it so.

These emotional swings lead people to make big mistakes. Many sold in 2008-2009 and haven’t gotten re-invested. The opportunity cost of that is HUGE.

It’s better just to start with the premise that the market can go up 100% and down 50% (as Benjamin Graham suggested decades ago). Just accept that now because it has throughout recorded history.

If you are rattled by that prospect, then you don’t belong in the game (and you’ll have to save roughly three times more money per year to reach the same goal as someone who is investing in stocks).

If you invest, you must be prepared for such swings, even though that is tough to do.

Could the market tank this summer? Yes. Will it? No one knows. If it does, you need to be emotionally prepared to handle a drop.

Could the market continue marching up and double over the next 7 years? Sure. Will it? No one knows, so just be prepared.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

The stock market could jump up or tank this summer, be prepared