Month: July 2013

Starting around 1988 we had our first workshops.  The workshops were mostly about getting organized as an investor, we talked about:  the reasons for saving money, explained retirement accounts, the importance of reducing taxes… tax deferral vs. tax free, financial planning 101, estate planning etc.  Comments about the future viability of social security were used to lend credence to the imperative nature of saving and investing money.  Assumptions that the government would be there to take care of you in retirement were considered humorous support for taking responsibility for your own financial future.  Actual comments about portfolio management typically were based on fundamental analysis (A.K.A analyzing the balance sheet of a corporation for clues as to future growth in sales in earnings.).  The concept of diversification was used as a panacea for investing.  And essentially if you were in fact “diversified” and prepared to be a long term investor all would be well.  We used charts depicting the last 30 years of being invested showing the inexorable climb in values of the capital markets.

In the early 1990’s we were in a recession, with a new word invented for being fired: Downsized.  Downsized implied the reason for the firing, the fact that companies could no longer operate with bloated employee numbers.  “Lean and Mean” became the slogan for increasing corporate profits. The shrinking corporate budget mandated cutting the fat, and we adopted Wendy’s Fast Food slogan as a metaphor:  “Where’s the Beef?”, or let’s focus on the doughnut not on the hole.  Quietly at first, and then with a roar of the river going over the falls corporations started eliminating pensions.  Pensions inspired and rewarded employee loyalty.  Good employees were hard to find, so why not do what needed to be done to hang on to them.  The baby boom generation changed the qualified pool of employees from small to big.  It was clear that with a large group of qualified employees, why the issue of loyalty could be down played.  And it gave an easy rational for eliminating pensions.  Pensions were expensive.  Pensions guarantee income.  No matter what the results of investing in the capital markets, the income for retirees had to be assured.  Bad years in the market meant that the company had to make up for poor performance, with contributions to the pension plan coming out of corporate income.  The bottom line short and sweet: pensions had to go.

The retirement environment changed to 401ks, 403bs, IRAs, Keoghs.  The beauty of this retirement planning environment (for corporate America) was that the future results were not guaranteed.  Employees put their own capital at risk.  As they say, hindsight gives you 20/20 vision.  The insight of the hindsight is that as the years progressed from the 1990’s towards the 21rst century the discussion in our workshops changed from understanding the terminology of financial planning, to understanding the terminology of risk.  The change was subtle.  Looking back, treating what we used to do as a sort of “connect the dots”, the picture…the word…that was emerging as we drew a line from dot to dot, was that the demand for topics at our workshops changed from the basics of savings and the investment process to subtleties of risk management.  Yes, today we still have the very real risk that Social Security could go up in smoke!  Nevertheless, looking back in time connecting the dots, the real retirement planning risk was the disappearance of the pension.  A pension PLUS Social security was and is the retirement “nirvana” of the “World War II Generation”.

Please notice the chart below.  During the 1980’s and 1990’s we would never have talked about periods where prudent risk management would have us “out of the market”.  Missing the best days of the market was tantamount to missing the most positive performance in the market.  As you can see, the biggest help to performance for the 25 years ending December 31, 2011 was to miss the worst 40 days.

Notice the last column to the right; compare the performance of the “Average Annual Return” at the top of the chart, to the column showing “Miss Both Best and Worst” days. This implies in our opinion that risk management is worthwhile even if in your attempt to miss the worst days you miss BOTH best and worst days, ….it was well worth the effort.

Connect the dots:  risk management is here to stay.

While not universal, there is a perception that when you retire, drastic changes should be made to your investment portfolio. One of the most common questions I hear from those about to retire is, “Shouldn’t I reduce my exposure to stocks in my portfolio and buy bonds once I retire?” While the impetus for the question is clear (i.e. the notion that moving investments to safer options will help negate the lack of contribution), the answer is less so.

Let’s look at this question from the viewpoint of someone who is 62, in good health, and is going to retire next month. Since summer is baseball season, I’m going let the fictitious soon-to-be-retiree make a few pitches for making changes based solely on the date of retirement and we’ll see how they hold up.

Pitch one: It makes sense to make changes to my portfolio based on my retirement date.

Instead of making wholesale changes to your investments simply because your last day of work is pending, I’d argue to take a look at what is going on in the capital markets. What asset classes are trending up and what asset classes are on the way down?

Monitoring current market conditions and making changes based upon this data makes more sense than shifting a large amount of money into income-producing long term bonds. The income from the bonds may be appealing, but with interest rates on the rise, the value of your bonds will not feel very safe as you watch it go down. That’s strike one against making wholesale changes.

Pitch two: I’m retiring now so big, protective changes need to be made now.

While you’re making a major life change now, you need to consider how any changes you make will impact your future. Hopefully, your goal is to have your monies last through your entire retirement providing an income stream or a source of money for fun trips or to cover major expenses.

As a new retiree, a major risk is inflation. Not owning investments that will at least keep up with, if not outpace inflation, will cause you to lose purchasing power down the road. Becoming too conservative too soon could be costly. Unless this 62-year-old is going to retire next month and spend all his money within the next two years, that’s strike two against making changes.

Pitch three: I’m retiring. I have to do something!

Yeah, relax. Assuming you’ve been planning for retirement for a number of years and paying attention to your investments, don’t make drastic changes based upon the emotion of retiring. Keep your portfolio matched to your income, growth and risk tolerances. Your final day at work will not result in a major shift in the investment universe. And there you have it, strike three

Staying abreast of the market and staying open and willing to making changes based on true market shifts rather than making drastic changes based on arbitrary dates will not only keep you in the game longer, it will allow you to play the retirement game the way you want.