Why You Can’t Just Set And Forget Retirement Investing

Ron Popeil of Ronco fame had an infomercial about a simple to use oven. There was a saying that he kept repeating throughout the 30 minutes show, “Set It And Forget It”. All you have to do was put a roast or chicken in, set-it-and-forget-it and voila, you’d have the perfect entre.

 

Most financial salespeople take the same approach to investing. Here’s their approach…

Are you 10 years away from retirement; needing to make up for lost ground? Just set it and forget it in this great mutual fund or annuity.

Are you retired but don’t need income? Just set it and forget it in this great mutual fund or annuity.

Are you retired and taking monthly distributions from your portfolio? Just set it and forget it in this great mutual fund or annuity.

They call this approach Buy and Hold. I call it Buy, hold and hope.

Like Ron Popeil, most financial salespeople believe that they are simple to use investments that, regardless of market environment, you just have to throw in your money, set-it-and-forget-it and you’ll get a perfect result every time.

If only it were that simple! But it isn’t. And that brings me to Common Sense Core Principal of Retirement Investing: In order to be successful, the strategy you use must be correctly matched to the current market cycle.

There’s no such thing as a good or bad investment, nor a good or bad investment strategy. Each has its own strengths and weaknesses. Successful investors recognize those strengths and weaknesses and then only use them in the type of markets they are best suited for.

We’ve all heard the terms Bull and Bear markets. In a Bull Market the markets are generally trending up whereas in Bear markets they generally trend down. There are also long-term and short-term market trends.

There are longer-term cycles that can last for a decade or more. These are referred to as Secular trends. Then there are shorter-term Bull or Bear market cycles that may last from a couple of months to a couple of years. These shorter cycles are called cyclical because they cycle back and forth.

So there are shorter-term Bull and Bear cycles within longer-term Bull and Bear trends.

The Buy, hold and hope strategy can work well when the markets are in a longer-term Bull trend. An example of that was the period between 1982 and 2000 when the Dow Jones Industrial Average generated a cumulative return of over 1000%. Those that correctly matched the buy and hold strategy with the type of market that it does best in did very well.

In a longer-term Bear market trend the same strategy turns into Buy, hold and SUFFER because secular Bear markets are characterized by extreme volatility and have more frequent and more severe ups and downs. Gains that are made can quickly be lost if you just buy and hold. 

2011 was a good example of that. The S&P 500 ended the year virtually the same place as where it started, but there were something like 6 different up and down moves greater than 15%. It was a roller coaster and few buy, hold and suffer investors were able to endure it as evidenced by the amount of money flowing out of stocks during that time. The buy and hold-type investors suffered not because the strategy they used was ‘bad’, but because it was not matched with the correct type of market.

A different approach is needed in a longer-term Bear market. The strategies used have to be more flexible and the account allocation needs to be dynamically adjusted more often. For instance, over the last couple of years, I anticipated that more conservative bond-oriented investments would do better than higher risk stock-oriented investments. So I dynamically adjusted my clients account allocations accordingly. During t time, bond-oriented returns have been greater than or similar to those of stocks but with minimal volatility. 

Just because we are in a Secular Bear Market, that doesn’t mean that stock-based investments shouldn’t be used, but that they should be used more sparingly and with greater caution. It means that they have to be tactically managed. Tactical management typically involves some type of pre-defined approach that helps identify when to enter the market and when to exit. Tactical-based strategies are better suited for cyclical Bull and Bear markets that might only last for a series of months instead of years.

For instance, one of the strategies I use is calendar-based. It is has been thoroughly academically researched and has been in use since the 1970’s. It moves into the market for about a week at a time, but on very specific dates based on things like tax reporting periods and holidays. Another manager I work with has used this strategy in his hedge fund for over a decade and, he reports that it didn’t have a losing year since 2001. Can you see how a strategy that remains in the safety of cash 72% of the time and is only exposed to the stock market 28% of time; yet has a history of capturing gains…can you see how that is better suited for a Bear market than the traditional buy, hold and suffer approach?

That doesn’t mean we shouldn’t ever use Buy, hold and hope. It just means that we have to realize that NO investment strategy is perfect. They all have strengths and weaknesses. So doesn’t it make sense that we should seek to match the strategy to the type of market we are in?

To wrap it up, retirement Investing is to recognize that it is vital that you adjust the type of investment strategy used to the type of market environment you are in. By the way, keep in mind that when I use the term ‘market’ I am not just referring to the stock market. There are many different kinds of markets—the US stock market, the US bond market, there are foreign stock and bond markets. There are currency markets and commodities markets—just to name a few. Typically, different markets cycle at different times, but the principal is the same—match the strategy used to the type of market it works best in.

Over the years, I’ve noticed that as investors have become more and more discouraged and that they have lowered their expectations of what a financial advisor should do for them. In my next blog post. I’m going to share the expectations that I would have if I needed to hire someone to help me manage my goose that laid the golden egg. And they are the expectations I would want my wife to have if something were to happen to me. I think you will find that these Common Sense expectations are anything but common nowadays.

Your posted comments on this and other questions are welcome.
If you have a question for Jeff an answer is just a click away.
Find a wealth of information at Jeff’s website.

Properly Assess the Financial Risk Associated with Your Compensation Plan

In the last blog post, I explained that you are the CEO of your Golden Goose Management Company. One of the most important aspects of the job of a CEO is risk management. CEOs naturally think in terms of risk and try to minimize it whenever possible.

As the boss you need to view financial decisions and compensation plans in terms of risk. This is another principle that I have had to learn the hard way and I hope you can learn from my mistakes instead of repeating them on your own.

There are two basic compensation plans that I want to use to convey this concept of risk. One compensation plan is where the monthly compensation is paid up-front and the other is paid after the work is complete. For instance, the Super Star that I referred to in the last principle demanded that I pay a very large sum UP FRONT and that would cover one month’s work. If things didn’t work out as planned, I am out that money that I paid.

The other compensation plan is where payment is made after the work is done. This is how I work with all my other contractors. We agree upon a set wage and when the payments will be made. For instance, the Super Star and I might agree to a wage for the month, payable at the end of each month.

As the CEO, which compensation plan has more risk for my company? Obviously the first one does. If I hand over the money and the Super Star doesn’t perform as expected, then I have LOST that money. I have little chance of getting any of it back. In the second compensation plan, I am not paying for the work until AFTER the work has been done. If the Super Star only works 1 week, then I will only pay for that one week.

When I pay the a large sum up front, I have a large sum at risk and it is possible that I can lose all of that. When I pay the that same amount after the work is done, I have avoided that risk. Which is better for my company?

Keep this in mind when dealing with a financial advisor to help you with your Goose that laid the golden egg. There are many products out there like annuities that make you pay for service UP FRONT. For instance, if you put your money into an annuity and change your mind, you aren’t going to get all of your money back. The money that you don’t get back basically amounts to the commission that you paid. If you invest $500,000 in one of these fancy annuities, you are basically paying $30,000 – $40,000 or more upfront to a contractor that hasn’t done any work for you yet. If things don’t work out—for whatever reason—then you have LOST that money. You will NOT get it back.

Some may argue that buying an annuity is like buying an item like home or a vehicle. In both of those cases you are paying the commission up front. So what’s wrong with doing that in an annuity? The biggest concern that I have is that many of the annuities being sold to retirees nowadays have all these special features like a 7% income guarantee and those riders are the main reason someone is buying it.

When you buy a house, you know what you are getting. You can have a home inspection done that will uncover any hidden pest damage or mold problems. You can have the foundation inspected. So when you commit to buying that home you know what you are getting.

If you buy a new car or a truck, there is a warranty associated with it that protects you from manufacturer defects. If the engine stops working a month after you buy it then the warranty should cover it.

In both of these examples, the compensation risk can be mitigated or reduced. It is very hard for the average investor to mitigate the risk associated with buying one of these annuities because they are very complex contracts that are even hard to professionals to dissect. And all of these fancy riders all come with clauses and conditions that often result in them working far different from the way many agents seem to portray them. You have to recognize that you have a significant amount of compensation risk when you buy one of these products.

There are advisors, like myself, that don’t earn a commission on the money they manage on your behalf. Instead, they earn a fee. They only get paid for the period of time you have them manage your money. It is like paying an employee at the end of the month instead of the beginning of the month. There is less risk to your goose that laid the golden egg if things don’t work out as planned or you just change your mind.

Your responsibility as CEO of Golden Goose Management Company is to closely manage risk. When you consider hiring someone to help you, take into account the compensation risk involved and, whenever possible, opt to pay someone after they do the work instead of before.

The fourth Common Sense Core Principle of Retirement Investing is to recognize and take into account the risk associated with the compensation structure of the ‘employee’ you are hiring to help you.

Feel free to let me know what you think about the information presented in this series—you’re feedback will allow me to make it better. And your comments and questions will help others, too.

Retirement Investing…It’s Your Money!

The second Common Sense Core Principle Of Retirement Investing is to constantly remind yourself that “It’s My Money!” When I look at the financial decisions that a lot of retirees make it seems to me that they have forgotten this basic fact!

                                                                   Retirement Investing – It’s Your Money

So many retirees have a lack of confidence in their ability to make sound financial decisions. It’s like they turn off their brains when they sit down to talk with an advisor. They discount what they know and magnify what they think the Wall Street System ‘advisor’ knows. (When I use the term Wall Street System I am referring to the financial media, the financial product companies and their sales force. You can learn more about it in my book, “How Success Investor’s Tripled the Return of the S&P 500” available on Amazon.)

Getting back to my point, you have to realize that you have an incredible amount of knowledge and experience in managing money. And if you are dealing with the typical Wall Street System advisor, you probably have DECADES more experience than them! Give yourself some credit!

Think about it: You are the one that has successfully created the wealth you are trying to invest. The only way you could have done that (unless you won the lottery or got it all as an inheritance) is if you applied solid money management principles. I bet that you worked hard—first in getting an education and then in an occupation. 

You probably did without all the fancy things your neighbors were buying so you could live within your means. I bet that you drove your cars till they practically stopped running. You lived in a house you could afford when you could have bought something bigger. You diligently and consistently set aside money for retirement and for your children’s college education.

All of those traits are what allowed you to get where you are today and those are the same traits that prove that you know more about managing money than the Wall Street System salesperson you’re talking to. You have decades of experience few of them has.

The second part of this Principle is that you have to place a greater importance on the money you’ve set aside for retirement and to remain engaged in how it is invested and monitored.

I know that many of you would much rather be on the golf course or travelling then paying attention to what is going on in the world and the markets. Keep in mind, though, that your money is the goose that laid the golden egg. It is what will produce the income you need for the rest of your life. If that goose is neglected and stops laying eggs you are in SERIOUS trouble.

Some retirees have the tendency to try to offload all of the money management responsibility to someone like a financial advisor. If you have read my book on the Wall Street System then you realize how dangerous that is. There are certain responsibilities and tasks that you can hand off to someone else, but you MUST remain engaged in the management and oversight of that person.

That doesn’t mean that you have to spend several hours a week double checking everything the advisor does. You should pay attention, though, to major economic trends or crises and think about how they might impact your financial situation

It is your responsibility to put in the research necessary to determine if a financial product is in your best interest. I have talked to hundreds of people who didn’t take the time to do that and they have lived to regret it. Many made the biggest financial mistake of their lives because they didn’t invest a few hours of research to verify that what they were being sold worked the way they were told it was. And now they’re stuck. 

I don’t want that to happen to you or your friends, and that’s why I’m sharing this information.

For instance, I remember a widow in Texas that called me one day. She had trusted a ‘financial advisor’ with all of her lifes savings. “He was such a nice man and seemed to know what he was talking about and he really seemed to care about me.”

It turned out that the experienced ‘financial advisor’ she trusted was simply an insurance sales person with little real money management experience or training. It’s possible he had only been an agent for a short time. Yet she willingly handed over her entire life’s savings and put it in a product that she thought did one thing, when in fact it didn’t work anything like what she was told.

She was stuck. She would either have to pay a huge penalty just to get HER MONEY back or would have to endure a decade or more of probable sub-par performance.

ALL because she lacked the confidence in her own abilities; all because she wasn’t willing to put in a couple hours of research to make sure that the product she was being sold worked the way she thought it did.

Annuities are some of the most popular ‘products’ that are being sold to seniors right now. These are very, very complex contracts. In fact, in my experience, 

…Very Few Advisors Understand How They Really Work!!!

The more complex a product is, the more time and work you have to put in before placing your money in it. Remember, this money is your goose that laid the golden egg. That’s a very valuable goose that needs to be closely guarded because there are LEGIONS of nice people that want that goose for themselves.

Be skeptical. Don’t just take their word for it. Do your own research. AND IF YOU CAN’T UNDERSTAND HOW IT REALLY WORKS; if it sounds too-good-to-be-true then DON’T TAKE THE CHANCE OF HANDING OVER YOUR GOLDEN GOOSE 

President Ronald Reagan is credited with ending the Cold War. His actions led to the fall of communism and the Berlin Wall being torn down.

One of his oft quoted phrases occurred during his discussions with Russian President Gorbachev during the nuclear arms treaty negotiations. The phrase was ‘Trust, but verify.’

Today’s investors are in a hostile environment. Let me be frank. There are many out there that have the best of intentions; who are nice, trusting people, who are honest and sincere…that are selling products incorrectly. When that happens, it is the investor the loses.

I’m basing this on THOUSANDS of conversations I’ve had with investors and on emails I’ve seen that these advisors sent the investor.

Trust, but verify.

Always keep these two thoughts in the back of your mind:

1. What if I’m wrong about how this works?
2. What is going to happen to me if this doesn’t work out the way I expect?

There are other actions you need to take if you are using any market-based investments like stocks, bonds or mutual funds (even in a variable annuity). Remember, it’s YOUR money!

You should check your account balances at least every 4 weeks and have pre-determined levels at which you will take action should the value of your nest egg decline.

You should have a clear understanding of the retirement investing strategies and philosophy that is being used to manage your money.

You should understand the fee structure and calculate the total fee percentage (this should be done before entering something like a variable annuity) that you’ll be paying each year. Keep in mind that every dollar that you pay in fees is a dollar you don’t get.

So remember, the second Common Sense Core Principle Of Retirement Investing is “It’s your money!” And your money is the goose that laid the golden egg. Remain engaged. Trust, but verify. Watch it carefully for the first signs of trouble. And take action when necessary to protect it.

The third Common Sense Core Principle Of Retirement Investing will allow you to turn the table on your financial advisor. It will keep you from being at their mercy.

One last thing—if you have a question about any of the information in this series or about your financial situation, you have a special level of access to me because of your subscription. Feel free to email me at jeff@CommonSenseAdvisors.com and I will respond as quickly as possible.

Keep an eye out for the next blog post, and please feel free to comment below and share this with friends.

See you then.

Why Retirees Must Focus On What They Financially Control

I can’t tell you how many retirees that I talk to that are scared by all the uncertainty in the world. They literally find themselves lying awake at night because they are afraid they are going to run out of money.

It doesn’t have to be that way—it SHOULDN’T be that way. And this First Common Sense Core Principle of Retirement Investing is that you need to focus on what you CAN control and not worry about what you can’t.

I believe people become scared because they feel they are in a situation where they don’t have any control of the outcome. The 24-hour news media has to fight for your attention so they use headlines designed to cause fear. There’s a saying in the media that ‘if it bleeds it leads’ which means they want to start with stories that make someone feel afraid. It’s to THEIR benefit, not yours.

So you watch the evening news and night after night they are talking about the crisis in Europe or our country’s deficit or of the latest dive in the stock market. They show scenes of thousands of people waiting in lines just to get a chance to try and get a job. There are stories of middle-class people now having to resort to food banks to feed their family. 

No wonder people are scared! Fear can be paralyzing.

We are afraid when we sense there is something threatening us and we can’t do anything about it. There’s nothing you and I can do to solve our country’s deficit. There’s nothing we can do to solve the crisis in Europe. We can’t keep the stock market from crashing.

But here is the key. We CAN control what we will do in each of those situations. For instance, we can control how we will adjust our investments to protect us from the threat of the U.S. Dollar declining in value because we have such a large deficit. We CAN control the risk associated with different outcomes in Europe by identifying the possible outcomes, determining the impact each might have on our investments and knowing ahead of time what we should do.

Successful people recognize they can’t control events, but they can control what actions they will take if an event occurs.

Having a plan for each of the various situations that might arise will make you feel more in control and less at the mercy of Fate. Focusing on what you can control will get rid of the paralysis and enable you to regain your confidence. You can do this. You can develop an understanding of the various potential economic threats that exist and determine the best way to overcome each one. All it takes is a little bit of time and effort…and I’ll help you along the way.

So, what are some of the things that you find yourself worrying about? Fear tends to be nebulous and that makes it hard to overcome. Think through what is causing your worry and try to identify the specific ways that the situation or event will affect you. What can you do to help prepare in case that does happen? Are there things you can do to could prevent it from happening or mitigate the effects?

Let’s Look At An Example…

One of the biggest fears most retirees have is running out of money. 

What is causing that worry? Is it that you’ve seen the value of your nest egg take a big hit and you aren’t sure there is enough left to last as long as you need it to? Is it that your expenses keep going up? 

If that’s the case, the first thing you need to do is to get the facts. Instead of just worrying whether or not you will have enough money, do the math so you can find out. There are different free calculators available on the internet that can help you see how money your money will last. 

By the way, you don’t have to do all the work yourself. It’s about getting the information you need, not personally crunching every number. I have a process where I have identified 54 different threat scenarios. I can then use statistical testing to determine the probability of success that someone will have of reaching their goal.

The point is that you find out the facts. Based on the facts, then you can develop different plans of action. Let’s say that testing shows that you will have a better margin of safety if you either reduce your expenses or increase your income.

• What are steps that you can take to reduce your income?
• Where can you cut costs?
• Would selling your home and moving to something smaller help?

Or maybe it would be easier to try to increase your income. Is it possible to get income from doing consulting work or taking a part time job? Is there a way to make money from hobbies that you enjoy?

Get the idea? This is just an example, but can you see how engaging your mind, getting the facts and then brainstorming solutions puts you back in control? We all feel better about a situation when there is something we can do about it. 

So this first Common Sense Core Principal is to focus on what you can control instead of what you can’t.

Real-Life Example From One Of My Clients.

My job as a portfolio manager is to put my clients back in control so they can sleep at night. A few months ago, a wonderful lady in Florida contacted me because she wasn’t completely satisfied with her current advisor. I’ll call her Sue. 

She was tired of worrying about what might happen if there was another big dip in the market. She found herself worrying when the evening news would report on riots in the streets of Greece. She would become afraid when she’d get emails or information in the mail that our country was going to collapse and that she should buy gold.

Instead of just worrying about things she couldn’t control, she decided to focus on what she could. She started doing research and found out that her worry was justified because the way her current advisor was managing her investments, there wasn’t anyone really watching her money from day-to-day. So she knew that if the market dropped several percent so would her account.

That research led her to contact me.

She ended up becoming a client because of the way that I approach managing investments and the well-defined risk management processes I have in place to prevent significant losses. 

That was about 3 months ago. At the time the markets were doing fine.

Then the markets started to drop. This was leading up to and shortly after the 2012 elections and the markets would surge one day and plunge the next. They were a real roller coaster. In the midst of all that uncertainty, a time when the clients of most advisors are calling them because they are afraid, Sue sent me an email and this is what it said:

“Jeff, I just thought you’d like to know that I am no longer squeamish as the markets continue to tumble up and down.  Just knowing you are aware of my risk tolerance and that should the market go to “Hades in a hand basket”  action will be taken to protect my assets from falling below that tolerance.  No more (as you say) buy, hold, and suffer!”

Sue doesn’t lying awake at night anymore because she realizes that there are plans in place regarding how the portfolio will be adjusted based on which of the various threats we may be facing. She feels in control because she knows there is someone that is working with her to plan how we will respond to what lies ahead, prepare for the various possible outcomes and that is ready to quickly execute those plans as needed.

Sue took the time to analyze why she was worried and found out that her worry was justified. She got the facts. Then, armed with the facts, she figured out how the situation could be remedied and she took action. 

If Sue can do it, so can you.

I want you to be successful and to be able to sleep at night. Focusing on what you can control and not worrying about what you can’t is the first Common Sense Core Principles of Retirement Investing.

Sometimes we allow advertising messages to unduly influence the way we think. That can easily happen with all the commercials and information about investing that bombards us. I’ve noticed a subtle shift in investors attitude toward their money…they seem to lose sight of one very basic fact—a fact that needs to guide all of their investment decisions.

The second Common Sense Core Principle of Retirement Investing addresses this shift and brings you back to basics. Keep an eye out on this blog for the next posting.

In the mean time please leave any comments you have below and feel free to share this article on social media.

Financial Planner Jeff Voudrie’s Week In Review 7/8/2013

Good morning!

Trend Indicators:
                Canadian Stock Market: Still in downtrend
                US Stock Market: Changed from Downtrend to Uptrend based on Friday’s closing data
                US Bond Market: Still in downtrend

In the markets:
Most worldwide markets gained last week, with the notable exception of the continuing  underperformance of Emerging Markets.  US indices gained an average +2%, led by Small Caps at +2.9%, with the S&P 500 gaining +1.6%.  Developed International indices gained an average +1% (led by European markets which enjoyed their best day in months on Thursday), but Emerging International indices once again lagged with an average loss of -3%.

Economic data released in the US last week was generally solid.  The US manufacturing Purchasing Managers Index (PMI) was slightly above forecasts in June at 50.9, after dipping below 50 in May.  Personal income rose a better-than-expected 0.5% in May.  Initial jobless claims fell by 9,000 to 346,000 for the week ended June 22nd.  Pending home sales jumped 6.7% in May, the most since April 2010.  On Friday, the Non-Farm Payrolls number came in above estimates at 195,000, and the US market responded with a good rally. (Wall St. Journal)

Following the release of the Non-Farm Payrolls number, bond yields immediately spiked higher in the US.  The 10-year note leaped from 2.50% to 2.74%, a huge increase and the highest level in two years.  At first, the stock market sold off in response to the rise in rates, but a feeling of “perhaps good news really *is* good news” took hold, and the market rallied to finish at the day’s highs with a gain of +147 in the Dow Jones Industrials. (Barron’s)

In Europe, the latest reports show contraction slowing in the Eurozone as a whole, while several countries are showing positive growth, including the UK and Germany.  Economic confidence in the euro zone rose to 91.3 in June, a one-year high.  Retail sales in Germany were up 0.8% in May, the most in four months.  Unemployment in Germany decreased for the first time in four months in June, falling by 12,000.  Business confidence in Italy was at a 16-month high in June at 90.2, and the the U.K.’s manufacturing PMI rose to 52.5 in June, a two-year high.  Further, ECB head Mario Draghi soothed markets again by telling a news conference that “Monetary policy will remain accommodative for as long as necessary.”  (guggenheimpartners.com)

However, in China, operating conditions deteriorated at the quickest pace since last September.  After adjusting for seasonal factors, the HSBC Purchasing Managers’ Index (PMI) was reported at 48.2 in June, down from 49.2 in May, signaling a modest deterioration of business conditions.  Operating conditions have now worsened for two successive months, according to markit.com. (markit.com)

Looking Ahead:
The internal indicators that I use to determine the trend of the stock markets switched from downtrend to uptrend based on Friday’s closing data (in the US stock market). The stock strategies that I was using based on these indicators went to cash several weeks ago. I expect to move that money back into the market today, based on the parameters and logic associated with each strategy. The US bond market continues to struggle with the 10 year US Treasury bond jumping from 2.5% to 2.75% on Friday (as noted in news snippet above). Mortgage rates have jumped substantially and data last week indicates that mortgage re-finance activity has virtually come to a halt.

Are we out of the woods because the indicators have moved back to an uptrend signal? Of course not. These signals are designed to pick up the shorter term (weeks to month’s) changes in trend and to alert us to when to buy or sell. The intermediate term indicator (months to years) continues to signal downtrend. The rallies the last several days have been on very low volume but the bottom line is the markets have been going up so it’s time to put some money back to work.

On the bond front, I expect that I will be liquidating more of the bond holdings and moving that money to the safety of cash while this period of uncertainty and high volatility (very high for bonds) exists. As always, I will continue to monitor the markets closely and to take action as deemed necessary to protect my client accounts and to make them grow.

God Bless and have a wonderful week!

Always At Your Service,
Jeffrey D. Voudrie, CFP® Practitioner