I recently came across one of the more relevant and thorough articles on investing and retirement planning that I have read in quite some time, but as it was 10 pages long I fear that even a summary of it would be more than the scope of this monthly newsletter could bear.
Instead I’ll take a slightly different approach with this month’s column and will quote the author four times and add my comments and perspective after each quote.
The Fatal Flaws In Your Financial Plan
February 21, 2017 by Lance Roberts of Real Investment Advice
1. From the article:
With the average American still living well beyond their means, the reality is economic growth will remain mired at lower levels as savings continue to be diverted from productive investment into debt service. This skew in wealth, between the top 10% and bottom 90%, has distorted much of the economic data which suggests savings rates and incomes are rising across the broad spectrum of the economy. The reality, as shown by repeated studies and surveys, is an inability for many individuals to meet even small emergencies, much less being anywhere close to having sufficient assets to support a healthy retirement.
My comments: This data is very revealing and very disturbing. Over the last 30 years the great American capitalist experiment has worked well for the top 20% of wage earners. The top 10% especially so. This means that over 240 million people in the richest country in the world have largely been left out. This tells me that it is an issue that must be addressed by leadership. It also tells me that one should pay critical attention to the work that they do and the ability to move upward toward that top 20 percentile if a financially fit retirement is a goal.
2. From the article:
Take a look at that graphic carefully.
- 33% of Americans have $0 saved for retirement.
- 56% only have $0-$10,000.
- 66% have less than one-year of median income saved.
- 74% have less than $100,000 saved for retirement.
With 3/4th’s of America dependent upon an already overburdened social security system in retirement, the “consumption function,” on which roughly 70% of the economy is dependent, is being grossly overestimated.” In other words, 74% of Americans are “hoping” the financial markets will bail them out of their “under- saving.
My comments: To paraphrase: people aren’t saving enough, consumerism is winning the day over savings, and most people are hoping that investment returns are going to bail them out. Tragically, in most cases this is not going to happen.
The gap is simply too wide. And while most of us would like to blame the meager returns of the securities markets since the year 2000, it is the lack of disciplined spending and saving that is the major contributor to poor retirement readiness.
Become a saver. Start now. Set up a systematic way to put money aside every time you earn some. If you are blessed to live to old age it will be one decision that you most appreciate from life. Not last year’s return on the S&P 500.
3. From the article:
Importantly, the return that investors receive from the financial markets is more dependent on “WHEN” you begin investing with respect to “valuations” and your personal “life-span.”
The single biggest mistake made in financial planning is NOT to include variable rates of return in your planning process.
Furthermore, choosing rates of return for planning purposes that are outside historical norms is a critical mistake. Stocks tend to grow roughly at the rate of GDP plus dividends. Into today’s world GDP is expected to grow at roughly 2% in the future with dividends around 2% currently. The difference between 8% returns and 4% is quite substantial.
Also, to achieve 8% in a 4% return environment, you must increase your return over the market by 100%. The level of “risk” that must be taken on to outperform the markets by such a degree is enormous. While markets can have years of significant outperformance, it only takes one devastating year of losses to wipe out years of accumulation.
My comments: I have spent the last 20 years trying to get this point across to, well, just about anyone who would listen.
Doing retirement planning and forecasting future investment returns by looking at long term investment data is flawed. Most people have a 20 to 30 year span of time to make and save the money they are going to use in retirement. As a result, the individual investor must be more in tune with the business cycle, bull and bear markets, and valuations than the endowment or the pension fund investor.
No one, and I mean no one can time the market. But making intelligent asset allocation decisions based on current valuations and opportunities must be incorporated into the investment process for the individual. One can’t simply allow the determining factor for investment success to be the year in which you were born and where the markets just happen to be when you are between the ages of 45 and 65.
4. From the article:
RISK does NOT equal return. The further the markets rise, the bigger the correction will be. RISK = How much you will lose when you are wrong, and you will be wrong more often than you think.
My comments: As I approach my 60s I can report to you that I get this. I get this because I have seen the consequences of simply believing that if one takes more risk one will be rewarded. I have seen it in others. I have seen it in my own investment decisions. Risk has its place in investing and is necessary, but it has become my goal as an investment manager to attempt to only incorporate as much risk as is necessary to accomplish investment goals. I also know that I must monitor that risk very closely and be prepared to adjust portfolios as needed.