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Posts Tagged ‘Retirement Decisions

Are Risk Questionnaires A Waste of Time?

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Are these things worth anything? … or nothing.

Risk questionnaires have played a major role in retirement and investment planning for as long as I can remember; and I’ve used them no less religiously than any other advisor.   Frankly, I’ve always felt they were a little stupid.

Elmer Duckhunter walks into Brainy Smartsuit’s office at Behemoth Securities.  It’s a beautiful place, full of mahogany with lots of beautiful brochures in the lobby.   Brainy has been successful at Behemoth, gaining promotion to Sr. Vice President after selling more Secure Your Future product than anyone else in the office using the “Secret in a Box” software supplied by the product wholesaler. 

“How can I help you?”, Brainy asks.

“Well,” says Elmer, “I have a lot of money from all those Tractor Pulls I won and I think it’s time I began investing for my future.  What should I invest in?”

“I think I can help you, but first I have to know more about you!”

“Makes sense.  What do you want to know?”

Brainy pulls out the Behemoth Risk Assessment questionnaire.  “First, I’d like to know a little about how you feel about investing.”

“Okay.”  Elmer settles in.  “How many questions are there?”

Brainy smiles, “Just six.”

“Six?  You can learn everything you need to know about me with just six questions?”

“Trust me.  This is very scientific, “says Brainy.

“Okay.”

Brainy begins.  “On a scale of zero to 10, how much risk do you feel you can handle?”

“I don’t know.  What would a ‘five’ feel like?”, asks Elmer.

“Just pick one that you feel comfortable with, says Brainy.  “The people who prepare these know what they’re doing.”

Elmer thinks for a second.  “Well, back in 2007 I was a 9, but after the crash I was a 2.  Now, I don’t know what I am.  That’s why I’m here!”

“Well, I can’t tell you how much risk to take until you tell me how much risk you want; then, I can tell you what you told me and we’ll have the answer!”

“Huh?”

They both look at each other, then Elmer continues, “How much risk do I want?  Seems to me you should be telling me how much risk I need or don’t need!”

“But what if it’s more than you want?”, asks Brainy.

“I don’t know how much I want.  I need to know how much I should or should not have?

Brainy perks up.  “Now we’re getting somewhere.  What are your goals?”

“Simple”, says Elmer, “to retire with as much money as possible with as little risk as necessary.”

“How much is that?”

“How should I know?  You tell me.”

Brainy senses a lack of forward progress.  “Let’s come back to that.   Try this one:  If your portfolio went down, what would you do?”

“I’d probably ask you for advice!  Isn’t that your job?”  Elmer’s beginning to wonder if Brainy Smartsuit is so smart after all.  “Why are you asking me all this.  I just want to know what I should be doing!”

Brainy comes clean.  “We have regulatory compliance concerns.  We have to make sure what we recommend is consistent with how you feel about investing.”

“I’d rather have advice that’s consistent with what I need,” says Elmer.  Are you protecting me or your firm?

“Well, actually, both…”

“There are six of these?”  Elmer’s fed up.   He puts on his duck hunter cap with earflaps, and stomps out of the office.

Maybe these questionnaires can shed some light about attitudes; but, they don’t tell Elmer what he needs to know.  Elmer just wants to know what he should be doing and why.

Once he understands what and why, the rest gets easier.  Fear can exist only where there’s a knowledge vacuum.    When knowledge replaces ignorance, fear dissipates and understanding prevails.

Maybe questionnaires have zero to do with long term success for the client; but, they maybe do help sell more Secure Your Future product.

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The Independent Financial GroupSubscribe to IFG Insights letters for individual investors.

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting and wealth management services for individual investors. Opinions expressed are solely those of the author and fictitious names were created solely for their entertainment value and are not meant to represent any person or organization living or dead.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com

Six Tips for Surviving Challenging Markets

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Here are six tips to help cope with challenging market environments:

1. Stay Engaged

When you sell an investment simply because it has declined in value,  it becomes impossible to benefit when it rebounds.  The same is true of the broad market in general.  Many of these major upside moves can happen quickly, often in just a few days.  To avoid missing these key days, you may want to consider staying invested and avoid panic selling. Consider this hypothetical example furnished to us by the folks at Principal Financial Group:

An individual who was invested in the S&P 500 from January 2, 1991, until December 31, 2010 would have turned a $10,000 investment into $58,137.02 for an average annual return of 9.20%, while an investor who panicked and sold their positions during this same period and missed the 10 best trading days in this period would have seen their return fall from 9.20% to 5.47%. [Source: Ned Davis Research]

The lesson is clear: No one can predict when the market will experience its best days.

2. Keep a Long-Term Focus

Studies show that time is your ally.   Of the three types of investments studied (stock funds, bond funds, and asset allocation investment options), the average investors in asset allocation funds held their investment options the longest (an average of 4.30 years) over the five time periods studied (1-, 3-, 5-, 10-, and 20-years).  It’s little surprise that these investors successfully weathered one of the most severe market declines in history (2000-2002). [Source: Dalbar 2010 QAIB study]

3. Have a Diversification Plan

According to the Dalbar study, investors guess incorrectly about the market’s direction 50% of the time.  So, diversification helps guard against those errors; but, many people mistake duplication for diversification by buying multiple mutual funds not knowing many of the underlying holdings are identical.

Choosing different management styles and market capitalizations of equities and bonds isn’t as simple as you’re lead to believe on television.  When was the last time you heard a financial entertainer the impact of highly correlated assets?   It’s boring stuff and makes for poor television, which is why it isn’t discussed, but it’s what you need to know.  Quality diversification enhances the benefits of asset allocation so investment balances are less affected by short-term market swings than they would be if you invested in a single asset class.

If you are an investor who is nearing retirement, consider consulting your advisor about this issue.  Remember, asset allocation/diversification does not guarantee a profit or protect against a loss, but it will likely make your journey much smoother.

4. Utilize an Auto-Rebalance Strategy

Historically, business cycle contractions last about one-sixth as long as expansions.  Now may be a good time to re-evaluate your risk tolerance. If you want a professionally managed investment option to handle this complicated task, you might want to consider a unified managed account (UMA).  It’s an option that simplifies your paperwork, virtually automates the rebalancing process, gives you consolidated reporting while providing the diversification of management, styles, and investments needed to do the job right.  UMAs can hold mutual funds, index funds, ETFs, institutional separately managed accounts, and more.  A UMA is not an investment; it’s a type of account you use to execute your investment plan.  Ask your advisor or – shameless plug – feel free to contact me for information about UMAs. 

There are also target-date and target-risk asset allocation funds available on the market; but, tread carefully.  Different funds with the same target date or target risk can still have very, very different holdings, styles, and risk profiles.  Not everyone retiring in the same year has the same financial picture or ideas about how they want to make the financial journey.  As you can tell, I’m not a big fan of ‘cookie-cutter’ solutions.

5. Keep Your Focus

Discipline is something everyone has until panic sets-in.  Quite often, that’s when an advisor can show the most value.   Successful investing is a marathon, not a sprint.  The tortoise did win the race, you know.

6. Get Regular Checkups

Too many individual investors are still stuck in the old paradigm under which their advisor, actually a broker, would call them with investment ideas or changes they should make.  Today, with the emergence of the fee-only – that’s different from fee-based – business model utilized by ‘pure’ Registered Investment Advisors (not dually registered to sell securities, too), the new paradigm operates more like other professional practices in law, medicine, or accounting.  In short, you need to make an appointment for your checkup, at least annually.   And, today, with online meeting technology, you can even do it without getting in your car… so there’s no excuse.   Get your checkup!  If you don’t, your financial health will likely suffer.

If you like information UMAs, you can request it here:

 
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The Independent Financial GroupSubscribe to IFG Insights letters for individual investors. 

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, Keep up to date with IFG on Twitter: @JimLorenzen

Abnormal Markets – Abnormal Times

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

When the Fed announced an open-ended QE3, the stock market rallied.  In fact, the market’s been trending up since 2009 after the meltdown when all the government spending began.  But, was that good?  Have those stock gains been real?

Since the meltdown, people have been chasing returns whereever they could find them, whether it was with high dividend-paying stocks or  buying gold – a demand largely fueled by all those tv commercials.

The financial industry, of course, has responded to both fear and greed by packaging yet another series of products, some of which come with either high or hidden costs… and sometimes both.

The question, of course, is whether all these “black box” solutions are really the answer… or whether the ‘basics’ are still relevant.

After all, companies that declare dividends are adjusting the price of the stock downward to compensate – you could arguably simply buy growth stocks that don’t pay dividends and simply sell what you need for income and still arrive at the same result! 

And, while gold has increased in value – in terms of the numbers of pictures of presidents you receive for each ounce – have you really received more value when adjusted for inflation?  Some say ‘yes’ but a J.P. Morgan study says something else.

We have more about this in our IFG Insights E-zine, which is appeared earlier this morning and is available in our archive.

It’s my guess much of the increase we’ve seen in virtually all equity categories, have been more nominal than real and are driven by the growth of debt.

We’ll see, won’t we?

Jim

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Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  

Additional IFG Links:

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization. 

 

Are You “On-Track” to a Successful Retirement?

IFG BlogJim Lorenzen, CFP®, AIF®

If so, you may be alone.

I attended a 401(k) Recon conference north of Los Angeles last week and was amazed, though not totally surprised, to hear a few very interesting points.

One speaker relayed a story about one company’s 401(k) enrollment meeting where 100% – yes, everyone – said they wanted to enroll in the company’s 401(k) plan.  They all were going through the materials and even choosing allocations they felt were appropriate – and all them were excited about starting to save for their retirement!

Would you like to guess how many actually followed through and actually participated?   3%.  That’s right; only three in one hundred actually did it.   Education didn’t seem to help, at least in that particular case, despite all the glowing post-meeting comments.

Benjamin Graham, the ‘dean’ of value investing who taught Warren Buffett at Columbia University, once said that behavior, more than investment choices, represent the largest impediment to financial success for most Americans; and the data seems to bear that out.

Poor savings habits, poor investor performance due to behavior, and paralysis often due to too many choices create roadblocks many have trouble overcoming.

Maybe the best gauge of investor success (or failure) might be whether they are ‘on track’ to a successful retirement, which some define as replacing 75% of preretirement income at age 67.   According to a study – I think it was conducted by Mass Mutual – revealed that only 15% of American workers are ‘on track’.   Even without my HP12-C, it’s obvious that means 85% are not.

It’s not rocket science.  It’s about three simple components:  time, savings rates, and return.   Time is the only component that constantly declines; and, as it does, it creates pressure on the other two.  When procrastination behavior impedes one of those, all the pressure falls on investment return.  This may be why some people reach a point where they begin making the risky choices they live to regret.

I’ve spoken about financial literacy before and how our schools need to do a better job – I even once met a CPA who didn’t know the difference between gain and yield.  When an accountant doesn’t know, it explains the deficiencies the rest America’s workers are experiencing.

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.  IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional. 

Additional IFG Links:

IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG does not provide legal or tax advice and nothing contained herein should be construed as  securities  or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.

Think You’ll Spend Less in Retirement? Really?

IFG BlogConventional wisdom:  When you retire you’ll be spending less.  You’re not commuting and you won’t need clothes for work; so your financial needs in retirement will be less.

Not my experience.

I’ve been helping people plan for, and manage, retirement for more than twenty years, and here’s what I’ve learned:

When people retire, they have time to do all the things they’ve been wanting to do for years:  Travel, play golf, visit family and spoil grandkids, take classes, start new hobbies… you get the idea.

Advisors – me included – have been preaching the 4% rule:  “You probably don’t want to take more than 4% of your initial assets, plus a cost-of-living increase, each year you’re in retirement.   It’s a mantra we all have preached.

But, people are living longer and there’s a factor many haven’t considered:  Inflation.

Yes, we did address cost-of-living increases in our 4% distribution formula; but, there’s more that hasn’t been addressed, even by yours truly!

Some time ago, I wrote a paper, ‘Why Investors Fail’, in which I addressed the `order of returns’ as a significant factor in retirement success.  I was by no means the first to talk about this and I certainly didn’t discover it.  But my discussion of the order of returns was limited to the investments.  It applies to inflation, too!

Bob Veres, writing in the current issue of Financial Planning, pointed out something interesting:  Inflation tends to strike retirees harder than preretirees.  The biggest reason:  Health care costs are rising faster than the inflation rate!  But, adding to the mix is the concern about withdrawal rates and their relationship to inflation.

Jim Otar, a Thornhill, Ontario-based financial analyst and planner, conducted a study of withdrawal rates over 111 years.  The results, cited in this month’s Financial Advisor, shows that the sequence of returns and how much prices move up and down contribute 32% to the total return of a portfolio and inflation can contribute 21%, with asset allocation and management making up 31%.   So, the order of inflation numbers, combined with withdrawal rates, can have a significant impact on how long money lasts!

The insurance industry, of course, has been jumping on this issue for some time offering guaranteed future or ‘longevity’ income annuities to ease investors’ worries.  Indeed, many planners are beginning to include these products in their planning for clients; however, there are some drawbacks everyone should consider, including their high internal costs, surrender charges, and high sales commissions – all paid by the purchaser.  Another concern is the risk that the insurance company could fail!  We’ve seen what’s happened in the credit markets before.  If an insurer fails, the policy holders would be subject to the payout limits and state insurance guaranty associations.

Another consideration:  Immediate annuity income won’t likely keep pace with inflation, even with cost-of-living adjustments.  And, government COLA data doesn’t include food or energy, and I wouldn’t put it past them to factor out health care before long.  The old-fashioned approach of simply diversifying assets among asset classes, using low-cost vehicles, according to age and risk tolerance, and using dividends and capital gains to meet income needs, as well as retirement plan distributions is still, in my opinion, the best way to keep your money for yourself instead of making the product sellers rich.

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  Additional resources:   IFG Investment Blog. Retirement Plan Insights Archive.

Twitter:  @JimLorenzen.

Waiting to Fund Your 401(k)? Not Good.

Jim Lorenzen, CFP®, AIF®

In fact, that may be the most expensive mistake you’ll ever make!

When I was young, my father told me, “Jim, if you just save 10% of everything you ever make – and start NOW – you’ll never have to worry about money the rest of your life.”   

Parents.  What do they know?

The fact is, the “start NOW” part is the most important part of that sentence!  I didn’t know it, of course; but, saving during those early years truly does make a huge difference!

Here’s a little lesson that will prove just HOW important it is.    I’ll keep the numbers simple for my little hypothetical comparing Fred and Gary.  

Let’s start both of them at age 25; this would give them 40 years before the normal retirement age of 65, though many today are working or even starting businesses past that date.   Also, to keep our hypothetical simple, let’s assume that each saves only $2,000 a year and never increases their savings, and that they earn an average annual return of 8%.

Fred saves $2,000 a year for ten years from age 25 to age 35 and stops saving.  But, he does leave his money in his account to accumulate at 8% until he’s 65.

Gary waits until he’s 35 before starting.  But, Gary invests $2,000 a year, beginning at age 35, for thirty years… all the way to age 65.  Who won?

At age 65, Fred, who invested during only the first ten years, ended up with $291,546.  Gary, who invested for thirty years but started ten years late, ended up with $226,566… almost $65,000 less!    In fact, for Gary to have tied Fred, Gary would have had to invest $2,573 a year – 29% more – each year for all thirty years!

Fred invested for only ten years!  But, it was the FIRST ten!   What if Fred hadn’t quit after ten years?  What if he’d kept going to age 65?  His final number, on only $2,000 a year, would have been $518,113?  That means those first ten years, by not investing, cost Gary $291,547!

Do the math:  Those first ten years, by not investing $2,000 in each year, cost Gary $29,154 per year! 

What if Fred had invested $3,000 each year instead of $2,000?   That would have been an additional $40,000 in savings over that 40-year period; but, given the same returns, the ending dollar figure would be $777,169…. $259,056 more!     And, all of it accomplished on $250 a month!

So, the $40,000 would have purchased a nice car – or, it would have created over a quarter million dollars in additional wealth!   How does that new car look, now?  Pretty expensive, huh?

But, the market is risky, you say?   Good!  You’d better hope it is!  Without risk, you don’t get volatility; and without volatility, investors would have a hard time building wealth.  Volatile markets actually work in favor of the person who’s building; but, that’s another article.

In the meantime, think about what a publisher can accomplish starting early enough!   Then, when sale-day comes, you’ll be adding additional value to a base-line that could be pretty sweet!

Dad was right, as usual.  Tell everyone you know:  Start NOW.

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner®and An Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.  Twitter; @JimLorenzen

Plan Sponsors: Retirement Plan Insights Archive.

Written by Jim Lorenzen, CFP®, AIF®

May 10, 2012 at 8:00 am

Portfolio Diversification – Don’t Be Fooled

Jim Lorenzen, CFP®, AIF®

Too often you’ll see senior executives and business owners make the mistake of putting all their eggs in one basket – their own company.    Depending upon the value of a single business isn’t a good planning strategy.  The same intelligent people who would never put their entire life savings into a single stock will still often bet their entire future on the fortunes of a single business, simply because they own it or work for it.

“But, Jim!  Warren Buffett has ALL his money in his own company, Berkshire Hathaway!”  

True enough; but, you neglected to mention that Berkshire Hathaway’s business is investing in scores of other businesses.  Berkshire IS diversified.

Proper diversification is a simple concept to understand; but, how to do it?  Today, the ‘flavor of the month’ is the target-date fund.  The idea is to select the fund with a target date that coincides with your retirement date!  Like all strategies, it has its advantages and disadvantages; but it’s most likely always better than no strategy at all.  The advantage is an obvious one:  It’s easy to do and it frees you from having to make a lot of allocation decisions – at least seemingly. 

The disadvantage is hidden inside the advantage:  You’re not making decisions that, maybe, you should be making.   For example, suppose your target date is 2027, 15 years from now; should everyone with that target date have the same allocation?  If one person has saved only $100,000 and someone else has already amassed $1.2 million through investments, inheritances, and maybe other sources, should  both of them be investing the same way?  Do both of them have the same `return’ requirements or risk profile?

The answers to those and other questions will help determine what the appropriate allocation should be for each investor.  Those participating in 401(k) plans should ask their employer about available tools or advice; but it’s likely everyone should get professional advice which will encompass their entire financial picture.

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner™ and An Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.  Twitter; @JimLorenzen

Plan Sponsors: Retirement Plan Insights Archive.