March was a relatively quiet month for the All-Cap Value portfolio. I did not make any changes to the portfolio, and returns were roughly in line with the S&P 500. Since April is National Financial Literacy Month, I have decided to devote this month’s post to providing some suggestions that might be useful to the average person who is struggling to save for retirement or meet other financial goals.
The following suggestions are offered as “food for thought” only. I am not a registered investment adviser and readers should consult specialists whom they trust before putting any of my suggestions into action.
One thing that we have all hopefully learned from the experience of the financial markets in the last decade is that we shouldn’t rely too much on investment returns to reach our financial goals.
If you have less money now than you expected to have, then you need to either adjust your expectations, increase your savings rate, or both. Welcome to the club. A friend of mine has resigned himself to a novel new post-financial-crisis strategy for securing his young family’s future: “don’t retire and don’t die.” A less extreme version of this mantra might be: “save more, spend wisely, and invest soberly.”
I believe it is important in today’s uncertain world to maintain adequate cash reserves and insurance. Before you even begin to think about accumulating a stock and bond portfolio, I believe you should make sure that you have six-months worth of cash socked away in a deposit account or very short-term CDs.
Be careful about money market accounts; they are not FDIC insured and may lose value if another financial panic occurs (which is likely to be just when you will need them the most). If you have dependents, I believe you should have substantial term-life insurance coverage.
The exact amount needed depends on the age of your dependents and other circumstances, but $500,000 in coverage is a good benchmark, in my opinion. I believe most average people do not need whole life or other more complex insurance products that are typically sold with out-sized fees and commissions for brokers or agents.
The standard investment advice that investors often hear from responsible, disinterested financial advisors is to allocate investment funds among stocks and bonds so that the percentage of bonds in your portfolio is approximately equal to your age.
The major beef that I have with this advice is that I believe there is a very real chance that long-duration fixed-rate bonds will be cremated as the U.S. inflates its way out of its intractable debt problem in the coming years. Consider floating rate corporate bond or loan funds, or even low yielding TIPs (in tax-sheltered retirement accounts only) for your debt exposure.
If inflation really takes off, it will no longer seem strange, in my opinion, that investors are willing to accept no real return, or to even pay a few basis points for a U.S. government guarantee that the real value of their savings will be preserved for twenty years.
Since the epic nose dive that the stock market took in the fall of 2008, many average people have been scared out of the stock market. I believe this is a mistake for anyone with long-term goals who has adequate cash reserves and insurance.
The stock market is risky, especially in the short-term, but it is not a rip-off. Stocks represent ownership in real, mostly profitable businesses, and that is how you should think of them. In the long-run, stocks have provided the highest returns of any investable asset class.
While there is no guarantee that the returns to stocks will be as high going forward as they have been in the past, I believe the future returns should be satisfactory to investors who do not buy in at egregiously inflated prices. Since determining what are egregiously inflated prices is not always so easy in practice, it might not be a bad idea to “ease in” to the market via a strategy of dollar cost averaging. The key is to understand that stocks are for the long-term. Don’t put money into stocks that you will need in less than 10 (or even better 20 or 30) years.
If you are thinking about investing in stocks, don’t pay any attention to the hoopla surrounding “high frequency trading.” I believe you should just identify good companies with cheap stocks and place your bids with limit orders. I think you should stay away from IPOs and other well documented rip-offs.
Don’t play into Wall Street’s hands by trading too frequently or spending money to construct complicated hedges using options or futures. A good rule of thumb, in my opinion, is that if Wall Street is trying to sell it to you, you don’t want to buy it. If all of this sounds too hard, find a capable advisor to manage your investments for you.
Just make sure that you choose one who is independent of the companies that sell the investments that an advisor will be buying on your behalf. Ask a potential advisor whether he is obligated under the law to act as fiduciary for you, which means that he is obligated to act in your best interest. Generally, registered investment advisers are, and stock brokers are not.
Returning to the big picture, saving money, avoiding disastrous investments and frauds, and reflecting carefully about your needs and wants are the most important factors in securing a financially satisfying retirement. The bad news about saving is that its not easy, but the good news is that it is under your control.
Avoiding investment disasters and frauds does not require genius, but a healthy degree of skepticism. For example, never write a check to an investment advisor directly. The standard practice is to write the check to the custodian (often a big bank or brokerage house) and give the investment advisor authorization to invest the funds, but not to withdraw them.
If you are contemplating a big investment commitment, talk it over with your spouse or a trusted friend or family member before signing on the line which is dotted. Above all, the older that you get the more important it becomes that you don’t risk what you have and need for things that, in the excitement of a moment, you think that you might want.
