Retirement Investing

What are you gonna' do?

Managing retirement investments

If you saved and invested wisely during your working life, via a 401K, IRA or other retirement saving vehicle, you should be able to continue living the lifestyle to which you have become accustomed before retirement. You will be spending rather than saving and most likely your investments will have to carry you through twenty years or more. You will need to manage your nest egg carefully. So this is what retirement investing is about. Make your money last as long as you do.

One of the key decisions is whether or not to manage your retirement investing yourself or to pay a professional to do it for you. At the very least though, you have to be able to select and monitor any financial manager or adviser that you select. And you have to know something in order to be able to do that.

I have decided to manage my retirement finances myself. But most of us received little or no financial education in either high school or college. I have spent many hours reading and studying to gain the knowledge and confidence necessary. It is not rocket science. The goal is not to become the next Warren Buffet, but to manage my portfolio in a prudent way.

One conclusion that resulted from my hours of research is that most professional money managers do not out-perform the market. But they cost you. And when you add in the costs, you as an individual investor receive significantly less than market performance. Added up over several years, this drag takes a large bite out of the market return you get to keep.

Another conclusion is that in matters financial, we humans are our own worst enemy. Spending time studying grounds you so you are better able to navigate times of financial turmoil. So If you intend to manage your own portfolio, prepare to spend some time mastering the basics.


The Secret

A few years ago I made several videos on the subject of investing for retirement that aimed at people still in the career cycle. I thought then too that financial education was severely lacking and that in today’s new world of 401K’s and IRA’s that my experiences would be helpful. People at early stages and even well in to their careers needed some guidance about saving and investing for their financial futures. I put the videos on Youtube but they did not get much traction. Perhaps people that need the most help aren’t searching for it.

While workers that should save and retirees that have to spend create different sets of problems, the basics of the investing process remain constant. So I am updating the previous material as the basis for a “lessons learned” series that emphasizes the perspective of actual retirement. Regardless of whether you manage your own retirement assets or utilize professional money management services, you need enough understanding to monitor your funds and to make key management decisions. I cannot help but think of Bernie Madoff and all the people that entrusted their funds to him.

My first video episode was titled “The Secret” as in the secret of investing for retirement. Many of the conclusions that I have reached rely on the writing and lectures of John Bogle, the now legendary founder of Vanguard Funds. I consider him to be a voice of wisdom for ordinary investors. “The Secret” keys off one of his speeches in which he says: “the one great secret of investment success is that there is no secret.” Success lies in “…the virtues of thrift, independence of thought, financial discipline, realistic expectations and common sense.”

Based on my readings of John Bogle and other articles I have developed several basic assumptions and precepts:  He cites four dimensions of investing– reward, risk, cost and time. These are the essence of retirement investing and should serve as the organizing principles for our investing decisions.

  • It is not possible to beat the market. Most investors, even the professionals, don’t even match the market. The goal is to keep the market from beating you.
  • Research shows that returns depend on “Asset Allocation”—how do you achieve this? Asset allocation is the art part of investing and I will share my thoughts and experiences about this.
  • You cannot escape human emotions; Bubbles will always be with us. Incidentally, this cuts both ways in my view (fear as well as greed). We just went through two bubbles—stock market and real estate. You are your own worst enemy—Anchor your decisions w/knowledge to apply self-discipline and protect yourself against catastrophic losses. Some losses are at times inevitable, but you don’t want these to be the result of foolish moves on your part that come from lack of understanding or excess emotion.
  • Be in it for the long term. The long term gets shorter as we get older, so maintain an appropriate horizon. We recently went through the worst market decline since the Great Depression. Some people panicked. But within 5 or 6 years the stock market has bounced back. With a solid foundation and good perspective you can weather financial storms and arrive at your destination.
  • Bogle emphasizes constantly that “costs matter”. Who is really getting the gains from your funds? You have to keep the maximum possible. You will have to track performance of your investments against benchmarks.
  • Do you need a financial adviser or not? If you put in your hard-earned funds, you want to keep the gains. You have to know enough to choose your money manager wisely and to make key financial management decisions. Don’t forget Bernie Madoff. Be prepared–educate yourself.

One key objective that I believe we should all have, is to construct an individual investment policy–just like a mutual fund or pension fund. Your individual investment policy will govern your actions and behavior and implement investing rules that are appropriate for you. It does not have to be elaborate or complicated. And then you need to follow it.

O Fortuna

O Fortuna is one of most recognizable pieces of music. It opens and closes the Carmina Burana by German composer Carl Orff. Carmina Burana is based on manuscript of 254 poems and dramatic texts mostly from the 11th or 12th century. Very first lines(27 seconds) in O Fortuna (translated) go:

O Fortune
Like the moon
You are changeable,
Ever waxing
And waning;

pie chart showing sample asset allocation

Asset Allocation

Proper management of retirement assets is within the capability of most people. It is not about becoming the next Warren Buffet. Nor is it about studying markets and picking winning stocks. All the evidence points to two factors as the essence of successful retirement investing: utilize asset allocation to control risk and keep costs as low as possible via index mutual funds.  Asset allocation determines the reward and using low-cost funds allows you to keep the maximum portion of that reward.


The Ragged Rock

We have all heard “no risk—no reward”. The two are linked. The only way to increase possible returns on your retirement investments is to increase your risk. But taking on more risk in no way guarantees higher returns. More risk also means the chance for bigger losses.

Investing Costs

Retirement investing has costs. These potentially include adviser fees, mutual fund fees, trading costs, and tax impacts. Adviser fees and mutual fund fees at least have visibility. Other costs can be hidden from the individual retirement investor. Overall, any one cost may seem small. But as John Bogle says, “…over the long run, investment costs become immensely damaging to an investor’s standard of living.” So examine your costs and the impact they can have on your standard of living.