Sunday, February 09, 2014

Again, the Retirement Thing

After actual investing for retirement (putting money away for your autumnal years) the next most important thing is this:

One of the toughest tasks for investors ... is determining how much of a retirement portfolio should be in equities and how much in bond funds.

In fact, this is one of the three most important decisions that every investor makes. (The other two are selecting the best asset classes and selecting the best funds.)

If investors were purely rational beings, this wouldn't be much of a problem. Statistical probabilities can guide us to stock-bond allocations with varying levels of predictable return and risk characteristics. But in the real world, investors are people who have emotions.

When the stock market is declining, real-world investors often want to own lots of bonds and fewer stocks. This not only feels good, but it's easy to rationalize. After all, your money won't do you any good unless you can keep from losing it.

When the stock market is going gangbusters, real-world investors tend to favor having lots of stocks and fewer bonds. This also feels good and is easy to rationalize. After all, why own bonds that pay only paltry interest rates when your neighbors and friends are making double-digit returns in the stock market?

If it were possible to know in advance when the market would go up and when it would go down, this choice would be obvious and easy. And in fact it would become a self-fulfilling prophecy. When everybody "knew" the market was about to start a big gain, everybody would pour money into stocks; that in turn would raise stock prices (supply and demand at work), and everybody could see that this was "working."

And if everybody "knew" a bear market was about to start, trillions of dollars would desert the stock market, stock prices would fall, and everybody would be "right." At least for a little while.

But because it’s impossible to know the market's short-term future, this sort of emotion-based pendulum is counterproductive.

Year after year, millions of investors learn that painful lesson the hard way. Fortunately, many people eventually realize they need to approach the stocks-bonds question based on facts, history and probabilities. This is one of the things I've been teaching for many years.

In hundreds of investing workshops that I led, I would often ask for a show of hands: "How many of you would like me to make a guarantee that you can absolutely count on?" As you can imagine, nearly every hand went up.

But they were always startled (and not always happy) to hear my guarantee: "If you follow my best advice, I guarantee you will lose money."

But it's the truth. I don't care if your portfolio is all in fixed income, all in equities or some combination of the two, there will be periods when your investments will decline. The trick isn't to avoid all losses. The trick is to control those losses — and your emotions — so you can let your investments do what they're supposed to do for you. ...

Investing can be simple and (relatively) easy.

You set an asset allocation (age in bonds, the rest in broadly diversified stocks). Except that there's the emotion thing. People tend to freak out when their stocks/stock funds are headed south, and bail out. Which is usually at the wrong time, and usually a good way to lose money.

That's why I think it's better for most people to buy a Target Retirement Fund where the heavy lifting is done for you, and just keep putting money in it until you reach your "number" and/or retirement age. It's probably better not to look at your fund's total numbers when there's a market correction (bombs away!) but that more than most people can do.

Main points: 1) Pick an asset allocation, 2) Start feeding the allocation, and 3) Stick with it through good times and bad.

Upcoming Animation Guild 401(k) Enrollment Meetings

Tuesday, Feb. 11th -- Titmouse/Robin Red Breast -- 10 A.M., Lrg. Conf. Rm, Santa Monica Bldg.

Nickelodeon -- T.U.F.F. Puppy Rm. -- 2 P.M., A 26

Wed. Feb. 12th -- Disney TVA, Sonora Bldg -- 2 P.M., Rm 1172

Thurs. Feb. 13th -- Fox TV Animation -- 2 P.M., Main Conf. Rm.


Unknown said...

Good article, raises some very good points. Obviously not something you want to do without at least some professional help. That aside I have been using an iPhone app for the past year or so that really helps me stay focused on my retirement plan (how much do I have to save now to reach that magic retirement number?). It's called the 5 Minute Retirement Plan and it's available on the App Store. Would recommend...

Steve Hulett said...

I donna, Jack. I didn't have much luck with professionals. The investments under-performed most of the time I engaged the pros.

Now that I'm doing it myself via Vanguard, I at least get market return, for which I'm grateful.

Unknown said...

Steve, don't disagree with your point. My only reason for making the comment is that some people don't have the time (or inclination) to do the due diligence of investing. Once thing I have learned over the years is that the markets can and are very unforgiving for the uninitiated. If you are not sure of what you are dojng you problem don't. As for disclosure I am not a financial planner nor have I ever been...

Thanks for the comment...

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