Models, Models, and More Models

Several media outlets have been writing about the demise of modern portfolio theory and that models used in the past need to be reevaluated in light of the current financial markets.

We agree.  The old models need to be reexamined and then discarded.  Financial models work well until they don’t work anymore.  The reason that they stop working is that they are simply models.  They are not theories, like the theory of gravity or the theory of relativity.  They are models based on fitting past data into a regression equation.  The regression equation is suppose to give everyone an elegant equation upon which to determine asset allocations, among other things.

The problem is that these equations are based not on financial laws but simply past data. Relying on past data to predict future performance is frightening!  The world has changed over the past decade and will continue to change.

If you are a Baby Boomer, I strongly suggest you reconsider using models to determine your financial plan and read my book, Bifurcated Retirement: A New Approach for Today’s Baby Boomers. We don’t rely on models.  We rely on better ways to secure your financial retirement.

The book can be found at

www.amazon.com.

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Know Your 401(k)

Below is a link to a recent Wall Street Journal article regarding your 401(k).  The article mentions four common mistakes.

Two of the four mistakes to avoid are excessive fees and a lack of proper allocation. These are the two most important aspects of retirement.  Stay with ETFs and their low fees rather than invest in mutual funds.  Extensive research has shown that, without question, mutual funds cannot outperform the market on a long-term basis: and you are investing on a long-term basis.  As such, the extra fees are not worth it.

Secondly, asset allocation.  This is the gorilla in the room.  A retirement plan must be properly allocated.  There are plenty of retirement planning software programs to help you determine your personal allocation.  It is best to DIY and understand the whole process, and then visit an advisor, if necessary.

Click Here

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Equity Defense + Inflation

Below is a recent article from the Wall Street Journal regarding some ideas about protection from declining stock prices and rising inflation.

The article mentions a lot of many methods to protect one’s assets: high yield bonds, variable rate bonds, dividend paying stocks, commodities, etc.  The article mentions diversification.

We agree that diversification is important.  However, the article does not even mention TIPS, which provide protection against rising inflation.

The article also mentions owning preferred stocks or international bonds.  The concern not mentioned is that these instruments decline in value as interest rates rise.

Be careful with your investments in today’s market.  There are a lot of ideas floating around but many of them either are short on ideas or offer conflicting ideas.

http://online.wsj.com/article/SB10001424127887323393304578360561789805232.html?mod=WSJ_PersonalFinance_PF4

Posted in 401(k), Plan Sponsor, Retirement, Retirement Confidence, Retirement Plan, Retirement Planning | Leave a comment

Old Models Just Fade Away!

Below is a link to a recent article in the Wall Street Journal.  It discusses the conventional rule of thumb that you can withdraw 4% per year, adjusted for inflation changes, from your retirement accounts and not run out of assets for at least 30 years.

This use to be a fair model, but, like all models, they only work so long.  In this case, with low interest rates and timing as to when you began investing for retirement, the 4% rule is no longer valid.

I wrote about this in my book – Bifurcated Retirement, The New Approach for Today’s Baby Boomers. I would refer you to the following link for the book.  I strongly suggest that you consider purchasing the book to learn how best to secure your retirement.  It is easy to read and understand and is structured to make retirement as simple as possible.

http://www.amazon.com/Bifurcated-Retirement-Approach-Boomers-ebook/dp/B008NBEW9I/ref=sr_1_1?ie=UTF8&qid=1362602900&sr=8-1&keywords=bifurcated+retirement

Good Luck!

http://online.wsj.com/article/SB10001424127887324162304578304491492559684.html?mod=WSJ_PersonalFinance_PF14

Posted in Bifurcated Retirement, Retirement, Retirement Confidence, Retirement Plan, Retirement Planning | Leave a comment

Don’t Forget the not so Distant Past

Below is a link to a recent article in the Wall Street Journal.  it is a great article that cautions all of us to not delude ourselves about our investment picking acumen.

According to the article, “Elizabeth Loftus, a psychologist at the University of California, Irvine, says people are prone to “spontaneous distortions of memory that make us feel better about ourselves.” Studies have shown, for example, that people remember voting regularly in national elections even when they haven’t cast a ballot in at least six years and that 71% of students who earned D grades in high school later recall getting higher marks.

“One thing that might make some investors feel better about themselves,” Ms. Loftus says, “is remembering that their losses were smaller or their gains were bigger than they actually were.”

That’s exactly the kind of polishing of the past that seems to be going on in many investors’ minds right now.”

Just be careful about taking too much risk, even though the financial markets look good at this time.

http://online.wsj.com/article/SB10001424127887323864304578320240801023634.html?mod=WSJ_PersonalFinance_PF4

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Diversification, Diversification, Diversification

Below is a link to an article in the WSJ regarding diversification.  It contans some very sound advice.

Basically, the article recommends thinking about your retirement portfolio in terms of what might happen in the future: expansion, recession, inflation, deflation.  That pretty much sums it up.

If we have an expanding economy, stocks should do well and inflation may increase.  As such, you might want to own equities and perhaps TIPS for the inflation protection.

If we have a recession, stock will not do well and we might experience deflation.  Bonds would be the best security to own.

According to the article, “Viewed this way, the challenge you face isn’t figuring out which assets are cheap today. It’s building a portfolio that can prosper regardless of whether economic growth is high or low or whether prices are rising or falling.”

“In your “expansion” bucket, for the scenario in which the economy grows faster than forecast, you want stocks, real estate and, if you can tolerate their risk, commodities. In your recession bucket, for times when economic growth falters, you want bonds. The inflation bucket, for periods when the cost of living rises faster than expected, holds Treasury inflation-protected securities, or TIPS, and, if you can stand the volatility, commodities. Finally, in your deflation bucket, for times when prices are falling, you want stocks and conventional bonds like U.S. Treasurys.”

“Of course, prices can rise or fall as the economy grows, and a shrinking economy can experience either surprisingly high or low inflation—which is precisely why you need money in each bucket.”

Very good advice and one that I think is worthy of consideration by everyone.  You might not hit a home run, but you will be protected under many different scenarios.

http://online.wsj.com/article/SB10001424127887324906004578292200253111008.html?mod=WSJ_Markets_LEFTTopStories

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Tapping into 401(k)?

I normally do not disagree with articles in the WSJ, but I must disagree with the article found below.

This recently published article mentions that individuals are pulling money out of their 401(k) accounts, albeit at a low rate.  The article mentions that this action might be acceptable to pay for the downpayment on a house, college education, or emergency funds should one become unemployed.  According to the article, “For many people, the retirement account could be their biggest source of savings. In that case, it also can be de facto unemployment insurance or the best way to pay for a house down payment or tuition.”

We think that this is wrong advice.  Retirement accounts should be considered just that, retirement accounts.  A “bucket” for retirement only, nothing else.  When an individual begins to consider their retirement accounts as a “one-size-fits-all rainy-day fund,” then danger lurks.  Behavior scientists have reported on the urgency of viewing retirement funds as a source for retirement only.

Don’t get swept up into the thinking that such accounts are just a piggy-bank to meet other expenses.

http://online.wsj.com/article/SB10001424127887323854904578260173772782776.html?mod=WSJ_Markets_LEFTTopStories

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New and Improved

We have been diligently making changes to our website in response to requests from the 401(k) community.

We have been studying up on behavior finance theories and how best to use them to address some important concerns of 410(k) plan sponsors.

We will be getting back to our normal blog posts regarding the retirement world shortly.

Stay tuned!  We will be rolling out a new version of our site – a new and improved version!

Posted in 401(k), Employee Benefit, Plan Sponsor, Retirement, Retirement Plan | Leave a comment