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The Cordant Blog

Putting your portfolio in a drawer

by Isaac Presley, CFA on December 11, 2017

"Money is like soap, the more you handle it, the less you will have." Gene Fama

The typical owner of an individual bond couldn’t care less about the current price of that bond. When asked “why not?” they’ll say it’s because they plan on holding it to maturity.

This is a technically wrong but a behaviorally useful way of looking at things.

Because what this bond investor cares about is getting their principal back at the end and earning a little interest along the way—no thought is given to the bonds changing price between the purchase date and maturity—they’ve essentially taken the bond and placed it in a drawer until it matures. They’re in it for the long run—something that is easy to do with individual bonds as they are more expensive to trade with less transparent prices that are quoted less frequently. These are all negatives but with one behavioral benefit: a lower temptation for action.

Long-term investors would do well to pull a page from the typical bond investor’s playbook and put their entire portfolio in a drawer.*

In Five Simple Behavioural Tips For Better Long-Term Investment Decision Making” Joe Wiggins, CFA offers a simple suggestion to “check your portfolio less frequently.”

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Tackling Required Minimum Distributions: What you need to know before year end

by Scott Gerlach, CFP on December 06, 2017

As we enter December, the last month on the calendar marks the final chance to cross your financial T’s and dot your I’s. For many, this means making last-minute charitable contributions, maxing out your 401k or ensuring your health care is solidified for next year. And for those individuals in their 70’s, this means satisfying their Required Minimum Distributions (RMDs). 

Boring for many, I love these year-end opportunities for financial optimization. Year-end is a great time of year for something else I love –football! With college football bowl season about to begin and NFL playoffs around the corner, the action on the field is as intense as ever. And while the on-field action is all good and dandy, I always get a kick out of the “coach speak” and endless clichés heard from coaches dancing around uncomfortable questions posed by their adversaries in the media this time of year.

Admittedly, comparing RMDs and football may be a “stretch”, but I promise this won’t be an exercise in futility. With that, let’s put our visor on, grab the clipboard, and break down everything you need to know about RMDs from the sidelines. Before we begin, it should be noted that this post will only focus on standard RMDs and will not be tackling Inherited RMDs, which have slightly different rules.

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Three Tips for Evidence-Based Retirement Plans

by Isaac Presley, CFA on November 29, 2017


*A version of this article origionally appeared on the CFA Institute's Enterprising Investor blog.

I recently participated in a fun exercise.

My friend Phil Huber, CFA, asked a group of us to define “Evidence Based Investing in 10 Words or Less.” My favorite definition came from Bob Seawright, who said, “A relentless focus on what works, what doesn’t, and why.”

On his blog, Above the Market, Seawright wrote that evidence-based investing is “the idea that no investment advice should be given unless and until it is adequately supported by good evidence.”

Who wouldn’t want that?

This growing movement has fueled Vanguard’s rapid growth, to over $4 trillion in AUM. It has also generated numerous articles, a magazine cover, an infographic, and some entertaining alternatives for those advisers who want to try another variation. It even spawned its own conference.

While these are welcome changes, much of the conversation has focused on the investing side of things: What funds to own; how to set an investment allocation; which factors work and which don’t; and how to minimize expenses, taxes, and trading costs, for example. However, the evidence as it relates to retirement planning — specifically the distribution phase of an investing lifecycle — is often left out of the discussion.

Both the accumulation and distribution phases are critically important. And with retirement, as with any vintage of wine, you have only one chance to get it right.

To extend the metaphor, think of the accumulation phase of an investing life as the planting of a vineyard. A vineyard, like a portfolio, can survive many different seasons and weather patterns, and like a well-designed portfolio, a vineyard is resilient. Though the vineyard is tended over time, the care should kick into hyperdrive each fall when the grapes are harvested.

As the weather over each growing season and at harvest makes each vintage of wine unique, the year you retire and your portfolio distributions begin has a big influence on the overall retirement experience. When it comes to distributing a portfolio, there are specific factors to pay attention to. Here are a few suggestions to put a little evidence-based thinking into your retirement plans.

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Best practices in investing

by Isaac Presley, CFA on November 22, 2017

If you need to cross a river, it's unlikely the bridge below you will collapse.

That's because the engineer has been trained in hundreds of years of best practices. From tension and compression to the latest on when and where to use a beam, arch, truss or suspension for support, she knows what's come before.

Not only that, but the bridge she designs is the result of countless iterations over the centuries. Every design has been improved based on trial and error from the millions of crossings before yours.

Bridge construction is an engineering project, and it's based on physics and best practices. Learn from the past, don't ignore it. It’s black and white: physical laws cannot be violated.

Investing, on the other hand, is something we value because the markets are dynamic. It is more than engineering—investing is, by definition, without guarantees. There are no physical laws. It’s gray: remove uncertainty from the outcome there is no opportunity for return.

But even so, investing is based on best practices and the evidence.

The value investor better have read Graham and Dodd, and more recently Damodaran. The asset allocator should be familiar with Markowitz, Swenson, and Bernstein. The factor investor needs to know William Sharpe, Fama and French, Mark Carhart, and James O'Shaughnessy. And those looking for insight on how humans behave in their interactions with the markets: read Kahneman and Tversky, Thaler, and Ariely.

Depending on the investment strategy you chose to pursue, ignore the work that has come before it if you want to, but learn it first.

For us, this means that our starting point is the global market portfolio (i.e., “the work that has come before) then deliberately shaping how we will differ. This might mean taking more (or less) risk, tilting towards factors of higher expected returns, or incorporating alternative strategies which we anticipate will improve our risk/return trade-off.

Different investment strategies work for different people, but before going down one of these paths, it pays to know the best practices of those who’ve come before.

 

 

*This post is inspired by and draws heavily from the article “Best Practices” by Seth Godin on November 22, 2017.

Photo by Dave Lastovskiy on Unsplash

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Because I said so investing…

by Isaac Presley, CFA on November 16, 2017

‘Because I said so‘ is the easy answer as a parent but rarely the best response. It's one I swore as a kid I'd never use when I grew up, but I do.

The investing version of this time-saving shortcut, “Because I said so investing,” is allocating based on headlines—something we all know we shouldn’t do, but that proves tempting nonetheless. It saves time and may feel justified in the short run but is ultimately harmful.

Last year provided ample opportunities for some ‘Because I said so’ investing. A string of bearish headlines from legendary investors Stanley Druckenmiller, Carl Icahn, and George Soros that Michael Batnick highlighted on his blog:

From May 05, 2016

From May 10, 2016

And, from June 09, 2016

But, since the last of these, on June 9th, the S&P 500 index is up 22%. Investing based on headlines, become someone said so, would have cost you real money.

Batnick, in his article, gave three reasons why these headline-grabbing “opinions have absolutely no place in an investment process.”

1) Losing money means literally nothing to them. They can drop $10,000,000 on a trade and not even notice it’s missing.
2) These guys are traders, they’re not married to their opinion. They can change their mind tomorrow and you’d never know it.
3) The best batting average of all time is .440. The greatest investors have a similar winning percentage.

 

The latest opportunity from ‘Because I said so’ investing comes from another billionaire investor. Jeff Gundlach made headlines this last week with his warning on Wednesday about the stock market:

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Health Care in Retirement: What Does it Cost?

by Scott Malbasa, J.D., CFP® on November 09, 2017

I had a high school physics teacher who told me more than once, “always be true to your convictions, but prepared to abandon your assumptions.”

At Cordant, we have a conviction for helping our clients make smart financial decisions and working with them to keep their financial lives on track. A key component in helping them make smart financial decisions is creating a comprehensive financial plan that is designed right, and that can be a reliable tool to help them answer questions like: Will I have enough to retire? Can I afford a second home? Should I pay off my mortgage? This is where assumptions come in: in order to create a financial plan, we have to make assumptions about the future, and those assumptions should be based on the best-known information because they can have a dramatic impact on the workability of the plan. If the data and evidence suggest our assumptions are inaccurate, we need to be (as my former teacher would be happy to know that we are) prepared to abandon, or at least adjust them.

The cost of health care, particularly for those on Medicare, is a prime example of a financial planning assumption that gets a lot of new research. This research causes us to evaluate whether our current estimates are ones with which we are still comfortable. With that in mind, I'd like to review our current assumption for health care costs in retirement, consider recent research, and evaluate whether we need to adjust.

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What Monte Carlo Projections Leave Out (...And Why You Can Still Trust Them)

by Scott Malbasa, J.D., CFP® on August 25, 2017

Do I have enough money?

Almost every client has asked some version of this question and addressing it is an important part of what we do as financial advisors.

To do that, we need a model, which we call your Baseline Financial Plan. Like any model, it’s only as reliable as the inputs. “Garbage in, garbage out” as the saying goes.  Our model (your baseline plan) consists of three key components:

  • A cash flow, which reflects future inflows and outflows based on agreed upon assumptions between us and our clients for items like Social Security, Inflation, health care etc., and which incorporate all known future financial objectives;
  • A balance sheet, which should include all the resources that are in place to support that cash flow; and finally
  • An output, which analyzes the likelihood of that balance sheet being able to support that cash flow over time.

We think that Monte Carlo simulations provide the best way to generate this output because we don’t know for certain what the future will look like.  We need to make assumptions about what to model and importantly, model (and plan for) a range of future outcomes. But obviously, comfort in the tool we use to create the output is going to heavily determine how confident clients are in their answer to the “Do I have enough money?” question.

There are a couple of questions that come up often as it relates to the analysis. They are: 1) can I trust the analysis given the wide range of potential future results? And, 2) does it account for fat tails—or in layman terms, low returns?

The purpose of this post to answer these questions related to our Monte Carlo simulations. But first, let’s take a quick look at why we use Monte Carlo in the first place.

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How should you handle the upcoming investment changes to the Intel retirement plans?

by Isaac Presley, CFA on August 16, 2017

Summary:

  • Intel is simplifying its retirement plan lineup by removing six investment options
  • This change goes into effect September 1st, 2017
  • If you own any of these funds and don't make a change before the deadline, your investment will be automatically sold and the proceeds transferred into an age-appropriate retirement date fund
  • For a complete list of eliminated funds and potential replacement, see our table below.
  • For clients of Cordant, we will coordinate any changes necessary on your behalf

 

If you’re like most Intel employees, you want to make smart financial decisions. You like being certain you’re doing the right things with your investments and making confident choices.

But, between a demanding career, family commitments, and other social obligations it’s not like you have a lot of extra time (or interest in the subject perhaps) to research your Intel retirement plan investment lineup and weed through the upcoming changes. So, how do you keep from making a mistake? Do you simply elected the default option or do you do something else?

Since we look at this stuff all the time for clients (and enjoy doing it too!), let's lay out the changes, the time frame, and the choices you'll be forced to make.

But first, why is Intel making the changes in the first place?

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Why Winging Your Retirement is a Really Bad Idea

by Isaac Presley, CFA on June 14, 2017

Last weekend the Wall Street Journal had a short article titled Beware of Winging Your Retirement that emphasized giving thought to the non-financial aspects of retirement before reaching this major milestone. The upside to those who envisioned and planned for their future? Greater life satisfaction. From the article:

But in talking with and hearing from hundreds of retirees through the years, I have found that those who are most satisfied with their lives spent at least some time thinking and talking about their hopes for the future—typically, several years before retirement itself—and then took specific actions to move closer to those goals.

This is exactly what we do as part of our financial blueprint process to help clients plan for their future. Or, as someone recently described it, we help them integrate their financial plan with their life plan.

But here I want to highlight, in addition to the non-financial reasons, a very important financial reason to stop winging your retirement: the sequence of returns risk.

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Making the Most of Your Intel Benefits: A Look at Outperformance Stock Units (OSUs)

by Isaac Presley, CFA on June 08, 2017

Starting in 2009, Intel announced a new form of stock compensation in the form of Outperformance Stock Units (OSUs) for top executives (MCM members) and expanded the OSU grants to executives grade 12+ in 2014 (coinciding with the last year of stock options). In 2017 for those levels 12+, OSUs will make up 60% of the focal grant’s value with the remaining 40% coming in the form of RSUs.

Given the increased importance of this relatively new form or stock compensation, let’s take a look at how they work, their historical performance and, for those nearing retirement, how they vest upon leaving the company.

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