Though I’m not qualified to give life advice, one thing I’ve learned through the years is that life is all about tradeoffs. For many decisions, the tradeoffs are obvious. Do I join friends for a beer or go for a run along the river? Admittedly, I don’t always make the most prudent decision on this one, but I do understand one path will lead to short-term gain, while the other will probably be better for me in the long-run (no pun intended!). Fortunately for me, (when I’m creative enough) the events don’t have to be mutually exclusive.
At Cordant, our primary role is to help our clients maximize the probability of reaching their objectives. While straightforward, the challenge is making recommendations in the face of uncertainty—the most obvious being the direction of the capital markets (stocks and bonds) in the short-term. I have
On numerous occasions, the need to put pre-Medicare healthcare costs in context arises with this conversation:
Me: “When would you like to retire?”
Client: “Well, I’d like to retire soon but know that I can’t. I have to work until at least age 65 so that I have health insurance…”
The client in the above dialogue might be right; he or she may indeed need to work until age 65. Pre-Medicare healthcare costs are a factor in the retirement decision and a significant one at that. But so is a mortgage, so is the need to buy a car, buy groceries, support family, etc. Every living objective that equates to a cost is a factor. Pre-Medicare health care costs play a role in the overall determination of whether you can afford to retire, but these are costs that are too frequently blown out of proportion.
Health insurance coverage prior to Medicare is a highly political and highly publicized topic. It is often in the news and is a part of our day-to-day conversations. The result is that it often seems like a bigger retirement factor than it actually is, and people ping to age 65 (the age of Medicare eligibility) because working until 65 means not having to bridge the gap between employer-provided insurance and Medicare—it means not having to worry about it.
This is why we encourage anyone evaluating their preparedness for retirement to take three steps to help them understand the impact of pre-Medicare health care costs on their retirement decision. By doing so, it’s not an unnecessary point of anxiety. The steps include, first, giving pre-Medicare health care costs appropriate context; second, knowing what it costs and how long one you will have to pay for it; and third, knowing what the worst case might look like. Taking these three steps helps you understand the impact and make a more informed decision about when to retire.
I’m clueless when it comes to cars. I take the bus to work, MAX to the airport and pretty much avoid driving at all costs (thanks Uber!). And despite my best efforts, my life is still dependent on them. You can imagine my anxiety when it comes to dealing with mechanics. They might as well be speaking a foreign language. As with most of life’s mundane occurrences, I can relate with Seinfeld’s George Costanza and Jerry Seinfeld conversation about mechanics.
As a financial planner, I’m sympathetic to those intimidated or frustrated with the financial services industry. After all, getting a new carburetor is one thing, investing your nest-egg or navigating the tax-code is whole other. For those that feel this way about coordinating their finances, this blog post is for you and is going to focus on one area of financial planning that has gained popularity in recent years: Health Savings Accounts.
“The drama's done. Why then here does any one step forth? — Because one did survive the wreck.” –The narrator, Ishmael, in Herman Mellville’s Moby Dick.
If you weren’t concerned about cyber security at the beginning of 2017, my guess is that changed in the time before the New Year. Tracking events like the Equifax hack, understanding their effect, and acting in their wake took attention and effort. If you’ve ever gotten to the last page of Moby Dick you might remember reading the above sentences. You may have found yourself, as I did, relating in a peculiar way to the narrator. Because after coming to the end of an 800+ page book, you may have thought: Reading that was a lot of work and required a lot of my time and headspace. I survived, but what do I do now?... Not to mention, that whale is still out there.
As ’17 comes to an end, I have the same feelings about cyber security as I did when I read the end of Moby Dick. I have read what feels like hundreds of pages of articles describing hacks, possible consequences, and ways in which I could protect myself and our clients. I took steps such as setting up 2-factor identifications and freezing my credit, and we recommended clients do the same. And yet, the whale remains at large! I don’t feel secure from the Equifax hike, much less all cyber threats.
I still find myself asking, what now? What can I do to protect myself?
The fact of the matter is that cybercrime and fraud are on-going, evolving threats and constant vigilance is key. The answer to the “What can I do to protect myself?” question is an ongoing and evolving process. With that in mind, I want to take this opportunity to review 8 ways to protect yourself with the current best practices.
"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.”
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.
*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.
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.
‘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:
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:
JNK ETF down six days in a row, closing near its seven month low. SPX up five of last six days, closing at an all time high. Which is right?— Jeffrey Gundlach (@TruthGundlach) November 8, 2017