When it comes to retirement investing, too much emphasis today is on investment returns, which often come at the expense of income dependability and peace of mind. Slash Your Retirement Risk redefines how to invest for retirement to maximize your reliable income and stabilize your financial future.
Rather than the typical approach to portfolio managementfocusing on returns and ignoring dramatic market downswings that can decimate portfoliosauthor Chris Cook shows investors how to create income reliability without sacrificing reasonable growth.
Instead of chasing uncertain returns, Slash Your Retirement Risk's strategy will help ensure your retirement portfolio will capitalize on opportunities for growth while weathering the inevitable economic ups and downs. You will achieve reliable returns and suffer fewer sleepless nights worrying about whether your money will last as long as you do.
Slash Your Retirement Risk is your step-by-step guide to create a retirement portfolio that will provide true financial peace of mind, one that features:
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About the Author
Investment manager and entrepreneur Chris Cook is a strong proponent of improving investing outcomes by applying scientific fundamentals. He is president and founder of Beacon Capital Management, Inc., a leading consultant and asset manager based in Dayton, Ohio, that serves financial advisors and institutional investors nationwide. Wealth & Finance International called Beacon one of the most innovative advisory firms in the country; Beacon was also named Financial Times Top Registered Investment Advisor for 2016. With his unique investment philosophy that focuses on calculated solutions and preemptive, tactical risk management, Cook is a go-to media expert on investing and financial topics for both consumer and industry. As an in-demand speaker, he also regularly shares his scientific approach to investing with audiences across the country.
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The Failures of Traditional Investment Strategies
RELIABILITY OF INCOME — the "New ROI"— is not a get-rich-quick scheme or about unrealistic returns amid historically volatile times. If you're looking for a hot stock tip or the latest market trend, then you'll have to look elsewhere, too. However, if you want a simple approach to equity investing and retirement saving based on sound fundamentals and Nobel Prize–winning scientific analysis, then you have come to the right place.
Because we live in volatile times — defined by market extremes and great economic and militaristic upheavals — our investment decisions can end up marked by greed or fear. Investors often look for home-run returns or it seems like they're stuffing their money under the mattress. Neither of those approaches will help achieve your retirement goals.
Unlike other investment strategies, the New ROI recognizes that the best strategy is one that embraces equities for their high-growth potential and partners that with portfolio diversification and stop-loss models to hedge against catastrophic losses that have become all too frequent in today's marketplace.
In these pages, I'll give you the tools and the information to implement the New ROI on your own or with the help of a financial professional. With either approach, you'll learn what it takes to build a portfolio that can generate the income to keep you comfortable through your retirement.
To better understand the New ROI and why it's vital to grow and protect assets into and throughout your retirement, we first need to better understand traditional investment strategies — why they were the right choice for generations of Americans, but why they no longer are enough today.
Post–World War II, the typical approach to retirement security focused on aggressive growth in the wealth accumulation phase followed by a very healthy distribution phase in which retirees could earn as much as 14 percent on safe-haven products such as bonds, CDs, Treasuries, and annuities.
It was a simple formula that worked. People poured their savings into equities like blue-chip stocks because, with a baby boom, real estate boom, and burgeoning infrastructure, everything tied to the U.S. economy seemed on an upward trajectory. There still were bear markets (1966 to 1978, for example), but strong returns from safe investment products still allowed retirees an option to continue to grow their assets while on a fixed income.
Those times have changed. With today's low interest rates, safe-haven investment options often don't even keep up with the rate of inflation. Investors actually can lose real equity while parking their assets in investments like CDs. Even though the Federal Reserve has begun to increase the federal funds rate after a half-dozen years of near-zero rates, those investments remain an unlikely ally to help an investor build the kind of cushion he or she will need in retirement.
Today's investing environment — in which market volatility is the new norm — is an even bigger problem. Unfortunately, the traditional retirement investing strategies fail to take rapid market swings and the increasing frequency of bear markets into account, and no longer can deliver on their promises of growth along with protection for your nest egg.
The new market realities have dashed the retirement dreams of millions of Americans.
Consider the case of Lou, a typical example of what's happened to so many retirees and their savings. Lou worked for years as an independent contractor. It was grueling work — mostly outdoors — but Lou did it, diligently saving and looking forward to finally slowing down at age 60 and relaxing in retirement. His last day at work was December 31, 1999. Lou had done his homework and determined that if he built a $500,000 nest egg and invested it in a balanced portfolio — split evenly between stocks and bonds — he could generate an income of $32,500 (6.5 percent) annually. It sounded good; Lou had the research to prove it, so he bought into the retirement investing approach.
The big problem, though, was the system didn't work. The new volatile market reality had begun. The bear market in 2000 and then another in 2008 took their toll on Lou's nest egg and his future financial security. Fifteen years after he retired, Lou's retirement savings were decimated. As of December 31, 2015, at age 75 he was left with just $73,000. The years of hard work had taken their toll on Lou's health, too, to the point where he faced hefty annual medical-related, out-of-pocket expenses. His is a scary financial future no one wants to have to face.
Are you willing to end up like Lou? From a retirement planning standpoint, Lou thought he had done everything right and that he and his wife would be financially set for life. He followed the popular approach that so many retirement planning experts touted; his investment moves made sense on paper. The strategy he followed had worked for his own father and for millions more Americans for decades. But Lou came up short because the traditional investment strategies no longer work.
Real Risks and Fallacies
Throughout the 20th century, we saw various iterations of this traditional portfolio strategy. Investors looked to create security by mixing equities for financial gains with conservative "safe havens" such as bonds, CDs, and Treasuries. The portfolio might be split 50-percent stocks to generate growth and 50-percent bonds for security.
Any chart that shows the projected income of this portfolio over the long term often paints a picture of future income curves that arc smoothly upward in the first years and early into retirement, and then, as withdrawals continue, slowly tapers off.
Figure 1.4 depicts a $500,000 retirement portfolio with a very realistic long-term 8.7percent return (that's the historical average since 1927 for a portfolio split between 50percent stocks and 50-percent bonds), and calls for regular 6.5 percent annual withdrawals — $32,500 a year — which increases each year to account for inflation and not run out of money for 30 years.
Unfortunately, that portfolio mix and the income arc in Figure 1.4 can be misleading because both count on an average projected return for the portfolio, and not the dramatic ups and downs of the stock market that are rapidly becoming more commonplace in today's markets.
Looking at the markets over time — in this case, 1927–2015 — that portfolio may average an 8.7-percent return. But that time period includes roller-coaster market years, including a worst one-year performance: a 22.8-percent loss in 1931. Losses in 2008 came close to the 1931 record, but didn't surpass it.
You can begin to see the problem and the trap for people who have saved and invested like Lou. What if it was 2008, and you had planned to retire soon or even the same year that markets dropped 20-plus percent? The chances are good that your portfolio might not recover enough in time — if ever — to meet your projected financial needs in retirement.
The greater the volatility of the market, the more hits on a nest egg that follows traditional retirement investing strategies — and the less reliable any projected income in retirement.
Why the Big Failure?
There's no single reason why traditional investment strategies no longer work. A complex set of factors — from market volatility to global economic interdependence, geopolitical turmoil, and more — all play a role in wreaking havoc on retirement investing plans.
Let's look more closely at these factors to better understand why old strategies come up short in the new market reality.
Theories abound regarding the causes of the increased market volatility — from the threat of terrorism and violence, to globalization and interdependence of businesses and industries, the prevalence of protracted economies, civil and political unrest, increased computerized program trading, and the simple fact that more people are trading in the markets today.
Almost anyone with an Internet connection can become a stock trader. That can be problematic for markets, because individuals tend to make investment decisions based on emotions such as fear or greed. In turn, what ends up as mass emotional buys and sells can reinforce dramatic price and market swings.
Less-experienced traders also tend to react more often to what are typical minor shifts in an industry or a sector. A drop of a few percentage points in several stocks in one industry, for example, could prompt a sell-off. Or some great new idea might prompt a buy, no matter the stock price, company earnings — or lack thereof — or other fundamentals.
Compounding the saving-for-retirement challenge, people are living longer today, which means their money has to last longer, too. The average American male who turned 65 in 2016 can expect to live 18 more years, while the average woman survives another 20.6 years, according to data from the National Center for Health Statistics.
Adding to those numbers, the latest actuary tables show there's a onein-four chance you or your spouse/significant other will live well into your 90s.
As the safety net for financial security in retirement, Social Security, which was signed into law in 1935 by President Franklin Roosevelt, never was meant to take care of Americans' needs for a retirement lasting decades. In fact, in 1930 the average life expectancy for men was just 58 and for women, 62.
Times and longevity definitely have changed. Without planning ahead for the potential for longevity and today's market volatility, you very well could outlive your money. That's the number-one retirement fear facing nearly six in 10 Americans, according to a 2015 survey from the American Institute of CPAs.
Rising Healthcare Costs
Americans clearly worry — and for good reasons — about the wildly spiraling upward cost of healthcare, too, and its effects on saving for and living through retirement. In the year 2000, Americans spent an average $4,857 per capita on healthcare, according to Centers for Disease Control numbers. By 2014, that per capita average nearly doubled to $9,523, and the numbers are projected to only go higher through the end of the decade. And these are in terms out-of-pocket costs, not the cost of insurance.
Of even more concern, a 65-year-old couple in 2015 would need to have $392,000 in targeted savings to give them a 90-percent chance of having saved enough by age 65 to pay for their healthcare expenses in retirement. That's up $65,000 from 2014's $326,000, according to the latest statistics from the nonprofit Employee Benefit Research Institute. And those numbers don't include any savings to cover the cost of long-term care if necessary. That can add tens of thousands of dollars per year to those expenses.
The bottom line means more pressure on a retirement portfolio to produce enough growth and still remain protected from potential dramatic and possibly devastating losses.
The New Retirement Lifestyle
As if all the above factors weren't enough to rethink how to invest and save for retirement, there's more. The Baby Boomer generation has redefined the meaning of retirement. Likely when your grandparents retired, the need for cash declined, too, because retirement back then usually meant quietly living out your few remaining years without having to work. For financial planning purposes, 70 percent of pre-retirement income was considered enough to fund the rest of your life.
Not anymore. Today's retirees are more active than ever before, engaged in every imaginable pastime. Whether it's volunteering halfway around the world, or traveling the world, a new second or third career, entrepreneur-ship, artistic endeavors, or simply enjoying the great (and costly) things that life has to offer, it takes a lot of money today to be "retired."
Poor Diversification Strategy
The traditional investment strategy offered a diversity of investments such as stocks, bonds, mutual funds, real estate holdings, or commodities. The growth of markets and the lack of rapid downturns meant that investors like Lou could invest their money, earn great growth potential, and their portfolios have just enough protection to hedge against the limited volatility of the day. But as you've seen, the new market reality is a very different animal.
Lou's approach can be mortally flawed today because our global, interwoven marketplace and economies blur the traditional lines of diversification among industries, companies, countries, and sectors of the economy. What once were diverse and separate holdings now have become closely intertwined. Global interdependence could result from a company's or industry's reliance on global sales, international sources of raw material or services, offshore outsourcing, or something else. Whatever the reason, though, that interdependence can seriously skew the models investors and their advisors use to supposedly help add diversity — and therefore protection — to their retirement investment portfolios.
More than 47 percent of the sales of the S&P 500 companies are derived in countries outside of the United States. It makes complete sense that traditional diversification strategies, such as U.S. and international holdings, are not as effective with almost half the revenues of our largest companies generated internationally.
The Inflation Effect
Denise decided the best approach to retirement savings was to diligently put a little money away every month. Then, when she had enough cash stashed, she would buy certificates of deposit and Treasuries. She figured it was a great way to save, build wealth, and ensure the safety of her money. She also figured the money eventually would grow into a huge nest egg to pass to her nieces and nephews (she didn't have any children).
Denise modeled her savings plan after that of a favorite aunt who had done the same thing and ended up very comfortable. Even after paying hefty, out-of-pocket, long-term-care expenses for several years, her aunt died with an estate worth well more than $1 million.
The flaw in the plan, though — as Denise is beginning to see after only five years — is that her aunt was investing her money in CDs and Treasuries at a time when double-digit returns were possible — not the very low interest rate environment of today that barely, if at all, keeps up with inflation.
Denise found out the hard way that except in specific market conditions or circumstances — like a sudden drastic market downturn — investors simply can't afford to leave major portions of their assets in fixed income investments like CDs, annuities, and bonds.
As Denise's situation reflects, the cost of inflation is too often overlooked by investors seeking safe haven amid volatile times. In the new market reality, even the onetime "safe bets" aren't, and can have a devastating effect on retirement plans.
James Poterba, the president of the National Bureau of Economic Research (NBER) and a researcher at the Massachusetts Institute of Technology, examined the dollars-and-cents toll that low interest rates exact on investing and saving to fund your retirement. What he found should be enough to shock all of us into taking a new and better approach to retirement investing:
In 1993, when the average yield on AAA corporate bonds was 7.9 percent, the annual payout per dollar of annuity premium for a single-premium immediate annuity purchased by a 65-year-old male was 9.7 percent. Twelve years later, in 2005, when the AAA rate was 5.4 percent, the annuity payout was 7.8 percent. In 2013, when the AAA rate averaged 3.8 percent, the annuity payout was 6.3 percent. An individual who had been accumulating resources with the goal of financing a specific retirement income target would have needed 24 percent more wealth in 2013 than in 2005 to meet this goal.
That study was completed a few years ago. Current AAA corporate bond rates, according to internal Beacon Capital Management, Inc. calculations, are hovering even lower — less than 3.5 percent today, leaving an estimated payout from a single-premium immediate annuity at 6.0 percent or less. However, that 6-percent number can be a bit misleading because with an immediate annuity, the holder is locked into the contract, and it's tough to escape. If you do, you — or your heirs — must surrender the principle. If, for example, you die before the annuity is paid out, the insurance company issuing the annuity keeps what's left.
The bottom line: As we saw with Denise and from the NBER study, parking your money in any one of those traditionally considered safe vehicles, except for emergencies or to provide quick access to cash, is a losing proposition. That strategy worked for previous generations, but not in today's new market reality.
Actively Managed No Guarantee
Relying wholly on a financial professional to time markets, buy and sell to generate gains, and know when and how to avoid losses, may not be enough to protect and grow a nest egg either.
Too many experts cling to the traditional investment strategies, and in doing so, may realize big gains, but too often leave themselves and their clients vulnerable to the big downturns that can ruin retirement plans.(Continues…)
Excerpted from "Slash Your Retirement Risk"
Copyright © 2017 Chris Cook.
Excerpted by permission of Red Wheel/Weiser, LLC.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Part 1 Why Traditional Investment Strategies No Longer Work
1 The Failures of Traditional Investment Strategies 15
2 In Pursuit of Reliable Income: The "New ROI" 31
3 Fallacies, Fantasies, and Biases in Today's Investment World 41
4 Maintain Discipline: Get the Emotion Out and Watch Your Portfolio Grow 59
5 Your Portfolio: The Right Mix of Equities and Bonds 75
Part 2 Equities: What to Do Now-The "New ROI" Strategy
6 The Power of Losses 87
7 Minimizing Risk and Cutting Your Losses: Your Personal Built-in Stop-Loss Plan 105
8 Real Diversification for Today's Real World: Sectors and Choices 121
Part 3 What Works for You
9 There's No Such Thing as "Fee-Free" Investing: How to Keep Fees Low 141
10 Your Options: Find an Advisor or DIY? 159
11 Making the "New ROI" Strategy Work for You, Step by Step 175
About the Author 207