Here’s how the Labor Department describes the problem. Assume you have 35 years until retirement and your current 401k account balance is $25,000. If your investment performance averages 7% over the next 35 years and your expenses average 0.5% your 401k account balance will grow to $227,000 in 2047. However, if your expenses averaged 1.5% with no additional contributions to your account your account balance would only grow to $163,000. The 1% difference in expenses reduced your account balance at retirement by 28%. And, that is with a paltry starting balance of just $25,000. Bigger 401k account balances are impacted the same way, the numbers are just bigger.
Every dollar of expense is one less dollar you have available for reinvestment and your future use. Therefore it is critical that you obtain the data you need to create an extremely accurate spreadsheet that documents every penny of expense that is deducted from your accounts or billed direct to you. Your measuring stick is the percentage of your assets that are paid every year in the form of expenses to as many as five service providers. Continue reading →
You know what the words investment performance mean, but do you know there are several types of investment performance that have varying levels of impact on your financial health?
Investment performance is the fastest way to achieve optimum financial health. For example, you earn $100,000 per year and you have a 10% savings rate ($10,000). Plus, you have accumulated $500,000 of retirement assets and your investment performance is 10% ($50,000). In this example, your investment performance had five times more impact than savings. Financial health occurs when your savings plus investment performance produces the assets you need to live the way you want to for the rest of your life with no compromises. Continue reading →
In a recent Charles Schwab study titled Independent Advisor Outlook Study, 63% of advisors say it will be difficult for investors to achieve their retirement goals. The study cited a partial list of problems that included: A historically high federal debt, high unemployment, and rapidly growing college and health-care costs.
Sitting in the background are additional causes for concern such as rising longevity, the demise of the defined benefit pension plan, and low saving rates compared to other developed countries. One of the biggest issues is the rise of defined contribution plans, such as 401k, that transfer investment performance risk to employees. Many current retirees enjoy the guaranteed benefits of a pension plan. Their children and grandchildren will not be so lucky. Continue reading →
In the good old days, there was a straightforward relationship between investors and stockbrokers who were paid commissions to help investors trade their portfolios. They recommended stocks for purchase and sale based on input from analysts that worked for their firms.
That whole model fell apart in 1975 when brokerage commissions were deregulated. This change spawned a new type of firm that was loosely described as a discount broker. Then, when you needed help on how to trade, you had a choice: the traditional full service brokerage firm or the new upstart discount broker. Continue reading →
I often wonder why millions of boomers have not figured this out. They spend 30 or 40 years saving trillions of dollars of pension assets in their retirement accounts. Then they turn the assets over to Wall Street professionals who are supposed to increase their pension amounts with sage advice and sophisticated investment services.
The role of pension assets is to produce income during retirements that may last 30 or more years. That’s right, a lot of boomers will spend as many years in retirement as they did working. That’s the good news. The bad news is rising longevity means investors will have to generate higher investment performance to offset the erosive impact of expenses and inflation for a lot longer than they may have thought. Or, they may face their biggest nightmare, inadequate assets late in life when they need it the most. Continue reading →
Your parents worked for companies that provided Defined Benefit Pension Plans. These plans were funded by the companies, invested by professionals, and provided retirement income for life. The only small catch – the company had to stay in business because its net worth was the ultimate guarantor of a lifetime of benefits for retirees.
What about performance? The company was responsible for contributing new monies to the plan and managing plan assets during your parent’s working years and during their retirement years. Investment performance impacted the company, not your parents. Your parents’ only responsibility was cashing the monthly pension checks that started arriving 30 days after they retired. Continue reading →
Investment performance measurement is a service that has been used by institutional investors since the 1960’s. It refers to the process of measuring the investment performance of institutional assets. Since the 1970’s this data has helped the trustees of pension plans meet their post ERISA obligations for monitoring the performance of their plans’ investments.
However, trustees did not manage institutional assets. They hired money managers to invest the assets for them. This brought another fiduciary requirement into play. Trustees were responsible for monitoring the performance of the managers they selected. This made sense. It would have been imprudent to select managers and ignore their investment performance. Continue reading →
A high percentage of investors have been conditioned to believe investment performance is determined by their willingness to invest a significant percentage of their retirement assets in the stock market. Consequently, they are exposed to substantial risks when they are in their latter years of accumulating assets for retirement or in their early retirement years with 20 or 30-year investment horizons.
According to an Investor Watchdog (www.InvestorWatchdog.com) survey 64.2% of investors are becoming very concerned about their ability to recover from stock market crashes. Their immediate concern is a crash between now and their retirement dates or within a few years after they retire. They have figured out how the math of falling and rising markets works against them. Bill and Ann Smith, our hypothetical investors, illustrate the problem.
Financial advisors know people want superior investment performance for reasonable risk and expense. Advisors use a variety of sales tactics for making this claim and the less ethical the advisor the bigger the claim. For example, an advisor may claim his performance ranks in the top 1% of all advisors in the country. The claim is verbal and no documentation is provided so this is a safe sales tactic for the advisor. If investors are gullible enough, they may just select this advisor based on a false claim of high performance for low risk and expense. Remember, 11,000 people turned their assets over to Bernie Madoff. Continue reading →
This article describes one of the more frequent ways financial advisors manipulate track records that are supposed to document their investment performance.
Financial advisors know you want to see a track record that documents past investment performance. This is the easiest way for you to measure the competence of a new advisor. It is also a very risky way. Most financial advisors do not have track records because their services vary by client. Some advisors, one or two percent, have legitimate track records. Then there are advisors who market fake track records. Continue reading →