Bringing out the best when times are tough defines American history. Rising from the depths of recessions, have been monuments and landmarks - Empire State Building, Mount Rushmore, Golden Gate Bridge, and Sears Tower; successful enterprises - Hyatt, FedEx, LexisNexis, Trader Joe's, and GE; great masterpieces - "Of Mice and Men," George Gershwin and Frank Lloyd Wright; new products - Monopoly, Diet Coke, and ketchup; and new technology - low-level laser therapy, MRI for the body, Lasik, and the IPod. Hope is not a strategy. Growth demands entrepreneurism, creativity and determination.
In reaction to a forecast of "Sunny, with a chance of tar balls," Gulf Coast vacationers modified their summer plans. With strong headwinds of high unemployment, tough economies, and mountains of debt, it too is an apt forecast for most investors. Some need reassurance that their futures are safe- review the charted course- while others find their goal line is further- revise the course- and some are terrified - get a new boat.
Retirees might feel, "I have a finite amount stashed aside and don't want to wear it out." Others have deferred retirement "I'm not quite ready to bail... if I pull that trigger I may be unable to get back into the game." People feel the need to hunker down and get more conservative - to reduce debt, build savings, and reduce risk. Some keep the vision of sipping Mai Tai's on the beach; and for others, it's the fear of having to serve them.
To navigate these rough waters, I'll summarize three major challenges, and suggest three actions.
Three Challenges
Life Expectancy - Having crossed the half century mark, my wife Georgia and I have a joint life expectancy of four decades. That's a long time to live with purpose, and balance between work and leisure. (For a picture of today's retirement, see Mitch Anthony's "The New Retirementality.") Financially, we need to see our savings grow and survive both time and inflation. Largely ignored, inflation robs us daily.
Our Own Worst Enemy - While I'm not a licensed psychologist, the most rewarding aspect of my job is helping people think things through. As much as humans strive to make thoughtful and rational decisions, emotional and cognitive biases get in the way. Dan Ariely's book, "Predictably Irrational," says it all. DALBAR, a research firm, conducts an annual survey to quantify the 'cost' of bad investor behavior (lower investor returns). The gap between investor and investment returns - which has ranged as high as 10 percent per year, but dropped to 5 percent in the 2009 study - is largely attributable to fear (loss aversion), over confidence, following the herd, and speculation (good happens to me, bad to others). Successful investors check bad behavior at the door.
New Normal When will things get back to normal? I like Peter Drucker's quote, "Anybody who tells you he understands the U.S. economy ought to be sent to teach modern dance." Historically, we've experienced strong economic (and market) rebounds following downturns. However, this recovery has been more anemic; thus, the descriptors of "restoration" or a "new normal" resonate with me. Should we lower expectations, with possibly single digit bond and equity returns for the remainder of the decade? How would lower investment returns and a sluggish economic recovery affect you?
Facing these challenges, Boomers need to seriously and carefully plan their retirements and circle their wagons. To better put things in your favor, consider three actions.
Update your personal financial plan - Planning is a process, life's curly, and things change. With asset devaluation, tighter cash flows, and potentially lower expected returns and higher taxes, update your plan with multiple scenarios. Four frequent goals to review:
* Retirement - Living a life with dignity and independence by building and protecting a lifetime (or more) of cash flow.
* Investing in younger generations - Funding college or vocational education for kids, grandkids, nieces and nephews to help them be successful and self-sufficient in an ever-changing world.
* Transferring wealth - Fulfilling legacies with loved ones or important institutions and causes.
* Protection - Protecting these goals and avoiding fire sales in the event of death, prolonged illness, or the litigious element of our society.
Adapt and refine investment strategies: Invest for long-term and manage risk - Unless you married or inherited wealth, you must build it. If the required investment return exceeds T-bill rates, then riskier assets (i.e. not insured) are needed. Was I concerned by the stock market falling some 50 percent during the 2008 financial crisis, or as 500 points temporarily vaporized in 15 minutes in May's Flash Crash? Of course. Remind yourself of the investor's 2 key assets: time and diversification. At the start of my financial planning career, the S&P stood at about 110. Now, 30 years later, with plenty of "end-of-the-worlders" of crisis and panic, the S&P is around 1,070, up some ten-fold in value, or a little north of 10 percent per year including dividends. Who wouldn't take that? And while a blessing of prudent diversification is not getting killed, it doesn't always work in the short term, or when systemic problems exist. We stick with traditional strategic asset allocation (studies say 95 percent of variance in returns is determined by how we "slice the pie"); and we've evolved with alternative investments and tactical allocation (behavioral finance) to smooth the bumps and generate added return opportunity.
Team up - When I need medical care, legal and tax advice, or to build a house, I go to the experts. People who I trust, deliver results, have done it for a long time, are bright, care about what they do, and charge me a fair price. Certainly, my industry has its share of scoundrels. However, consider the value of a buffer between money and emotions, simplifying the complex, and a fiduciary that places your interests before their own. Do your homework, and check references. For those who enjoy doing it themselves, would you consider a back up for your family in the event your Kevlar wears thin?
This has been the most difficult of times in helping clients plot a course, navigate the challenges of life, and see that their futures are well-funded. Some of the pains inflicted will heal sooner than later. Others will take time. Nevertheless, we will be in a better place when the people's faith is restored. So be it. Control what you can control... accept the uncontrollable. Stay focused on the goals and what matters most to you. Hold fast and stay the course.
Brian Loy, CFA, CFPis president of Sage Financial Advisors,a fee-only wealth management firm headquartered in Reno.
