Can you name one significant way people should manage their money differently during the accumulation stage in their life compared to when they are actually retired?
Accumulation vs. Distribution: During the distribution phase when you are paying out income to live on, it is paramount to minimize downside volatility. Dollar-cost averaging may be fine during your accumulation years (allowing you to purchase more shares when the market is down). However, during your distribution years, downside volatility can be deadly to a successful retirement income strategy, as the benefit of dollar-cost averaging works parabolically in reverse. Retirees should consider the new ROI– rather than the traditional thought process of return on investment, in retirement, it’s reliability of income. The Reliability of Income Model approach, by minimizing volatility in your early years of retirement, strives to provide you with a reliable source of monthly income, while maintaining the potential to increase that income over time to offset the rising cost of living. Structured properly, you should have the flexibility to change as the times do.
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Is there a way for employers to provide financial education to employees without the biases associated with their 401(k) providers?
Yes — 404c regulation states that all 401(k) participants need to have “sufficient information to make informed choices.” There is a nonprofit organization called the Society for Financial Awareness (SOFA) that helps companies meet their 404c requirements. Additionally, it offers companies and organizations the opportunity to utilize its educational expertise free of charge. SOFA will conduct educational “Lunch and Learn” seminars on various topics. During them, no products or companies are discussed. For more information, you can contact the Connecticut chapter of SOFA at 203-591-1840, email them at CTChapter@sofausa.org or visit their website at www.sofausa.org.
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With some predicting a potential inflationary environment in the coming months or years, what is the best way for people to guard against rising prices?
It’s important to understand that inflation is more the cause of the value of the dollar decreasing than it is prices rising. That is, as the value of the dollar erodes, things priced in dollars rise. Every portfolio needs to be prepared for rising prices when too many dollars are chasing too few goods. In times of government or political instability, safe havens, such as gold and silver bullion do a good job, as do most commodities. As political stability increases, bullion tends to lose its luster and emphasis shifts to investments that have the ability to stretch their valuation metrics to accommodate dollar price pressure. Mining companies do well in this phase and then, eventually, valuations become more realistic in the general equity market and inflation begins to reflect itself in the major averages. The key is to understand the market in real dollar adjusted terms, not just nominal terms. Today, there are also investment products that allow the average investor to bet against the dollar or even invest in non-dollar-denominated investments. Certainly, there is no best way. Usually, a combination of strategies is appropriate. Be sure to consult an independent financial advisor.
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You said earlier this year that investors should reposition their portfolios for a “secular bear market.” What is a secular bear market?
Markets and economies have expansion and contraction cycles all the time. Secular trends tend to be longer term, major overriding trends that last anywhere, historically, from 7 to as many as 20 years. Cyclical trends occur within secular trends. One way to view today’s market is to think about the ocean tides. A secular bull market could be likened to a rising tide. As a rising tide approaches the shore line, investors don’t need to be highly accurate as long as they can get close enough to the water, which will eventually come in and lift all boats. In a secular bear market, the financial tide is out and continues to recede. Though waves of prosperity continue to hit the shore – comparable to the potential to still make money (cyclical bull market) – the trend has been fewer opportunities to launch investment boats. If you try to put your boat in at the wrong time or in the wrong place, you could be stranded on dry land for quite some time.
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What is one way to protect against it?
Though there isn’t any one-size-fits-all prescription for the investing ills of all investors, there are common factors that they should consider when deliberating over how to proceed in the current market. Any tactical move you make should consider the safety of your income stream, how much you have saved and your life goals.
Decisions should be framed by your life stage. There’s no question that, for those in the 20- to 30-year-old age bracket, the down market is a buying opportunity. Retirement is decades away and portfolios have plenty of time to rebound. What’s more, plummeting home values, coinciding with low interest rates, have created a perfect storm of opportunity for qualified first-time homebuyers.
With less time on their side, those in their 40’s and early 50’s need to adopt the discipline of buying selectively in the downturn and then selling selectively in the eventual upturn. Those approaching retirement with substantial nest eggs might consider a divide-and-conquer strategy, managing their current portfolio of dollars more conservatively and directing any new investment assets more aggressively, taking advantage of buying through the dips.
People who are already retired should keep a sharp eye on portfolio withdrawals. Although 4 percent a year has been the accepted standard safe withdrawal rate, that may not be the case for everyone and it may be prudent to withdraw less in years of substantial market declines. What’s more, keep in mind that this year, Required Minimum Distributions (RMDs) from IRAs and employer-sponsored retirement plans have been suspended to alleviate the pain of making withdrawals from accounts that likely posted losses.
Remember, in secular bull markets, new market highs can be bought as the tide is still coming in and those highs will likely be surpassed. But, in a secular bear market, tops should be sold and bottoms generally seek lower lows until the tides are ready to turn. Tides will continue to recede and lower lows can prevail.
