“I am more concerned about the return of my money than the return on my money.”
— Mark Twain
During the previous five weeks, you’ve considered what you want your retirement to look like. You’ve organized your paperwork and begun tracking your net worth. You’ve learned how to destroy your debts and create a spending plan to track, and hopefully lower, your expenses.
This week we’re going to talk about investing for retirement. Presumably, since you’re taking this course, you’ve already been investing in a retirement plan or two, and are already familiar with things like mutual funds, 401(k) plans and IRAs.
If you’re not familiar with the basics of investing, however, get that way. It’s as important to reaching your retirement goals as driving is to reaching your job.
There’s a ton of information out there, at Money Talks News, other sites and, of course, the library.
For those of you already at least somewhat familiar with investing, let’s go over a few important basics.
Investing for retirement
I’ve been investing in stocks for more than 40 years, so I’ve long been accustomed to the ups and downs of the stock market.
I bought a bunch of stocks when the start of the Great Recession in 2008 led to the market meltdown of 2009. My age at the time was 54. My logic then was that sometime between 2009 and the time I would retire, the stock market would come back.
In retrospect, that was obviously a good move. The money I put into stocks has more than doubled. But that was then. What about now? Now I’m 63, not 54. My retirement is no longer distant; the light at the end of the tunnel is getting brighter.
As I used to say when I was a Wall Street financial adviser, “There’s no return that justifies losing sleep.”
This is the dilemma we all face as retirement looms. Guaranteed accounts often don’t pay enough, but risk assets mean risking the comfortable retirement we’ve worked our lives to achieve.
What’s an investor to do?
What most investors do as they approach retirement is radically reduce their risk. This is logical. But too many investors reduce their risk too much.
Asset allocation rule of thumb
Here’s a simple rule of thumb I’ve advocated in myriad articles and multiple books over the last 30 years as a guide to how much of your long-term (five or more years) savings to invest in stocks:
- Subtract your age from 100.
- Invest the difference as a percentage in stocks.
The remaining 40 percent, you’ll divide equally. You’ll put half (or 20 percent of the total) in a bond fund, like the Vanguard Intermediate Term Bond Fund or ETF. You’ll put the final 20 percent in a safe, liquid fund, such as a money market fund. (I typically suggest Vanguard because they’re low-cost. I have no affiliation with them.)
Another common and slightly more aggressive formula suggests beginning with the number 110, rather than 100. In that case, a 40-year-old would have 70 percent of their money in stocks, with the remainder equally divided between bonds and money market.
Why use mutual funds?
Why not buy stocks, rather than a stock mutual fund? I invest in both; there’s nothing wrong with individual stocks. But for most, a simple, unmanaged stock index fund, like the Vanguard fund suggested above, is better than individual stocks.
Individual stocks are far riskier and require more money, more time and more attention to detail. In addition, there are few professionals who can outperform an unmanaged index fund, so why should you and I even try?
Dealing with risk
If you’re age 60, the formula above would suggest putting 40 percent of your long-term savings into stocks. For a lot of folks, that’s going to sound too risky. Fine. That’s why it’s a rule of thumb and not a law. Nobody is going to beat you with a baseball bat if you choose to invest less.
As I used to say when I was a Wall Street financial adviser, “There’s no return that justifies losing sleep.”
If you follow my advice, then end up taking more risk than you can handle, here’s what’s going to happen, in this order:
- The market will take a scary slide.
- You’ll freak out and sell everything, probably at the worst possible moment.
- The market will rebound, but it won’t matter, because you’re no longer in it.
- You’ll hate me and yourself. (But mostly me.)
Over the years, I’ve seen this happen too many times to count. The two best ways to avoid it: Never assume more risk than you can tolerate and always educate yourself. An informed investor is a stable investor.
When times get tough, it’s often better to adjust your expectations than your investments.
On the other hand, too many investors — especially those in or near retirement — are so afraid of taking risks they avoid stocks entirely. They are inadvertently assuming a different risk: the risk of outliving their savings.
Stocks are one of few investments that beat inflation over time. Therefore, keep at least some of your retirement savings there.
As I write this (in late 2018), stocks are entering the final phase of a 10-year bull market, one of the longest in history. I’m pretty sure unhappy times are ahead, with a lot of my net worth tied up in stocks. I’ll probably sell some; like I said, I’m not getting any younger.
But as long as I’m drawing breath, I’ll have money in stocks. Experience has taught me that when times get tough, it’s often better to adjust your expectations than your investments.
Do you need a financial adviser?
When you’re sick, you go to the doctor. When your car dies, find a mechanic. But when it comes to your money, do you really need a financial adviser, or can you do it yourself?
Here’s an example of a question I’ve gotten many times.
Do I really need a financial adviser to handle my money, or will I do just fine in a low fee Vanguard [mutual fund] or something similar?
Here’s how I answered Robert:
Going it alone
Every year Money Talks News covers income taxes, and every year, in stories such as “7 Tips to Find the Best Tax Pro,” we offer advice like this:
Remember, most preparers are simply entering your information into a software program. Rather than pay hundreds to someone else, you could spend a lot less and do your own data entry.
The same logic applies here. Money management isn’t rocket science. Providing you’re willing to do a little reading, you can easily do it yourself. Let’s look at Robert’s case.
Here’s what he might consider:
- Step 1: Decide how much to put into long-term savings (money he definitely won’t need for at least five years).
- Step 2: Subtract his age from 100 and put the result (as a percentage of his long-term savings) into a simple stock index fund. If he was 40, he’d put 60 percent (100 minus 40) of his savings into a fund such as the Vanguard 500 Index Fund or ETF.
- Step 3: Take the remainder of his long-term savings, 40 percent, and divide it equally. Leave half in an interest-bearing, risk-free savings account, and the other half into a bond mutual fund, such as the Vanguard Intermediate-Term Bond Index Fund or ETF.
He’s done. No pro needed.
If Robert is concerned about putting too much into stocks, especially all at once, he could invest gradually over time. If he feels that investing 60 percent of his long-term savings into stocks is too risky, he could invest less. And if he’s confused by terms such as “500 Index,” “bonds” and “ETF,” he could read more.
Bottom line? Robert, and you, can safely go it alone, provided you’re willing to do a modest amount of learning.
Still, anyone might consider the services of a professional. Perhaps the amount of money involved is intimidating, the options so complex you feel out of your depth, or you just want confirmation you’re on the right track.
I’ve been a CPA since 1980, and I’ll still consult a tax expert from time to time.
There’s certainly nothing wrong with turning to a pro. There is, however, something that can go wrong if you turn to the wrong kind of pro. So let’s explore how to find the right kind.
Finding the best professional help
In a past life, I worked as a financial adviser for several big Wall Street investment houses. While I called myself a stockbroker back then, those in the financial advice business these days rarely do.
They use titles presumably meant to convey trust: financial analyst, financial adviser, financial consultant, financial planner, investment consultant, wealth manager and others.
None of these titles mean a darn thing. These jobs require no specific education, skill or certification. In fact, your barber probably has stricter licensing requirements.
Some titles, like Certified Financial Planner, Certified Financial Analyst or Certified Public Accountant, are indicators of educational achievement and experience; hence the “Certified” in the title. But don’t rely on title alone.
More important: Compensation
The problem with the investment advice business: Most advisers make money from commissions. Anyone who makes money from commissions can never be completely trusted.
Harsh? Maybe. There are certainly many commission-based advisers who are sharp as a tack and honest as the day is long. But they’re working within a flawed system, one that requires them to move your money around to earn a living, when often that’s not in your best interests.
Whether you enlist the services of a professional or not, understand what’s happening. The reason is simple: Your adviser’s retirement won’t suffer if they screw up, but yours will.
Furthermore, most advisers aren’t required to act as a fiduciary, meaning they are not required to place your financial interests ahead of their own. Instead, they adhere to a lesser standard of conduct, known as “suitability.”
Suitability requires only that they suggest investments that are suitable for an investor with your goals, risk tolerance and financial means.
What’s the difference? Suppose a certain type of stock mutual fund looks right for you, and two similar funds are available. One charges a 5 percent commission, the other 2 percent.
A fiduciary would be legally required to suggest the fund with the lower cost, as it’s in your best interests. The suitability standard, on the other hand, allows the adviser to suggest the fund that pays them the higher commission, because either fund is “suitable.”
The truth is this: A system built on commissions and without fiduciary standards invites abuse. That was true when I started as a stockbroker 35 years ago, and it’s true today.
Whom can you trust?
To receive objective advice, I advise taking commissions out of the equation. There are three ways to do this:
- Pay an adviser an annual fee based on the amount managed. (Learn the pluses and minuses in “Ask Stacy: Why Is My Investment Adviser Charging a Fee on Idle Cash?“)
- A better option: Pay for financial advice by the hour, as you do with an accountant or lawyer. How? Use a fee-based financial planner.
- The best option: Learn the ropes and make your own decisions.
How to pick an adviser
Here’s how to go about picking the right adviser (or accountant, lawyer, doctor, mechanic or plumber), however you pay.
- Ask friends or co-workers for referrals. Most useful will be those sharing a situation somewhat similar to yours.
- Ask your accountant. Not only are some accountants good with investment advice themselves, they probably know competent advisers.
- Ask about experience. As with most things in life, experience is often the best teacher. If two professionals charge the same amount, pick the one with 20 years of experience versus 20 months.
- Ask for referrals. Any professional should be happy to provide them. Of course, only an idiot would provide referrals to clients who would bad-mouth them, so don’t put too much weight on this one.
- Talk to several before deciding. This is easily the single most important tip for hiring any professional. Only after you talk with several candidates will the attributes you’re seeking surface in one of them.
- Ask how they get paid. If you read what I wrote above, this one should be obvious.
- Check credentials and disciplinary history: You can research stockbrokers at FINRA BrokerCheck. Check registered investment advisers at adviserinfo.sec.gov. Check out a Certified Financial Planner (CFP) at the nonprofit CFP Board.
Wealthramp, a free referral service, can help you find vetted independent, fiduciary advisers in your area.
The bottom line on financial advice
Whether you enlist the services of a professional or not, understand what’s happening and keep your eye on the ball. The reason is simple: Your adviser’s retirement won’t suffer if they screw up, but yours will.
So, if you opt for professional advice, understand it. Remember: You can choose to relinquish control, but you can never relinquish responsibility. It’s your money.
Try to avoid commissioned salespeople. Instead, use a Certified Financial Planner, who has fiduciary responsibility.
Your task for this week
Download: Week 6 Worksheet: My Asset Allocation
Now’s the time to figure out your asset mix. Review your investments and determine what percentage is in stocks.
Remember the rule of thumb: 100 minus your age is, in theory, about the right share to have in stocks. Split the rest between bonds and money market funds. (110 is a slightly more aggressive but common number to subtract from.)
If your current asset allocation is off, consider rebalancing your portfolio, and rebalance annually.