By Brad Thomason, CPA
 
 
Smith and Jones live on a planet in a galaxy far, far away.  It costs $100 a year to live on this planet.
 
Smith makes $100 a year.  Jones makes $200 a year.
 
 
Question:  Is Jones twice as well-off as Smith?
 
Answer:  No.  Jones is infinitely more well-off than Smith.
 
 
That’s because Jones has an opportunity to build wealth, and Smith does not.  The fact that Jones has a higher income than what he needs for immediate bills breaks the seal on a source of incredible economic power.  The money he has above and beyond what gets depleted in the same period that it’s earned, is money of a completely different type.  That money has productive capacity – the ability to replicate and multiply itself by way of investment returns.
 
In time, the amount of money that Jones possesses will come to far exceed the simple sum of each year’s extra portion.  The extra $100 he received in the first year may come to be $500 or $600 at some point out in the future, as the result of compounding returns on the original seed amount.  Maybe more.  Maybe a lot more.  And the excess from each successive year is a candidate for getting on the same path to expansion.
 
One day in the future Jones could have a pile of money that he will never outlive, even if he quits his job.  Smith, on the other hand, will not be able to afford such an option.  He’ll have to keep matching current income to current bills.
 
Sometimes we get caught up in very complicated lines of thought when we are engaged in managing our finances.  But many of the most important things to remember are also the most basic.  Having some investment capital in the first place is the pebble in the pond which sets up all the rings which will grow in the future.  For most of us, that capital will come from not spending everything that we earn.
 
Entry to the club really is that simple.  Or maybe straight-forward would be a better term.  Because sometimes it is difficult to end up with a little bit of surplus each year.  But there’s no mystery about how you become an investor and start the process of building wealth, even if doing it may require some effort, or even discomfort, in another part of your life.
 
Note also that this dynamic persists all throughout your working years.  At any point along the way that you make money which doesn’t get immediately spent, you get to tap into this power source over and over again, in ways that are cumulative at an ever-accelerating rate.
 
Which, if you stop and think about it for a minute, is pretty dang cool.
 
Our planet is a little more complicated than the one that Smith and Jones live on.  The possibilities for what a person might make, and the range of things that a person might spend that money on, are far more varied.  But the financial underpinnings are the same. If you can find a way to turn some of what you earn into productive capacity, you are on the road to being more like Jones. Which, to me, seems a lot better than being more like Smith.

By Brad Thomason, CPA
 
 
It takes a lot of money to live a long time.  You won’t know until the end exactly how much, because you don’t know when the end is going to be.  We’ve discussed this before.  But it stands to be a lot. 
 
On the day that you decide to retire you will either have enough money to go the distance, or you won’t.  The only way to know for sure (or at least something approaching certainty) is to have so much money that it is likely to last well beyond any remotely realistic life span.  If you are 65 and can reasonably fund your lifestyle as you know it today for the next 60 or 70 years, then we can all pretty much assume that’s going to be good enough.  Probably 30 years will be good enough (though more people live past 95 than you probably think; and it’s plausible to think even more will do so in the decades to come).
 
But the point here is that you will have enough money to “overwhelm the problem” (of ongoing expenses), or you won’t.
 
If you don’t have a high enough portfolio balance to play the overwhelm card, you are going to have to do something which you may not want to do.  Here are your four basic options:
 
Option 1:  Postpone your retirement date and keep working in your current career/position.
 
Option 2:  Semi-retire.  Either cut back on hours (if your employer is amenable) or switch to some sort of different position (or even field) for a few years when your formal career comes to its end.
 
Option 3:  Take a more active stance as an investor, and in so doing take on more hassle and/or risk than is ideal (and maybe more than is even advisable…) in pursuit of higher returns.
 
Option 4:  Gamble that you will die early enough to keep depletion of your assets from being a problem.
 
Yes, I know none of that is going to get labeled as feel-good information.  But it is the truth.  And given the title of the post, hopefully you weren’t expecting feel-good anyway.  If you were, sorry to be a downer.
 
But in spite of all of the speculation, professional opinion and advice-giving that is an inseparable part of a modern retirement discussion, there are certain underlying realities, mathematical givens we might call them, that underpin all of it.  They are utterly factual, utterly immutable, and as potentially harsh as any other aspect of the natural world’s fabric. 
 
If the question is one of spending, then knowing what’s in the kitty will always be a substantial concern.  And one number –projected outflow vs balance available - is almost always bigger than the other.  A win or a loss follows therefrom, in the most mechanical, impersonal of fashions.  Just the way it is.  When faced with the proposition of a potential shortfall, the four items listed above are the most common responses; despite wide understanding that none of them are great.
 
Information of this type is presented to provide a jumping off point for decision making.  If you haven’t retired yet, you can decide to enter these waters, or try to use your remaining years to drive your balances high enough to get in position to make the overwhelm card possible.  If you are at or already in retirement, you can consider these various possible paths, and spend a minute contemplating which strikes you as the least of the evils.
 
Look, no one can realistically make the case that being short of funds is a good thing.  So my take on it is, let’s not even try.  Instead, I think better outcomes arise when we survey the landscape as it is – not how we want it to be, or in some abridged or fictitious way designed to spare people discomfort – and go from there.  Solid ground is a good start for good decisions, even if the solid ground itself is unpleasant. 
 
Plus, even if I tried to spare your feelings, you can do arithmetic as well as I can, and you would know anyway.  Right?  
 
So if you aren’t yet in this situation and don’t wish to be, you know what you need to do to try to affect the outcome.  And if you are, now you know what your most likely options are. 
 
OK.  Now I’ll let you up for air.  I’ll try to make the next post a little more cheery.

By Brad Thomason, CPA
 
 
In last week’s blog I addressed the fact that simplistic headlines can create misunderstandings about how market behavior plays out.  Though short and direct statements are necessary for a headline to be workable, such statements can imply a direct cause and effect relationship which is simply not there.
 
Today I’ll mention two other topics about investment news that are worth keeping in mind.
 
The first is a discussion of what often happens when a particular company gets an above-average amount of news coverage for something bad.  In these cases, it is not unusual to see the company’s stock price fall.  Often, in fact, it falls far further than one would rationally predict if comparing the probable cost of the bad item to the degree of loss in market capitalization.
 
These events happen all the time, but one from the year just passed that you may remember was the scandal with Papa John’s, after its founder made some less-than-well-received-remarks last summer.  Social media blew up, the story was everywhere, and over the course of a month the shares lost 30% of their value.  Then the news cycle moved on.  People kept eating pizza (‘cause, you know, it’s pizza…) and within a few more months all of the old decline had been recovered.  A sharp watcher had a chance to pick up a nice gain for a hold time of well less than a year (remember that the recovery of a 30% loss equates to more than a 40% gain for someone who buys at the bottom of the dip).
 
News hits of this type often cause changes in market prices which far exceed economic reality, and when that happens, the end of the news event usually sets the stage for the economics to take over again.
 
The second news-related topic we’ll address today really isn’t so much about news, but rather about the absence of news.  For everything that you see in the popular press about financial topics, there’s far more that never gets into the general reporting – and much of what’s left out is way more interesting than what actually gets talked about.
 
Most people in the US know that the Dow fell in December. Most people don’t know that the metal palladium is up over 50% since late summer.  Nor that investing in palladium was just as easy as investing in the Dow, requiring nothing more than a plain old stock brokerage account.  But was that price climb chronicled on the evening news? 
 
In fact, closer to home, your friendly neighborhood Target store saw its shares surge by an even bigger percentage than that from the summer of 2017 to this past summer.
 
Trust me when I tell you these things are not rare:  If pressed for more examples, I could go on longer than you would keep reading.
 
Everyday there are far more stories about investment-related topics than ever make their way into the mainstream news.  Sometimes looking at specialty news outlets is the key.  Sometimes spending your time digging around in random price charts will help you uncover these not-hidden-but-not-publicized developments.  And the reality is that even with those steps there would still be a lot you missed.  There aren’t enough hours in the day to find out about everything that happens.  But back to the basic point: be aware that the fraction you get from regular news is tiny, indeed. 
 
So to sum up the last two posts, on the matter of news:
 
1. News headlines have to be simple, but in being simple are usually misleading when they suggest causality.
2.A lot of news attention about a negative event can cause shares to lose an amount of value that is all out of proportion to the economics of the actual event; and in such cases prices often quickly recover when the news goes away.
3.For all the financial news that gets put out, it only covers a small fraction of the stories; and often misses many of the more interesting ones.
 
Well, that’s it for today, folks.  Happy new consumption.

By Brad Thomason, CPA
 
 
Many of yesterday’s financial headlines were built on a basic framework that went something like this:  Fed Chairman Powell Makes Positive Comments and Dow Surges More Than 700 Points.
 
I find headlines of this type to be troublesome, understandable and amusing all at the same time.
 
At the level of factual accuracy, you can’t fault it.  Yet that’s not the whole story.  It would be equally accurate, as a matter of fact, if the headline had been Brad Thomason Pours Cup of Coffee, Then Dow Surges by More Than 700 Points.
 
Now, I’m not suggesting that my morning beverage routine moves markets, nor am I discounting the opposite with respect to the chairman of the Federal Reserve.  Merely pointing out that such simple statements, even if technically correct, don’t ever tell the full story, and often imply a level of causation that is simply not there.  The following paragraph will represent a more nuanced example of what the headline should have said, if more complete assessment had been the goal.
 
The Fed chairman made some comments this morning which market participants received favorably.  This set the initial tone for several hours of trading activity in which prices rose and stayed there.  Also on the minds’ of traders, a new jobs report which showed better than expected results.  That all said, today’s rally follows a down day yesterday, and it was reasonable to expect some snap back in today’s session irrespective of new news.  Finally, the overall behavior of the market today was essentially the same as it has been for the last three week, with prices rambling around in spirited fashion between the 22,000 and 23,500 levels on the Dow.  In terms of changes to the established ranges, nothing really happened.
 
The reason that my paragraph would never be workable as a headline is obvious.  But it highlights the inherent flaw in news distributed by way of headline.  Because headlines have to be short and clean and simple, they inadvertently give the impressions sometimes that A caused B, end of story. 
 
Compounding the problem, when you hear TV and radio folks talk about it later in the day and they are asked what happened, they usually lead with a repeating of the headline.  Instead of clearing up the confusion, they reinforce it. 
 
Unless you are really on your toes you can get lulled into forgetting all of this, with the effect that you come to accept that a single data point was directly responsible for an entire day of trading activity.  It wasn’t.  But less informed consumers of news don’t realize that and come away with an incorrect understanding of how markets work.  And like I said, even those of us who do know better can forget.
 
Jerome Powell did not reach the end of his comments and the Dow was 700 points higher in the next minute.  Yet the basic headline sort of implied that’s what happened. 
 
Anyway, you get the point.  Just do yourself a favor anytime you are reading headlines about what caused the day’s market result:  remember that you get the point.
 
Next time, I’ll discuss two other aspects of the news which are worth remembering.

By Brad Thomason
 
 
A couple of weeks ago the Centers for Disease Control (CDC) announced the updated life expectancy statistics or 2018.  For the third year in a row, it declined slightly to just shy of 79 years of age.
 
What does this have to do with retirement planning?  Essentially nothing.  Which is why I’m mentioning it.  I wanted to make sure you knew.
 
The general life expectancy numbers take into account all deaths at all ages.  So the average figure that gets quoted every year includes things like infant deaths, teenagers having accidents, and so forth. 
These factors don’t apply to people who are retired or those about to retire.  If you are already 60 then the odds of dying as an infant are 0%.  If you are 70, it necessarily means that you did not have a lethal accident when you were learning to drive.
 
In fact, if you look at life expectancy tables by age, you will see that the older a person gets, the higher the life expectancy climbs.  People who are 60 have a lower life expectancy than those who are 70, because some of them will die in the next decade and those deaths pull the average down.  Those who are already 70 have to die at 70 or some later age, which in turn pulls the average up.
 
(Misunderstanding of this basic principle leads to stupid internet articles in which someone touts the idea that people who retire later in life live longer, as if continuing to work has some mystical life-sustaining effect.  It doesn’t.  It’s just that if you don’t retire until 70 it means you couldn’t have died when you were 68, or whatever…)
 
Using the general life expectancy statistic for purposes of retirement planning is the wrong approach for two reasons.  The first, as we’ve discussed, is that it does not pertain to the portion of the population that needs to use it: those at or approaching retirement age.
 
The other reason is because life expectancy is itself just a measure of the average result.  Essentially life expectancy says that if we started out with 100 people of a given age, the point at which we would expect half of them to have died is what we’re measuring.
 
So if 100 people used any particular life expectancy (for people who are already 65, it would be about 86) then half the people in the group would be expected to live past that age.
 
In other words, if all 65 year olds assumed they would die by 86, and used that as the gauge for how many years of income they would need to cover, half of them would run out of money due to living past 86.
 
So if the general life expectancy is too non-specific, and the particular life expectancy is only suitable half the time, what number should we use?
 
One approach is to look at the ages at which people are dying right now.  If you look at all of the deaths for a given year, by age (which is also a stat that the CDC tracks), what emerges is a rough sense that about 95% of the deaths of retirement-aged persons (65 and older) in a given year occur by about age 95. 
 
But even that number is a little deceptive, because affluent persons tend to live a bit longer.  And people who have enough money to make it to 95 in the first place have more resources than what’s average/typical. 
 
Also, the thing we really want to measure is how many years of income are required for the household, not the individuals.  So for married persons, the death of the first spouse is not really a factor (and if we were to take those out it would mean we’d need to go to a higher age to get to a true 95%).
 
Finally, if a person in their sixties is doing this assessment right now, it is not a stretch to think that medical advances over the course of the next three decades could have an impact on all of this by the time they get to that point.   
 
Anyway, back to the question:  I can’t tell you the one best number that you should use, because I’m not sure it’s an answerable question.  But in practice I am always resistant to the idea of projecting to any age less than 95, and frequently like to look to see what would happen if we moved it out to 100 or even 105.  Doesn’t cost anything to jigger a few numbers on a spreadsheet, and sometimes doing so can lead to important insights.
 
But all of that said, the main point is that the CDC announcing a new average life expectancy is not an event which has any bearing on retirement planning.  And I just wanted to make sure you knew that, and why.

By Brad Thomason, CPA
 
 
It will not be a surprise to you that most people would like to know how much money they need to retire on.  It’s not a surprise, most likely, because you are one of those people.
 
The good news is it’s a number that we can find.  Or at least approximate.  But we can’t always do it quickly, and there’s always some uncertainty involved.
 
To understand why, consider a couple of scenarios involving a bucket of water with a small hole drilled in the bottom.
 
If I told you how much water was currently in the bucket and the rate at which it was leaking out, you would have little trouble figuring out how long until the bucket was empty.
 
But what if the bucket were outside, there were rain showers in the area, the neighbor’s dog might stop by for a drink or two, and the hole in the bottom was getting bigger the longer the water was draining out? 
 
Not so straight forward anymore, is it?
 
In trying to determine how long our retirement money will last, we know that we have to know how much we’re starting with and the rate at which we’ll be spending it down.  But we also have to account for the fact that the principal may earn some returns before we spend those particular dollars (i.e. like rain falling to partially refill the bucket).  We know that there might be unexpected items to pay for – probably healthcare related, but not necessarily – which can further deplete what we have (i.e. like that pesky dog).  Finally, there will be inflation; and the effect of inflation will become ever-greater as time goes on, accelerating the rate of depletion at an ever-accelerating pace (i.e. like a hole in a bucket that magically gets bigger with time).
 
If we don’t account for all of those factors, our odds of being even close with our estimates are not very good. 
 
We all want simple answers.  We’ve usually got other things to do, and even when we don’t we don’t want to spend our time breaking our heads over tedious lines of thought.  I get it.
 
Problem is, whether we want simplicity or not, little is on offer when it comes to retirement planning. 
 
In boxing they have an expression for dealing with unfavorable moments: bite down on your mouthpiece and keep going.  There’s nothing wrong with wanting it to be easy.  It only becomes a problem when the fact that it isn’t easy stands in the way of us doing it.  This is one of those areas in life – like getting hit in the face – where you need to press on in spite of the fact that it isn’t any fun.
 
If you don’t know your number, you need to.  Or at least a range which takes into account some realistic expectations about return levels and longevity. 
 
Precisely hitting projections that are decades away is not a real high-probability activity, even under the best of circumstances.  Still, you need to go through the exercise.  That’s because what you most need to know about are those scenarios which have little if any chance of succeeding, the ones in which running out early are likely or even inevitable.  Preferably you find out about them while you have enough time left on the clock to do something about them.  Which, back to the top, is why you need to look now instead of later.
 
The end of the year is coming up, and that is always a good time for some assessment and thinking.  If you don’t know where you stand, why not find out?  If you need to make some changes, start thinking them through.  And if you need some help putting them in place, give us a shout…though preferably after the first of the year.  Looking at my schedule for closing the year out over the next four weeks, it is evident that I’ll need to be biting down on my mouthpiece, too.

​By Brad Thomason, CPA
 
 
November is national Long-Term Care Awareness Month.  From time to time I have conversations with people who have a parent that needs care, and they are thinking about retiring early to be the caregiver.
 
Today’s post will be short, because I don’t need a lot of space to cover this one.
 
When a person is working, there are often five key things going on which contribute to a better financial position in retirement:
 
1. The current paychecks pay this year’s bills
2.Contributions to the 401(k) or similar continue to be funded
3.Employer matching contributions continue
4.The portfolio capital is left alone to compound for another year
5.The total number of years that the retirement savings will have to ultimately pay for is reduced by one year
 
When a person retires early, all five of these things stop.
 
Why the person retires does not matter, financially speaking.  Whether you have a fantastic reason (like love for a family member) or no reason at all, the dollars are impacted the same.
 
When a person retires early they are essentially giving their retirement savings a bigger job to do (cover more years’ worth of bills), and demanding that it be done with fewer resources (due primarily to forfeited future investment returns).  It’s tough to see how that could be a step in the right direction.
 
Please be careful if you are contemplating the DIY approach to helping a family member with a care situation.  The costs are likely to be much larger than what they appear on the surface to be. 
 
That’s true even before you get into the quality-of-life costs, by the way.  Which are by no means insignificant, in their own right.  Caring for another person can be demanding and stressful – so much so that it could negatively impact your own health.
 
Again, please be careful if you are facing this situation, and appreciate the fact that you are dealing with something that has the ability to do damage to your financial security, by hitting at many different aspects all at once.  Being the primary caregiver is probably the wrong answer, even if at first look it appears to be the right one. 

By Brad Thomason, CPA
 
 
One of obvious aspects of retirement planning is the fact that there’s often a wide degree of difference between the factors which bear upon one case, as compared to those which bear upon another. 
 
What one family would ideally like to do is often very different than what another would like; and this difference exists even before we start getting into things like how much capital is available, where the capital is deployed, what kinds of returns it’s earning, the rate at which it will need to provide income, and so on.  None of which is likely to be the same.
 
Yet in the face of all of these differences, there are also certain similarities.  These similarities are not a large enough part of the picture that it becomes reasonable to argue for one-size-fits-all planning.  But neither does it mean we are in a land where we have to start completely from scratch each time a new plan starts to come into being.
 
I think it would be fair to say that most of the work that we do in the field of retirement is based on the idea that understanding is the result of a process, and the process of understanding works best when there are frameworks available for organizing the various pieces of information which are important to the task.  Having a place to cognitively put things helps to keep everything straight, and makes the information more useable.
 
The designers of aircraft, for instance, need to have a basic understanding of whether or not a particular feature is primarily there to create lifting force, or there to absorb the forces associated with returning to the runway, or whatever.  Within the larger job of “make it fly,” there are sub-jobs which must act in concert to bring about the general success.  Knowing where you are in the big picture, as you move around among the details, is the means by which true knowledge of the whole eventually emerges.
 
One of the early framework elements we settled on in our work was to make a hard distinction about the job the portfolio needs to do before a person retires, versus the job it needs to do after the person retires.  When we point this out to people it gets almost immediate and universal acknowledgment as an important aspect of the landscape. 
 
This, despite the fact that few other voices in the retirement planning discussion seem to be pointing it out very often, if at all.
 
Another of our framework efforts is in the delineation of the kinds of elements which make up retirement income.  We don’t know of many other resources which take the time to go into these in depth.  But once you’ve been through them, it is hard to see how a complete understanding of the requirements could have been achieved without having picked them apart.
 
The key to these frameworks lies in the similarities between cases, not the differences.  It may be that one person has a resource base and future needs which differ greatly from what someone else is working with.  But it will also be the case that no matter what those variables are, the situation is going to change in analogous ways once they stop working and turn to the portfolio to provide some or all of the monthly cash flow need.
 
People retire at different ages; though mostly those ages fall within a fairly narrow band of years.
 
People live to be different ages; but the outer reaches of life expectancy for all of us are pretty well defined (at least they are at this point in time…).
 
People buy a lot of the same stuff.  Inflation affects everyone similarly.  Health costs are likely to be a major category of non-budget items when dealing with groups of older persons.  Et cetera.
 
These similarities provide us with the building blocks for creating the frameworks we use to try to help bring order to the planning process.
 
If you think about it, if we didn’t, then just about all of the questions one could ask about what to do in terms of retirement planning steps would have to be answered with some variant of the response, “Well, it depends…”
 
A person engaged in planning will eventually get to the point where the unique factors will take over the conversation.  It’s just that those unique factors aren’t all there is to talk about, nor do they necessarily have to be talked about first.
 
So some degree of structure, based on similarities, is preferable.  But we have to be careful not to go too far down the path.  Though many do. 
 
Unfortunately, there are any number of rules of thumb circulating in the conversation, rules of thumb which are attempts to short-cut what is unfortunately a not-so-simple thing.  They seem to dream of a world in which the average retiree is the only we need to provide for.
 
In twenty five years of doing this stuff I’ve yet to meet the average retiree.  If he/she exists, you can’t prove it by way of anything I’ve ever observed.
 
Rules of thumb usually fail in real-life examples for the simple reason that they are typically attempts to build sameness or framework out of the parts of the equation that actually are different.  The effort of building framework should have stopped when the supply of similarities was depleted; but the constructors and advocates of many of the general dictums seem to have not let a little thing like being out of suitable materials get in the way of trying to build the sand castle to greater heights.
 
This of course flies in the face of that famous admonishment from Einstein, to make things as simple as possible, but not simpler.  Frequently, it leads to exactly the outcome you would expect it to.
  
What all of this means, in the end, is that your retirement plan will need to be tailored for you.  Your specifics will play out differently than what other people will experience.  But you can nonetheless follow the same process of putting the plan together that others have followed.  Because just as there are profound differences, there are also some basic similarities.  If you use those similarities to create a sense of order, you will be in a much better place to contemplate and understand the range of possible outcomes offered by the remaining differences.  Just be mindful of where the line between the two is, by among other things, being very careful about how willing you are to follow rules of thumb or follow the guidance of those who suggest that the task in front of you is a simple one. 
 
Because it isn’t.  But neither is it completely uncharted territory.

By Brad Thomason, CPA
 
 
There’s nothing like a drop in stock prices to remind everyone what they already know:  that stock prices can fall.
 
Lots of people are paying attention to changing market levels right now, and wondering if they should take some action as a result of them.  You can hardly blame them.  But in some respects that’s like wondering if you should have fire insurance after you see the flames.
 
In principle, we like the idea that the stay-or-go question ought to be tied to whether or not you’ve achieved the amount of money you need to retire on.  When you have, it’s fair to ask if any of your at-risk investments should remain a part of your portfolio.  Once accumulation reaches the level of an apparent win, the argument to get off the field becomes much stronger.  In other words, it’s ideally a decision which is best made without reference to whether the market closed up or down on a particular day.
 
In practice that means you may exit a rising stock market.  Which as far as it goes, doesn’t sound appealing.  The obvious problem though is that you won’t know until after-the-fact whether it really was a rising market, or one which had reached its peak ahead of a reversal.
 
The market today is more or less exactly where it was at the beginning of the year.  I can tell you from long experience that if you had been discussing reallocation back in January with a retired person with investments in stocks and funds, it would have been the most common thing in the world for that person to express resistance on the grounds that doing so could cause him/her to miss the next run-up.
 
Well, guess what?  If they are still holding stocks and funds today they DID miss that next run-up.  They have spent 10 months in the market with nothing to show for it, at least as of today.  If prices rise from here, then maybe they catch the next run-up.  But the one they stayed in for back in January is now gone forever.  And looking at the future from the perch of today, there’s no way to know if there actually will be a next run-up anytime soon.  Nor, if there is, that it won’t eventually reverse and dissolve right before our eyes just like the recent run-ups of 2018 just have.
 
You can hopefully see that there is a certain merry-go-round aspect to this whole thing, making it possible for a given investor to get caught up in this giveth and taketh cycle for quite some time.
 
People who aren’t retiring for awhile can probably ride out any fluctuations.  Historically, that has been the case.  Whether or not that’s the best course of action is a different story.  But the indications are that it is at least doable.
 
People who have already retired should have already made the assessment of whether or not assets of that type were consistent with their goals and needs.  If they haven’t, they should make that assessment now.  Not because the market is falling.  But because it’s something that is a critical step in a secure retirement. 
 
On a final note, a word of caution to those of you who were working to “a number,” almost got there, but are now just a little bit short of it because the market didn’t keep going up.  There is a temptation to stay until you achieve that number.  It is often phrased as, “Well, now I can’t afford to sell.”  I’d like to invite you to sit down in a quiet place, perhaps with a nice cup of coffee, or maybe something stronger, and work through the logic of that position.  Or rather I should say try to work through the logic of it.
 
Warren Buffett has stated that a key realization for him was the fact that a person who loses money doing activity #1 is not obligated to continue with activity #1 in pursuit of making it back.  You can make it back with any number of other activities, many, and maybe all of which may be a much better prospect than activity #1.
 
If you don’t like the idea that you were at 99% of your goal, but now you’re at 97%, how are you going to feel if you wake up two or three months from now at 90% (or 80%...) all because you tried to make back that 2% the same way you lost it?
 
Thinking that one can fully ignore the market when making investment decisions is not that realistic.  I’ve read plenty of articles on why people should.  But I’ve met few actual people who do.  That said, the broader point here is that your decisions to invest or not invest in anything should ideally be made in consultation with the progress and needs of your plans, and not any particular move in prices.
 
If it makes more sense to protect what you already have than it does to risk it in the hopes of maybe making more (especially if you don’t need more), then that probably tells you a lot of what you need to know about what to do next.  And looking at where the market closes this afternoon really shouldn’t add much to the equation.

By Brad Thomason, CPA
 
 
When we go looking for an investment advisor or new fund, a common step is to ask about the track record, the past performance of the thing we’re thinking about getting involved with.
 
Now, we’ve all heard the endless warnings about past performance not being a guarantee of future results.  And we get it.  Sort of.  Yet it still seems like we ought to find out something about the past before we get involved.  That’s part of “due diligence,” right?
 
Let me point out a few things you might want to keep in mind.
 
First, the context of the track record matters.  You often hear people say things like, “My guy’s done a real good job for me the last few years.”  But what does that really mean?  If the market was up 20%, and your account went up 20%, how much of that is really attributable to “your guy.”  To simply know the degree of movement doesn’t tell you much.  A far more important measure is the degree of movement after taking out the part that the market naturally gave to everyone who just showed up.
 
Or is it?  The second thing to remember is that market returns don’t repeat.  Like, ever.  If you look at twenty years of annual returns, from any period in US history, you are unlikely to see the same rate of return for any two years in the data set.  Probably you are going to have twenty different numbers.  If the historical record all but proves that the results are going to be different year to year, and the market return has a big impact on the return you experience, how much insight about what you will earn in the future can you really discern from looking at the past?  Moreover, to get back to the point made above, even if your return in one year really was meaningfully helped by the actions of the advisor or fund manager, how does that imply that a repeat is coming?   
 
Which brings me to my final point.  Understand that track record comparisons in the investing world are fundamentally different than what we do when we look at stats and win/loss records for athletes.  Why?  Because there is a sameness to sporting events which doesn’t translate into the world of the market. 
 
In a baseball game, for instance, while it may be the case that you have different people playing the positions, different order of pitches, different weather conditions, and other unique features from one game to the next, at the structural level, at the rules level, one game of baseball is exactly like every other one. 
 
The variances are minor, and exist within a rigid framework; meaning that the possible permutations and the range of variance are essentially fixed.  This stable environment, in turn, makes it possible to draw some meaningful comparisons.  When we look at the batting averages of two players, for instance, we can get some insight as to how each player may perform when presented with essentially identical circumstances in the future.  As a measure of relative performance, it really can tell us which guy is the better hitter.
 
But if we get into a land where the events are not repeating, this mode of analysis loses its ability to tell us much of anything about what to expect.
 
Now, to be clear, markets are not brand new inventions each new day.  There is some sameness from one day to the next.  But unfortunately the small amount of sameness has a tendency to draw our attention away from the far more expansive degrees of difference.
 
The paradox is that markets are always just the composite of people buying or selling.  So at the broadest level they seem like an unchanging, rather simple, thing.  The problem though is the vast range of possibilities for why people transact, when they transact, and in what quantities.  Those ranges are so much broader than steal second/don’t steal second that the variances become the drivers, and the sameness loses most of its meaning.  They keep the market from attaining the kind of stable environment status that we wish it had.  Instead, it’s just an accumulation of historical events. 
 
Historical events simply don’t repeat themselves in a way that makes standard measures of probability suitable for gaining insight.  There was only one Waterloo, and there will only ever be one Waterloo, because Napoleon and Wellington are never going to relive that day again.  The ever-changing aspect of global political and economic events, combined with the ever-changing cast of market participants who happen to show up on a particular day, make a day in the life of the market much more similar to Waterloo than just another baseball game.
 
So before you spend too much time comparing and considering track records, make sure you understand what you are really looking at and what value (if any) it can really offer.
 
I’ll leave you with this thought, which you may find instructive.  Professional traders often look at past studies of various strategies in order to try to gain a sense of how they will perform in the future.  But the best traders understand the inherent limitations of this approach, and proceed accordingly. 
 
Many ask the rather simple and general question, “Does this event happen more often than not?”  They want to know, is there something to indicate that a particular set up or indicator identifies a greater than or less than 50% proposition?  If it does, they often stop the analysis right there and turn their attention to how they will manage the position: when to get in, when to take profit, when to stop out. 
 
In other words, they use the track record to gain a small bit of insight.  But they don’t try to take it much further than that.  Because they realize there isn’t much more it can tell them.  Just because the particular thing happened 63.7% of the time during the test period, doesn’t imply that the same results will be repeated.  It just confirms that the thing did in fact happen more than half the time.  With that out of the way, they turn their attention to the practical matters of what they will do if the investment works out the way they hope, and what they will do if it doesn’t.
 
If the pros allocate their time and attention in that manner, well that probably says something worth hearing about the way other investors should approach the matter, too.