By Brad Thomason, CPA
Here is a stupid argument: you should not invest in x because you can make more money by investing in y.
Now, I’m betting when you read that sentence, one of two things happened. One possibility is that you nodded your head and thought to yourself, “Yep, I know where he’s going with this.”
Or, you thought, “I don’t know that the argument is stupid, but the fellow doing the writing sure sounds like he is.”
Touché. But let me see if I can persuade you over into Group 1.
The reason it’s a stupid argument is because it inherently pre-supposes that how much money you make, the rate of return, is the basis of the decision, the most important consideration.
It is fair to say, and I will readily concede, that how much money you make will likely never be an unimportant factor. But that doesn’t mean it’s the most important. Not always.
Risk also matters. So does liquidity. There might be some aspect of timing that matters. In a particular case, there might be special factors to take into account. It’s complicated; or at least sometimes it is.
As you approach retirement, it becomes more important to think about shifting your holdings to less risky assets, and ones that have low levels of complexity. You want predictable results, you want low odds of loss and you want it to be easy if someone else has to step in to help you out with managing your affairs. That’s true pretty much in all cases. In the ideal cases, doing so is more palatable because the job of building the wealth to suitable levels is already done at that point.
The fact that you are taking an action which likely diminishes your earnings capacity is easier to live with, because you know you’ve won, and now it’s time to get off the field and use what you have to pay for some remaining years of peaceful existence.
Of course, getting more money is a benefit. But benefits come in other forms, too. That’s why, to simply pretend that the yield is the only thing that matters, is stupid. Because it’s not.
Stock and mutual fund guys have been using this line of argument to beat up on bonds and annuities for years. Don’t do it, they say. You can make more if you leave your money in the market. Dance with who brung ya, and all that.
Perhaps you could. Perhaps. But it isn’t a certainty. Getting what you expect from a bond portfolio is more likely. And getting what you expect from an annuity contract actually is about as certain as it gets, as a matter of law.
Anyway, I’m not going to try to convince anyone that money doesn’t matter and that having more of it isn’t a good thing. But don’t let anyone else convince you that it’s the only thing that matters, ok?
And should they try, you might ought to factor that into your decision about whether to listen them on other topics, as well.
By Brad Thomason, CPA
People who are interested in pulling off a successful retirement often end up considering an awful lot of information over the course of the preparation phase. In general, I think this is a good thing. That said, if there aren’t some constraints on the openness to input, a number of problems, running the range from simple overload to damaging misinformation, can crop up.
So who should you be listening too?
Should you be interested in what billionaires have to say about managing your money? Should you seek wisdom and counsel from someone who is younger than you that has already retired?
Maybe. But maybe not.
I’ll pick on the early retirement guru first, not only because it’s pretty easy, but also because I realize a need to exercise a bit of caution insinuating that a billionaire isn’t a content expert on the topic of money.
If a guy who is forty-five wants you to watch his video about how he retired successfully at the age of thirty, you can save yourself the trouble. Why? Because at forty-five there’s no way that he could possibly know if his retirement is a successful one.
The true tests of a retirement plan come when you are in your nineties, after you have already lived without work income for many years, and after (to be blunt) you have already passed the life expectancy for your peer group.
No forty-five year old has ever experienced anything like that. As such, there is no basis for a declaration that the retirement was a success. It’s like looking at the scoreboard at the end of the second inning. They can say they successfully paid all the bills for the last fifteen years without having to have a job. But those two claims are not the same. Not even close.
Moreover, if you actually listen to most of these guys, they will soon start talking about their “side hustles.”
Folks, a ‘side hustle’ in Millennial-speak for, “I started a small business.” Probably, “I started a small business, which is actually not that successful, but since I live really frugally, the little bit of money it does produce helps to delay the rate at which I’m depleting my other resources.”
In other words, they aren’t even actually retired, in the first place.
I think I can leave it right there.
As for the billionaires, I’m not sure they are your best candidate for advisor either. But for a totally different reason.
I am prepared to stipulate, a priori and absent any other actual proof, that anyone who is a billionaire necessarily knows something about money and how to make it.
But a much more subtle point is the reason I would potentially discount what they have to say when the topic is how to manage money during retirement.
Most people, no matter what they manage to save, are probably going to get to the point where they have to start liquidating assets in retirement to keep the bills paid. For something like 98% of the population, maybe more, that will be the case if they live long enough. The longer a person lives, the more likely this becomes.
Billionaires are not in that boat, though. If you are a billionaire, all other things being equal, it is likely that you can pay the bills from each year’s investment wins for far more years (decades. centuries?) than a normal human life span. But, still being human, you are susceptible to the same blind spot that we all are: assuming that everyone else is living in the same version of the world that you are.
When the odds of running out of money are nonexistent, then things like investment risk are sort of academic. But in real life, for most people, being too aggressive can and has lead to severe financial damage and unmeasured heartache and regret. Some people can afford the risks of pursuing maximized returns. Most can’t.
I will stop short of saying ignore the billionaires. But do keep in mind that one of the most significant financial events that most retirees encounter – the moment where you have to start spending down the principal – is likely not even on the billionaire’s radar screen.
Real retirement stories don’t exist in the realm of the energetic middle-aged, nor in the land of bottomless riches. As such, be thoughtful about how much guidance from those glamorous lands that you invite into your reality.
By Brad Thomason, CPA
People seem to be publicly upset a lot more these days than used to be the case. So as I’ve watched that trend over the last few years and thought about it more than I did in the past, I’ve come to think that simple misunderstanding is responsible for a massive portion of the hurt and upset experienced by the human race, the world over. For so many people in a state of literal outrage, it seems to me that even the tiniest bit of education could perhaps go a really long way. Understanding how things actually work, and knowing enough to spot erroneous explanations or chains of logic, are important if for no other reason than to tamp down the number of people getting agitated over purely-imagined evils.
Well, I don’t think we can change the world. On the other hand, it is sort of the purpose of this blog to provide clarity on the topics surrounding retirement.
With that in mind, I thought it might be beneficial to spend some time talking about the inner-workings of one of the truly foundational models in personal finance, that of the traditional pension. This has nearly universal application in the US, not so much because every worker has an old-school pension, but because of Social Security, which works on the same basic framework. So for that alone, it’s a good thing to know something about.
But it is also key to understanding what many consider to be a very important option in the retirement planning/management toolbox, the private annuity contract, with a lifetime payout of income. Well, both understanding it, and avoiding anger-inducing misperceptions about it at the same time.
But first, pension basics. Assume that you have to provide income for a bunch of workers who, on average, live for twenty years after they retire. So if they retire at sixty five, on average, they all live to be eighty five (which, by the way, is not too far off actual life expectancies for people who have already made it into their sixties. Note that life expectancy, in laymen’s terms, more or less means the point at which half the group is no longer living. So half do not live to be 85, and the other half live longer than that.).
How much money does that take? In simplest terms, for each worker, it takes one year of income times twenty years.
In reality that’s only the approximate figure because during the twenty years interest will be earned. Also over the twenty years there will be some inflation, and to keep pace there will have to be some cost of living increases to the payout. To some extent, those two offset each other though, so to keep life easy let’s just go with $X times 20 for purposes of this simple explanation.
It would be mathematically equivalent, more or less, to say that the pension plan has some pool of money for the person, and they are going to divide it into twenty portions, to be paid out one portion at a time.
So that’s the first point. Some pool of money divided by some years of expected payouts. However, understand that while this basic building block (a pool of money associated with each worker, individually) is a necessary part of the conceptualization process, that’s about as far as it goes. As we will see, each worker’s pool of money, isn’t really their money; not in the same sense as having a bank account that they can withdraw from whenever they like. It’s just sort of a gauge to help the pension track the level of resources available to meet the promises it has made.
To dig a little deeper, let’s consider the case that there are three workers covered by this plan, one who lives for only ten years, one who lives exactly the prescribed twenty years, and one who makes it thirty years.
Note that the wide disparity between these outcomes still reduces to an average lifespan of twenty years past retirement (10+20+30=60 years; 60/3 workers=20 years). So our overall assumptions for the pension are still intact. Though what happens individually veers of course rather substantially.
The first person does not end up receiving all of the money that the pension fund thought would be paid out. The third person gets a whole lot more. And where does the extra come from? The money that was not paid out in the first case.
If we make an assessment of what happened, it goes like this: all three workers were promised income for life, and all three workers got income for life. They just didn’t all get the same amount of money (because “get the same amount of money” was never the promise, to begin with).
In order to make that possible, the pension plan simply had to have the ability to reallocate in order to fit the facts as they played out over the years (e.g. the death of the first worker). Simple, but not insignificant. In fact, that one feature is quite powerful, even critically necessary. Without the ability to internally shift things around, the entire system could not function as it does. To really get to the heart of the operation, we need to see the disconnect between what the pension initially allocates to each worker for planning purposes, and what each worker owns and ultimately receives. That’s the key detail.
What’s described above is how the teachers’ retirement folks do it. It’s what the Social Security Administration does. It’s also what Medicare does when one person gets really sick in a given year, while five or six others don’t have any significant medical bills to speak of. It’s what your home owners’ insurer does with the premiums they collect from, say thirty people, when one person has a fire but the other twenty nine people don’t.
In all of these cases, the entity managing the coverage shifts resources as necessary to meet the promises they made. The promise – not the individual payout – is where they deliver the same thing to everyone in the group. The fact that different group members get different actual payouts may not be an immediately obvious by-product of such a system. But I think if you’ll think about it for a minute, it will become clear that it really couldn’t be any other way. It’s the natural result of responding to uncertain outcomes which affect each person a little differently than everyone else.
Notably, in the scenarios described above, the “consumers” of those services don’t seem to have much problem with the way things are done.
But when the topic turns to purchasing your own life income from an annuity company in a one-on-one transaction, for some reason, everything seems to change.
Probably the number one reason people do not choose the lifetime income option on an annuity contract (which in many cases may be the single most valuable benefit associated with the contract) is the concern that if they die after just a few years, the annuity company will “keep their money.” If the number of payouts received by the annuity owner prior to death are equal to less than what they paid to purchase the annuity, then they will have made a bad deal. And perhaps more importantly, the insurance company will have screwed them over by keeping the difference instead of giving it back to the person’s estate. That’s the perception. So they don’t do it, sometimes even getting preemptively angry at the very suggestion of it. If they select an annuity at all, they take a payout for a guaranteed number of years to make sure nothing gets left behind.
Which is fine. Nothing wrong with taking the deal just to collect the interest. But in so doing, they give up the coverage associated with lifetime income.
For the record, I get it. It is very hard not consider the possibility that you might be spending money, a substantial amount of money in this particular case, on something that will not benefit you in the future. Even if that is exactly what you’ve already done with every other form of insurance you’ve ever purchased.
But as in all important decisions, you really do need to move past perception, and get to actual substance, before you make the call. What’s ultimately on the table here is the question of who has financial responsibility for you living past your life expectancy, you or the insurance company? That’s potentially a really big question.
If you want them to assume that liability, you not only have to pay them to take the risk off your hands, you also have to realize you are entering a much larger equation where they (the insurance company) are having to simultaneously manage and make good on many promises of the sort they made to you. To do that, they have to have the ability to reallocate resources, just like any other functioning player in these environments does.
In other words, you have to realize that at the point in time you agree to life income, it stops being your money. It’s the price you pay for the benefits promised as a voluntary member of the coverage group.
If you think that has value, you should consider taking the deal. If you don’t think it’s a fair trade, don’t take the deal.
But either way, I think it is important to be clear-eyed about what’s going on. Keeps people from getting upset when they actually got exactly what was promised. It’s also more fair. Which is not trivial. Because even though I’m unsure how important it is to insurance companies that people regarded them fairly, I do think that trying to be fair is good for the person doing it. Call me old fashioned…
So there you have it. A quick primer on the fundamentals of pensions and life income. For things like Social Security, the situation is what it is and you don’t really get any say in the matter. But it’s nice to know how things which affect you function.
When it comes to voluntarily establishing an income stream by way of an annuity contract, each person will have to make an individual decision about how much they value the risks and benefits involved, and react/transact accordingly. Though there may be ample room for different persons to come to different conclusions about those questions, it really doesn’t serve anyone’s interest to accommodate misperceptions about how the basic process works, or assume malign intent on the part of the parties involved with making the machinery work.
Hopefully this piece clears some of that up, making for better decisions, and less risk of this topic being one which generates misunderstanding and the bad feelings that go with it.
By Brad Thomason, CPA
Dividends? Like ‘em. But you gotta be a little careful.
As you no doubt know, dividends are periodic payments made by some companies to their shareholders. They, along with interest payments, are the most common types of investment income. For many retirees, they go a long way towards covering the portion of the household budget not paid for by Social Security.
But I don’t quite trust them. Not completely. Not as a long-term means to secure income.
I like them when they come, and I think that in general they are based on stable enough stuff that we shouldn’t just think of them as a bonus that we’re a little surprised to actually get. But neither are they necessarily a permanent, enduring solution to the question of funding the monthly bills for decades to come.
There are three key things you must keep in mind when it comes to dividends. If you do, it will emerge as obvious to you too that thinking of dividends as a bulletproof income tool is a bit of a bridge too far.
The first point is that dividends are optional. As a general proposition, every single dividend payment has to be proactively and explicitly approved by the company’s board of directors. While they may have a long track record of doing so, and attendant pride at the length of the unbroken run, they don’t have to pay one next quarter just because they have the last 100 quarters. There is no legal requirement to pay a dividend, which is one of the chief reasons that companies use stock as a financing route instead of debt, on which they would be required to pay interest.
Point two, even if they do pay a dividend, the dollar amount may change radically from what the last one was. It is true that under normal circumstances they are not prone to fluctuate from quarter to quarter; and when they do it is more typical for them to go up a little each time, rather than bouncing around all over the place. But the fact that they are both optional and decided upon one quarter at a time means that if the board is feeling a little nervous about the company’s financial position, near-term profitability prospects, or really any other concern, they may decide that preserving cash is more important than paying the dividend. Even if they don’t vote to end it, they may vote to cut it.
Frankly, we could stop right there. Basing your income on something that may change from period to period and may not even be paid at all, is plenty to call the whole thing into question.
But like I said, there’s a third matter.
Being a dividend recipient means being a shareholder. Even if the dividend keeps getting paid out, and even if it stays the same amount as when you bought the stock, there’s no guarantee that the shares themselves will hold the same value you paid for them.
Now you might take the position that as long as the dividend stays where it was, a drop in price is really not your problem. And it may not be, not for many years. But should the day ever come (because of inflation, because of medical expenses, etc) that your old level of income doesn’t quite do it anymore, you may have to sell some stock to pay the bills. On that day, the fact that it fell from $40 a share to $20 during your holding period is going to matter. All of the sudden, those dividends will start looking less like actual income and more like a consolation prize for the losses you were taking (but not feeling).
Taken together, that’s enough to prompt a bit of caution. A need for some moderation.
If you have a good set of holdings which is currently producing enough dividend income for the current needs, so be it. But just understand that even though it works today, it may not work forever. It bears thinking about what your next plan needs to look like, before the day comes that you need it. Simultaneously, make sure that your attention on the payments themselves doesn’t distract you from the potentially more substantive matter, the resale value of your shares.
In practice, this set of concerns argues for basing some of the income on interest; and making sure that some of your money is invested in assets which remain at the same valuation levels all throughout the holding period. Bonds, annuities and even CDs, all have some potential for involvement on those fronts.
There’s plenty of room for customization, from one person to the next, as to which instruments and how much of each. But as a general proposition, an approach to income that’s based 100% on dividends is a plan that I think you ought to be nervous about. Nervous enough to change it, or at least nervous enough to spend some time thinking about how to change it should the need ever arise.
By Brad Thomason, CPA
It is a truism the world over that we do not want the kiddos playing with matches. This is not in service of the fact that the little cherubs are malevolent and destructive creatures who need to be walled off from the means of carrying out dastardly intent. Quite the opposite, they simply don’t have the necessary perspective to see the true scope of the risk. They do not have a solid grasp of just how badly things can get out of hand, just how much real and awful damage can accrue from tiny little portions of carelessness. What they don’t know can absolutely hurt them… and then go zipping right on past to hurt or even kill everyone else in the vicinity.
Today I want to talk about Youtube videos that discuss financial topics. That intro was not intended to be an act of subtlety. If you are running short on time, in fact, you can probably bail now. It’s pretty likely you know what I’m going to say, and why.
For those of you who are still here, I want to make it clear that I do not wish to paint every producer of such content with the same brush. Nor am I going to brand any of them as bad actors. Benefit of the doubt, and all that.
But I will tell you there’s some real garbage on there. So you need to be careful.
I’ve been in the advice-giving business for thirty years, more or less. Almost from day one, I guess, I adopted a rigid position that if you are going to hold yourself out as an advisor on a particular topic, you have an obligation to know something about it. Radical, I know. But that’s just the kind of guy I am.
My position hasn’t moved. Hasn’t even budged. Adherence to this principal has lead to many instances over the years when I told a would-be client, “I’m not the guy you need to talk for that,” where ‘that’ was a topic I did not think I knew enough about to have any business giving advice on. That business walked right out the door to another firm, and I have never regretted it even once.
The old (ancient) principle of being careful who you listen to has not changed. Legitimate credibility springs forth from all the same places that Aristotle described. Here’s a hint: number of followers and number of likes, were not on the list.
There is nothing inherent to Youtube as a platform which somehow diminishes the quality of quality content. Good people do put good work on there. It’s just that there are no barriers in place to make sure that content posted is quality content. If ever there was a place where let-the-user-beware was more applicable, I’m not sure where it would have been.
A common red flag is someone telling you that everyone else on a topic is wrong, and that they alone have the secret knowledge that no one else in the entire financial industry has ever managed to figure out. Which makes the whole notion sound really silly when I say it that way, doesn’t it?
I have something of a bum shoulder that’s been giving me trouble again over the last few months. Recently I have been looking at various content (mostly from physical therapists, orthopedic surgeons, etc) about rehabbing tendon damage. Of course, when you look at one video on a topic, the algorithm sends you more; which I admit can at times be helpful. The other day, while scrolling through the suggestions, I clicked on something which looked fairly innocuous and professionally produced. But I turned it off at about the two minute mark, because in the span of one hundred short seconds the guy said, four times, “your doctor won’t tell you this, because he doesn’t know it.”
This quick story demonstrates both how easy it is to get sucked into one of these things; as well as what to do about it.
I do believe that you can find some worthwhile information on Youtube. Just expect to have to wade through a good bit of slop to find it. People who do actual client work are not always the best performers, and folks who look great on camera sometimes say ridiculous things which can lead to great harm if you follow their suggestions. Then again, sometimes the opposite is true, in both cases.
As such, looks, good or bad, may not tell you anything important. Instead, substance is the name of the game. You know, pretty much like it has always been. If it is not obvious why the person doing the speaking would have any special knowledge on the topic, especially if what is being proposed strikes you as radical or just plain goofy, you probably have enough information to know what you should click next.
Followed by promptly forgetting whatever the video said. If you can. I mean, sometimes this stuff is just so zany that it’s hard to unhear. I remember this one knucklehead…
By Brad Thomason, CPA
The amount of Social Security related content on Youtube, and the internet at large is to me, astounding. Pretty much everything you need to know is summed up in a few pages, available directly from the government (both the Social Security Administration and the IRS). Yet there is a seemingly endless stream of repetitive content flowing to online outlets; and, one must assume, an eager audience for it.
I’m no expert on everything that is out there, but the gist of a lot of it seems to be how to get the greatest possible benefit. Which as a stand-alone proposition is certainly reasonable.
But my concern is the part that is unspoken. Because I think a lot of this content is aimed at folks trying to come up with some sort of plan to retire (ideally early) that just barely squeaks by as theoretically workable, and they are looking to some Social Security “hack” to somehow provide the last little nudge to get them there.
Folks, if you are thinking that an extra $100 or $200 a month from Social Security is going to be the thing that gets you over the hump, let me just go ahead and tell you. It isn’t.
That’s because there aren’t any circumstances (that I can think of) where that small a swing is a reasonable basis for determining something ought to be close-enough to work. That’s the case irrespective of whether the money comes from Social Security, or anywhere else (yes, I’m looking at you, dividend “experts”).
To be comfortable that you can reasonably hang up your spurs, you need a whole lot more margin for error than that. The big questions in retirement management are interested in whether or not you can keep things going for twenty years or twenty five years or thirty years. Not whether you can wiggle and contort enough to make year one work.
Year one should be a given. So should years five, and ten, and fifteen. If they aren’t, you are not even approaching the realm of a secure position. Retirement should not be an imminent event for you.
Don’t think that I’m telling you that you should be willfully ignorant about the inner workings of Social Security. Don’t think I’m proposing that you should just accept less than you could get. Don’t think that I’m suggesting that Social Security is an unimportant input. For most folks it is in fact a very important input.
But it’s only one important input, and it is not the one that financially secure people rely upon to provide pull-able levers, flexible tactics and cushions against monetary shocks as they navigate retirement. It’s more like the thing in the background that you take as a given, and build from there.
So to end where we started, Social Security minutia is not where you need to be focusing your attention. If you don’t have a clear-cut case for retiring with just the minimal, basic benefit from Social Security, then you already know what you need to know, for the moment. The rest of your equation is not far enough along to be considering a near-term retirement, in the first place. Work on those other parts instead, be realistic about the size of the resource base you actually need for a robust financial position, and accept that getting there may take some more time.
Once all of that is done, as something in the spirit of an after-thought, if you can figure out a way to wring a couple of extra bucks out of Social Security, so be it. But treat it like a final snack after dessert, not any of the earlier, more substantive courses. Certainly not the focus of the meal.
Otherwise you stand to make a big mistake (forfeiting your ability to get a paycheck) at the point in your life when you have the fewest options available to make up the difference. That’s a tough one to contemplate, especially when it is completely avoidable in most circumstances.
Plus, you’ll waste a lot less time on Youtube. Or at least have more time for watching cat videos (which is another thing I really don’t understand).
By Brad Thomason, CPA
Human nature seems to be to conflate where possible to make things simple. Problem is, conflation often cuts out important information.
I had a conversation with a guy one time, who had read a good bit of my stuff, and he said, “So basically, you’re anti investment advisor.”
I explained to him that there were situations in which I thought using a pro – be it a registered investment advisor, trust/entity lawyer, tax strategist, business consultant, whatever – made sense, and situations where it didn’t. I also pointed out, sensible or not, there was going to be a cost, which had to be an upfront consideration in assessing the question. It’s really never a good idea to make a decision about doing or not doing much of anything in which the cost is not weighed; much less cases where it doesn’t even seem to be consciously acknowledged that a cost exists in the first place.
The root of his conclusion, I suspect, was predicated on my oft-repeated position that people should take an active role in planning and executing their own retirement income campaign. I am not a fan of dumping everything in a professional’s lap, a la here, you take care of it. I also do not think a lot of those interactions in which the client meekly gives a shoulder shrug and says, ‘I just do whatever he tells me to.’
But that has more to do with capitulation of sovereignty/responsibility, a common path to suboptimal outcomes. Not the mere presence of the fee-charging professional.
Here’s perhaps a simple way to understand it. College endowments hire outside investment managers all the time. When they want to deploy some capital in the direction of a particular market or asset class, they seek a presumed expert in that arena, grant them a portion of capital to oversee, and send them off to get the returns.
If that sounds like hiring someone to do a job, then a did a good job of describing it. Because that’s exactly what’s going on. The fact that the endowment wants access to the person’s knowledge and abilities in no way clouds the picture as to who is in charge. The endowment seeks to receive benefits (in excess of the cost, by the way), but they are benefits which were identified by the endowment as part of a strategy that the endowment managers (not the hired gun) established, and it is utterly clear at every level where the sovereignty lies. The sub-manager knows that there will be accountability, perhaps rigorously measured and enforced, and that the funding for the whole allocation can be pulled if the performance is not there. The only aspect of dependency is that the manager is depending on the owner of the capital for payment of fees on services rendered. That’s it. No dependency flowing the other way. No notion that the endowment would be at a loss for what to do if the pro vanished into thin air.
That strikes me as a good use of professional help.
Things go differently in the private realm, of course, since you don’t have your own staff to run this stuff like the endowment does. But the basic premise holds. Directing activities is not the same thing as being someone’s ward; and the difference between the two is a big enough difference to make…well, a big difference.
Another thing that I have said many times, in many different ways, is that once you have all you think you are going to need, you need to reallocate your holdings to reduce your risk exposure. One of the most straight-forward ways do that, functionally speaking, is through products offered by insurance companies.
Buying insurance, be it a policy for specific coverage, or using an annuity as a means to interest or lifetime income, is an act in transferring risk. We all implicitly know that, I think. But transferring it to whom? Why, the pros in the employ of the insurance company.
Think about it: to remain able to deliver on promises made (a legal requirement, monitored closely each year by the insurance departments of all of the states in which the insurer operates) they have to have people on staff charged with managing the assets. That is to say, doing the job of making sure returns come about, so that you don’t have to.
Anyway, it really comes down to this. Managing money requires someone being present to do it. If that someone isn’t going to be you, it still needs to be done. So now it’s a conversation about hiring a professional. Just understand that having that conversation as a person engaged in directing is very different than having it as a person focused solely on being a spectator or being cared for. Beyond that, there will be some sort of cost, which necessarily needs to be less than the benefits received.
But yea, if you’ve thought about those things, have a sense of how you will benefit in excess of what it is going to cost, and can afford it, using a pro can be perfectly reasonable. Though take note that those are some pretty substantial pre-conditions; and without them then the answer to the question is not the same.
By Brad Thomason, CPA
As the result of all the news coverage about COVID, your average lay person probably knows more about the mechanics of immune responses and the vaccines that love them (or is it the other way around?) than was the case circa 2019.
When the immune system meets a new compound it says, “Ah, what’s this?” What makes a disease a bad disease is that in that moment of wide-eyed wonder, the virus or bacterium replicates fast enough to cause problems before it fully dawns on the immune system that the body is under attack.
This moment of pause is a significant event in all forms of interactive conflict. For instance, in boxing, the jab – that multi-tool of pugilism – is often used quite effectively to throw off your opponent’s timing, especially when he’s in the middle of a planned attack of a series of punches (i.e. a ‘combination’). When a guy is one movement into a choreographed set of, say, four strikes, and you unexpectedly bop him in the nose, it tends to break his concentration. As such, he may stop for just a second. That saves you from getting hit multiple times, at minimum; and maybe it lets you counter attack him instead and do some damage before he regains the presence of mind to block or move.
Nations do this sort of thing with submarines, cruise missiles, etc.
A moment of surprise followed by indecision can be a bad thing if you’re a white blood cell, a heavy-weight contender, or a convoy of military vehicles trying to be all sneaky back in the mountains or other boondocks.
Or a person trying to navigate retirement.
A vaccine lets the body get to have a look at the dangerous compound, work through the getting to know you bit – followed by decided dislike – and move on to the counter-act and defeat phase. Gives it a head start for later when an actual infection tries to make a run.
Much of our work is in the vein of talking about the kinds of decisions you will have to make as your retirement plays out, and highlighting some of the problems which frequently occur in typical cases.
Our work has little to do with saying what the future will hold, and everything to do with talking about possibilities in the hopes that if you get thrown a curve ball it will be a type that isn’t a total shock. If you’ve already thought about it before it happens, then you can at least consider how you might respond; and maybe even have prepared some defenses, too.
Protecting against a temporary moment of being frozen in place may not seem like much, but it may be enough. We’re trying to deal with a world where problems can’t be predicted or stopped but might be able to be dulled just enough if a sneak attack can be prevented. Which, in turn, may end up making a really big difference in how your future plays out.
By Brad Thomason, CPA
The Dow Jones Industrial Average is a price-weighted index, whereas the Standard & Poor’s 500 is a market-cap weighted index.
If, at this minute, you are thinking to yourself, “Bradley, why on Earth would I ever care about that?,” I’m about to tell you.
Not all indexes (or indices, if you prefer…) are calculated the same way. I’m not going to brutalize you with the whys and hows of the various methods. But just know that in a market-cap weighted index, the biggest, most valuable stocks exert the most power on the value of the index.
Which companies are now the big ones exerting extra pressure on the S&P 500? The big tech stocks.
Historically, are tech stocks more volatile or less volatile?
Tech stocks, for the last few decades have almost always been high-multiple stocks which are valued based on their growth potential, rather than the old-school book value/multiple-of-earnings type of process traditionally applied to companies working in the more tangible fields. That’s a valuation basis that inherently focuses more on what a company may become, as opposed to what it already is.
Which also inherently must leave the door open for the possibility that it will fail to fully attain that theoretical potential.
An abiding characteristic of high-multiple stocks is that in times of malaise and panic, their prices usually get hammered worse than your average ticker. Investors who are willing to push their shares higher in times of prosperity, seem to know that they are skating on thin ice, and usually head for the exits much more vigorously at the first little sounds of cracking.
A mini version of this happened just the other day, around Thanksgiving, when news about the Omicron variant started coming out. Nothing really changed in the economy. But the prospect of a new wave was a scary enough piece of speculation to trigger a low-grade sell-off. High multiples and bad news do not play well together. In that particular example the prices snapped back fairly quickly once the news was not so new. But in actual crashes, the timescale is much longer, even when the underlying mechanics are the same.
So what if you had a situation where, over time, a country’s highest multiple growth stocks sustained enough success that they eventually came to be that country’s largest market cap stocks, too? And the predominant stock market index for that country used a market-cap weighting…
It has been the case now for the past two or three years that the S&P 500 index has been dragged around disproportionately by the biggest components at the top of the list. Like the top fifty; and at times the top fifteen or twenty. The other 450 - 485 have had net behavior which was at times much different, but you wouldn’t know it just by looking at the index quote on the news. If you weren’t watching the individual pieces, you wouldn’t necessarily notice it.
Since the movement over that period has been up, up, up, you probably weren’t watching the pieces. The news from the market seemed to be unequivocally good, so why bother, right?
What, if anything, does all of that tell us about what the next stock market crash might look like?
Well, if the market gets spooked by some sort of sustained bad news, the first and most severe casualties are likely to be the ones with the highest speculative multiples in the first place. Since, at this moment in history, those stocks also happen to be many of the mega-caps, then they are going to have an out-sized impact on the resulting index measurements. They have to, based on the formula they use to get the index number.
In other words, our responsible (but somewhat inattentive) retirement saver may have put a bunch of money into index funds or ETFs, thinking that doing so was a boringly-conservative thing to do, only to find out that doing so at the present time instead had the effect of causing them to be over-weighted to the tech sector – currently at record high valuation levels.
Thought they were playing it safe and boring, but in actuality volunteered for concentrated exposure to the most highly-valued, volatile stocks in the land. Oops.
And maybe Ouch, too.
All because of some nerd math that you didn’t even know was something you had to worry about.
But now you do. So that’s at least a step in the right direction.
In a real crash, you really don’t want to be in stocks in the first place. Historically, about eight out of every ten stocks typically follow the major market moves, especially the downward ones. This next time it could go differently, though. Because of the excess “air” that’s in the really big stuff, the mid caps and small caps could have a different time of it, and maybe even fair pretty well.
But if all you have is index-denominated holdings, you may never feel that difference. The rapidly- deflating giants will be enough to sink the whole index, and your account balance, too.
By Brad Thomason, CPA
If you want to be wealthier in one year than you are today, mechanically, two basic requirements need to be met. First, earn a return. Second, don’t withdraw anything.
That’s it. If both of those conditions are met then in a year you will be wealthier than you are today (at least with respect to your investment portfolio, proper. I’m ignoring changes to debt levels, home value, business holdings, etc, for purposes of keeping this discussion simple).
Perhaps it seems like it should be more complicated than that. For some reason we tend to want things which are important to be the result of grand means and requirements. But in this case, it’s just those two things.
There’s nothing much to add. But it probably is worth an extra minute to dig a little bit deeper into what is there, such as it is. That’s often a good route to better understanding.
First, just take note of the fact that wealthier necessarily means more wealthy. So to set that up there had to be some wealth to begin with. Without some basic amount of wealth at the beginning, there’s no means for earning that return.
On the matter of withdrawals, to say don’t do any at all is admittedly sort of blunt-instrument-esque. If you earn ten and withdraw two you are still eight ahead, for instance. So we don’t actually, mathematically, have to have an absolute moratorium on withdrawals.
But if the goal is to get as much wealth growth as we can (for the level of risk incurred), then we don’t want to spend any of the return. I like to use the term ‘give your money a life of its own.’ This is what I mean by that.
If your investments earn returns, let them fuel future investments and future returns, and higher levels of growth. Don’t spend them on a fancy vacation or a new car you don’t need. That sort of thing.
Eventually, when you get to retirement, you will need to use that accumulated wealth to pay the bills. But inventing voluntary bills along the way works at cross purposes to that larger mission. Ultimately, I’m not saying don’t go on the vacation or buy the car, by the way, as much as I’m saying if you do spend those dollars, let them come from this year’s paychecks. Don’t raid your brokerage account to get them. Not if creating the best possible chance of a successful retirement is your goal.
So that’s it. Two things. Use your old money to make new money, and then send the new money out to earn some more new money of its own instead of spending it. Repeat year after year. Get ever-wealthier. Retire secure.
Older blogs (2015-2017)