Do Your Future Self a Favor
By Brad Thomason, CPA
Jiu Jitsu is a Japanese martial art which is essentially a form of wrestling. Most cultures around the world developed their own styles of wrestling, and this particular one developed alongside Judo, and in response to the proposition of an unarmed peasant having to take on an armed samurai wearing armor. That’s the legend, anyway.
Obviously such a match-up would not be a very fair fight. But the result of trying to figure out how to deal with this problem was a surprisingly complex set of maneuvers which exploit bio mechanics (elbows only bend one way, for instance), off-balancing your opponent, and generally trying to use physics and forethought to create an advantage where normally you would have no hope at all of winning. It has become a huge international sport, and has wide appeal to people looking for physical activity that is both vigorous and has to be thought about pretty deeply, too. Many have referred to it as whole-body chess.
As you might imagine, if you are up against an experienced opponent, you can find yourself in some truly awful positions. A lot of the training comes down to learning what these positions are, how to do them to other people, and what to do about it if you find yourself on the receiving end.
A significant portion of the advice about how to deal with a bad position comes down to ‘don’t get yourself in that position in the first place.’ Which is about the most unhelpful advice in the world if you are in fact already there. Yet it happens to be good advice: prevention really does trump cure in a lot of those situations. If you watch the best guys on the mat for a while, you come to realize that what makes them so good is their ability to stay out of trouble to begin with.
Serious discussions about retirement usually take place among people who are at least fifty, and often older. The reasons are plain enough. Even if you know that retirement is out there in the future, the needs of a growing career and maybe a growing family too, are what soak up virtually all of the attention span when you are younger.
But as folks get closer to actually having to retire, they naturally start to think about it more. They get more interested in making sure to take the steps they need to take, and become more and more preoccupied with whether or not they have the bases covered.
It turns out that even if most of the heavy lifting gets done after fifty, what you do as a younger person sets the stage for how tough the job is when you are older. Below I’ve listed four things that a person can do to keep their future self from having to work too hard to get out of a bad spot:
1. Be capital efficient. Pay attention to when it is time to sell and reinvest. Make sure that interest checks and dividend payments don’t just lie around doing nothing. Turn them into investment capital; that’s what makes compounding happen, and as we all know, compounding is the heart of the secret sauce.
2. Be proactive about setting the stage for future income streams. That could be by way of a job with an old-fashioned pension plan, or getting some rental houses that the tenants can spend the next 15 years or so paying the debt down on, or even something in the farming or forestry realm like a stand of pine trees (a favorite here in Alabama) or something similar. Having ongoing income after you no longer receive a paycheck, even if it only covers a modest portion of your ultimate retirement withdrawal needs, can count for a lot more than you might think from a casual glance.
3. Have good outcomes when you risk capital in pursuit of a return. Admittedly, there’s luck involved with this one. Then again, the prudent tend to have better luck than the imprudent. If the market rewards you for your risk, and your own sense of caution keeps you from taking on goofy risks, the net effect will be that the you of tomorrow has more resources available to make everything work out.
4. Front load your savings. In order for you to benefit as much as possible from a long compounding period, you not only have to start early, you have to have enough capital for it to make a difference. The great thing about retirement savings is that both time and capital act as force multipliers. But you have to have some force to multiply in the first place. Saving a bigger portion of your earnings in the early years, so that your balances can reach significant sums while there’s still a lot of time left on the clock for compounding to work, is one of the most sure-fire retirement tactics out there.
As you get older the focus shifts from growing the size of your nest egg, to protecting what you already have. The shift to lower risk assets in most instances means that overall return levels are going to come down too, later in life.
When a person can do one or more of the things listed above when they are young, it puts the future self in a much better place to be able to accept these lower return levels that are common to the less risky asset classes.
Even if you no longer think of yourself as being all that young, there are probably still things which you can do today that will make tomorrow a little easier. This is especially true if you are still working, or could be working - even to some degree - if you wanted to be.
Fighting out of a bad position is something that some folks just have to do. It’s unfortunate, but it happens. That’s why it’s important to spend some time looking at how to not get all the way into the bad position in the first place. Even if it ends up happening to someone, maybe that someone doesn’t have to be you. Starting sooner is better when it comes to prevention. But even if things have already started to progress in the negative direction, there may still be things you can do to contain the damage and keep the situation from getting worse.
If you think about it, all of us make decisions everyday on behalf of the person we are going to become next week, next month, next year. Makes a lot of sense to help them – us – out, if possible. At the very least, we don’t want to make it harder for our future selves than it has to be. Either way, being aware that what we do in the present has impacts out into the future is the first step. But only the first step. Since it is beyond our power to keep the present from becoming the future anyway, ideally we should use the event to our advantage.
By Brad Thomason, CPA
The S&P 500 just closed up 28% for the year of 2019. Which is a big number, and an accurate number.
But is it a misleading number?
A big part of the reason that 2019 looks so good, is because 2018 finished the year basically at the bottom of a pretty sizeable dip. So the recovery of that dip boosted the results for 2019.
How much so? Well, let’s put it this way. While the 12-month result was 28%, the 15-month result was around 10.5%. Same stock market. Same impact on any holdings you had going into the Q4 2018 dip. Now, to be sure, 10.5% is still a healthy increase. But it certainly isn’t the same as the 12-month number.
The 24-month annualized average shows an even more tame picture, by the way: about 7%, compounded for both years.
Part of the problem with trying to interpret statistical information about outside events is that it is not always clear what the implications are for your portfolio. For instance, if you had two investors, one of whom was fully invested 24 months ago (a typical scenario for a retiree) versus someone who started their investing career on 1/1/2019, you would have vastly different results from the exact same market.
So part of the challenge of answering the question ‘how does this affect me?’ is tied to all of the particularities of your individual story.
External measurements mean different things for different people; and even different things depending on how many weeks or months you include in the measurement picture. That’s a lot of non-specificity, you know?
When looking for more solid ground, one approach is to focus more on internal measurements than the external ones.
You know how much your current investment balances are.
You know how you have your capital allocated among the various asset classes.
You know what percentage of your investments could be affected by a major downturn in a particular market or some other sort of loss.
You know more or less how much you are going to need to spend for planned items in a typical year.
These are the elements which form the backbone of both a current assessment, and the basis for future plans.
Moreover, there are important principles which don’t change at all, whether the market is going up, going down, or doing nothing at all. These include the understanding that when the retirement period starts, the job of the portfolio changes from growing, to providing a source for income withdrawals. Another one? The understanding that the risk level needs to come down as you age, and that the way that happens mechanically is by reallocating balances, or depleting higher risk pools of money ahead of lower risk pools (and in most real-world cases, likely some combination of the two).
When the stock market has a nice run, and you end up with more money than you had in the past, that’s a good thing. For sure, it is. Great to experience, and fun to talk about.
But don’t let that distract you from the more enduring aspects of what’s important. You won’t find them listed in the Wall Street Journal. Instead, you already have that information at your finger tips – or if you don’t you certainly know how to get to it. That’s the stuff you should be paying the most attention to as you plan, act, monitor and adjust your finances in the service of getting an eventual win in the retirement game.
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