It’s a scary feeling when you retire and cut the cord from your full-time job. I stared at our brokerage statements and realized my new job was investment manager. I had to make our money last so we could enjoy the rest of our lives.
Several friends had recently rolled their 401k into self-directed accounts, and we discussed our feelings. My friend Pete said it best, “If you are not a little bit scared, you don’t understand the problem!”
I was confident in my investing skills and had done well in building our nest egg. Like most investors, I learned some expensive lessons along the way. Once retired, things changed overnight. In the past when I took a loss, I had my job and the benefit of time as my security blanket. With that security blanket removed, risk tolerance, confidence, and the emotional reaction to taking losses all changed.
My stockbroker invited me to an event. The president of their bond department was conducting a class on bond basics. His credentials were impressive, so I signed up.
He did a good job of covering the basics, bond ratings, explaining different types of bonds and associated risks of default.
I quickly realized this was a sales pitch disguised as an educational workshop. He said things like, “Our bond experts can custom tailor a group of individual bonds to suit every investor’s needs. We have a perfect track record, our clients have never lost money.” I would hope not! If you pick top-rated bonds with a low chance of default, you shouldn’t lose money.
When it came time for questions, I asked about inflation. He frowned and said inflation is not really a problem. If you are concerned, they will build a portfolio that does not go out more than ten years. I did not respond. Sure, I want yield plus safety from default, but I need to protect the buying power of our nest egg also. No one knows what inflation will be next year, much less 5-10 years from now.
At the end of the workshop, retirees rushed forward to get in line to sign up. I’m sure he generated a great deal of additional business. Those who invested probably did well as inflation has been under control.
My concern was basic. Sure, investing in bonds is one element of a diversified portfolio. Wouldn’t an investor that truly understands all the risks be better off? Knowing all the risks will factor into the decision of how much money you want to invest in that sector.
I had a similar experience at a broker’s “educational workshop” about a new computer tool for portfolio management. Basically, you feed all your financial information into their company computer and out pops a report showing how you should allocate your investments. Of course, the recommended investments are dominated by their company-sponsored mutual funds.
The speaker said something like, “The computer program is based on many years of historical market data; similar to what the big-boy programmed traders are using. The computer tells you when and what to buy, and when to sell. It’s that easy!” He went on to tout the safety because of the computer program and wide diversification of investments. They actually had an option where the computer would initiate buy and sell orders for you.
One participant asked about a major market crash taking down all stocks. The response was something like, “The market always comes back and that is factored into the computer program.” I didn’t bother to ask about stop-losses, gold or inflation.
Once again, I am sure that many investors have done well investing this way. Why do I suspect the underlying purpose of the “educational seminar” was to entice investors to invest as much money as possible in their company-sponsored mutual funds so they could earn handsome fees?
In both cases, I believe the information presented was 100% factual. I’m sure their lawyers have been through their presentations with a fine-toothed comb. It’s what’s left out that can hurt you.
What is the big challenge?
| Where can an individual investor become educated – with all the facts, pro’s and con’s; without feeling pressured to buy some type investment products? |
I Googled “retirement investing” and the first six listings that popped up were from firms that sold investment products or managed other people’s money.
I’m sure these firms are reputable and staffed with well-educated, licensed, qualified investment professionals. Many employ Certified Financial Planners (CFP) who are required to adhere to the Fiduciary Responsibility to their clients. In layman’s terms, they are required to put the clients’ needs ahead of their own.
I know many CFP’s that fit that mold. They have a sincere and genuine concern for their clients, and their integrity is beyond question. They surround themselves with qualified experts on estate planning, insurance products, wills and trusts so they can focus on the big picture for their clients. Experienced experts, who are up to date on the current laws and regulations, and are working with these issues on a daily basis, would be an excellent place to go for education.
| Investors may want to delegate some money management responsibility to licensed professionals, but NEVER, EVER abdicate that responsibility. I sure as hell don’t want to abdicate that responsibility to a computer! |
Education is the individual investor’s responsibility. If your advisor loses a major portion of your life savings, they lose a client; your comfortable retirement may go up in smoke! You must understand investments and work closely with your advisor.
Here are some considerations.
Education is a continuous process. Remember the old saying, “If you read one book a month on a subject, within two years you will be a world expert.” If you spend 15-30 minutes per day reading about money management, you will be well ahead of the game from both a knowledge and confidence perspective. If you have to, record your favorite TV shows and fast-forward through all the commercials. There is something like 12-15 minutes of advertising on each hour show, you can easily free up plenty of time.
Look for educational sources that do not sell investment products. Our mission at Miller, On The Money, is education. We don’t sell investment products or manage other people’s money, nor do we recommend anyone that does.
I had one reader ask if, “I had all the answers?” I told him, “No, but I sure can help you with necessary questions to help you gather the facts and find your answers.”
The more unbiased sources you can find, the better. Get several opinions on the same subject and then decide what you feel makes the most sense.
No question is a dumb question. After a workshop, I had a friend ask me a question. I asked why he didn’t ask the speaker. His response, “I didn’t want to look dumb!” There is no dumb question. You are responsible for making your life savings last so you and your spouse can enjoy your golden years. Ask away, there are probably many others who have the same question.
If you subscribe to investment newsletters, don’t be shy about dropping the editor a note. Many questions from readers have caused me to research and publish articles because I realized a lot of readers probably have similar concerns.
Don’t be bullied or put down. In both workshops, questions were asked and the speaker minimized the participant’s concern. “Don’t worry about it” is an unacceptable answer! The response might shut down the question, but the person who asked will still worry. The questions were about potential risks, probabilities, and consequences, which must be understood.
Some readers have told me they had some intense discussions with their financial advisor after reading some of our free weekly articles. That’s a good thing for all concerned.
The two most common issues are stop-losses and real inflation protection. Readers were concerned about not only preservation of capital, but also about preservation of buying power. In one case, a reader took an article to his advisor and asked him to read it.
I am a strong believer in working with a qualified, licensed professional. Remember, they work for YOU. Part of their job is to educate you in terms you can easily understand.
If protecting against catastrophic losses is your highest priority, they must design a portfolio to meet YOUR needs. Your fears are real! Educate yourself, listen to them as a trusted, educated source, weigh all the input and decide what YOU feel is best.
I saved the best for last…
If you are feeling pressured – stop! I once teased a mentor about being “sold” an investment. He responded, “I was not SOLD a darn thing, I chose to buy.” That was followed by a learning session where he explained the seller provided facts. Then he thought things through logically and made his decision.
The best response under pressure is, “I need some time to think about it.” If the other party continues to pressure you, they have confirmed your feelings; you need time to think things over.
Self-education is a challenge. Once you accept the job and realize it is a continuous process, you will come to enjoy it. You will soon become more comfortable if you are a do-it-yourself investor or dealing with financial professionals. Don’t be surprised if, after a couple of years, people start asking you to help them understand things.
And Finally…
“If you always protect your offspring in a cocoon they will never learn how to fly…”
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Until next time…
Dennis
www.MillerOnTheMoney.com
