Truth #1-Past performance is no guarantee of future results.
Truth #2-The definition of insanity is doing the same thing over & over, and expecting a different result.
Are these two truths a paradox, or is one (or both) simply untrue? The answer is largely in the semantics, as is often the case. Although past performance does not guarantee future results, doing the same thing repeatedly rarely generates different results (most other things equal).
Once I was discussing personal finance with a friend who questioned the benefits of setting money aside for the future with "what if you die early?" To which I sharply responded, "what if you don't?!" As I have discussed before, "what if" can be a precarious game that portends mistakes.
The drivers of personal finance are uncertainty and probabilities. Over time, stocks generally return better performance than bonds or cash equivalents. Likewise, human generally live 80 years. Neither generality ensures that stocks will outperform bonds and cash in any given year any more than it can ensure survival through the year. Regardless, if stocks outperform bonds and cash seven of every 10 years with higher average annual performance for each period, then expecting stocks to outperform bonds and cash over the long run is highly reasonable (the opposite of insanity).
Even when expectations change, it is generally best to stay the course, at least until the changes become more certain. Several years ago, I was talking to a friend about an obligatory market recession because the bull run had been going for so long. She referred me to a source, citing that the man had been projecting this downturn for the past five years, to which I quipped "So, he has been wrong for the past five years." She quickly defended him, before realizing what I had said was in fact true. That bull market has continued fairly strongly through today as the Dow Jones has 30,000 on the horizon.
Until domestic stocks prove to be unreliable performers, they are the best foundation of a growth portfolio for the next 10 year or more. Perhaps decades from now, international stocks will have proven to outperform domestic stocks significantly more often than not, in which case they may become a better foundation for growth portfolios. But projecting that shift today and shorting domestic stocks as a result has not been a reasonable strategy.
Saturday, February 22, 2020
Monday, February 10, 2020
The Full Motley -- 1Q, 2020
Another anniversary entry today, starting my 11th year of financial blogging. In that time, I have gone from the recordkeeping department of a finance company to community college for a Paralegal Studies Program into work at a small bankruptcy firm to the legal department of a finance company. During this time, I have been contributing to my Roth IRA and my 401(k) accounts when available (too bad I missed out on that misunderstood myRA by a few months).
There were a couple years though that I did not max out my Roth IRA. Honestly, I did not even contribute to my Roth IRA for that year I was in school. Why? Due to those personal circumstances.
I have been of the mindset lately that financial bloggers need to put more emphasis on the “personal” in personal finance. It is misleading to promote personal finance as a series of rules to follow. Those rules are guidelines or self-discipline, adjustable to circumstances. I have been fortunate enough to max out my Roth IRA for many years, but when financial bloggers say to “max out your IRA,” people think “I cannot reach the max, so that advice won’t do any good.” The end result is a step in the wrong direction. Contributing half of the maximum amount would still be progress in the right direction (with the ultimate destination being financial security). I would love to hear that advice worded as “Contribute to your Roth IRA, maxing it out when you can.” That advice not only supports starting with smaller amounts, but even places that as an expected starting place. It is rare that someone has the financial freedom to adjust their finances immediately. Most have to not only learn good habits but also break their bad habits, and those steps may not happen concurrently.
My quarterly reallocations are almost always moving small percentages. This move saw about 0.7% of the account moving into domestic bonds and international equities, taken predominantly from the domestic equities and a sliver from international bonds. Although it was less than 1% of the account balance, the dollar amount equating 1% has risen significantly over the past 11 years because the account balance has almost tripled since April 30, 2011. There have been no new contributions since that time, and recently, I even learned that my employer put more money into this account than I did. The amount I set aside was not even a large amount (about the sum of my annual income when I was first hired there). Regardless, this account is currently the single largest portfolio of my net worth today.
Patience is a virtue, and patience pays, especially in the stock market. I have my own first hand testament to it, but I read an interview with John Hancock’s Retirement Plan Services CEO Patrick Murphy recently, and I wanted to share it because it is another voice saying what I have for years. His words rang more powerful to me, in large part through his current position and dismal early-life circumstances. (The following comes from Emily Laermer and some of his responses were edited for brevity and clarity by Ignites.)
Q: How did you get into the industry?
I got into this business not to help people accumulate wealth, but to help people avoid becoming poor.
I’m one of six kids. My parents got divorced when I was young, and then my dad died. He left us no life insurance, no savings, no nothing. My mom was left with six kids, and we had to figure out how to fend for ourselves. And we lived on welfare for a long time.
Fast forward, I muddle my way through high school, I get the opportunity to play college football and get an education. And then I took an economics class, and I learned about financial services. And I realized that what happened to my family never has to happen to anybody. It’s tragic enough to lose a parent and a bread-winner, but then to be plunged into poverty because of a lack of planning? That was a big, "aha!" moment for me.
I’m a big believer in the power of financial security. You can break the cycle of poverty by helping people acquire the skills and the habits.
Q: How do you get investors to actually start saving money?
Sometimes I tell them my story. I’m living proof that this stuff actually works — and it works well.
I started saving when I was 22 years old. It’s a real basic formula. Everybody’s trying to figure out how to time the market and how to outsmart the system. It’s not really that complex. I tell them to start early, save as much as they can and then increase over time. Then, just invest wisely.
Q: What plan design features tend to work best?
I’m a big believer in auto features. It’s not that people are stupid; people are nervous and stressed. That creates inaction.
If we can just auto enroll them and auto escalate them, and provide auto advice, then people eventually start to really engage. Then they get confidence, and then they start to learn more, and then they become more proficient. But trying to do all that up front is hard.
Q: You’ve been in the industry for over 30 years. What change has had the biggest impact?
Technology. Previously, it was really people-intensive labor to provide the kinds of services to participants that we can provide now. Now, it’s easy, scalable and cost effective to provide the level of real personalized service that was so expensive and cumbersome 30 years ago.
Now you can provide a better experience for the customer with greater levels of compliance. And quality and accuracy are more cost-effective. We can actually serve more people in a higher-quality way and run a profitable business at the same time.
Q: What trends will most impact the industry in the next decade?
The HSA market is really interesting. Health care is a big competing cost for companies and for employees, as it relates to what prevents them from saving for retirement.
HSAs are a way to invest for future health care costs. A lot of people today use them as a pass-through to pay for current-year medical expenses. But they are also a really powerful tool to help address a growing need in retirement.
What people forget is that their medical expenses might not be that high when they first retire, but their leisure expenses will be really high. And then later, that kind of flips. So they don’t really travel as much, but their health care expenses increase.
Q: What is the biggest challenge facing the retirement industry?
It’s helping customers understand the value that we provide. We’re in an era of fee compression, where everybody wants the lowest-cost thing. And everybody’s like, "Cheaper is better."
Cheaper is not better.
What adds value is helping customers understand the value that we provide to them.
Contact the reporter on this story at elaermer@ignites.com or (212) 542-1226.
Link:https://www.ignites.com/c/2635223/319293/living_proof_that_this_stuff_actually_works_hancock_retirement_chief
There were a couple years though that I did not max out my Roth IRA. Honestly, I did not even contribute to my Roth IRA for that year I was in school. Why? Due to those personal circumstances.
I have been of the mindset lately that financial bloggers need to put more emphasis on the “personal” in personal finance. It is misleading to promote personal finance as a series of rules to follow. Those rules are guidelines or self-discipline, adjustable to circumstances. I have been fortunate enough to max out my Roth IRA for many years, but when financial bloggers say to “max out your IRA,” people think “I cannot reach the max, so that advice won’t do any good.” The end result is a step in the wrong direction. Contributing half of the maximum amount would still be progress in the right direction (with the ultimate destination being financial security). I would love to hear that advice worded as “Contribute to your Roth IRA, maxing it out when you can.” That advice not only supports starting with smaller amounts, but even places that as an expected starting place. It is rare that someone has the financial freedom to adjust their finances immediately. Most have to not only learn good habits but also break their bad habits, and those steps may not happen concurrently.
My quarterly reallocations are almost always moving small percentages. This move saw about 0.7% of the account moving into domestic bonds and international equities, taken predominantly from the domestic equities and a sliver from international bonds. Although it was less than 1% of the account balance, the dollar amount equating 1% has risen significantly over the past 11 years because the account balance has almost tripled since April 30, 2011. There have been no new contributions since that time, and recently, I even learned that my employer put more money into this account than I did. The amount I set aside was not even a large amount (about the sum of my annual income when I was first hired there). Regardless, this account is currently the single largest portfolio of my net worth today.
Patience is a virtue, and patience pays, especially in the stock market. I have my own first hand testament to it, but I read an interview with John Hancock’s Retirement Plan Services CEO Patrick Murphy recently, and I wanted to share it because it is another voice saying what I have for years. His words rang more powerful to me, in large part through his current position and dismal early-life circumstances. (The following comes from Emily Laermer and some of his responses were edited for brevity and clarity by Ignites.)
Q: How did you get into the industry?
I got into this business not to help people accumulate wealth, but to help people avoid becoming poor.
I’m one of six kids. My parents got divorced when I was young, and then my dad died. He left us no life insurance, no savings, no nothing. My mom was left with six kids, and we had to figure out how to fend for ourselves. And we lived on welfare for a long time.
Fast forward, I muddle my way through high school, I get the opportunity to play college football and get an education. And then I took an economics class, and I learned about financial services. And I realized that what happened to my family never has to happen to anybody. It’s tragic enough to lose a parent and a bread-winner, but then to be plunged into poverty because of a lack of planning? That was a big, "aha!" moment for me.
I’m a big believer in the power of financial security. You can break the cycle of poverty by helping people acquire the skills and the habits.
Q: How do you get investors to actually start saving money?
Sometimes I tell them my story. I’m living proof that this stuff actually works — and it works well.
I started saving when I was 22 years old. It’s a real basic formula. Everybody’s trying to figure out how to time the market and how to outsmart the system. It’s not really that complex. I tell them to start early, save as much as they can and then increase over time. Then, just invest wisely.
Q: What plan design features tend to work best?
I’m a big believer in auto features. It’s not that people are stupid; people are nervous and stressed. That creates inaction.
If we can just auto enroll them and auto escalate them, and provide auto advice, then people eventually start to really engage. Then they get confidence, and then they start to learn more, and then they become more proficient. But trying to do all that up front is hard.
Q: You’ve been in the industry for over 30 years. What change has had the biggest impact?
Technology. Previously, it was really people-intensive labor to provide the kinds of services to participants that we can provide now. Now, it’s easy, scalable and cost effective to provide the level of real personalized service that was so expensive and cumbersome 30 years ago.
Now you can provide a better experience for the customer with greater levels of compliance. And quality and accuracy are more cost-effective. We can actually serve more people in a higher-quality way and run a profitable business at the same time.
Q: What trends will most impact the industry in the next decade?
The HSA market is really interesting. Health care is a big competing cost for companies and for employees, as it relates to what prevents them from saving for retirement.
HSAs are a way to invest for future health care costs. A lot of people today use them as a pass-through to pay for current-year medical expenses. But they are also a really powerful tool to help address a growing need in retirement.
What people forget is that their medical expenses might not be that high when they first retire, but their leisure expenses will be really high. And then later, that kind of flips. So they don’t really travel as much, but their health care expenses increase.
Q: What is the biggest challenge facing the retirement industry?
It’s helping customers understand the value that we provide. We’re in an era of fee compression, where everybody wants the lowest-cost thing. And everybody’s like, "Cheaper is better."
Cheaper is not better.
What adds value is helping customers understand the value that we provide to them.
Contact the reporter on this story at elaermer@ignites.com or (212) 542-1226.
Link:https://www.ignites.com/c/2635223/319293/living_proof_that_this_stuff_actually_works_hancock_retirement_chief
Subscribe to:
Posts (Atom)