Make a Plan on How to Handle Risk, Then Stick to It

Make a Plan on How to Handle Risk, Then Stick to It

By: Carl Richards I ski the backcountry a lot, so I pay close attention to reports of avalanches. In particular, I pay attention when a skier is caught and killed by one. This year alone there have been 20 avalanche fatalities in the United States. In January, there were nine fatalities in nine days. Very few avalanche accidents are completely random. It seems like many skiers get caught because they are ignorant of the danger. Or they knew about the danger, had a plan to stay safe and then didn’t follow those rules. I’ve heard and read many stories that go something like this: “When we left the car, we promised we wouldn’t ski that slope because we knew it was dangerous. But then we got up there, it was a beautiful day and there was a foot of fresh powder. We talked ourselves into doing it even though we knew we shouldn’t.” What I find so interesting about these avalanche anecdotes is how much they remind me of the way we treat risk, particularly in our financial lives. At the very least, there are two very important lessons we can learn. Risk doesn’t exist until you experience it. Planning not to ski a hazardous slope is not the same as standing on a foot of fresh powder and looking down the hill. When we’re investing, we do lifeboat drills to practice what we would do if we woke up one morning and our portfolio was down 30 percent. We play out these hypotheticals to discover the point when we would wave the white flag and sell. That’s not the...
Retiring? Consider These Three Things to Avoid Running Out of Money

Retiring? Consider These Three Things to Avoid Running Out of Money

By: Manisha Thakor The majority of Americans don’t think they are saving enough and are worried their savings won’t last as long as they do. Only 31 percent of workers who participate in an employer-sponsored retirement plan, such as a 401(k), 403(b) or 457, are “extremely confident” or “very confident” that they will not outlive their money — and the rest aren’t so sure, according to a new survey by BlackRock. If you’re worried, take these three steps to make sure you don’t run out of money in retirement: Be ready for inflation Prices have more than doubled in the last 30 years. As a new report from Wells Fargo Investment Institute points out: “Today, you need more than twice the number of dollars you would have needed in 1985 to buy the same amount of goods and services — despite relatively modest inflation during that time.” Read More: Women Save More Than Men Before Retirement Historically, U.S. consumers have seen price increases of about 3 percent a year. Using that figure as your guide, plan on having double the amount of money you have today to maintain the same standard of living in 20 years. Check out the impact of inflation on your retirement with Bankrate’s online retirement calculator. Continue investing in stocks Even in retirement, the potential return from stocks over time is more likely to outpace inflation when compared to the long-term returns from cash or bonds, according to the Wells Fargo report. Some experts say you should have 40 percent or more of your portfolio in stocks during retirement. Read More: Thinking About a Retirement...
Don’t Buy Winners

Don’t Buy Winners

By: Larry Swedroe For almost five decades, the literature on the investment performance of mutual funds has found that very few managers possess sufficient stock-picking or market-timing talent to allow them to consistently and reliably produce positive risk-adjusted performance after considering their fees. In other words, there’s little to no evidence of outperformance beyond the randomly expected. As my co-author Andrew Berkin and I discuss in our book, “The Incredible Shrinking Alpha,” while perhaps disheartening, this result shouldn’t be surprising given the very high skill level of active managers competing fiercely in a zero-sum game, even before expenses. Thus, investors shouldn’t expect there to be many opportunities for a free lunch. In addition, because we should expect the scarce resource to earn any “excess returns” that occur (and the ability to generate alpha is far more scarce than investment capital), it is naive to expect that mutual fund managers won’t charge sufficient fees or attract a sufficiently large amount of assets to effectively capture any alpha they generate. Said another way, investors should not expect to be the beneficiaries of the manager’s skill. Despite the large body of evidence demonstrating that it’s a loser’s game (one that, while possible to win, has odds so poor that it’s not prudent to try), the most common strategy used by both institutional (such as pension plans and endowments) and individual investors to select a fund manager involves hiring outperforming managers and firing underperforming ones. Buying The Winners Bradford Cornell, Jason Hsu and David Nanigian contribute to the literature on this strategy with their February 2016 study, “The Harm in Selecting Funds That...
Boring Advice, Better Expected Returns

Boring Advice, Better Expected Returns

By: Dan Solin The financial media went into overdrive hyping the sharp decline that the market experienced at the beginning of 2016. Much less has been made of the recovery of the S&P 500 Index, which closed on March 2 with an unremarkable 2.81 percent loss for the year. Good news doesn’t sell. Bad news creates fear and anxiety, which generates commissions and fees for the securities industry. Ignore short-term data The emphasis on short-term results is harmful to your returns. The securities industry and talking heads love to speculate about the future of the global markets. I have yet to find credible evidence that they have the expertise to predict what the markets will do next reliably and consistently. One area of constant chatter is whether investors should globally diversify their holdings or focus on U.S. stocks. It’s easy to make the case for U.S. stocks. From Jan. 1, 2010 through Feb. 29, 2016, the S&P 500 Index returned a stellar 11.66 percent. The MSCI World ex USA Index returned only 2.26 percent and the MSCI Emerging Markets Index lost 2.28 percent. Diversify globally Before you succumb to the temptation to limit your investments to U.S. stocks, here are some issues to consider: Almost half of the world’s market capitalization is represented by non-U.S. stocks. There are 10,000 foreign stocks from 40 different countries. A properly diversified portfolio should include these equities. While the recent performance of foreign markets has been disappointing, over the long term, globally diversified investors have benefitted. For the period from January 2000 to December 2009 (often called the “lost decade” for U.S. stocks),...
Life Insurance Made Easy

Life Insurance Made Easy

By: Carl Richards As soon as somebody depends on you financially, you need life insurance. Most of us know this, but for some pretty good reasons, we don’t really want to think about it. To start, someone has to die for life insurance to be of use. Also, buying a policy means putting a price on the life of someone we love. That’s all complicated, messy, emotional stuff. So we’re stuck lying in bed thinking about this dilemma: We know we need the insurance, but it’s the last thing we want to think about. So let me get to the point here and just give one very simple way to check life insurance off you mental checklist. My goal is to give you a “good enough” plan that you’ll actually take action on, rather than spending time in the pursuit of the “perfect” plan you will never find. We want you to sleep at night, and this good enough plan will do that. Step 1: Take your salary and multiply it by 20. First, you have to decide how much life insurance to buy. This is where most people get stuck. You’re not going to get stuck. Just take your income and multiple it by 20. For example, let’s say your income is $50,000. Take $50,000 times 20 and you get $1 million. This is the amount of life insurance coverage you’ll buy. This goes a long way toward replacing the economic loss that will result if you’re no longer around. Step 2: Buy a 20-year term policy for that amount. Term life insurance is the cheapest policy you...
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