Category : investing

401k Management Requires Dissection

What Do an Appendectomy and 401k Management Have in Common?

Picture this. You start to feel a dull sense of pain around your belly button that shifts to your lower right abdomen. Within just a few hours the dull pain has escalated to a sharp pain that can no longer be ignored. When you move, the pain gets excruciating and if by chance you need to cough or sneeze – you’d better be gripping onto something!

At this point, you realize you need to get your butt to the ER. After what seems like a million bumps in the road on the way to the hospital, you check yourself into the ER. The ER doctor then begins the examination. After just a few moments of probing your lower abdomen — she is confident that you have appendicitis.

The doctor explains that if appendicitis is not treated quickly, the appendix can rupture. When that happens, it releases bacteria into the abdomen and potentially leads to other, life-threatening infections.

Because of this danger she explains, appendicitis is considered a medical emergency. It typically needs to be removed within 24 hours of the condition being diagnosed. Given the amount of pain you’re are in, surgery sounds like the least of your worries. So, you tell her, “Let’s do it! Get this thing out of me. Nobody even knows what the heck an appendix does anyway!”

Then comes a response that you were not at all expecting. Instead of starting the process to prep you for the appendectomy, she instead asks you just about the …

Strangest Question You Would Expect a Doctor to Ever Ask

“I would love to perform this appendectomy, but before we can proceed, I need to know how much you have saved for your retirement?”

You are thinking … WTF!  What in the world does my retirement saving have to do with this emergency surgery? But given how much pain you are in, you will answer just about any question if it means getting you closer to the pain meds.

“I have about $70,000 saved up in my 401k,” you answer proudly. Still, you hadn’t seen the 401k management questions in the admittance form. What’s this about?

Her reply leaves you totally dumbfounded. “That is great but, unfortunately, you don’t have enough saved for ME to perform the appendectomy you badly need.”

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Eggs Need Diversification Beyond One Basket

Why Diversification Matters in 401k Management

“In the world of investing nothing is as dependable as cycles” – Howard Marks, Oaktree Capital chairman

We want to illustrate the randomness of markets and why diversifying is a good idea.

We put together the following chart to do just that. It shows the performance of several of the major asset classes over the last 10 calendar years updated through 12/31/2016.

Diversification - Asset Category Performance

A Few Things About Diversification Jump Out

While US markets have rebounded strongly since the global financial crisis in 2007-2008, international markets have lagged for the most part. Unfortunately, this is causing a lot of investors to abandon their international funds or avoid them altogether. If we extended this chart back a few years further, the opposite would have been true. Another reminder that markets are cyclical. Nothing new to see here.

Poor commodities. They had their first positive year of the past six years in 2016. Even after that gain, the asset class is down around 50% since the beginning of 2011. Commodities still have a place in a diversified portfolio, but if you have been banking on the return of the gold standard, you have likely been disappointed.

Looking only at this chart, bonds seem to be a dependable source of a decent return. However, like all history, context is everything. We’ve seen a 30-plus year bull market in bonds where the 10-year treasury yield went from over 15% in the early 1980’s to around 2.5% at the end of 2016. Falling interest rates are a positive for bond prices, but they can only fall so far. The next decade will likely look different for bonds.

The Diversification Chart Teaches Valuable Investing Lessons

First, there will be up years and down years. Chasing the best performing asset class of the previous year won’t yield great results. Oftentimes, the top performing asset class one year will be near the bottom of the pack the next year, and vice versa. Other times, an asset class’ relative performance will persist (see: commodities from 2011-2015 or US large cap from 2013-2016). The point is, the future is unknowable.

If you’re relying on your (or anyone else’s) ability to time the market, you’re doing it wrong.

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Sir Isaac Newton…astronomer, mathematician, physicist…and super crappy investor.

Newton made a huge impact in the 1700’s with his contributions on the Law of Motion, gravitation and inventor of the first reflecting telescope. Stay with us here…he was also a fellow of Trinity College, a member of Parliament, and was knighted by the Queen in 1705.

By all accounts, the man was a freaking genius.

But, Boy Oh Boy, Did He Suck at Investing.

Think about that? How is it even possible that a person this smart could be bad at investing? Simple. And here is the story:

Enter the South Sea Company. This was a company that was established in the early 18th Century. In exchange for assuming England’s war debt, the company was granted a monopoly on trade in the South Seas.

Bingo. Investors loved this. They smelled a huge money making opportunity.

Sir Isaac Newton was no different than any other investor. He too had been charmed into purchasing shares of the South Sea Company and by 1720 after seeing the stock rise rapidly without reason at a fever pitch he rationalized, “I can calculate the movement of stars, but not the madness of men.” So, he cashed out. And profited big time from his investment.

Then he watched as the stock continued to soar THREE times higher than when he sold his shares. We can only imagine the regret he was feeling. As evidence, he went on to repurchase South Sea Company. Only this time he was buying it THREE times higher than when he last sold it.

Briefly, the stock continued to rise. We’re sure Newton was feeling wonderful about his decision. And then things started to go awry. The stock peaked weeks later and then cratered. Newton ended up losing £20,000 (nearly his life savings) which in today’s dollars equates to roughly $3,000,000.

Let That Sink In. Astronomer. Mathematician. Physicist. And….Broke.

Newton, a genius by all accounts, couldn’t pull off investing without letting his emotions get the best of him. Where does this leave you?

Simple. You need to find a professional that can help you navigate the emotional ups and downs of investing. We don’t care where you get help, just get help! Many traditional advisors have $1,000,000 account minimums before they’ll talk to you. Luckily for our clients, we don’t have a minimum and we focus on the ever confusing 401k that you might have set on “auto-pilot”.

Look, this isn’t about your IQ score. 1000s of folks using blooom are super smart people – doctors, teachers, fireman…shoot, we even have financial advisors using blooom for their own accounts! Yes, they are all smart. BUT they’ve come to the realization that it’s best to have someone hold your hand through the inevitable ups and downs you will see as an investor.

Don’t let your investing experience become a history lesson for someone else.

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Hamburger Helper Really Helped Me

For the past 30 years – pretty much all of my adult life – I have been a planner and a worrier.  I am the type of person that starts packing two weeks before a big vacation.  I am the type of person that starts putting a Thanksgiving grocery list together in OCTOBER.  It isn’t that I plan to worry, I just worry if I don’t plan.  These traits are deeply embedded in the genetic code of my family going back multiple generations.  At times it can be a good thing to keep me on track, but often it can be overwhelming and take up too much of my day.  If I get this worked up prior to a beach vacation or family holiday, you can only imagine how I feel when it comes to retirement planning.

One of my biggest fears in life is running out of money in retirement.  The idea of working in my 70s and becoming a burden on my kids has caused me to lie awake at 3AM more than a few times.  I know how hard retirement planning is going to be for today’s youth so I do not want to add taking care of mom and dad to their plate.  Now I am not just worrying about my own retirement, but the retirement of my children 50+ years away.

How have I learned to deal with this and prevent what is left of my hair from falling out?  By identifying which factors I have control over versus the factors I do not.  I have no control what the market is doing, at what age I die (outside of eating less Kansas City BBQ…not happening), or what the federal tax code is going to look like in 20 years.  What I can control is my savings rate, which funds to invest in, and doing my best to eliminate debt.

I was lucky growing up that my dad was also a planner/worrier, and he taught me at a young age to save and then save some more.  He worked for the same large company for 33 years, working long hours, often travelling more than he was home, and missing valuable family time for the good of the company.  At the age of 53 the company decided he was too old and “retired” him.  It was a scary time and had he not saved for a rainy day, our family would have been in the middle of a monsoon.  Thankfully he was a third generation planner and was prepared by saving, living below his means, and reducing debt.  I’ve always admired him for taking control of his financial situation and not leaving his later years to chance.  He has been retired now for 23 years and is still going strong.

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Something about Mary…

When the 60-something woman walked into the office I could see her fighting back the tears.

From time to time this happened to me as a financial advisor. After all, once you’ve counseled 500+ families about retirement, you’re bound to see some tough situations.

But on that day in April of 2009, it turned into a situation I’d never forget. The kind of situation that would make me sick to my stomach.

As I came out to introduce myself to her (let’s call her Mary), she thanked me for my time. I’d never met Mary before. She’d been referred to us by her husband’s co-worker.

We made our way to the conference room and as I always started off meetings, I asked her, “What can we do to help you today?”

Mary replied, “I’m in trouble. And I don’t know what to do.”

“Okay, what’s the situation?”

“Up until last Friday, I worked at a small regional bank for 32 years. On Friday, the Federal Government came in and seized the bank. They locked the doors. We are officially out of business. Which means I lost my job.”

“I’m really sorry to hear about that. That’s definitely not an easy thing to digest…”

“Yeah, well my job is my last concern. The problem is that I had my entire retirement account invested in the private stock of the bank. The valuation last year said it was worth $750,000. Is there anything I can do?”

I already knew the answer and I suppose deep down she did too…the simple answer was there’s nothing she could do. And the stock was virtually worthless. 

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