We should not just take a standardized approach to advising people on their retirement money, because the circumstances vary so much. This does not stop us though.
The way that we advise those who are saving for retirement or are in retirement is in great need of revision. There is so much work that needs to be done here that we cannot even have a realistic belief that this will improve much anytime soon.
There are several big obstacles to this. One of the bigger ones involves us not paying enough attention to how well a plan we recommend will even take care of the needs of our clients, as their needs aren’t really accounted for very much if at all. For the most part, this is simply ignored, and if we do tweak the standard fare that is on the menu for everyone, these changes are minor at best and leave people doomed to their fate of falling well short of what they need.
There are a percentage of people who have actually managed to put away enough, but this is a small percentage indeed compared to the vast majority that is not headed to a good place at all. There’s no question that this is the biggest obstacle, but while we may encourage people to dig deeper and save more, that didn’t happen, and we should not resign ourselves to failure so easily.
If you are looking to put together a playbook as the coach of a football team, you will need to realize that the game situation dictates which plays you should run, and you would not just go with a conservative plan such as running the ball every down. There are some situations where this might be appropriate, if you are so far ahead that running out the clock becomes important, but this just won’t be appropriate in many situations and certainly not in all of them.
We are treating retirement savers like they are this far ahead, where in reality the vast majority of them are way behind, where trying to run out the clock would be the worst thing you could do. You aren’t even trying at all to win with this, and retirement is a game where winning isn’t just the most important thing, it’s the only thing.
If the goal is to be able to live out your retirement years with a decent amount of comfort, and you are instead shooting for much discomfort, that doesn’t make any sense, no more than a football team running on every play where they should be throwing the football every down instead.
This is at the heart of the problem, where coaches have essentially ripped out all of the offensive plays from their playbook and are instead content to have everyone just play defense, at a time where they need to go all out on offense.
Unless you can live off of the income that an investment strategy can be reasonably expected to produce, whatever income you are shooting for just won’t be enough, and the very idea that we favor investments that have an income component for older folks is plenty stupid in itself anyway.
The fact that people who are supposed to be at least of sound mind can be fooled by such an obvious mistake as seeing investments that have an income component as being pure income investments in itself speaks to the utter lack of reasoning that goes into fashioning retirement income advice. People will buy bonds and ignore how price changes impact these investments, and even try the same thing with crappy stocks even though everyone is supposed to know that stocks go up and down quite a bit in addition to paying dividends.
It would not be inappropriate to describe the stage of evolution that rules the retirement advisory community as being one that we are limited to grunting, it’s that unevolved. When both advisors and clients are limited to grunts, they will never move out of the cave.
It turns out that they are actually afraid to venture out of the cave, even though the goal is to find enough food so that their families can eat well. They can only manage to sneak out at night and find picked over carcasses to drag home. The family has become scrawny as they all huddle together, and even as they complain, they never even question their choice of this living situation, because they have yet to experience the outer world in the light of day and are unaware that better alternatives exist.
We’re going to take a step out, where we now dare to ask questions and dare to observe and consider alternative approaches. We especially need to look at ourselves and examine our own goals and resources because these are the things we need to aim for as well as what the limitations will be to achieve them.
The first and most obvious thing that appears to us when we see the light of day is how far off where we need to be actually is. It is well on the horizon, far too distant to ever get there in time crawling on our hands and knees. We now know that we must rise to our feet if we’re going to make some real progress, where we then look to decide how fast we must run to get there.
Success Here is All About Trying to Optimize, Not Minimize
The two factors in this race are risk and return. We cannot understand anything about investing without understanding both of these factors sufficiently. It turns out that while there isn’t that much to learn to at least get a much better handle of things, the status quo has such a dim understanding of this that we need to never look back at our cave and keep our eyes forward toward our goals.
These two factors do not exist independently, and we therefore cannot just look at either. If we just pay attention to return, we’d want to leverage all of our money at 1000:1, which you can do on some contracts for difference or forex sites, where only a tenth of a percentage move from our entry will wipe us out completely.
This isn’t quite as bad as it appears though, as the problem here isn’t using leverage, it is using so much of it that the risk becomes extreme. Using leverage in itself should not be shunned out of hand though, as we may need to do some leveraging to get to where we need to be, where we then need to compare the risk of failing by trying with the risk of failing by not trying. If you know that you will fail on your current trajectory, we do not have the luxury of excluding approaches out of hand.
We certainly do not want to come out of this with our portfolios smashed to bits, and we want to work hard to never get there, but at the same time we need to realize that seeing it depleted and fail to achieve its objective isn’t something we want either. We need to choose our level of aggression or passivity based upon a consideration of all the factors involved, not just go into the turtle and still be bonked on the head in the end.
Ignoring return and only considering risk would have us keeping all of our money in safety deposit boxes, and some might think that putting it in the bank is the same thing, but we hold the money, we know we can always access it no matter what happens to our bank or even the FDIC.
That’s not going to do anything for growing our savings though, and just about everyone needs to grow their savings by a lot. Savings vehicles and even treasuries aren’t that far away from this though, and as we may look at 0% not getting us to where we need to be, the same is almost always true of the paltry returns that these asset allocations produce.
The true path will be found between these goal posts, and it is our task to seek out the most optimal amount of risk/reward, where the two function together to allow us to best achieve our retirement objectives in a manner that is acceptably safe.
Risk and return are not just lumped together in fixed ratios, like many mistakenly assume. We need to manage them separately to do this right, not just treat a certain type of investment as having this much return and this much risk.
We need to think of these natural characteristics of investments, such as stocks or bonds having a certain amount of risk and return generally, as being in the unmanaged state, where we use our observation to determine what this unmanaged risk and return consist of, and then look to manage both to our advantage.
The conventional approach fails to do this at all, but what’s worse, they aren’t even up for selecting the right asset classes and therefore fail broadly. If you don’t even give people a chance of succeeding, how can you expect them to do anything but fail?
The blame then gets handed to us, for not saving enough, and while that may be true, this does not end the story. While we always want to take personal responsibility for our fate in retirement, being led by the hand to the poor side of town by the system of investment thinking that just about everyone is in the grips of does involve unfriendly forces acting upon us that need to be fleshed out.
This sad tale is more about our not really paying attention at all to our needs than anything, where it would be bad enough to not even aspire to manage our positions, but we’re not even picking ones that are at all suitable for us, managed or unmanaged.
We need to start by looking at what sort of return we need, not just turn our head completely away from this. For the vast majority of people who are looking to either accumulate or preserve enough retirement savings, the way that they are told to invest is not set up to even put a scare into their future needs.
We can easily estimate what sort of return we will need to achieve at least our basic objectives, and for many, this will end up being a pretty big number, due in large part to their neglect but also due to lesser amounts of disposable income that could be saved.
Regardless, the number may end up being completely unrealistic, but at the same time we do not want to let our limiting beliefs set the ceiling way too low. We aren’t just limited to market returns with stocks though, as there are bigger clubs in our bag than this, provided that we know how to swing them.
We do have our 1000:1 trade on the far side of the field, and although that one is too risky regardless of your situation, it does demonstrate the true limits of our potential on the return side of things. We’re going to need to find a way to shoot for what we need a lot more safely than this though, which is where risk management comes in.
Older Investors Do Need to Manage Risk Better, But This Does Not Mean Being Scared
People think that they should naturally be risk averse when saving for retirement, and this might seem to be the case if you do a direct analysis of the opportunity cost of lost money. Due to the principle of diminishing marginal utility, each dollar lost is worth more than each dollar gained.
We can think of this as the greater importance of food and shelter versus entertainment. Having extra for entertainment will make us happier, but not enough to compare with a corresponding reduction in our more basic needs being satisfied, perhaps having to go hungry on account of our striving to be better entertained.
This view misses the fact that future value is multiplied significantly by investing, where we can prevent a whole lot more pain than we are risking, given that we have so far to go to get to the point where we’re comfortable in retirement. This is a lot like the way future value becomes multiplied by investment when we compare the present value of money to the future value, where a dollar spent now will be worth several dollars in the future net of inflation and we should account for this effect a whole lot more than we usually do.
This means that our risk/return ratio with an approach that actually strives to accomplish our goals, or come as close to them as we reasonably can, will become significantly improved by shooting for enough return, where the gain in comfort that we are after can be much greater than the additional discomfort that we are risking by opening things up more, because the benefits that we may achieve by seeking higher returns becomes multiplied.
We want to try to limit the discomfort as well as seeking enough comfort though, where we can take the risks inherent in our plan and look to minimize them without affecting our rate of return, and perhaps even improving it.
It might seem odd to think that this more aggressive form of investing is compatible with the idea that this is the time that we need to be paying more attention to risk, not less, but that is only because we misunderstand risk management so much. A very simple example is wanting bull markets but not wanting bear markets, and then limiting ourselves to bull markets. If we want to play the bear markets as well, this can have us doing even better.
When we are later in the game, it is indeed more important to not have our plans dashed by the vagaries of the market. We may not care so much about these things if we have 30 years to go, as we can ride out any size wave, but this is no time to be caught up in one and beached, especially with the waves as high as they are now.
This is the part that involves managing our risk, rather than just sitting on our hands and hoping. Standing up against all opponents is not the only way to play this game, like those who have stood up to this current bear, although you would think it is given now many people exclude any hope to get to where they need due to this misunderstanding.
This means that we will have to manage our risk more tightly than normal, and pay even more attention to not being exposed to negative outcomes and especially those that scare and harm. Those who invest to protect themselves against bear markets, and are so willing to settle for far less than they need in doing this, need to realize that this is actually a terrible way to be protected, as we can just take action when these things happen, as they just did.
This is not so difficult to do, but the task is made impossible if we do not even try. We need to swing the bat, and often swing for the fences, but the ball will never get there with the bat remaining on our shoulder. Getting called out on strikes and losing the game surely cannot be acceptable. Standing around and sticking our heads in the path of the ball and getting beaned is certainly not very smart.
This can be as easy as investing in an index ETF with an acceptable stop loss. If you are investing in a bull market like today’s, you could have entered at any point over the last 10 years and be ahead handsomely over traditional approaches without ever coming close to stopping out.
Those who have done this got out with only a 10% loss, and sat on the sidelines while so many others have lost an additional 20%. An even simpler approach to this is to hold through the mediocre news and sell on the real bad news such as what we have now, which would not even have seen you lose 10% because we knew the skies were dark enough to flee before this.
When we throw off the idea that we will stand firm in the face of any threat, and instead choose to act appropriately and sensibly, this allows us to look to make a lot more hay when the sun is shining, we’ll make a lot more money, and this in itself will provide plenty of protection against downturns. Those who have chosen to bury their money in the backyard will have a bigger chunk of it taken from them when the bears come over someone who has grown their wealth to two or three times larger.
To actually be able to achieve our objectives, we’re going to need to shoot for bigger returns than we usually do, as for most people, this will fall well short of their needs and is destined to fail regardless, whether the bears come or not, and especially when they do.
Putting all of your money in an index fund and getting out at the first sign of real trouble would be an improvement over what virtually everyone does, but it still isn’t enough. We need to realize that the index fund approach is an unmanaged one, and that’s what people find so appealing about them. Like our wanting to manage our risk, we also should want to manage our return by being more selective than not at all.
If the goal is to be in investments with a positive expectation, then we should prefer something that has a positive expectation over something with a negative expectation, and also prefer something that has a more positive expectation over something that has a lesser positive one, this won’t happen by just doing nothing. Sometimes the only positive expectation is with running with the bears for a while, although if we consider this against our investing religion, we are doomed to cheat ourselves by way of ignorance.
This is all comparative, and there will be some potential investments that are simply superior in the return category, and these are the ones that should attract our interest. We won’t be investing in Bitcoin though, as we also need to be able to manage the risk, and Bitcoin is simply too volatile to do this right in all but the most skilled of hands. This is also not something we want to be putting our retirement money on the line with either.
Markets move both up and down, and when things are moving up, we want to be in them to take advantage of the move, and be on the right side of things. We also need to be investing with a purpose, where we may need to leverage a bit to get there, and the only real reason why leveraging doesn’t make sense is that it is not something we can execute very well in the turtle position, just waiting to be attacked.
If you instead choose to stay on your feet, seeking to identify the real threats and take action when needed, you can leverage bull moves and even bear moves comfortably enough while shooting for the more than double returns that leveraged ETFs provide. This is always all about riding the trends, not plopping down your money and choosing to ignore managing both risk and return. It is when we manage both well that we really succeed, but we will fail at both if we choose to ignore both.
There is so much more potential to help ourselves in saving for retirement, although not by following the way that we are told to save, which is such a bad plan that it is beyond words. The combination of fear and ignorance that guides this thought is far from the way to the promised land, yet we willingly accept it as we have not even bothered to consider if better approaches even exist. That’s the starting point.
This may require that we consider investments like the ProShares Ultra Pro QQQ ETF, which up until last month, when the coronavirus scare hit us, had a 10-year return of over 6300%. This is the bull market version of this, and when the bears come, if you had switched to the inverse version of this, this guy is up 67% since then, and the combination would have multiplied our initial investment a hundredfold so far, as opposed to the mere doubling or tripling that the standard approach provides.
This only makes sense, as if you are willing to leave when things really sour, this allows you to invest in things like this that triple returns on the bull side when we’re in a bull market, with the bear version tripling returns on that side when things are running this way, We might think that this is far too unsuitable for retirement savers, but we need to examine these beliefs first, where we will see that this is not inappropriate at all and in the great many cases, is actually needed.
The reason always ends up being that we cannot just sit idly by drop the 67% that this ETF has given back over the last month, but anyone who has been that foolish certainly should not be holding things like this. A little common sense is all we need to rebut this though. Executing this strategy properly has us sidestepping this mess we are in at the very least, and those who do not have any hang-ups with betting on the bears as well have made a lot of money over this time, not lost a lot like just about every other retirement investor.
The only road worth travelling here is one where we toss all of our prior ideas about saving for retirement and look to build something better from the ground up. We especially need to discard the idea that we are relatively powerless, as we do have the ability to take the reins and direct our horse down a much better road, but only if we believe.