Links to Posts Regarding Investment Management
- Our Approach as Retirement Investment Advisors
- Should I Buy Stocks or Bonds?
- The Case for Real Estate
- Invest For Retirement
- Plan to Make Your Portfolio Last Through Retirement
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Our Approach as Retirement Investment Advisors
We don’t buy and forget.
I want to help you to understand the steps that we take so that our “buy and hold” strategy for long-term investing does not turn into “buy and forget.”
The mission of our firm incorporates a focus on “proven, time-tested investment solutions.” Such solutions for our clients include a proactive approach to research and analysis of the funds that make up our portfolios.
First of all, when I meet together with folks for the first time, I don’t start out right away by making recommendations about what they should invest in. As a Certified Financial Planner®, I focus first of all on assessing their situation and needs and helping them think through the process of retirement planning. I build a financial plan, then buy investments to fit that plan. We approach investing from a long-term perspective and avoid the lure of attempting to “time” the stock market for short-term gains.
We believe that fund managers should be reviewed on a regular basis to make sure they are still the best of the best. So then, how do we go about selecting the funds for our recommended list? Following are some of our ongoing investment practices so that once we recommend a fund or an investment strategy for a person, we don’t just “buy and forget:”
- I subscribe to Morningstar, which is the most well-known mutual fund research firm. This service provides research reports, portfolio trackers and many relevant articles, along with fund analysis and recommendations. Because there are over 2,900 mutual funds, I use this service to screen for the best funds available.
- I consult together with other financial advisors. Through this peer interaction, we are able to compare tools for conducting the best funds analysis as well as share best practices with one another.
- I make use of research available from Charles Schwab & Co., Inc. (“Schwab”). (Dickinson Investment Advisors has selected Schwab as primary custodian for our clients’ accounts.)
- I subscribe to research resources through Litman Gregory AdvisorIntelligence.
- I regularly confer with fund managers as part of my own independent personal research. Recently, I shared a sample portfolio model of mine with a group of funds analysts and authorized them to evaluate the funds I recommend for the portfolio. Overall, their analysis helped to reinforce the strengths of the asset allocation that I have had in place, and it also gave me several ideas for continuing to make improvements in my funds selection.
- Dave, Tom, and I meet together as an Investment Committee to evaluate the funds on our recommended funds list as well as those that are in our Supervised Portfolios.
We have learned over the years that when selecting funds for our clients, we don’t base our decisions on this year’s performance alone or on the latest headlines or on the fanciest marketing glitz by fund companies. We seek to evaluate each fund according to how it will work within an entire portfolio to accomplish what is best for our clients – to enhance reward and reduce risk.
As a tax preparer, I have the advantage of seeing the investments used by many of the advisors and brokers in the Omaha/Council Bluffs metro area. I am always comparing what I do with what others do. I believe we compare very well, but I’m not opposed to finding new ideas from others as well.
In summary, I trust that this helps you to better understand our commitment to bringing value to the process of selecting funds for your retirement assets. We would be glad to arrange a meeting with you to meet our whole team and discuss these things together in person.
Committed to your successful retirement,
Ron Dickinson, CFP®, CPA, MPA-Tax
Disclosure: This blog has been independently produced by Dickinson Investment Advisors. Dickinson Investment Advisors is independent of, and has no affiliation with, Charles Schwab & Co., Inc. or any of its affiliates (“Schwab”). Schwab is a registered broker-dealer and member SIPC. Schwab has not created, supplied, licensed, or endorsed, or otherwise sanctioned this blog nor has Schwab independently verified any of the information in it. Dickinson Investment Advisors provides you with investment advice, while Schwab maintains custody of your assets in a brokerage account and will effect transactions for your account on our instruction.
Should I Buy Stocks or Bonds?
Ron asks you to think about the following perspective: as of today the interest rate paid on U.S. Treasury bonds is 2.02%. If you buy these bonds and hold them for a full ten years, you could make just a little more than 2%, and you are guaranteed by the government to receive all your money back at the end of ten years.
In contrast, if you would buy the U.S. stock market as measured by the Standard and Poor’s 500 Index, the dividend yield is 2.3%. If you are looking for income, you would make more by investing in stocks. Remember that it’s impossible to buy the index without some cost, but a simple index mutual fund would have an internal cost as low as 0.1%. With this approach there is no guarantee what the value would be at the end of ten years.
Let’s consider how this might actually impact *Jim and Peggy (not their real names) who are both in their early 60s and are working out their retirement plans after four decades of hard work and sacrifice for their family. They say, “Wait, I might need the money before ten years comes around!”
Well, let’s look at this for a moment. I agree that they might need a portion of their portfolio before the end of ten years – to do some travel, to make a significant contribution to their church or favorite charity, or to help their adult children to buy a business – so that portion of the portfolio should be in investments that are less risky than the stock market. A simple financial plan can figure out how much this should be.
Now let’s focus on the permanent part of their portfolio – the principle portion of their nest egg that they plan to never touch – and let’s look at different possible outcomes.
If Jim and Peggy can hold their portfolio with bonds and not touch the money for ten years, they will only get their original investment back. With stocks the outcome is uncertain. However, there has never been a ten-year period where stocks have experienced a loss.
I agree that there have been some scary times, but even in the worst of these times there has never been a loss if you hold for a full ten years. Statistically one shouldn’t experience a loss, and one might actually make a lot more. The key is to not get scared out, which many people do during the worst of times.
If Jim and Peggy ask, “What happens if we don’t hold our portfolio for the full ten years?” Then bonds are not as safe as they might think. It might seem illogical to some, but as interest rates rise bond prices fall.
If one would need to sell the bonds before maturity, sellers would have to go into the open market and find a buyer. One’s low-yielding bonds would not be as attractive so they would be depressed in price. On the other hand, if interest rates fall, bond prices rise.
Many bond investors have experienced a bull market over the past decade as rates have been lowered, and to them bonds feel safe and profitable.
So, let’s pose this question to Jim and Peggy: “In today’s environment, which way would you guess interest rates are headed?” In my opinion, rates can only go up from where they are today. So buying bonds today is like “heads I lose, tails you win.” If Jim and Peggy hold for ten years, stocks will more than likely perform better. If they need the money before then, bonds carry a risk of their losing money, and this risk could be as much as the risk of stocks in today’s environment for investing.
So why would we put bonds into a portfolio for Jim and Peggy in the first place? Because bonds reduce the overall perceived risk in the portfolio. When times get tough, the average investor tends to make poor decisions and ends up locking in a loss. Having a portion of Jim and Peggy’s portfolio in bonds may give them the ability to stay invested during turbulent times, rather than abandoning their investments entirely.
Conclusion: Many investors in retirement believe they should be more conservative and I agree with that. However, in reality if couples like Jim and Peggy will stay invested for the long run, stocks may actually be a more logical choice than bonds.
This might sound a bit adventuresome for the average retiree, but there are some alternative investments to bonds that can also provide income. We are recommending for retirees to consider reducing their exposure to bonds by investing in real estate, master limited partnerships, and preferred securities. These can be rather complex investments, so we would prefer to sit down with you in person and explain the pros and cons of each and how they may fit best into your plans.
Committed to your successful retirement,
[*Jim and Peggy are fictional names, but they represent the kind of clients we serve.]
The Case for Real Estate
I recently attended a conference with a roomful of investment professionals – supposedly a group of smart guys managing many millions in investments.
The presenter asked an interesting question: How much would you estimate the stock market will make in a normal year? The average response was around 8%. (Fifteen years ago the answer no doubt would have been between 10% and 15%.)
The presenter’s next question was: How much would you estimate the bond market will make in a normal year? The average response was around 1-2%.
The conclusion was that a diversified portfolio of 60% stocks and 40% bonds for a typical retiree would be anticipated to return only 5-6%. This is not a satisfactory answer that would produce a secure retirement for many retirees. Retirees would need to either reduce what they need their portfolio to produce or find other ways to generate income.
(You need to know that this was a real estate conference, and the products being demonstrated were direct investments in real estate.)
How It Works:
Direct real estate produces monthly dividend checks these days in the range of 5-7%. Direct real estate does not trade on the stock market so investors do not experience the wild volatility with daily price changes. This is a nice feature that helps reduce portfolio losses during difficult times, and it helps me sleep better at night.
Direct investment in real estate is not a liquid investment; your money is tied up in real estate. In order to get your money back, you need to wait until the manager sells the building. This is a negative feature for some investors. However, isn’t part of your portfolio permanent? Yes, you may need access to cash for a new car, for travel, or for emergencies – and your portfolio should be designed to provide this. But isn’t the bottom fourth of your portfolio a piece that you never plan to touch?
Some direct real estate funds place 90% of the money into real estate and 10% into a bond fund. This is to provide the ability for investors to request their money back before the real estate would be sold. If everyone asked for their money back at the same time this would be a problem, but typically this doesn’t happen. This “more liquid” method of direct real estate typically offers a lower monthly dividend, but it’s still currently over 5%. We have been using this kind of investment to replace some of the bonds in our clients’ portfolios. We believe bonds may be risky in this environment where interest rates are poised to rise.
In both kinds of direct real estate, investors receive regular dividend checks, but they also have the opportunity to participate in additional capital gains of the properties. One won’t know how much this will be until the properties are actually sold or appraised, but typically the total return is higher than the 5-7% from the dividends.
Of course it should be noted that real estate could decline in value, but over my lifetime these declines have been temporary.
Personally, I have been increasing my allocation to direct investment in real estate, and I think it is appropriate for many of my clients. However, this type of investment requires a face-to-face meeting to discuss the pros and cons, many of which I have touched on above. We need to make sure that such an investment would be suitable for your personal financial plan. I encourage you to give us a call and ask to meet with us to evaluate this option.
Committed to your successful retirement,
Invest for Retirement
A sound investing strategy is what gives you the means to turn your retirement dreams into reality. In my book 18 Common Sense Rules for Enjoying a Successful Retirement, I share my roadmap for folks being able to experience “proven, time-tested investment solutions” for their lives.
(This is the sixth article in the “7 Steps to Financial Security” series.)
What do you want to do in the second half of your life?
– Give back to the next generation some of what you have received?
– Help your kids as they negotiate adulthood themselves?
– Cheer on your grandkids as they attempt new things?
– Support your favorite charities as you give back to society?
– Experience some new adventures?
– Pass on what you have learned about investing?
The “Go-Go” Years
People over the course of their retirement seem to move through three phases – kind of like teenagers. First, there are the “go-go” years of their sixties and sometimes well into their seventies. In this period, travel and hobbies are really important. They spend money on motor homes, cruises, and home remodeling. They want to see their grandchildren as much as possible, so they attend a lot of ball games, plays, and other school events. It is a very social and active time of life.
The “Slow-Go” Years
Next, they transition into the “slow-go” retirement years. Life is still very enjoyable, but their desire to travel diminishes. Their minds are still active and sharp, but they just don’t get around like they used to. They spend less money on big-ticket items. They are more content with life’s simpler pleasures. They play bridge, read the books they’ve put off for years, go out to dinner with friends, and have their grandchildren visit them on the weekends.
The “No-Go” Years
Finally, they move into the “no-go” years. Their minds and bodies may be slowing down, so they need a little help. Perhaps they move into a retirement community or perhaps move in with their children. A lot of their friends are passing away, so they really begin to come to terms with their own mortality. They enjoy company, but find themselves spending a good deal of time in quiet reflection. Sometimes they may feel lonely, but most often they are simply happy for every day of life they have.
Life is a natural progression. With wise planning and with a focus on meaningful relationships, your faith, and the blessing of good health, it can be a beautiful journey.
Charles Schwab, in his book You’re Fifty – Now What?, recommends for people to make investing for retirement an automatic habit by:
– Using electronic funds transfer from your checking account or paycheck to your brokerage account
– Using dollar cost averaging, which is a systematic method of investing in which you invest a fixed amount of money at regular intervals
– Reassessing your plans every couple of years so that your plan reflects any major changes in your personal circumstances, as well as in the economy.
In the same book, Charles Schwab states that you will need 80 percent of your gross annual income per year in your second half of life to enjoy your current lifestyle. He brings a reality-based approach to retirement planning: don’t expect to ever see an “average” year, and don’t expect retirement to be a long string of “average” years.
Wise planning focuses on building a diversified portfolio for your financial safety net. Diversification means that you will have your money in a variety of investments – stocks, bonds, and mutual funds – rather than being concentrated in just one area.
The key to enjoying each phase of retirement as much as you can is to be sure you don’t run out of money before you run out of life. It’s a crime to save a large nest egg out of fear and not enjoy your go-go years. Why would you want to sacrifice so drastically just to have a bunch of money in the bank and never actually enjoy it?
Hence, you need to have a solid financial plan that includes the right combination of investments and insurances. You will know it’s the right combination when you are living within your means and you’re not constantly second-guessing yourself.
Life is too short not to enjoy it every day. Retirement is too long not to plan well for many years of success.
Plan To Make Your Portfolio Last Through Retirement
When it comes to planning regarding your assets for retirement, how much is enough? In my book, I explain my approach to developing investment solutions for such a question.
(This is the seventh article in the “7 Steps to Financial Security” series.)
Establish the Basis for Contentment
You will never experience genuine contentment if you believe you can actually “have it all.” As strange as it may sound, there is no inherent security tied to the size of your portfolio. Contentment is not found in the amount of things you have accumulated. In fact, sometimes the more you have, the more worry and stress you have.
However, you can find satisfaction in knowing you won’t run out of money in retirement, even if you have to revise your desires and live a more simple life. True contentment can be found as you focus on the intangible things of life including your faith, meaningful relationships with family and friends, and good health.
Your Unique Priorities
There are so many ways to spend and invest your money in retirement, so you have to decide what is most important to you. Most of us work several decades to accumulate our savings and investments, so we should have a chance to enjoy the fruits of our labor. After all, the average person retiring at the age of 65 will spend more than twenty years in retirement. But, how long will your retirement actually last?
As you plan for a successful retirement, you need to build your financial future around your particular goals and priorities. Don’t subject yourself to a cookie cutter approach. Find a skilled financial advisor who will tailor planning to your unique needs and life circumstances and who has a proven track record of being a wise financial steward of others’ resources.
More Than a Number
Retirement planning is more than just coming up with a number. Your “number” is your total nest
egg. You will use it to generate a level of income that supports your dreams and ambitions in retirement.
Planning a successful retirement is a lot like running a business; when you develop long-term strategies, you increase your chances of success.
There are so many variables in our economy, in our political system, and in the world around us that are far beyond our personal control. However, you don’t have to live your retirement in fear. Because none of us can predict the future with absolute certainty, it is vital to look for solutions that provide flexibility.
In determining whether you have saved enough for retirement, first you need to figure precisely how much you spend every month, including those expenses that come up randomly. Reduce this by how much you will receive from your pension and from Social Security. Then, a well-designed portfolio can be constructed to provide for an annual payout to cover the difference.
However, beware of the impact of inflation. Inflation will increase your cost of living substantially during retirement. Make sure that your tax and financial advisor has constructed a good financial plan to cover this as well. Some great planning software can help in this process.
Determining Your Second-Half Paycheck
In his book You’re Fifty – Now What?, Charles Schwab defines your “second-half paycheck” as the amount available for you to make use of from your retirement investments. It is wise to start out with a withdrawal rate of 4-5 percent per year. That gives you the best chance of outliving your money. Basing your second-half paycheck on a percentage of your portfolio’s value will give you a variable income. If your portfolio goes up, so will your paycheck. If the value goes down, your paycheck will too.
A reminder for you about your assets in IRAs: Don’t withdraw from your Traditional IRA until you have to. By not withdrawing early, you avoid penalties and delay taxes. You also allow that money to continue working for you.
Being sure that your planning for retirement accurately reflects your dreams, your ability to handle investment risk, and your need to be flexible requires constant care. Through working with a proven, trusted financial advisor, you can experience peace of mind as you venture into the rewards of retirement living.
[Financial Planning and Investment Management Services offered through Dickinson Investment Advisors, Registered Investment Advisor. Statistics and market information provided by Litman Gregory Advisor Intelligence.]