Monday, January 25, 2016

The Retired "Investor"...

Having counseled retired folks for many years, and through many market cycles, I so appreciate how corrections and bear markets can impact their psyches. No longer collecting a steady paycheck, by itself, elicits a strange, perhaps uncomfortable, sensation; bring on a rapidly falling stock market and, well, you can forget "strange" and put "uncomfortable" in bold uppercase!

While my perpetual lecture on long-term thinking helps our still gainfully employed clients keep their wits about them, there's something about taking from a portfolio (a good percentage of our retired clients take monthly distributions)---when its value is declining by thousands more than the monthly withdrawal---that can test the resolve of even your most seasoned investor.

Our experience with clients, and our findings from back-testing, divulges what is probably the most critical aspect of a disciplined retirement portfolio strategy. Which is: never sell the stocks of a diversified portfolio to generate income during down markets. Which ought to be intuitive, given that market history proves that every down cycle is to be followed by an up cycle. And the way to ensure that this aspect of a disciplined strategy is followed is simply to maintain ample cash and/or short-term fixed income securities to draw from as equity markets sell off. I.e., if you're retired and your portfolio is balanced, and you’re not overdoing it in terms of your distribution rate (I'm generally comfortable with 4-5%), history suggests that you should be sleeping just fine, even during times like these.

Good enough (you retirees)? Not quite? Okay, let's try this:

So you retire, you begin receiving social security and, maybe, a pension, and you've accumulated $XXX in retirement plans over the years. The social security, etc., doesn't quite get you there in terms of financing the lifestyle you dreamed of, so you'll be taking from your retirement plan.

The only way to guarantee that you'll never stress over down markets is to stay out of markets altogether---which would include the bond market, particularly if you think interest rates are ever to rise again. Which leaves you doing some simple math; you'll divide $XXX by the amount of additional monthly income you'll need and you'll know exactly for how many months you'll be living the retirement life of your dreams. Now, if your $XXX looks to run out at an age in which you expect that your physical capacity will allow you to continue enjoying the retirement life of your dreams---and that notion doesn't work for you---you'll be doing some soul searching.

You understand that income is generated through the process of exchange; the income recipient produces a good or service that someone will desire enough to exchange dollars for. So, if you're the inventive sort and you've got an idea, you'll want to pursue it and hope that the world will want what you've got to the point where it will pay for you to produce it. In which case, of course, you'll no longer be retired. Or you could offer up your services; surely your talents are still in demand somewhere within your area code. In which case, of course, you'll no longer be retired. Hmm.... Since we're assuming that your objective is to stay retired, now what?

Again, income is generated through the exchange of a good or service for dollars. So then, is there a way to participate on the receiving end of the dollars without having to come out of retirement? Well, yes there is; by investing in a company that produces goods and/or services in return for a percentage of its growth over time, its income, or both.  Problem is, the risk: You could, alas, invest your life savings into a company that ultimately fails, leaving you no choice but to come out of retirement and leverage your inventiveness, or your services, or both.

So, the notion of investing in one company doesn't set well when one's looking for greater assurance that he/she can stay retired in a manner that he/she hopes to become accustomed to. Now you're wondering if there's a way to invest in a number of companies and, therefore, eliminate the risk that the failure of one, or even a few, forces you out of retirement---or into a lifestyle you'd prefer not to become accustomed to? Well, yes there is. It's, are you ready?, the dreaded (or lately dreaded) stock market.

Yep, you can become an owner of the companies you buy your stuff from. And when you do it through investment funds, you do it in a hugely diversified way. For example, if you happen to be one of our retiree clients, you’ll get a slice of the dividends and whatever growth Procter and Gamble can realize by selling:

Product Images P&G

And whatever GE can realize by selling:

Product Images GE

And Kroger can realize by selling:

Product images Kroger

And Merck can realize by selling:

Product images Merck

And CVS can realize by selling whatever's inside there:

Product Images CVS

And Johnson and Johnson can realize by selling:

Product images JnJ

And Apple can realize by selling:

Product images Apple

You’ll even get a slice of whatever this guy can produce:

Product images Buffet pic

Of course the above is the very short list of what resides in your portfolio.

So, while the prices of the stocks of what will continue to be the world’s finest companies fluctuate as generally short-term thinking market participants trade amongst themselves, you approach the world of investing like the gent in that last photo.
There seems to be some perverse human characteristic that likes to make easy things difficult.

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

Time is the friend of the wonderful company, the enemy of the mediocre.

We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'

Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.

All Warren Buffett

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