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A $200,000 Mistake

In early 2016, the stock market experienced a 10% market correction in a matter of a few weeks.  It resulted in a few phone calls from clients wondering if they should move to cash.  One conversation with a recent retiree really stood out for me and I wanted to share an abbreviated version of it with my readers:

Client:  At the start of the year, I had $1 million invested in the market.  But now it’s February and I’ve lost $100k. We’ve got to stop these losses.  Please sell me out of everything and put me into cash.

Me: Would you consider staying the course a while longer?  As quickly as the market can decline, it can increase just as fast.

Client: Thank you, but I still want to move to cash.

Me: How about we sell 10% of the total value of the account?  That will cover your distributions for the next two to three years.

Client:  No thank you.  I want to be in cash now.

Me: Just one last idea – how about we move 50% of the account into cash?  That will cover your distributions for 10 years.  And in ten years, you can tap into your investments for your future distributions.

Client:  Look, I rode out the 2008 and 2009 recession and I don’t want to have to do it again.  I’d rather keep it in the bank and not have to worry about the stock market.

Me:  Ok, I’ll sell everything today.


There is a lot to process in this conversation.  First, the client called up believing they lost money.  Between the start of the year and the day the client called, the account had declined about 10%.  The sketch below shows how he visualized the loss.

From a behavioral finance perspective, the client anchored his thinking to the high point in their portfolio.  It became his frame of reference, his point of comparison. But if we looked backward and used a different reference point the story changes.  We would see that his account balance is right where it was 12 months earlier:

The idea of anchoring to a high point is a common issue that behavioral economists study.  We, as humans, sometimes make irrational decisions.  We make decisions that we believe to be based on objective facts, but are in reality detriments in how we try to solve problems.  I tried to reframe this particular client’s thinking a few different times but was unsuccessful.

Recently, I went back and reviewed this client’s portfolio to see how he would have done if he stayed the course.  As we know, the market ended up recovering and ended the year up about 10%!

The day the client called wanting to sell out of the market ended up being the very bottom of the market “correction”. For the rest of the year, the stock market recovered from its lows in February and then began to reach new highs by the end of the year.  Unfortunately, that client stayed in cash for the rest of the year.  It has resulted in a $200,000 mistake!

That red circle in the sketch above represents a behavior gap.  This is a well documented phenomenon in which investor decisions and behaviors are dragging down their portfolio performance (Morningstar). In this case, it could have been completely avoided or at least significantly minimized.  The quick reaction to move to cash will have a lasting impact on this client, but he probably won’t notice it until his cash balance is drawn down substantially.

This serves as an example for investors to stick to their plan and avoid making sudden and drastic changes to their investment strategy… and to listen to alternative suggestions from their advisor.

Move Over Florida, There is a New Retirement Hot Spot

Florida may not be the ideal location for retirement according to some new research from Bankrate. Based on tax rates, crime states, weather and health care, Bankrate has ranked all fifty states to find the best ones for retirees. Florida ranks 17th! Connecticut comes in 32nd

New England has two states that make the top of the list. New Hampshire claims the top spot and Maine claims the third spot. Surprised? I am too. I guess Bankrate didn’t factor in cold weather as Minnesota and Colorado also made the top 5.

See the full list

Alternative Retirement Examples (Millennials, this one is for you)

Ask a 20 or 30 something about their vision of retirement and they often shrug.  They can barely make ends meet now – how can they try to envision themselves in 40 years?  Conventional wisdom suggests that they should save as much as they can.  If they save enough, they might be able to retire early!  Soon, that conventional wisdom will be labeled as outdated.  It does not reflect the changing situation of current retirees and especially the mindset of Millennials who value work life balance much more so than other recent generations.

This post will explore some of the more creative ways someone can retire.

  • Semi-retirement.  Currently, the most popular alternative.  This approach suggests that someone could retire in their mid 50s and work part time doing a fun job until they are ready for full retirement.  This is a very common option for many of our clients who have started consulting businesses or have turned a hobby into a side job. In many cases, these semi-retired individuals are working well into their 70s doing something they love.
  • Our traditional view of working one career for 45 years may be changing.  A very small but rising trend is to take a 4-5 year sabbatical every 15 years of working a full time job.  In this case, the individual is enjoying “retirement years” much earlier in life. Working years are broken into three 15 year full time chunks of time and are sometimes delineated by different careers each time.  Perhaps, someone takes a few years off to get an advanced degree and reenters the workforce as a consultant or as a teacher.
  • Short Sabbaticals.  An alternative to the above is to take a year every ten years and work on a reduced schedule.  This gives the individual flexibility to travel or do something they love without having to give up their career.
  • Extreme Retirement.  This is the traditional retirement approach taken to an extreme.  In this case, the individual (or couple) in their late 20’s or 30s is saving 70% of their income every year with the hopes of retiring in their 40s.  They are taking frugality to the highest level and this concept is starting to turn into a movement.

In all of these cases, planning becomes crucial.  The status que and conventional wisdom is tossed out the window and is replaced with a truly customized plan for the individual.  If any of these options resonate with you (or someone you know) make sure a financial planner is engaged early in the process to ensure the right plan is in place.

A little bit of forethought early in one’s life mixed with the correct planning can have a tremendous impact on one’s life.

What Happens When Your Retirement Plan Goes Awry

US News recently made several good points in the following article: When You Do Everything Right But Your Retirement Plans Go Wrong

I would add that a financial plan should be reviewed on a regular basis regardless of what’s occurring in the market.  The analogy we use is that a financial plan is similar to sailing a ship across the ocean.  Throughout the journey, there are many course corrections along the way.  It’s to be expected and the plan must be dynamic enough to adjust.  In some cases, investors believe that a financial plan is static and that it never changes.  It’s important to remember that a plan is good for only as long as the underlying assumptions remain valid.  If inflation increases too much or if the markets are negative for an extended period of time or some other assumption changes, it may warrant a change in the plan.

Critiquing a Financial Plan

The following article examines five young people and their financial plan (more like their lack of planning).  They are then offered some preliminary advice about how to improve their situation.  Unfortunately, in every case I found the advice to be overly simplified.  Here’s the article

And here are some overarching strategies that apply to all the case studies:

1)      Emergency fund.  Start here first and make it a priority to build an emergency fund that can cover non-discretionary expenses for 3-6 months.

2)      Save more.  If you can’t save more now, earmark any future raise toward saving.  When asked about a rule of thumb for how much to save, I’ll often respond with “Save as much as you can”.  Young people and millennials are unlikely to have pensions and with the questionable future of Social Security, the burden to save is placed on their shoulders much more than previous generations.

3)      Automate.  Make sure any savings are set to occur automatically.  The mental anguish of writing a check every month or year to a retirement account can be surprisingly difficult.  Many times it is our own biases that create obstacles to reaching our own goal and simple processes like automating our savings can have a huge impact.

4)      Disability.  Life insurance is commonly discussed when a couple has children.  But disability insurance is rarely brought up.  What’s odd is that people are more likely to file a claim for disability insurance than life insurance.  And it doesn’t apply just to physical injuries, either.  We’ve had several clients and prospects tell us about their long term disability that affects their ability to do a desk job as a result of a bad car crash.