Investing Your Nest Egg "Investing Your Nest Egg" Worksheet Polaris Advisors, the website, the worksheets and the seminars are not endorsed, reviewed or approved by either Gillette or Procter and Gamble. Polaris Advisors is an independent Financial Planning Firm, and prospective clients must make their own assessments of the accuracy and validity of the material presented. Of all the mistakes one can make in their transition to retirement, investing mistakes can be the most devastating. If you fail to plan your budget, you can run out of money, for sure. And that would be disastrous. But a bad budget is a slow death, and often, corrections can be made before the ultimate price is paid. Paying too much tax on your severance, or leaving some of your Pension on the table, or failing to create a responsible estate plan, can hurt a retirement too, no doubt.
But Investment mistakes can truly devastate a retirement, and render it impossible to realize the income needed for the next 25 years. If too much risk is undertaken, catastrophic losses can hit at any time. If too little, or no risk is taken, earnings will be unable to support expenses, and retirement income dies before the retirees do.
Rarely do we see a wisely designed portfolio, created to minimize the risk inherent in seeking a respectable rate of income. Sadly, many end up taking uncompensated risk. That is, risk that is unnecessary to achieve their goals, and risk for which they do not get adequately paid. Usually this risk is from lack of diversification. And often, this risk is taken without the knowledge of the retiree. They just do what they have always done in the savings plan, because “it worked then.” But they were putting money in, back then. Now they are taking it out! This means losses are amplified, not moderated.
Part of the problem is that designing a minimum risk portfolio is an exercise in statistics. How many people just love statistics? Who even understands statistics? Who wants to? It’s much more fun to put your money down on ideas, and hope they come up winners. Ideas are what most Brokerage Firms promote. Each one asserts their ideas are the good ones. But here’s the problem. Ideas equal RISK! There is the possibility that they work, or that they don’t. But, Brokerage Firms don’t want to promote statistics because most people don’t understand them very well, and therefore aren’t likely to authorize a purchase that will create the commission the Broker is seeking.
But statistics are what keep Casinos making money. Statistics are what keep insurance companies profitable. And statistics are what Pension Funds use to insure they can make the Lifetime Income payouts to which retirees are entitled. Statistics work because they are nobody’s ideas. So, no one can be wrong. If you flip a coin ten thousand times, you are going to get about half heads and half tails. It’s just the way things work. There is no maybe about it.
The statistics of designing portfolios to produce a predictable long term income are well known. They were developed in the 1950’s and named; “Modern Portfolio Theory.” In the early 1990’s the Theory won the Nobel Prize in Economics, and has been used extensively by Pensions, Endowments and Institutions ever since. So, why aren’t they so extensively used by individuals and retail investment brokers? First, individuals are rarely versed in statistics. Secondly, neither are Brokers, and, more importantly, building portfolios this way doesn’t generate a constant stream of transactions to pay commissions. So, Brokers don’t like them.
Efficient Portfolios, as the Theory provides, need to be created as a whole, not piecemeal. Professionals that create them for Institutions generally earn fees, as consultants, and are evaluated on overall results. Just as an Artist is judged on an entire work of Art, and not separately for the blue, the red and the yellow, Investors need to evaluate a portfolio as a complete work. Most people just aren’t accustomed to looking at their investments this way. They look at it piece by piece, getting rid of those that are not working and keeping those that are. It isn’t until the markets change and the winners become losers that they see how much balance was lost and how much risk was taken.
Polaris Advisors is an Investment Consultant to its clients. We have attached a worksheet called “Investing Your Nest Egg.” This is an analysis of how a properly structured “Mix” of various kinds of investments (indexes) would have fared over the 21 years since 1984. (The Dow Jones Industrial, or the NASDAQ, are examples of Indexes) There are four choices of “Risk:” 40/60, 50/50, 60/40, and 70/30. These correspond to the portion of the portfolio that is held in Stock type investments vs. Bond type investments. These are called “allocations” and using them, we help retirees understand the risks they take and how to manage them. Once we reach agreement with our client, we then build the portfolio using a screened list of top tier money managers to create each “allocation,” and balance and monitor it thereafter.
So, download your spreadsheet: “Investing Your Nest Egg” and look it over. And don’t hesitate to contact us with questions or for clarifications. We know that statistics don’t light up the life of most retirees, so we stand ready to explain. We are always glad to hear from you.
| |||||||
| |||||||
|
| |||||||
©2010 Polaris Advisors, LLC. All rights reserved. |
Adobe
Acrobat Reader
Microsoft
Excel Viewer
Microsoft
Word Viewer
Microsoft
PowerPoint Viewer