Monthly Archives: March 2011

Investing Book Review: Jim Otar’s Unveiling the Retirement Myth

This is a guest blog by By Steve Thorpe.

(Part two of this review, Steve Thorpe’s compilation of the best advice and insights from Unveiling the Retirement Myth by Jim Otar, will run tomorrow.)

For individual investors planning for retirement, basing those plans on averages just doesn’t cut it. For example, one might estimate an investor’s expected life span, future investment returns for a given asset mix, inflation rates, etc. But the investor may live longer than average, the sequence of future investment returns could easily go against him or her, likewise inflation effects can be enormous over time. Bad luck in any of these areas can easily deplete a retiree’s investment portfolio to zero during his lifetime. Unfortunately we are unable to change the luck factors that can so profoundly affect a retiree’s future income stream – or lack thereof.

Jim C. Otar, a financial advisor, Certified Financial Planner, and engineer, clearly explains these topics and more in his book Unveiling the Retirement Myth: Advanced Retirement Planning based on Market History. This review contains only a sampling from this fine body of work; accordingly I’d recommend that you pick up a copy if you want to understand all the details.

Most Research and Many Strategies Are “Just Plain Garbage.”

He covers a lot of ground in the book including: diversification, rebalancing, optimum asset allocation, warning signals of potential diminishing luck, flaws of investment simulations, budgeting for retirement, determinants of a portfolio’s success, and many others. This review will focus mainly on two core insights. First, that luck plays a remarkably large part in how well any retirement plan holds up. Second, that lower withdrawal rates, not savvy asset allocation, is the best defense against bad luck. Continue reading

Mutual Fund Trading Costs Add Up. Are ETFs a Better Option?

According to a study by the Center for Retirement Research at Boston College , 401 (k) plans could seriously bring their costs down if they were to  substitute Exchange Traded Funds for mutual funds in their retirement saving options for plan participants.

Their findings have interesting implications for investors in general, as they shed light on an area of mutual fund expenses not commonly discussed or easily quantified.

Generally when mutual fund fees are discussed, the figure used is the fund’s expense ratio. This is the cost of paying the fund manager, marketing and other fund overhead. For some actively managed funds it can be fairly high, and it’s generally lowest at passively managed index funds. Vanguard is especially well-known for its low fees (as it turns out, partly enabled by that firm’s particular ownership structure in which the funds own the firm.) As we have previously written up, according to Morningstar research,  low fees are the single most reliable predictor of future fund performance,  better than any other metric, including Morningstar’s own five star ranking system.

Expense ratios are fully disclosed and readily available in fund literature and at sites that follow the fund industry,  including Morningstar.

The High Price of Fund Trading Fees

The study by the Center for Retirement Research focuses on a different cost, but one that is both difficult to track and quite significant: a fund’s trading costs. Continue reading

Working Longer As The Retirement Solution Has Its Flaws

Today many people expect to work past the traditional retirement age of 65. According to the 2010 Retirement Confidence Survey conducted by the Employee Benefits Research Institute (EBRI), today 33% of workers expect to retire after age 65, a dramatic increase. In 1991, only 11 percent felt that way. One reason may be that many of us won’t be eligible for full Social Security payments until age 67.

Working Longer, Not Saving Enough

Even more important, few of us feel highly confident that we’ll have enough saved for when retirement time comes: only 16% according to the EBRI survey. On this, the skeptics seem to be right. According to a study published last December by actuarial firm Nyhart, “most employees age 60-64 will likely need to work until the age of 75 to be able to afford to retire at their current levels of contribution to their 401(k).”

Extending retirement further out into the future is also frequently proposed as a solution for the funding problems facing Social Security. In her recent analysis of the the current US economic situation, USA, Inc., former Morgan Stanley Internet analyst, and current Silicon Valley venture capitalist, Mary Meeker outlines the impact of moving Social Security eligibility from 67 to 73.

But what if a worker can’t work that long? Continue reading

Warren Buffett Exhibits Long-term Investor Thinking on CNBC

I enjoy watching Warren Buffett talk. He just makes so much sense! But it’s especially fun to watch him on his semi-regular visits to CNBC. In this one from earlier this week (video below) Becky Quick does give Buffett room to talk and a chance to break some news (like his opinion that Quantitative Easing 2 should end.) But CNBC is still CNBC and it’s fun to watch her try to drag the man famous for long-term investing into commentary on the market’s momentary gyrations. Continue reading

Investing in Dividend Stocks Now

With events in the Middle East and Africa boosting oil prices, some economic watchers are beginning to talk about the possibility of stagflation: a period in which both inflation and unemployment are high. Like the 1970s in the U.S., the time of “malaise,” lines at the gas pump, and strong performance of dividend stocks.  According to John Schloegel,  portfolio manager at CORDA Investment Management, during the stagflation of the 1970s, 70% of the total stock market return for the decade came from dividends, only 30% from price appreciation. Even without that bad brew, dividends pack a punch, he says: Over the longer run 40-45% of total stock returns can be attributed to dividends. Continue reading