JUST PLAIN TALK: Observations from the Rockies

We wrapped two weeks of vacation around a financial planning conference outside of Denver. It’s efficient — my plane ticket was a business expense. Rick Ferri was speaking at the conference but just before the Garrett Planning Network’s annual retreat started Hayes Carll played a small Boulder venue. Imagine that, seeing two American visionaries within 48 hours. Both of them offer Americans a choice, albeit from a different point of view. Since I have no musical ability, I’ll share Rick’s presentation, although the concert was magic.

It’s human nature to look for patterns to guide us, but Ferri warns that rules of thumb can be misleading. Take the idea that your age should be your fixed income allocation, “age in bonds.” Statistically, people under age 40 own less stock than those over 40. The tech wreck and The Great Recession left many young people gun-shy. Some wealthy retirees with high stock allocations can live on the income the portfolio generates. They are investing for future generations, plus there are tax advantages to holding highly appreciated investments until death. Age is important in asset allocation, but should never be the primary guideline.

Another one is your risk tolerance score should define your optimal asset allocation. While sounding good in theory, it ignores your current tax bracket, amount of money you have and the need to take additional risk. Studies indicate risk tolerance scores change with market performance — bull markets lead to higher risk tolerance scores. Plus it is more efficient for the industry to plug new clients into model portfolios based on a few data points. Since riskier investments often have higher fees, there is an incentive to tilt more aggressively.

According to industry hype, rebalancing portfolios to an optimal asset allocation (see earlier paragraph) increases returns and lowers risk, but the data is inconclusive. The reality is cash flow works just as well. Portfolios generate dividends, capital gains distributions, and interest income. Retirees make withdrawals, while workers and employers make contributions. Along with no guarantee of higher returns, there’s no ideal time frame either. Plus frequent rebalancing flies in the face of a disciplined long-term investment strategy. In many cases, the primary purpose of rebalancing is to justify fees.

Past performance, supposedly, is not an indicator of future results. However, actively managed funds consistently underperform passive index funds. There are two types of investment strategies. Active managers buy and sell stocks based on stock research and economic forecasts. Passive managers track a specific index. Costs matter and actively managed funds struggle to overcome the headwind of higher costs. It is difficult to outperform indexes consistently and without taking additional risk. Investing can be overwhelming, but using broad market indexes reduces complexity and leads to better results. Genius is taking the complex and making it simple.

You can’t always get what you want but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.