How a brilliant doctor lost thousands

Think you’re having a bad day? I just read in THE WEEK that the American author of Fiesta: How to Survive the Bulls of Pamplona was recently gored by… a bull… in Pamplona. Fortunately he survived but the doctors had to operate; he had his credibility removed. Speaking of doctors, a physician […]

How black swans can impact your retirement

As a 10 year-old altar boy I drank 3 milkshakes right before serving a wedding mass… … and threw up on the bride during the service. Not pretty – especially the janitor trudging onto the altar with a bucket and mop to clean up the mess. I was as surprised […]

60 Minutes Expose: U.S. stock market rigged?

Did you happen to catch 60 Minutes on CBS on Sunday? Their lead segment was entitled, “Is the U.S. stock market rigged?” and featured Michael Lewis’s new book about high frequency trading.


Very interesting.


If you’re an investor, you need to check it out. Or read Lewis’s book called Flash Boys. Or both.


Here’s an excerpt from the piece.


60 Minutes:  What’s the headline here?


Michael Lewis:  The United States’ stock market is rigged.


60 Minutes:  By whom?


Michael Lewis:  By a combination of the stock exchanges, the big Wall Street banks, and high-frequency traders.


60 Minutes:  Who are the victims?


Michael Lewis:  Everybody who has an investment in the stock market.


60 Minutes:  High-frequency traders, big Wall Street firms and stock exchanges have spent billions to gain an advantage of a mili-second for themselves and their customers – just to get a peak at stock market prices and orders a flash before everyone else, along with the opportunity to act on it.


Michael Lewis:  The insiders are able to move faster than you… they are able to see your order and play it against other orders in ways you don’t understand… they are able to front-run your order.


60 Minutes:  What do you mean, front-run?


Michael Lewis:  It means they are able to identify your desire to buy shares in Microsoft — and buy them in front of you — and sell them back to you at a higher price. It all happens in infinitesimly small periods of time… sometimes fractions of mili-seconds. But it’s enough for them to identify what you’re going to do and do it before you do it at your expense.


60 Minutes:  So it drives the price up.


Michael Lewis:  It drives the price up. And in turn you pay a higher price.


If you missed the show, you can watch it online at: ( ).

Don’t let these investment “myths” sink your retirement plan

I can’t verify it, but supposedly this is a true story of a radio exchange that took place off the coast of Newfoundland between the American aircraft carrier Abraham Lincoln and Canadian authorities:


Americans: Please divert your course 15 degrees to the north to avoid a collision.


Canadians: Recommend you divert YOUR course 15 degrees to the south to avoid collision.


Americans: This is the captain of a U.S. Navy ship. I say again, divert your course!


Canadians: No, I say again, you divert YOUR course.


Americans: This is the aircraft carrier USS Lincoln, the second-largest aircraft carrier in the Atlantic Fleet. We are accompanied by three destroyers, three cruisers and numerous support vessels.


I DEMAND that you change your course 15 degrees north, or countermeasures will be undertaken to ensure the safety of this ship.


Canadians: This is a lighthouse.  Your call.


In my experience, people have some pretty dogmatic opinions on investing. But what if everything you thought you knew about investing turned out to be wrong?


That was the case for me years ago.


All my life I had been told these investment “truths:”

  • you have to RISK money to MAKE money
  • real estate doesn’t go down
  • gold rises when markets fall
  • stocks go up and down but they grow 10% a year on average

These are financial facts of life as preached by the denizens of Wall Street. But like the first facts of life I heard from Richie Silver in the 4th grade, these “facts” are more like rumors or myths. Except these myths can be dangerous, as the years 1998, 2002, 2008, etc., have taught us.


Perhaps the biggest Wall Street myth that continues to be perpetuated today is the concept of “average” returns. If X mutual fund increases by 50% one year and then decreases by 50% the next year, the mutual fund company is allowed to say that it “averaged” a 0% return.


But did it? Let’s do the math.


Imagine you have $1 million invested in X mutual fund. In year 1 your account grows 50% and you now have $1.5 million. In year 2 the fund tanks 50%, and your account falls to $750,000. The mutual fund company declares a 0% average return, but your account is down $250,000 or 25%. (This is one reason why we say that when you’re at or near retirement, a loss hurts a lot more than a gain helps. And why the sequence of returns can be as important as performance.)


Okay, now let’s imagine that the fund goes up 30% in year 3. At this point Wall Street is proclaiming that the fund averages an 10% return. A 10% return compounded over 3 years would turn a $1 million initial investment into $1,331,000. But on your real world account statement, your balance stands at $975,000 — $25,000 below where you started — and a far cry from $1,331,000.


This is 4th grade math – but few people ever do the calculation. Instead they accept the Wall Street myth that the stock market averages 10% returns.


The truth is, the only way to grow a dollar by 10 percent per year is to geometrically compound that dollar on itself.


And the only way to do that successfully is to avoid large losses.


If you’re not avoiding large losses – in other words, if you’re riding the Wall Street roller coaster up and down and up and down – than you’re not getting 10% a year growth. Or anything close to it. (I encourage you to do the math.)


Today’s fast-paced global economy requires more than a traditional “buy and hold” model for success. There are a number of proven strategies available to put a safety net under your savings and help you avoid the large losses that decimate a portfolio… and improve your overall returns.


Ask us about them.


Where Fantasy Football Meets Retirement Planning

From what I can find on the Internet, it’s estimated that 40 million people will play fantasy football this year. In contrast, 50 million Americans have 401(k) accounts. The numbers aren’t too far off.


I admit, I’m one of the fantasy folks. The other day, while tinkering with my lineup, the thought hit me that building a retirement nest egg is like building a winning fantasy team. Many of the rules for success are the same. (OK, maybe it’s a stretch analogy, but it’s too fun to pass up.)


So, with tongue slightly in cheek, here’s how to put together a winning investment team and fantasy football team in four easy steps:


#1: Avoid Turnovers – Flashy quarterbacks like Tony Romo and Matthew Stafford throw lots of touchdown passes. On paper, they look like star fantasy players. But you’re much better off drafting a “boring” QB such as Andy Dalton. Why? Romo and Stafford put up lots of touchdowns, but they also throw lots of interceptions – and these interceptions hurt their performance numbers. Meanwhile, Dalton racks up points consistently. He doesn’t hurt himself with turnovers.


Same with investing. Consistent gains without large drawdowns beat roller coaster gains and losses every time. If you have $100,000 and you’re up 50% one year and down 50% next year, the score is not tied. You’re down $25,000 and trailing by more than a field goal.


#2: You Just Need to be a Little Better – Each week in fantasy football, you square off against one opponent. It doesn’t matter if you win 35-34 or 135-134, as long as you’re just a little bit better than your opponent. In the draft, everyone’s looking for a player who can score 30 points a game. Instead, if you can average 10 points per player, you will win most games and make the playoffs.


With investing, so many people are hunting for 10-baggers. But you don’t need huge gains to be a winner. Take a look at the chart below showing the returns on a $100,000 investment. Investor A earns a steady 4% per year. Investor B goes up and down, but has three very strong years. Which investor is better off at the end of five years?


Investor A’s cumulative total is $121,665 while investor B’s total is $119,340. Slow and steady wins the game.


#3: Don’t Play Last Year’s Game – Super Bowl winners don’t repeat. Fantasy football winners don’t repeat. NFL rushing leaders don’t repeat. Leading mutual fund gainers don’t repeat. Last year’s results don’t matter. It’s today, tomorrow and next week that matter. For example, if you’re about to retire, it’s income that matters, not rate of return.


#4: Pick a Strategy and Stick With It – Your #1 receiver has a bad game. What do you do? Do you stick with him, or bench him and start a rookie the next week? How you coach is even more important than what players you have.


I’ve seen investors change fund managers after one month or one quarter — and then sit on the sideline and watch the fund double the market’s performance over the next two years.


My experience is that second-guessing is counterproductive, and most often relegates you to the bottom of the league… where the trash talkers live.

Are Comfortable Retirements Becoming Extinct?

Twenty years ago, a financial advisor named William Bengen identified a disturbing trend. Retirees, who used to be able to count on Social Security and pensions, were starting to depend upon their own savings to manage retirement.


This problem is even more acute today, as companies have largely abandoned pensions in favor of 401(k) programs. With retirees forced to be more self-reliant, they began asking a new question:“How much can we safely withdraw from our portfolio each year during retirement and not run out of money?”


Tough question! Mr. Bengen developed a solution in 1994 and published his research in the Journal of Financial Planning. Today his approach is called “the rule of 4%,” although Mr. Bengen would actually call it the “rule of 4.5%.”


After reconstructing the investment experience of retirees over decades past, Mr. Bengen concluded that if retirees withdrew no more than 4.5% of the portfolio in the first year and then adjusted annually for inflation, they could be confident they wouldn’t run out of money over a 30-year retirement. The number was depressingly low for many, but nonetheless, the majority of financial advisors began to recommend it.


Today, however, Mr. Bengen acknowledges “we’re in a period of time which may challenge it.” After two massive drops in the market since 2000, many retirees have been forced to either go back to work, cut back on expenses, or pursue options like reverse mortgages.


Frankly, it’s time for new research. Princeton Ph.D., Wade D. Pfau, Ph.D., has tackled the question again in his paper, “Can We Predict the Sustainable Withdrawal Rate for New Retirees?” published in the Journal of Financial Planning. In his study, Dr. Pfau predicts that for a portfolio invested 60% in stocks, the safe withdrawal rate is 1.8%.


If 4% was tough to swallow, how easy is it to imagine only withdrawing 1.8%? To put this in perspective, this means if you worked hard enough to save $1,000,000 for retirement, you can expect to live high on the hog with $18,000 per year. Frankly, this is getting ridiculous.


Apparently, Money Magazine thinks so, too. In an article entitled, “Forget the 4% Withdrawal Rule,” Money Magazine listed 3% as a safe withdrawal rate. They also said, at 3% you still have a 24% chance of outliving your savings. Do you want to go into retirement with a 24% chance of running out of money before you run out of life?


In truth, you don’t have to live a low-income, low-expectation retirement, if you’re willing to take advantage of the innovation that has occurred in financial products over the last several years.Today, retirees using safe, principal-protected vehicles can actually have guaranteed withdrawal rates of 5, 6 or even 7%.


If you want to insure your standard of living during retirement, give us a call and let’s have a conversation.