Monthly Archives: June 2012

Proving the Value of Risk Management in Retirement Planning

The Wall Street Journal’s recent article, “Same Returns, Less Risk” discusses different approaches to managing portfolio risk while maintaining exposure to potential returns available from stocks and other riskier asset classes.  

 If you are a Portfolioist reader, you know that we’ve written about the importance of risk budgeting in the past (see, “Risk Budgeting: A Critical Tool for Portfolio Management”). You also know that we believe that risk budgeting is an important part of successful long-term investing. That’s why we constructed our line-up of Target Date Folios using a risk budgeting approach—and this stands in stark contrast to the strategy used in more traditional Target Date Mutual Funds that generally use static asset allocations that don’t adjust their risk allocations in volatile market conditions. Continue reading

Safety Not Guaranteed

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

I haven’t seen it yet,  but I love the conceit behind the indie film Safety Not Guaranteed, which has opened to excellent reviews.  The words of the title are found in a mysterious classified ad in a local paper seeking a partner for time travel.  The ad also states that applicants will need their own weapons and, ominously, “safety not guaranteed.”

That’s a pretty good metaphor for investing and for life in general. Continue reading

How Much Risk Should A 65-Year-Old Take?

Stacy Schaus, Executive Vice President at PIMCO and her colleague, Ying Gao, recently wrote a white paper titled, “Loss Capacity Drives 401(k) Investment Default Evaluation” that tackles some of the most important issues in retirement planning. The white paper discusses the development of asset allocation strategy over an investor’s working years and into retirement. (Schaus has worked on this problem for years and has written a book called Designing Successful Target Date Strategies for Defined Contribution Plans: Putting Participants on the Optimal Glide Path on this topic).

While the white paper covers a number of elements of the life cycle asset allocation problem, I’d like to focus on one in particular: How much can a 65-year-old investor approaching retirement really afford to lose? Continue reading

The Case for Dividend-Focused Investing

Morningstar’s recently published article called “Our Favorite Dividend ETFs for 2012” makes the case for investing in stocks on the basis of dividend yield.  I also recently published an article in Advisor Perspectives on dividend-oriented funds called “Finding the Best Dividend Fund” that discusses why dividend-oriented investing makes sense. Both articles explore what makes an attractive dividend-focused stock fund and provide lists of dividend-oriented funds and their characteristics.

Historical Out-Performance

The Morningstar article states that high-dividend stocks have outperformed non-dividend stocks by an average of 3% per year from 1927 to the present. The source data for this analysis comes from Kenneth French, a well-known professor of Finance at the Tuck School of Business at Dartmouth. French is an Continue reading

Why Doesn’t Everyone Use Passive Investing?

Guest post by Contributing Editor, Lowell Herr, ITA Wealth Management. Lowell is a subscriber to the Portfolioist and his investment philosophy is similar to ours.  Enjoy.

If passive investing is so successful, why is it that so few investors actually use this approach to construct and manage their portfolios?

Good question and one that likely has a score of answers.

Here are a few to consider:

1.  There is a large collection of investors who are confident they can beat the market.  Ego certainly enters into this thinking.  Why would I be investing if I did not think I could outsmart the majority of other investors?

2.  Index investing does not have “water cooler” appeal.  For some reason, Continue reading

From the Portfolioist Bookshelf: The Clash of Generations by Laurence J. Kotlikoff and Scott Burns

I have just finished reading The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy, the new book authored by Boston University Economics professor Laurence Kotlikoff and well-known financial journalist and advisor, Scott Burns. This is a truly important book, and I hope that it will be so widely read as to inspire a meaningful widespread dialog among individuals, families, and policymakers. Continue reading

Are 401(k) Fees Consuming 30% of Our Lifetime Savings?

There is a story getting considerable coverage this week about a study that finds that an average family may end up having 30% less in total lifetime accumulated wealth in their 401(k) plans due to high fees and expenses. The study inspiring all of this attention is titled “The Retirement Savings Drain” and published by policy research firm Demos.

The Demos study estimates that the all-in costs of a 401(k) plan, (including fund expense ratio, trading costs and administrative fees) average 1.56% of assets per year. This figure is based on asset-weighted average expense ratios for mutual funds and assuming trading costs that are pretty reasonable. The all-in cost estimates are fairly consistent with other estimates that I have read. Participants in large low-cost plans may pay less and participants in small company plans tend to pay Continue reading