It's All About the Strategy

It’s All About the Strategy                                      
Tough questions to ask yourself before retirementby Barry L. Unterbrink

Americans have experienced a huge change in their thinking the past 7-10 years in how we view our money in retirement, and it may affect our pocketbooks for years to come.

First think back 25 years or so; you worked for one employer, retired after 20-30 years, and collected a defined benefit or pension for your lifetime. In the 1970’s qualified plans (IRA’s, etc.) were developed and became popular as an option to save and invest, normally with your employers blessing and match of dollars in some cases. Non-salaried people could also then enjoy some savings as well through IRA’s. Employers generally loved these new options, as they began to phase out their benefit plans, transferring the risk and management of their retirement savings onto their employees shoulders. The good news: the trillions of dollars today sitting in IRA’s, 401k’s and similar retirement plans is a testimony to Americans’ discipline to save for their future when they leave the workforce.

More recently, year after year of low interest rates have affected our ability to "earn" enough to offset inflation and taxes. New challenges face millions of workers today on a number of fronts.

First, how do I effectively manage my money? What’s a proper strategy to use? What are prudent allocations of money between stocks, bonds, cash/other to use at various ages. What's a fair fee to pay? How much employer stock is appropriate to own? Do I have an exit strategy with my money; when to sell or reduce the risks? 2008 taught us about risks in stocks, down 38%. So did 2001-2002.

Next, how do I turn on a source of income from my "pot" of money when retiring? What will interest rates be? Tax rates? What are your options when you need the money to live on? How much can be taken each month without running out of money in the future? What if I retire when my account balances are down? When will that happen next?

I apologize if I’ve left you with more questions than answers today. There are solutions in the financial markets and through the banks and insurance companies that can will help you "get a firm" handle on your retirement money now and when you need it the most. My next post will address some solutions before year-end. So stay tuned at http://moneyruminations.blogspot.com

Barry L. Unterbrink
Chartered Retirement Planning Counselor

The 7% Solution; Should We Consider it Now?

The 7% bet ... is it prudent now?

This blog post was last updated the end of 2009, but the basic strategy is still very relevant. The market continues to reach new highs in stock prices. If you've invested in stocks, in retirement accounts or otherwise, you should be ahead nicely year over year. But what now? Perhaps employing a "safe money" strategy is prudent now with a portion of your money. Read on.

Investing has always been a trade-off. Making choices with your money involves weighing the potential risk and rewards to determine the best course of action to achieve your desired goal. So, in a way, investing is akin to odds-making. In America, wagering is never a sure thing, but you can weigh the odds by using past data. This is fairly easy to determine in the stock market since reliable statistics and performance are readily available for past sessions going back at least to before the Great Depression, or about 1925.

I thought it timely to undertake this market study now, as the stock market has fallen about 20% since its high last October (2007). I'm using this 7% figure to compare stock price performance vs. a hypothetical 7% rate of return, what's available in a fixed index annuity. The answer sought: is it generally better to accept the market risk of stocks (gaining above in any one year/decade, and also losing money), or to bet with the a less risky maximum 7% annual return with no risk of loss when the stock market is down for any year. To get started, I took the annual Standard & Poor’s 500 Index* and compared this with a fixed index annuity that would credit you interest annually based on the performance of the S&P 500 Index with a cap of 7%. The cap is the maximum you could earn in any year. The floor is zero in the down years. You would never lose money in a down year with your principal. Dividends were not considered for ease of calculations. Eight decades of data were used, starting in 1930, and ending in 2009. This covered all of my available data, and represented co-incidentally about the lifetime of an investor, 80 years.

The data presents itself as follows:
1930’s Stock market lost 41%, the 7% strategy gained 31%
1940’s Stock market gained 34%, the 7% strategy gained 40%
1950’s Stock market gained 257%, the 7% strategy gained 65%
1960’s Stock market gained 53%, the 7% strategy gained 50%
1970’s Stock market gained 17%, the 7% strategy gained 49%
1980’s Stock market gained 227%, the 7% strategy gained 66%
1990’s Stock market gained 315%, the 7% strategy gained 68%
2000’s Stock market lost 24%, the 7% strategy gained 40%

Well, the tally is pretty easy to figure visually: being a long term investor in the stock market paid off more than the 7% annuity plan, but you needed a strong stomach to stay in during all the bad markets periods (25 years were down years). Using the 7% maximum gain in any one year, and all down years counted as zeros, you would have beaten the buy and hold market one-half the time by decade, ‘30’s, ‘40’s, ‘70’s, and ‘00’s. The other 4 decades your stock portfolio would have bested the 7% strategy. Note also that all decades were winners for the stock market, except the '30's and '00's just completed. But - the 7% plan beat the market in the '40's and '70's due to truly bad years that reduced the average gains over the 10 year decade.

Taken all together, you earned about 2X more by following the market as a buy and hold investor. You may say, "that’s all history now, what do I do today?" My reply; if you are 10-15 years to retirement, keep ¾ of your money in the market, and ¼ in the 7% plan. If you are older and closer to retirement, keep less with Mr. Market, and more in the safer 7% plan. With the recent stock and credit market turmoil, you should look at your money allocations to determine your risks as you inch closer to retirement.

If you can't eat or sleep well, you probably need to consider changes. Call me and I can help you with that.

Barry Unterbrink, C.R.P.C.
(954) 719-1151
* source Ibbotson & Associates SBBI yearbook

Gold, Your Portfolio, and Your Money

Gold, Your Portfolio, and Your Money

The recent fall in commodity prices has raised more than a few eyebrows on the validity of owning these types of investments, particularly gold.
Much advice out there centers on just diversifying among Stocks, Bonds, and Cash. Their plan has led to heavy losses in the past, taking years to get back to even. Our recipe requires gold, silver, other natural resources that protect and diversify your investments. Depending on the client, we can also provide for physical ownership of bullion, funds that hold physical bars, and when warranted, mining and commodity companies that produce the metals.

Do you believe commodities, gold and the stock market are risky places to invest? We answer: YES, in isolation. However, when combined with other non-correlated investments, over time the combination increases the returns but decreases the risk.

Let's talk gold: the mixing of gold into your portfolio of stocks did have a dramatic and positive effect on your overall portfolio performance year by year for 40 years. Gold has the qualities to act as a hedge in a portfolio to lessen the negative effects that a bad stock market can deliver. So, just as investing in the yellow metal alone could cause sleepless nights. When mixed with stocks and bonds, it greatly mitigates larger draw downs (falls in your portfolio value) and contributes to the overall portfolio performance. What is critical is not how each component of your portfolio preforms but what is the PROFIT or LOSS at the end of the year - and the volatility or drawdown of your portfolio during that time.

Two major actions / beliefs that investors cling to that I feel can hurt your pocketbook. First, if you are viewing your portfolio line-item by line-item, looking at each holding, you are missing the boat and need to change your outlook. It's a portfolio of investments, to be gauged as a whole. Don't nit-pick this and that. Second, view your results over time, not from their peak. Few can time the markets and you'll be disappointed if you use this gauge of performance. Instead, what is your 3-5-7 year average performance? Did it meet your expectations based on your level of risk you (or your advisor) recommended?

Historically when stocks turned down, gold delivered. Gold helped boost your results of an actual portfolio of stocks, bonds, cash and gold in 1973, 1974, 1977, 1990, the 2000-2002 bear market, and the most recent 2007-2009 ugly bear market when stocks fell 50% in just 17 months! Gold rose $200 an ounce or 30% during that stock meltdown.. That’s the diversification or balancing effect Gold will have in the next bear market which could be imminent.

Barry L. Unterbrink
Chartered Retirement Planning Counselor
Fort Lauderdale, Florida
(954) 719-1151

Note: We have just received the performance report on the largest portfolio managed by our research department. For the 10 years we have managed this account we have had an average annual return of 11.84% per year. This performance report has been verified by the major brokerage firm who is the custodian.
Although I cannot quote individual client performance in this space, the benefits of staying diversified and adding Gold the last two calendar years for those investors in this program: +10.5% in 2011 and +10.6% in 2012.