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Investment Sense – The Value of Ongoing Advice

Index Returns Through March 31, 2014

Index Returns Through March 31, 2014

2014 got off to a rough start… of course now that things have stabilized, it is hard to recall the rough start. That is an example of “recency bias” in action. Recency bias is our tendency to use recent experiences as the baseline for what will happen in the future.

When the market is down, we become convinced it will remain at a permanent low. When the market is up, we become convinced it should keep going up. When interest rates are dismally low, we become convinced they will stay low forever. Although at the time we may feel convinced of it, that doesn’t make it so.

Reviewing what has happened helps bring perspective so we don’t get quite as caught up in recent events. To review, let’s take a quick look at this past quarter.

At the beginning of the year, the market did go down (the S&P 500 was down about 5% and the Dow Jones Index was down about 7% as of the first few days of February), then, despite Russia’s annexation of Crimea, evidence that growth is slowing in China, and a changeover in Federal Reserve leadership, U.S. stocks managed to accrue a mild gain for the quarter. U.S. large cap stocks were up 1.8% and small caps up 1%.

These first quarter fluctuations should serve as a solid reminder that short term market fluctuations have no impact on your long-term financial success. When times get turbulent, if you find yourself watching a lot of financial news and getting caught up in it, try a different tactic.

One client told us that about a year after he hired us he and his wife simply stopped watching any shows that focused too much on financial news. They report they have found life to be far more relaxing now. This sounds like a smart approach.

You don’t have to keep up on financial news because we do keep up on it – but not the kind you see reported on TV or in Money Magazine. The reports we read each month are put together by institutional investment firms and cover financial data at a level of depth that far exceeds what can be reported on TV.

This past month, here are some of the near-term (one year out) future economic expectations included in the research we read:

  • Inflation to remain subdued
  • Business spending/investment to pick up
  • Increased consumer spending due to improvement in income growth, job gains, and replenished household balance sheets
  • Leading economic indicators signal modest economic expansion
  • Interest rate increase expected around spring 2015

This all sounds positive. After the past five years, stability and continued growth are welcome.

With this positive news, we have many clients who have asked about increasing their allocation to the growth (equity index fund) portion of their portfolio. Once again, this is recency bias in action.

Current economic news should not drive your personal investment decisions. If you are a business owner, current news may affect how and when you expand and market your business, but it shouldn’t affect the level of risk you take in your portfolio.

Here’s an example: if consumer spending is likely to increase, a business owner might decide it is a good time to open a new location. This is logical.

But if that same business owner also decides it is time to put a lot more of their IRA money in stocks – that is where the logic breaks down. The equity market is a leading economic indicator, so the stock market is likely to go up months and months in advance of this potential increase in consumer spending. Economic forecasts cannot be used to time market moves.

Despite what the media may lead you to believe, the economic data that the media focuses on has little relevance to your own level of financial security. This point is well made in GMO’s Investing for Retirement whitepaper (April 2014) where they say,

“An investor for retirement has fairly well-defined needs, both in terms of how much wealth he needs to accumulate and his pattern of consumption in retirement. An investor’s portfolio should be driven primarily by his needs and circumstances – what does he need and when does he need it.”

Your needs and circumstances should always be the foundation of your portfolio decisions – and that is exactly the approach we take. Does this approach pay off? Research studies report that it does. Here’s a sampling of what Vanguard and Morningstar say about the value of ongoing advice.

Vanguard’s March 2014 Advisor’s Alpha whitepaper says,

“Based on our analysis, advisors can potentially add “about 3%” in net returns…”

On a $1,000,000 portfolio, 3% net returns adds up to $30,000 a year.

Morningstar’s September 2012 Alpha, Beta, Gamma paper says,

“We focus on five important financial planning decision/techniques… each of these five components creates value for retirees, and when combined, can be expected to generate 29% more income…”

For a retiree with $100,000 of income, 29% more income stacks up to $29,000 a year.

What types of decisions lead to such results? All of the following items have been shown to contribute to improved results in terms of after-tax returns, future retirement income, and total wealth:

  • Cost-effective implementation (using low expense ratio funds)
  • Rebalancing
  • Behavioral coaching
  • Asset location (which funds go in which types of accounts)
  • Spending strategy (withdrawal order)
  • Capital gains management (harvesting gains and losses)
  • Strategic Roth conversions (converting IRA money to a Roth when appropriate)

Notice not one of these things has to do with the latest economic data. Most of these things have to do with your personal circumstances.

We find it silly that so much of the investment world focuses on external factors that have no proven ability to add returns to an individual investor.  That’s why we’ll continue to focus on the personal factors that have been proven to deliver results.

*Returns data in graph above from Advisor Intelligence. When possible We report index fund returns to show performance net of fund fees. As such in the graph:

Total Bond Market Index is: Vanguard’s Total Bond Market Index Fund(VBMFX)
US Large Cap is: Vanguard’s 500 Index Fund (VFINX)
US Small Cap is: Vanguard’s Small Cap Index Fund (NAESX)
Real Estate is: Vanguards’s REIT Index (VGSIX)
International Large cap is: Vanguard’s Total International Stocks Index (VGTSX)
International Small Cap is: MSCI World Ex USA Small Cap Index (not a fund)
Emerging Markets is: Vanguard’s Emerging Market’s Index Fund (VEIEX)

(Investment Sense is an almost-monthly posting of market commentary with a common sense twist. For all our latest commentary follow us on Facebook.)

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Income for Life

Retirement income is different.

A comprehensive retirement plan means you can relax and enjoy retirement.

You can’t control everything in retirement. But when you have a comprehensive plan in place that helps you manage the aspects that are within your control it frees you up to relax and enjoy yourself.

Ask yourself these questions:

  • Are you prepared for retirement?
  • Do you have a strategy for investing your retirement assets?
  • Is it the same strategy you’ve used to get this far?

Your savings and investment strategy may have been quite effective in helping you accumulate assets. But that same strategy may not be the optimal one for creating lifelong retirement income.

What many fail to realize is that once retired, you are solving a different math problem. Your retirement goal is to increase the odds of maintaining a life-long standard of living over unknown economic conditions for an unknown life expectancy. The portfolio structure that most effectively accomplishes this goal is not always the same portfolio structure that accomplishes the accumulation goal of maximizing returns for a given level of risk.

In a nutshell, solving for maximizing life-long income is not the same as solving for maximizing risk-adjusted returns. Or put differently, what got you here, may not get you there.

If you like to dig in to the details, in Why Retirement Investing Needs to be Done Differently I have linked to many research studies that expand upon the difference in solving for life-long income vs. solving for maximizing returns.

If you’d prefer to watch a video, check out the Income for Life Model®. It is a comprehensive strategy for generating retirement income with the objective of providing inflation-adjusted income for life.

If you’re ready to get a plan in place, please fill out our Pre-Meeting Questions, and we’ll reach out to schedule a complimentary introductory meeting.

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Welcome Kathleen Mealey!

Kathleen Mealey

Sensible Money welcomes Kathy Mealey.

A service business lives and dies by the quality of its people. A sales organization isn’t so concerned with that.

In my brokerage firm days the revolving door of advisors who were hired and quit spun around at a rapid pace. It wasn’t about expertise, and unfortunately if often wasn’t about ethics. It was about  finding people who could sell.

Times are a-changing though, and for the better I must say. Our organization is on the forefront of that change. We are specialists.

You only retire once, and the planning that goes into a successful transition to retirement requires specialized knowledge. Most advisors don’t have the skills that I deem necessary to join our team. That’s why I was so excited when I found out Kathy was available and interested in what we are doing.

I first met Kathy in the summer of 2012. I was a guest lecturer at the RMA (Retirement Management Analyst) boot camp at Salem State University. She was attending to acquire her RMA designation.

She wanted to learn more so a few months later just prior to RIIA’s (Retirement Income Industry Association’s) fall conference in October 2012 she reached out to me to ask if she could take me to dinner when I was in town. (I’m in Arizona.) Bless her, she picked me up from the airport when I landed in Boston, we went to dinner, and chatted for hours.

The next time Kathy and I caught up was the summer of 2013. She and her husband Tom were on a trip to Arizona and stopped in the office to say hi. We got to chatting again and talked shop over happy hour. I thought she was great – so at the start of this year when I found out she was looking for a place to build her wealth management practice, I immediately reached out.

There are two things I consider when determining if an advisor is a good fit.

First, do they have the technical skills? As a CFP®, RMA, and EA (Enrolled Agent), Kathy has all the technical knowledge needed; it takes at least six years to teach these skills from the ground up.

But more importantly, I look for this intangible goodness about someone. I’ve often said, “I can teach skills, but I can’t teach someone how to be a good person.” When this quality is present, I know someone will fit in with our culture, and I know they’ll do the right thing for the client every time. That’s what matters to me.

Each and every person on our team is good to the core. And Kathy fits right in.

We are super excited to have her! Even better, she’s just as excited to be joining us.

If you want to learn more about Kathy you can visit her LinkedIn profile.

Written by Dana Anspach, Founder of Sensible Money.

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More Frequently Asked Questions About Our Services


Smart planning delivers an increase in retirement income when compared to an unplanned approach*.

How do your services work?

We quote you a one-time price to prepare a financial plan. We call this going through our Juicing® process – as it is designed to help you squeeze more out of your money.

Your financial plan projects how well prepared you are to meet your financial goals.

A plan is necessary in order to make the appropriate investment recommendations.

Once the plan is understood, most Sensible Money clients work with us on an ongoing basis to manage investments and provide planning on a holistic basis.

What does the plan cover?

  • If you are near retirement your plan covers the items we discuss on our Time to Drink page.
  • If you are farther from retirement your plan covers the items on our Filling Your Cup page.

 How long does this take?

  • The introductory meeting takes 30 minutes to an hour.
  • If you hire us it may take you several hours to gather the data we need to prepare your plan.
  • Then plan on meeting with us for 1-2 hours each over a series of 3-4 strategy meetings each spaced about 2-3 weeks apart.

 Do I have to move my assets to you in order for you to work with me?

  • In your 2nd or 3rd strategy meeting you will have the opportunity to decide if our investment management services are a good fit for you. You are not required to move assets to us. We are looking for clients who are willing to listen to our investment approach and consider it.

 How are your services priced?

  • Our initial financial planning engagement is priced as a package of hours at a rate of $100 – $200 an hour depending on the experience and qualifications of your advisor. Right now most planning work is priced at a rate of $150 an hour.
  • Investment management services are structured as a percentage of assets.

 What should I expect in the introductory meeting?

  • Expect a friendly conversation! No decisions are required at this meeting.
  • We explain our services, we will have questions for you, and you will have questions for us.

What should I bring to the first meeting?

  • Bring questions and any data you wish to share with us.

We update and add to the questions above as needed. We have additional information on our permanent frequently asked questions page.

*See Morningstar research paper Alpha, Beta and Now… Gamma.

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