Don’t Blow Your Retirement Nest Egg By Listening To Warren Buffett
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.” – Warren Buffett.
The Buffet theory acknowledges risk is mitigated by sector gains offsetting sector losses; however the opposite is also true – sector losses offset sector gains and reduces returns. His is willing to take on additional risk attempting to maximize returns. Forget about it!
Investopedia counters with:
“…(D)iversification is widely considered a part of investing basics. Personal finance courses teach it as gospel, deriding individual stocks as tantamount to casino gambling. In fact, many investors never even invest in an individual stock. Instead, they turn to mutual funds and exchange-traded funds (ETFs).
…The idea behind this strategy is that no matter what the market is doing, a portion of the investor’s portfolio is likely to do well.”
“In theory there is no difference between theory and practice. In practice there is.” – Yogi Berra
Today’s Real World
Despite Mr. Buffett’s success, he needs to walk a few miles in the moccasins of average baby boomers and retirees. Most had the rug yanked out from under them in 2008 when the stock market crashed and the banks were bailed out. We’ve now had 8 years of Federal Reserve Zero Interest Rate Policy (ZIRP) and no end in sight.
The Buffett theory is based on maximizing your gains in an arena you are comfortable. It’s easy to say if you have a few billion to fall back on if you make a bad investment.
Much has changed since the Fed destroyed investments like top quality bonds and Certificate of Deposits paying decent interest. Investors lost the “safe income certainty” these investments provided. Many are forced to tap into the principal to pay their bills.
Build a good foundation
Every retiree needs a certain amount of monthly income. No matter what the stock market does, they know they can count on it – “safe income certainty”. Social Security helps, but for most it is not enough.
Preservation of capital is the top priority. I have spent 8 frustrating years attempting to find safe, decent yielding investments to fill the void caused by the Fed’s ZIRP. I dislike having to put so much capital at risk. I’m not alone.
The big boys, with their army of pedigreed economists equipped with sophisticated computers are also struggling. The Los Angeles Times sums it up well:
“The nation’s biggest public pension fund is falling far short of its annual investment goals.
The California Public Employees’ Retirement System earned only 3% in the 10 months that ended April 30 and is likely to fall short of its 7.5% annual target.
… Absent a ‘remarkable rally in the global stock market,’ said Ted Eliopoulos, CalPERS’ chief investment officer, the ground to make up in two months is too great to avoid a likely shortfall.”
54% of their assets are invested in a global stock portfolio fraught with risk, and they are generating 40% of their targeted income – meaning they have to dip into the principal to meet their obligations. If the big boys have those problems, what chance does a little guy have?
|Unless you are ultra-wealthy, or fortunate enough to have a terrific pension, the chances of being able to retire with social security and income from your nest egg – with no financial worries – are pretty slim.
I cringe each time I hear a friend tell me they now have to dip into their principle to pay the bills. They’re afraid they will run out of money before they die.
I don’t care how many times you run the damn numbers and they indicate (at the current drawdown rate) you will have enough to last until age 125 – you are still going to worry. Why? You now worry about both “safe income certainty” and “expense certainty”.
Way outside the comfort zone
The investment world changed – and may never revert back to what we once knew. We are forced to look at ideas well outside our normal comfort zone.
Demand for safe, income-producing products have driven prices so high, the yields are terrible. Ten-year treasuries currently yield 1.56%. Factor in taxes and inflation and you are losing money.
|Safe investments with good yields have been picked over like a grocery store the day before a hurricane.
For years I was biased against annuities. I decided to investigate them again.
Reluctantly I contacted Stan Haithcock, much better known as Stan The Annuity Man. I like Stan because he lives up to his reputation. He has been referred to as the “walking middle finger of annuity truth”. He’s considered the nation’s “annuity consumer advocate” for all things annuity.” Stan is my kind of guy – he tells it like it is.
Not only did Stan agree to an interview, he also convinced me to spend countless hours researching and developing the Miller On The Money Annuity Guide. Stan said people who sell annuities write most of the information currently available. I would be objective and unbiased. I took on the challenge and drilled Stan with the hard questions. It’s a terrific, eye-opening interview. You can read it HERE.
While they guarantee income for life, I have a major concern. An annuity may fill a big void in the income floor many desperately need today, but what about future inflation? Stan did not mince words:
“If an agent says that they have an annuity that adjusts for inflation, politely ask them to leave and never speak to you again because they are just trying to sell you the dream. There is not an annuity type on the planet that legitimately addresses inflation. Let’s destroy those sales pitches once and for all.”
|Insurance companies profit from inflation. They collect premiums in current dollars and pay future claims with inflation-depreciated dollars. You must protect your buying power with some inflation protection type assets.
My personal revelation!
For some, annuities are a good element of a comprehensive retirement portfolio – they are not a stand alone, do it yourself retirement plan.
Properly structured annuities provide a good income floor. You need to surround an annuity with inflation protection framework. I’ve probably written the only Annuity Guide that says you also need quality bonds, dividend paying stocks, growth stocks, foreign currencies, gold and other inflation protection assets. I highly recommend using a licensed, qualified, trustworthy financial planner to help you assemble it all together.
Gathering the pieces
Whether you are a do-it-yourself investor, or work with your trustworthy financial planner (recommended), you need to look at the big picture and tie things together. Here is what you need.
Income floor – safe assets. These assets are as close to bulletproof as you can get. The foundation is Social Security or a safe, guaranteed pension.
You may include high-grade bonds or Certificates of Deposit. A good contractually guaranteed annuity fits into this group.
The goal is to throw off guaranteed income, with maximum safety. You can’t go overboard, the yield will be low; this is a trade-off.
Assets for growth. You expect growth over the long term. Growth potential takes priority over dividend yield. You hope they will grow ahead of the inflation rate.
This could also include, quality stocks, productive farmland, waterfront property and precious metals. I’ve shown readers how gold appreciated well ahead of the inflation rate during the Carter years. Owning some physical gold is a MUST.
Assets providing safety, growth and yield. This included dividend paying stocks and foreign currencies.
Many high quality companies today are not paying the highest dividends. Investors are willing to accept a lower yield for the added safety of a solid company. When in doubt, go safe! Diversify across sectors for additional safety.
Foreign currencies offer some yield and inflation protection. Jo and I hold FDIC insured CD’s from Everbank denominated in foreign currencies. The yields are currently small. We own them as insurance against inflation and hope we never have to sell them.
Cash. Hold enough cash type investments to pay your bills for a year. Why? You don’t want to be forced into selling assets at the wrong time should something unexpected come up – or be unable to snap up an unexpected bargain.
You can hold cash in your brokerage account and invest it in safe, liquid short-term cash investments. You can also ladder 3 month CD’s. You trade immediate liquidity for a little more yield.
We can daydream about having poured money into Apple and calculate our riches. Pick the right one and you are set for life. Who daydreams about having all their money in Enron just before the crash?
Pouring the bulk of your life savings into annuities, gold, or “hot stock tips” from your barber is just too risky. Mr. Buffett admitted, “…(R)isk is mitigated by sector gains offsetting sector losses.” Preservation of capital takes precedence over high risk and chasing yield.
CNBC provides a Berkshire Hathaway Portfolio Tracker. I find it interesting that Mr. Buffet’s company is invested in almost 50 different holdings across many market sectors.
Diversify, blend you assets carefully together, and sleep well!
On The Lighter Side
It’s fall here in North America. In less than a month it will be time to turn your clocks back – unless you live in Arizona.
The Cubs won the first game of their playoff series 1-0 with a late inning home run. The sideline reporter said she was surprised; many fans were crying. That’s no surprise for Cubs fans.
If they are lucky and win it all this year, there will be many gallons of tears flowing around the world. Fans will be crying tears of joy, wishing their elders were alive to celebrate. All baby boomers, and most of their parents, can say the Cubs have never won a World Series in their lifetime. If it happens, darn right we will be crying.
Thanks again to those who bought the Miller, On The Money Annuity Guide. I appreciated those who took the time and offered good, constructive feedback. Please keep the email coming. You are not too late. In the next few days we will be rolling out phase two of our marketing program.
My wife Jo sent me some important facts to remember as we grow older:
- Life is sexually transmitted.
- Good health is merely the slowest possible rate at which one can die.
- Health nuts are going to feel stupid someday, lying in the hospital, dying of nothing.
- Life is like a jar of jalapeno peppers. What you do today may be a burning issue tomorrow.
And my favorite
- Give a person a fish and you feed them for a day. Teach a person to use the Internet and they won’t bother you for weeks, months, maybe years.
Until next time…