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Derided strategy looks good right now for retirees! July 28, 2009

Posted by shaferfinancial in Finance.
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Perhaps there is no strategy that was attacked by mainstream financial planners and do-it-yourself investors more than variable annuities.  Derided as expensive, sold by selfish insurance folks looking out more for themselves than their customers, and generally laughed at, this product has turned out to be much better than its critics have admitted.  Now I will admit that I am not a big fan of variable insurance products, preferring instead the equity indexed strategy.  However, the Wall Street Journal ran an article on this product last week that highlights what I have been telling folks for a while.  Folks that believed the indexers and invested their retirement funds into mutual funds have a huge problem.  Anyone that followed that strategy over the last 10-12 years has seriously compromised their retirement income.  As the Wall Street Article points out, if instead they bought the insurance product with the additional expenses and the guarantee they would have a much higher income today.  And so far, even though a couple of insurance companies have been bailed out, there has been no failed annuity payments even by AIG!

How much is that guarantee worth to retirees?  I would say quite a bit today.  In short, this is another example of where the mainstream has put expenses at the top of the list to their detriment!  The models of the mutual fund cheerleaders are severely flawed as I have pointed out many times.  Not that I am suggesting variable annuities; I’m not, I’m suggesting value in insurance products and their guarantees!

The time to take the added risk of equity investments is during your accumulation period.  And if you haven’t proven your investment acumen as you approach retirement, you might want to consider taking that guarantee!

What I found during my search for an alternative to MUTUAL FUNDS? April 27, 2009

Posted by shaferfinancial in Finance, Uncategorized.
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Ten years ago, I took a look at my mutual fund accounts and what I saw was very disappointing.  Despite the overall upward movement that occurred in the 1990s, it didn’t seem to turn into the type of numbers I needed to create significant retirement income.  So began my search for an alternative financial instrument.  During my research time on mutual funds I became disillusioned with the whole idea of mutual funds ever performing well in producing retirement income.  I thought I would share the fruits of my research and thinking about mutual funds in a concise form.  Now,  I have written several posts in the past covering different parts of my thinking, but thought it would be useful to put it into a concise form for the reader.

1.  The reported investment returns for mutual funds is totally dependent upon when you start and when you need to use the money.  In other words, the difference between the theory of what the individual returns can be and what are the actual results is extremely wide.  Even making an assumption that you will invest in mutual funds over a 30-35 year period [which is not likely according to the data], there are entire decades that if you retire into would give dramatically lower returns like the last decade.  So much of your success is determined by pure luck.

2.  The idea of diversification behind the design of mutual funds does reduce stock picking risk, but does not reduce market [systemic] risk.  The resulting risk reduction is skewed toward the upside.  In other words you can reduce you chance of loss any given year to -60% by using diversification techniques [including asset diversification] but in order to do that you given up the 250% upside that is possible by choosing a single stock that does well.  This skewed reduction of variance results in taking it on the chin during market wide downturns [like now], but inhibits your ability to recover from the loss.  Does anyone really think that they will recover from a 50% loss in their mutual funds anytime in the next few years? After all to get back to EVEN, you need to have a 100% gain!  How long will that take inside a mutual fund?

3.  The majority of folks invest in mutual funds inside their companies 401K.  These funds are heavily laden with fees that bleeds the overall returns significantly.  On top of that the idea of deferring income taxes on inputs today in order to pay them on the total account values of tomorrow strikes me as simply silly.  At the very least, your tax bill will be several times the amount you could have paid today, and that is assuming tax rates don’t rise and you are in a lower tax bracket during retirement.  These assumptions are simply not logical given today’s economic environment.

4.  Investing in mutual funds encourages passivity with one’s finances.  Invest automatically; put money in today and don’t worry it will be there for you in the future;  you have diversified away all the risk;  the market has returned 10% since WWII, and there is no reason to believe it won’t do the same in the future; our money managers can beat the market, or alternatively no one can beat the market so the best you can expect is market returns [this ignores the existence of people like Warren Buffet, George Soros, Ben Gramam], making money in the investment world is easy just let dollar cost averaging and the market tide take you to wealth, etc.  Heard any of these?  Well they all have a small, very small grain of truth embedded in them, but for the most part are simply propaganda used to sell mutual funds.  Being passive in your financial life leads to only one thing, being poor and the data points this out too.

5.   The actual results from folks investing in mutual funds is very poor.  Currently, a 1.8% return for those investing over the last 20 years.  Now, critics will say unfair to look at it in the depth of a bear market, but before the bear market of 2008 started the returns were only 4.4% with a twenty year look back.  The data on how large of retirement accounts people have is another signal data point and even at its peak it was less than $90,000 for the 55-64 age group.  You simply can’t find any data out there that points to this being a successful investment strategy even before the 2008 bear market!  When it comes to successful mutual fund investing, it is literally all theory and totally divorced from reality.

The bottom line is that mutual fund investing as a retirement vehicle is a total failure.  This has driven me to find alternative methods of building up a retirement account and reformed my ideas of personal finance.  This journey that I hope to take my readers along has transformed my thinking in many areas.  But first you have to decide to stop doing what has failed and start looking for something better!