You Can’t See Tomorrow

cook_headshotPaul Cook, AIF®, Vice President and Regional Director, Retirement Plan Services

Thomas Hobbes’ famous description of life in times of war as “nasty, brutish and short” could just as easily have been applied to peacetime in the 17th century. Life expectancy in relatively developed England was just 35 years during Hobbes’ lifetime, owing largely to high infant and child mortality rates. In the less developed American colonies, life expectancy was a scant 25 years in Virginia and 40% of New Englanders died before reaching adulthood.

While very few of us would trade the realities of Thomas Hobbes’ day for our own (indoor plumbing is awfully nice), there is no denying that we are psychologically better equipped to prepare for a short life than a long one. The reason this is so is that we have a tendency to focus on the here and now and discount the future that psychologists refer to as “present bias.” To illustrate the power of present bias, consider the following:

Suppose I asked you whether you would like $250 one year (52 weeks) from now or $225 50 weeks from now – which would you choose? Now, what if I offered you a choice between $225 right this second or $250 two weeks from now – would your answer change? If you are like most people, you chose to wait for the larger payout in the first scenario but selected the immediate payoff in the second scenario. The farther we move from the present moment, the more dramatically we begin to discount time. Both scenarios involve a $25 gain for a two-week wait, but we perceive them very differently.

Present bias is rooted, among other things, in our tendency to experience now as a “hot” emotional state and the future in cooler terms. Simply put, right now seems more real than twenty years from now. As a result, many people prioritize meeting the needs of the all-too-real right now but ignore the just as real, but less salient, needs of their future self. If this is done consistently enough, tomorrow becomes today and you find yourself wholly unprepared.

Solution: Stanford Researchers1 have found that seeing a computer simulated aged version of your face makes you more likely to save for retirement. Why? Seeing the “older” version of yourself moves you from a cool to hot emotional state and makes the reality of your retirement more visceral. Psychologists have shown repeatedly that the more salient a variable is, the more likely it is to be acted upon. Start to increase the salience of your own retirement by discussing a few of the following questions with a partner or loved one:

  • Where will I/we live in retirement?
  • How will I spend my days in retirement?
  • What will be the best part of being retired?
  • What problems might arise that I could prepare for now?

For 10 years, Brinker Capital Retirement Plan Services has been working with advisors to offer plan sponsors the solutions to help participants reach their retirement goals.  The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Source:

1 Exploring the “Planning Fallacy”: Why People Underestimate Their Task Completion Times, Roger Buehler, Dale Griffin, and Michael Ross.  Journal of Personality and Social Psychology, 1994.

Nix the Mixed Emotions About Retirement

cook_headshotPaul Cook, AIF®, Vice President and Regional Director, Retirement Plan Services

The future holds many uncertainties, leaving us to often have mixed feelings when thinking about retirement. Even if you feel more than ready, on an emotional level, to move to the next phase of your life, you may have some uncertainty about whether you will be able to maintain the lifestyle you wish.

Last week in Roddy Marino’s Eight Signs You Are Ready to Retire, he shared some useful statistics from an Ameriprise Financial survey that address this notion of mixed emotion. Close to 50% of respondents felt they were ready to retire, but admitted that there was still some concern. 21% admitted more bluntly that they felt uncertain or not ready at all. Suffice it to say that a large portion, about 63%, of newly retired boomers said they felt stressed about retirement leading up to the decision.[1]

We’ve talked before about how your physical health can impact your retirement, but let’s take another approach and look at six financial certainties that may help to lower your stress and avoid some of the mixed emotions about retirement.

  1. You will need cash. Throughout your retirement journey, you will need quick access to your money. Typically, you will need enough liquidity to cover two years’ worth of anticipated living expenses.
  1. The quicker you spend, the shorter it will last. Your predictable expenses may total up to, for example, $2,000 a month. But how many years could you go on spending $24,000? The impact of spending on your portfolio becomes clear once you determine a spend-rate. For example, if you had $500,000 in a retirement savings account and withdrew $2,000 a month, the portfolio would last 20-29 years. A $500 reduction in spending, however, could result in 9-15 more years of longevity for the portfolio.
  1. The money not needed to cover expenses must be invested…wisely. While you can’t control the markets, you should feel confident that your investments are managed with skill and integrity. Choose an investment advisor with whom you have a trust and have a high level of confidence.
  1. Eventually, you will run out of cash and need more. One of the tricky parts of managing your money in retirement involves knowing how to create an income stream from your portfolio. You need to figure out which assets to take distributions from, and when. To ensure that each of your assets performs optimally, you must conduct a careful technical analysis and evaluate moving market trends. If you are like most retirees, you could benefit from having an expert perform this service for you so that you can have confidence that you are benefiting from all possible market and tax advantages.
  1. You’ll make more confident decisions if you know how your investment performance and expenses measure against your goals. Throughout your retirement journey, it is helpful to know where you stand against your goals. If your overall goal is to outlive your savings, then you should have a system in place that helps you contextualize your spending and its relative impact on long-term goals.
  1. Markets are volatile. When markets fluctuate, many investors feel like all semblance of control over their financial future is lost. Having a well-diversified portfolio may help to smooth the ride and reduce some of the emotions of investing.

If you approach retirement by developing an income solution that addresses each of these known facts, you can feel as if you are on more solid ground to enjoy your retirement.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.


[1] Ameriprise Study: First Wave of Baby Boomers Say Health and Emotional Preparation are Keys to a Successful Retirement, February 3, 2015

Eight Signs You Are Ready to Retire

Roddy MarinoRoddy Marino, CIMA, Executive Vice President
National Accounts & Distribution

New England Patriots quarterback is famous, and infamous, for a number of things both on and off the football field. His stance on retirement, however, is a personal favorite. When asked when he will retire, the then 37-year old quarterback said, “When I suck.”

Brady has the benefit of stats, sacks and millions of armchair quarterbacks to tell him when it’s time for him to hang up his cleats, but the decision to retire isn’t as clear for most Americans.

According to a survey conducted by Ameriprise Financial, nearly half of retirees (47%) felt ready to retire, but approached it with mixed emotions. 25% of the people surveyed said they could hardly wait for retirement, but nearly as many (21%) felt uncertain or felt that they were just not ready.[1]

If you are among the group of pre-retirees who feel uncertainty, here are eight signs that will help you decide if the time is right for you to consider retirement:

  1. shutterstock_447538888You are emotionally ready. Choosing when to retire has as much to do with emotions as it does finances. The transition from a full-time job that, for many, shaped their identity, to life with less structure can be scary. According to the Ameriprise study, losing connections with colleagues (37%), getting used to a different routine (32%), and finding purposeful ways to pass the time (22%) pose the greatest challenge for the newly-retired. Despite these challenges, 65%say they fell into their new routine fairly quickly, and half (52%) report to having less time on their hands than they would have thought.
  2. You’ve paid down your debt. Debt represents a key barometer in retirement readiness. If possible, you will want to keep working until your high-interest credit card debt, personal loans or auto loans have been satisfied—or you have a plan to retire such debt.
  3. You have an emergency fund. It’s important to plan in advance for how you will address emergencies, big and small, in retirement. The same survey revealed that 90% of Americans have endured at least one setback that harmed their retirement savings. Setbacks vary from caring for adult children, to college expenses stretching over six years instead of four. Others include loss of a job, assisted living expenses, and disappointing stock performance. As the survey indicates, unexpected life events cost the retirement accounts of the respondents $117,000 on average. An emergency fund can serve to prevent you from having to resort to retirement savings during hard financial times.
  4. You know what it’s going to cost. Some people believe they will enjoy a significant decrease in post-retirement expenses; however, that may not be the case. Instead, many retirees experience trade-off in expenses. For example, instead of daily commute costs, retirees may take longer trips thereby canceling out any savings in transportation expenses. Most retirees’ expenses follow a U-shaped pattern. For the first few years, the expenses mimic pre-retirement expenses, then as the retiree settles in, expenses dip only to rise as health care costs kick in.
  5. You know how you will create income. Much of retirement planning involves asset accumulation, but it is equally important to figure out what assets to tap, and in what order. Your income plan should include a decision on when you will elect to receive Social Security benefits. It should also take into consideration all sources of income including fixed, immediate, and indexed annuity strategies, pensions, and even your house. It should also address the timing as to when and you will withdraw income from all potential sources.
  6. Your children have their financial lives in order. Family dynamics play a significant role in shaping one’s retirement experience, yet are often overlooked during the planning process. Many retirees do not anticipate or underestimate the financial toll associated with providing financial support to their adult children. If you are thinking of retiring and still have a financially dependent child, consider establishing parameters for the arrangement, set expectations, and deepen the child’s understanding and appreciation of what is at stake for you.
  7. You have prioritized your health. When it comes to determining retirement well-being, health is typically more important than wealth. Retirees in better health have the added peace of mind that comes from financial security. They tend to enjoy retirement more, feel fulfilled and are not as prone to negative emotions as their less healthy counterparts.[2] For most, health care costs top the retirement expenses charts so your ability to pay for medical care you will eventually need should be a key consideration. Healthy habits and preventive medical treatment before retirement can help to serve as a cost-containment measurement as well as a lifestyle booster.
  8. shutterstock_128132981Someone you trust can help you make your financial decisions. A trusted advisor is invaluable throughout your retirement journey. He or she can help you manage your retirement portfolio to meet your preservation and growth objectives, help you establish an income strategy matched to your spending needs, and track your spending versus assumptions. If a crisis arises, a trusted financial advisor will already know your financial history and can help make decisions that are in your best interests. Similarly, it is extremely helpful to have a trusted advisor relationship solidified in the event your cognitive abilities decline, and you need help with decisions.

[1] Ameriprise Study: First Wave of Baby Boomers Say Health and Emotional Preparation Are Keys to a Successful Retirement, 2/3/15: http://newsroom.ameriprise.com/news/ameriprise-study-first-wave-baby-boomers-say-health-and-emotional-preparation-are-keys-to-successful-retirement.htm

[2] Health, Wealth and Happiness in Retirement, MassMutual. 3/25/15

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Diversification: It’s Not Beauty and the Beast, but Still a Tale as Old as Time

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes & Founder, Nocturne Capital

Hedge fund guru Cliff Asness calls it “the only free lunch in investing.” Toby Moskowitz calls it “the lowest hanging fruit in investing.” Dr. Brian Portnoy says that doing it “means always having to say you’re sorry.” We’re speaking, of course, of diversification.

Diversification, or the reduction of non-market risk by investing in a variety of assets, is one of the hallmarks of traditional approaches to investing. What is less appreciated, however, are the ways in which it makes emotional as well as economic sense not to have all of your eggs in one basket. As is so often the case, the poets, philosophers and aesthetes beat the mathematicians to understanding this basic tenet of emotional self-regulation. The Bible mentions the benefits of diversification as a risk management technique in Ecclesiastes, a book estimated to have been written roughly 935 BC. It reads:

But divide your investments among many places, for you do not know what risks might lie ahead. (Ecclesiastes 11:2)

The Talmud too references an early form of diversification, the prescription there being to split one’s assets into three parts—one third in business, another third in currency and the final third in real estate.

The most famous, and perhaps most eloquent, early mention of diversification is found in Shakespeare’s, The Merchant of Venice, where we read:

My ventures are not in one bottom trusted,

Nor to one place; nor is my whole estate

Upon the fortune of this present year:

Therefore my merchandise makes me not sad. (I.i.42-45)

It is interesting to note how these early mentions of diversification focus as much on human psychology as they do the economic benefits of diversification, for investing broadly is as much about managing fear and uncertainty as it is making money.

Don't put your eggs in one basketBrought to the forefront by Harry Markowitz in the 1950s, diversification across a number of asset classes reduced volatility and the impact of what is known as “variance drain.” Variance drain sounds heady, but in a nutshell, it refers to the detrimental effects of compounding wealth off of low lows when investing in a highly volatile manner. Even when arithmetic means are the same, the impact on accumulated wealth can be dramatic. (This is not the same as the more widely used annualized return numbers, as they account for variance drain, but for this illustration, we’ll look specifically at variance drain.)

Say you invest $100,000 each in two products that both average 10% returns per year, one with great volatility and the other with managed volatility. The managed volatility money rises 10% for each of two years, yielding a final result of $121,000. The more volatile investment returns -20% in year one and a whopping 40% in year two, also resulting in a similar 10% average yearly gain. The good news is that you can brag to your golf buddies about having achieved an average return of 40%—you are an investment wizard! The bad news, however, is that your investment will sit at a mere $112,000, fully $9,000 less than your investment in the less volatile investment since your gains compounded off of lower lows. (To account for this, the investment industry uses annualized returns, which account for variance drain, rather than average returns.)

Managing variance drain is important, but a second, more important benefit of diversification is that it constrains bad behavior. As we’ve said on many occasions, the average equity investor lags the returns of the equity market significantly. It is simply hard to overstate the wealth-destroying impact of volatility-borne irrationality. The behavioral implication of volatile holdings is that the ride is harder to bear for loss-averse investors (yes, that means you).

As volatility increases, so too does the chance of a paper loss, which is likely to decrease holding periods and increase trading behavior, both of which are correlated with decreased returns. Warren Buffett’s first rule of investing is to never lose money. His second rule? Never forget the first rule. The Oracle of Omaha understands both the financial and behavioral ruin that come from taking oversized risk, and more importantly, the power of winning by not losing.

DiversificationAt Brinker Capital, we follow a multi-asset class investing approach because we believe that broad diversification is humility in practice. As much as experts would like to convince you otherwise, the simple fact is that no one knows which asset classes will perform well at any given time and that diversification is the only logical response to such uncertainty. But far from being a lame concession to uncertainty, the power of a multi-asset class approach has the potential to deliver powerful results. Take, for example, the “Lost Decade” of the early aughts, thusly named because investors in large capitalization U.S. stocks (e.g., the S&P 500) would have realized losses of 1% per annum over that 10-year stretch. Ouch. Those who were evenly diversified across five asset classes (U.S. stocks, foreign stocks, commodities, real estate, and bonds), however, didn’t experience a lost decade at all, realizing a respectable annualized gain of 7.2% per year. Other years, the shoe is on the other foot. Over the seven years following the Great Recession, stocks have exploded upward while a diversified basket of assets has had more tepid growth. But the recent underperformance of a diversified basket of assets does nothing to change the wisdom of diversification; a principle that has been around for millennia and will serve investors well for centuries to come.

Diversification does not assure a profit or protection against loss. The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, a Registered Investment Advisor.

Investment Insights Podcast – The Good and Bad of Trading on Emotion

Raupp_Podcast_GraphicJeff Raupp, CFA, Senior Investment Manager

On this week’s podcast (recorded January 26, 2016), Jeff looks at the opportunities created via emotional selling while monitoring the negative factors at work in the economy:

  • Leading reasons for weakness in the marketplace continue to be falling oil prices and China’s slowing growth
  • Strength of the global economy is creating uncertainty.
  • When markets are volatile, it’s important to evaluate where markets may have overreacted and opportunity has been created.
  • Emotional trading seems to have generated attractive entry points into the market, but unique to an investor’s risk tolerance and time horizon.
  • Positives in the market include tame inflation and accommodative monetary policy; negatives include overtightening by the Federal Reserve.

For Jeff’s full insights, click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast – July 10, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded July 7, 2015):

What we like: Harvard study shows when there’s debt relief as part of the solution, countries tend to recover and thrive more quickly

What we don’t like: The emotional impact the Greek crisis has on investors, chiefly contagion and anger

What we’re doing about it: Touting behavioral finance; investors shouldn’t allow this anger or fear to dictate their investment decisions; encouraging the themes found in Personal Benchmark: Integrating Behavioral Finance and Investment Management 

Click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

 

Managing Emotions During Life’s Disruptions

Sue BerginSue Bergin, President, S Bergin Communications

It seems like a new survey comes out daily revealing how ill-prepared Americans are for retirement. Well, to reference one, now there is a study that shows two-thirds of those who have saved for retirement may still fall behind.

TD Ameritrade’s 2015 Financial Disruptions Survey shows that unexpected events have cost Americans $2.5 trillion in lost savings. [1] Typical scenarios involve unemployment or having to take a lower-paying job, starting a family and/or buying a home, assuming a care-taking role, experiencing poor investment or business performance, suffering an accident/illness or disability, divorce, separation, or becoming a widow or widower.

No surprise that any one of these events would cause stress. As explained in the best-selling book, Personal Benchmark, Integrating Behavioral Finance and Investment Management, stress triggers a move away from a rational and cognitive decision-making style in favor of an effective style driven by emotions. Research also has suggested that we experience a 13% reduction in our intelligence during times of stress, as valuable psychophysiological resources are shunted away from the brain in service of our ability to fight or flee. [2]

When under stress, emotional decisions tend to be myopic. We privilege the now and forget about the future. Decisions made under stress are also reactive. Since our body is being signaled that something dangerous is imminent, we tend to react rather than reason. Reacting is great for swerving to miss a car, but not such a great impulse to follow when it comes to setting a course that will traverse the next five years.

What we learn from the study is that the average length of the disruption was five years. These weren’t one-time events or blips on a radar screen. They were prolonged periods over that necessitated several financial decisions.

84% of those who suffered from disruptions indicated that prior thereto, they had been saving $530 per month for long-term financial goals/retirement. During the “disruption” savings were reduced by almost $300, which had a cumulative adverse impact on their long-term goal, on average of over $16,200.

Interestingly, the TD study asked how they could be better prepared for the unexpected. The vast majority focused on what authors of Personal Benchmark suggest in helping to manage emotions during stressful times, which is to focus on matters within their control. The top five responses included:

  • save more (44%)
  • start saving earlier (36%)
  • better educate self on investments (26%)
  • consult with a financial advisor (19%)
  • pay closer attention to investments (15%)

There are two key takeaways from this study. Expect the unexpected by doing as much advanced planning and saving as possible. And, when life does throw you a curve ball, manage your emotions by focusing on matters with personal significance and those that are within your personal control.

[1] http://www.amtd.com/files/doc_downloads/research/Disruptor_Survey_2015.pdf

[2] Dr. Greg Davies, Managing Director, Head of Behavioral and Quantitative Investment Philosophy at Barclays Wealth

The views expressed are those of Brinker Capital and are for informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Teaching Moments: Help Clients Shake the Emotional Hangovers

Sue BerginSue Bergin, President, S Bergin Communications

While the I-make-a-decision-and-forget-about-it approach might have worked for Harry S. Truman, it does not describe the vast majority of today’s investors.

According to our recent Brinker Barometer advisor survey[1], only 22% of advisors clients embrace Truman’s philosophy. The vast majority of clients suffer from emotional hangovers after periods of poor performance. They let the poor investment performance impact future decisions. Sometimes, it is for the better. In fact, 31% of clients made wiser decisions after learning from poor investment performance. Nearly half of the respondents, however, claimed that emotions cloud the investment decision following poor performance.

Bergin_LiveWithDecisions_7.30.14Another recent study, led by a London Business School, sheds light on how advisors can increase satisfaction by helping clients make peace with their decisions. According to the research, acts of closure can help prevent clients from ruminating over missed opportunities. To illustrate the point, researchers simply asked participants to choose a chocolate from a large selection. After the choice had been made, researchers put a transparent lid over the display for some participants but left the display open for others. Participants with the covered tray were more satisfied with their choices (6.30 vs. 4.78 on a 7 point scale) than people who did not have the selection covered after selecting their treat.

While the study was done with chocolate and not portfolio allocations, behavioral finance expert Dr. Daniel Crosby says that it can still provide useful insights on helping clients avoid what Vegas calls, “throwing good money after bad,” and psychology pundits refer to as the “sunk-cost fallacy.”

“Many clients are so averse to loss that they will follow a bad financial decision that resulted in a loss with one or more risky decisions aimed at recouping the money. If you detect that a client is letting emotional residue taint future decisions you should counsel them to consider the poor performance as a lesson learned. This will allow the client to grow from the experience rather than doubling the damage in a fit of excessive emotionality,” Crosby explains.

[1] Brinker Barometer survey, 1Q14. 275 respondents

The views expressed are those of Brinker Capital and are for informational purposes only.

Everyone’s Unique

Jeff Raupp Jeff Raupp, CFA, Senior Investment Manager

Whenever I go to the bowling alley it strikes me how unique people are. And no, it’s not because of the multi-colored shoes or even the matching team jackets complete with catchy names like “Pin Pals” or “Medina Sod” sewn on the back. It’s because of the bowling balls.

Every time I head to the lanes, I can bank on spending at least ten minutes trying to find a ball that works for me. You have the heavy balls with the tiny finger holes and the huge thumb, the balls with the finger holes on the other side of the ball away from the thumb, and the ones where it seems like someone was playing around and drilled three random holes. Half of the time I find myself weighing the embarrassment of using a purple or pink ball that feels okay versus a more masculine black or red ball that weighs a ton but can only fit my pinkie. I’m always left thinking, “Where’s the guy or gal that this ball actually fits?”

Raupp_Everyones_Unique_2.14.14But at the end of the day, I find that if I find the right ball, where my hand feels comfortable and the weight is just right, I have a much better game.

In the same way, how to best save toward your life goals is unique to each investor. Even in the scenario where two investors have the same age, same investable assets and generally the same goals, the portfolio that helps them achieve those goals may be decidedly different between them. Investor emotion can play a huge role in the success or failure of an investment plan, and keeping those emotions in check is vital. There is nothing more damaging to the potential for an investor to meet their goals than an emotional decision to deviate from their long-term strategy due to market conditions.

Fortunately, there’s often more than one way to reach a particular goal. There are strategies that focus on total return versus ones that focus on generating income. Strategies that are more market oriented versus those that look to produce a certain level of return regardless of the markets. And there are tactical strategies and strategic strategies. For any investor’s personal goal(s), several of these, or a combination of these, might provide the necessary investment returns to get you there.

Raupp_Everyones_Unique_2.14.14_1Here’s where the emotions can come into play—if you don’t feel comfortable along the way, your emotions can take over the driver’s wheel, and your investor returns can fall short of your goal. In 2008-2009, many investors panicked, fled the markets, and decided to go to cash near the market bottom; but they missed much of the huge market rebound that followed. While in many cases the investors pre-recession strategy was sound and ultimately would have worked to reach their goals, their irrational decision during a period of volatility made it a tougher road.

Unfortunately, you don’t have the benefit of rolling a few gutter balls while you’re trying to find the right portfolio. That’s why working with an expert to find an investment strategy that can get you to your goals, and that matches your personality and risk profile, is vital to success.

Good bowlers show up at the alley with their own fitted ball and rightly-sized shoes. Good investors put their assets in a strategy fitted to their goals.

Applying Behavioral Finance To Investment Process Crucial To Financial Advisors, Brinker Barometer Finds

Earlier this week, the results of our latest Brinker Barometer advisor survey were made public. Click here to read the full press release. This particular Barometer had a focus on aspects of behavioral finance and how advisors gauge progress towards meeting their clients’ financial goals.

Check out some of the most interesting survey results in the infographic below!

1Q13BrinkerBarometer_5_14_13