Purchasing power and the big power of small changes

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

“A nickel ain’t worth a dime anymore” — Yogi Berra

Odds are, you’re now familiar with the Parable of the Boiling Frog. A story that posits that a frog dropped in boiling water will hop right out of the pot, but that one placed in tepid water that is gradually raised to boiling will meet its demise. The absolute veracity of this metaphor is questionable, but the illustrative quality of the narrative is beyond reproach. The fact is, slow, incremental change can be damaging to us in profound ways. The imperceptibility of these changes leaves us helpless to react, and we only become aware of what’s happening once it is too late.

Sadly, there is a “boiling frog” dynamic at play in the way you think about money, something behavioral economists call the “money illusion.” As best described by Shafir, Diamond and Tversky, the money illusion “refers to a tendency to think in terms of nominal rather than real monetary values.”

In a nutshell, we think of numbers in a way that is disconnected from their purchasing power, and in doing so can make irrational personal financial decisions. Consider the ways in which a six-figure salary or being a millionaire are still considered useful shorthand for wealth. While these may have been meaningful distinctions in say, the ’70s and even eye-popping in the ’20s, they simply don’t mean what they used to because of inflation and decreased purchasing power. The fact is that going forward, multimillionaire status will be required of even middle-class Americans who want to retire with peace of mind.

purchasing power

Inflation creep is slow and insidious, just like the proverbial boiling water, and just like the water, it can have lasting detrimental effects. Consider Yale professor Robert Shiller’s comments on the money illusion as we mentally account for our housing purchases,

“Since people are likely to remember the price they paid for their house from many years ago, but remember few other prices from then, they have the mistaken impression that home prices have gone up more than other prices, giving a mistakenly exaggerated impression of the investment potential of houses.”

Thus, people may overextend themselves to get into an expensive house, hoping for a large nominal return over the years, never realizing that the numbers they are looking at may not even be keeping up with inflation.

While getting in over your head on a home represents excessively risky behavior precipitated by the money illusion, it can just as soon lead to inappropriate risk aversion. Consider the “flight to safety” that occurs during most economic downturns. Investors flood into treasuries, which may not even keep up with inflation, while ignoring equities, which are at their greatest value in years. Truly conceptualized, nothing could be less safe than putting your assets in a class that minimizes purchasing power. By conceptualizing assets in nominal terms instead of “real dollars,” investors irrationally lock in an absolute loss in their efforts to protect against a nominal one.

Financial professionals can help their clients understand purchasing power in a way that is aligned with their individual desires and aspirations. Advisers should emphasize that investors can be lured into focusing on illusory numbers that have little impact on their ability to meet their own needs. As we’ve seen, incremental negative changes can be as bad for your financial future as they are for a frog’s health.

The Center for Outcomes, powered by Brinker Capital, has prepared a system to help advisors employ the value of behavioral alpha across all aspects of their work – from business development to client service and retention. To learn more about The Center for Outcomes and Brinker Capital, call us at 800-333-4573.

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

New year, new solutions

Noreen D. BeamanNoreen D. Beaman, Chief Executive Officer

There are few traditions as optimistic in spirit as resolution setting. While losing weight, enjoying life more, and living a healthier lifestyle typically top the resolutions charts, many Americans seek to create better financial outcomes in the upcoming year. The GoBankingRates.com 2017 Financial Resolutions Survey listed ‘save more, spend less,’ at the top of the list of financial resolutions, followed by paying down debt and increase income.


If you aim to create better financial outcomes in the upcoming year, and beyond, here are five steps to bring you closer to your goal:

  1. Look within. The more you know about investment principles and the long-term historical record of the market, the better outcomes you can expect to achieve. Making your investment education a priority is proven to make a significant difference in outcomes. The American Association of Individual Investors (AAII) found that investing knowledge enhances risk-adjusted returns by at least 1.3% annually. Over 30 years, the improved portfolio performance can lead to up to 25% greater wealth.
  2. Control what matters most. What matters even more than picking the right stock, is controlling the impulses and biases that prove self-destructive, like trying to time the market or trusting your gut. For better investment outcomes, you must know your emotional triggers and come up with strategies to defuse them from sabotaging your success.
  3. Think purchasing power. Purchasing power is the most common objective and destination of a long-term investment strategy. It is the experience most investors want. Investors know they like the lifestyle they now enjoy and want to do what is needed to keep that lifestyle in the long-term. To do so, you must appreciate multi-asset class diversification and accept market volatility to increase future purchasing power.
  4. Benchmark against your goals, not market indices. Instead of looking to the Dow Industrial Average to gauge the adequacy of your performance, look to your goals. Personal benchmarking motivates positive savings behavior and helps you tune out the noise of the markets. Don’t allow yourself to get bogged down, nor hyped up, by the current buzz. Instead, let personal goals and the long-term historical market record guide your decisions.
  5. Stack the deck. By working with a trusted advisor who provides behavioral coaching, you stack the deck in your favor. Research has found that when an advisor applies behavioral coaching, performance increases from 2-3% per year. In times of uncertainty and market volatility, which you are bound to encounter, your advisor will help you stick to your financial resolutions.

For 30 years, Brinker Capital has provided investment solutions based on ideas generated from listening to the needs of advisors and investors. From being a pioneer of multi-asset class investments to using behavioral finance to manage the emotions of investing, our disciplined investment approach is the key to helping investors achieve better outcomes.

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


It’s National Retirement Security Week!

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

It’s National Retirement Security Week!

Doesn’t sounds familiar?  You’re not the only one.

This week kicks off the sixth year celebration of National Retirement Security Week (formally National Save for Retirement Week), sponsored by the National Association of Government Defined Contribution Administrators (NAGDCA).  While this is not a Hallmark-holiday, this important week marks a national effort to raise public awareness of the importance of saving for retirement.  The goals of this week are to:

  1. encourage employees to save and participate in their employee-sponsored retirement plans
  2. educate employees about how saving for retirement is crucial to security during retirement years
  3. increase awareness of the various retirement saving options

With the American life expectancy currently at 78.8 years1 and children born today expecting that nearly one-third of their contemporaries may live to see 100 years of age2, we are living lives with greater comfort and more free time than any other point in history. It is truly an incredible time to be alive, but even the best advances can have unintended complications. Such is the case with ever-increasing longevity and the reality of preparing for a retirement of unprecedented length. Successful retirement planning requires a great deal of forethought, tolerance for uncertainty and consistently delayed gratification. This can be challenging for some facing retirement because individuals must invest in risk assets if they are to retire comfortably and most individuals are emotionally and psychologically ill equipped to invest in risk assets.

So, why must you invest if you are to retire? As of today, the median wage in the U.S. is $26,695 and the median household income is $50,500. Let us suppose for illustrative purposes, however, that you are four times as clever as average and have managed to secure a comfortable annual salary of $100,000. Let us further suppose you set aside 10% of your gross income each year until the first day of your retirement. Assuming you begin saving at age 25 and retire at age 65, your efforts will have yielded a nest egg totaling $400,000.

While $400,000 may seem like a decent sum of money, it hardly provides much for someone who could easily live another 30 years in retirement. At $13,333 per year, you would be living near the poverty line by today’s math, to say nothing of how dramatically inflation would have eroded the purchasing power of that figure 40 years on.

If we turn back the clock 40 years from now, we see that roughly $90,000 in 1975 money would get you $400,000 in purchasing power in today’s dollars. A little back of the napkin math tells us that even though $400,000 may seem alright today, we will need more like $1.5 million 40 years from now to maintain that same level of purchasing power.

Remember too that the average American couple currently spends an estimated $245,0004 in retirement on health-related expenses above and beyond their monthly premiums. Factoring in even modest inflation over the next 40 years, the money spent on medical bills alone would far outstrip your savings on the high-earning-always-saving model.

While you could complicate the assumptions above to greater reflect the reality of the average worker (most people don’t make $100,000 right out of college, most people get raises over the course of a career, most people don’t save 10% of their income), the basic math is the same. You simply aren’t going to get to the necessary savings target by age 65 without a little help from risk assets whose returns exceed the insidious and corrosive power of inflation.

As Burton Malkiel said far more succinctly, “It is clear that if we are to cope with even a mild inflation, we must undertake investment strategies that maintain our real purchasing power; otherwise, we are doomed to an ever-decreasing standard of living.”3

While 2/3 of U.S. employees are saving for retirement, according to data from the 2015 Retirement Confidence Survey conducted by the Employee Benefit Research Institute, they are not adequately saving to fund their retirement.  In the coming days, we will examine three behavioral impediments to retirement preparation that many plan participants experience and ways to overcome them. This week serves as a great time to remind employees of the importance of saving for retirement and provide them with a realistic picture of how to get to their goals.

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.


1 Centers for Disease Control and Prevention. http://www.cdc.gov/nchs/fastats/life-expectancy.htm

2 Live long and prosper, The Economist, June 4, 2016.  http://www.economist.com/news/books-and-arts/21699886-how-plan-long-long-life-live-long-and-prosper

3 A Random Walk Down Wall Street, Burton Malkiel.

4 “Health Care Costs for Couples in Retirement Rise to an Estimated $245,000,”  Fidelity Investments, October 7, 2015.  https://www.fidelity.com/about-fidelity/employer-services/health-care-costs-for-couples-retirement-rise

Financial Advisors Finally Confident in U.S. Economy, Q3 Brinker Barometer Finds

We have the results of our third quarter 2013 Brinker Barometer® survey, a gauge of financial advisor confidence and sentiment regarding the economy, retirement savings, investing and market performance.

For the full press release, please click here, but in the meantime check out the infographic below for some of the highlights:


Yield in the Time of Cholera

CoyneJohn E. Coyne, III, Vice Chairman, Brinker Capital

I recently reread the Gabriel Garcia Marquez novel from the 80s, Love in the Time of Cholera, and as I found myself being warped back to that decade, it naturally led made me reflect on the current municipal bond market! I’ll explain.

Because romance is nowhere near as risky as this market is today, it is easy to see how we can fall in love with the exciting, attractive yields in the after-tax world (around 8.5% on the long end). Nevertheless, there is something to be said for stability and safety in a time of incredible uncertainty especially with continuing interest-rate increases and, even more unnerving, a frightening credit risk landscape.

The rising-rate environment of the late 70s and early 80s played havoc on both the value and purchasing power of bonds held by individual investors. So whether for income or safety of principal, the holder was punished. And the credit markets were not nearly as challenged as today. Rates topped out in 1983, and we began the 30-year bond rally that has recently unraveled. I would imagine that during that extended period, an argument can be made that a passive-laddered approach might have been acceptable as opposed to active management—particularly in the bygone days of credit insurers like MBIA and AMBAC.

8.28.13_Coyne_Yield in the time of CholeraWell, not today. If investors want to navigate the treacherous credit markets while capturing these currently attractive yields they need a steady, experienced guide to help manage their portfolio. Advisors should be working with their municipal managers to craft strategies that can balance out their needs for income, safety and maintaining purchasing power.  Now that can make for a wonderful romance.

In Case You Missed It

Wallens, JordanJordan Wallens, Regional Director, Retirement Plan Services

By now you’ve no doubt heard all about the latest dreadful returns from our nation’s stock market. The first five months of 2013 have been historically galling for most American investors. Wait, what? Am I talking about the same roaring stock market you’re talking about? Yes! And, no.

Yes, clearly the U.S. Equity market has exhibited one of its vintage thoroughbred rallies this year. But no, sadly, it turns out the average American saver largely missed it. How can this be?

Now, throughout this banner season for equities, the largest holding in the majority of Americans’ overall asset allocation has been Cash—which is earning zero. Now lest one dismiss this truth as some other generation’s problem, to be clear: this misbegotten tail-chasing ‘bet on cash’ situation pervades across ALL age groups, right through Generation Y.

It’s like we’re our own worst enemy, because when it comes to investing, most of us are.
The problem is that savers tend to move in backward-looking, frightened herds. Which is wise…if you’re the prey.

But we invest not for short-term survival. We invest to advance long-term purchasing power.

Relax, it’s not life, just money. Money you’re not even using. That and, though it takes awhile to adjust, as a species we haven’t been hunted by predators in some time. (Pray that multi-millennial ‘food chain’ rally knows no end.)

5.30.13_Wallens_InCaseYouMissedItWhen it comes to our money, we largely still don’t get it. It’s why even Warren Buffett and Bill Gates get advice. If investors were a baseball team, they would position all eight of their fielders in the spot where the previous opposing batter’s hit had landed in preparation for the new batter at the plate. Helps to explain why an Institutional fund investor captures 90%+ of the upside in a given mutual fund, while the Retail investor deprives himself via bad behavior of fully 75% of all the long-term gains suffered in the very same mutual fund.

In spite of the adage, the average investor left to his own devices will systematically buy high and sell low every time. And why? Foremost among them, we fear present losses many, many times worse than we covet future gains. This asymmetrical analytically unsound ‘loss aversion’ leads to frenzied investor behavior, which rarely works out well. Ergo, this glorious pan-rally is the worst news in awhile, for those damaged capitalist souls who needed the help the most.

5.30.13_Wallens_InCaseYouMissedIt_2Meanwhile the S&P 500 inconspicuously peels past the thousands like a freight train. Forceful, if not fast. It’s working out great for the professionals, and those who stuck to good advice, those who stuck to their plans, timetables, discipline, and personalized their benchmarks. They never left, and as you have probably observed, historically the majority of the market’s best days/quarters strike closely behind the worst. Miss those best 10 or 20 days, and you forgo a significant chunk of your long-term returns.

Fortunately, with each passing day, more and more investors succumb to longer-term logic and get back with the program—their program. Which is a good thing, as long as you orient your benchmarks around your tested personal risk tolerance and remember your time frames. Then, most important of all, stick to your plan.