This forum loves stocks, but will they love you back?

[Larry Ragman]

Apropriately-diversified equity mutual fund/ETF portfolio (all low-cost index for clients) for the long term, rebalanced annually, and invested according to the dictates of a financial plan is what we preach and I have not yet found a reason to waiver from that. Appropriately-diversified does not mean tech heavy (been there, done that, had the carryover) or owning highly undiversified individual pieces of real estate (same story, 2007-2008, still working on liquidating a can’t miss real estate partnership, fortunately invested cash), but a plan to invest only the money that you do not need for at least 5 years. If you will need it during that time period (again, according to the dictates of a financial plan, which most people don’t want to bother with), again, buy bonds (I d/n look at this as an investment, but a liquidity option), CD’s, or keep $$ in savings. All we have is long-term history…and our imaginations.

Emotions very important, of course. But, again, very few people want to take the time and/or spend the money for real financial planning. It’s so so much easier to default to formulas. And, for doctor families, it really doesn’t matter whether you are on track to die with $50M, $75M, of $100M+, so who cares if you die a little “poorer”?

But what you don’t see is the potential in your life and career choices that you are bypassing - earlier retirement, knowing whether you can afford college + med school for your kids, travel plans, etc. But, most importantly, being FI and no longer stressing over whether you are doing “enough” and fighting about money with your spouse.

I love your approach.

Side note on financial planning. Most people would benefit from professional advice, though of course this forum skews to DIY. It is frustrating to watch my colleagues and friends pay too much though. A very smart guy I know is locked into a 1% AUM deal. (It works out to be a little less than that on a sliding scale because he has several millions with them.) It is just crazy. They do a pretty good job with his investments all things being equal, but not better than a simple three fund portfolio. And they never proactively recommend the sorts of advanced moves we commonly discuss here (e.g., MBDR, BD Roth, or DAF use to offset windfalls) all of which I have taught him to use. The interesting thing is that he trusts them for the one thing that he could never get from educating himself (which he has little interest in), advice from an amateur like me, or even a professional advice only planner: professional management of the funds for when he is gone. He is focused on a plan to professionally manage the money to preserve it and distribute it for his wife, who is actively fearful of managing money on her own. Maybe an extreme case, but it is easily worth the AUM fee to him.

[Tim]

I love your approach.

Side note on financial planning. Most people would benefit from professional advice, though of course this forum skews to DIY. It is frustrating to watch my colleagues and friends pay too much though. A very smart guy I know is locked into a 1% AUM deal. (It works out to be a little less than that on a sliding scale because he has several millions with them.) It is just crazy. They do a pretty good job with his investments all things being equal, but not better than a simple three fund portfolio. And they never proactively recommend the sorts of advanced moves we commonly discuss here (e.g., MBDR, BD Roth, or DAF use to offset windfalls) all of which I have taught him to use. The interesting thing is that he trusts them for the one thing that he could never get from educating himself (which he has little interest in), advice from an amateur like me, or even a professional advice only planner: professional management of the funds for when he is gone. He is focused on a plan to professionally manage the money to preserve it and distribute it for his wife, who is actively fearful of managing money on her own. Maybe an extreme case, but it is easily worth the AUM fee to him.

The question you raise is intriguing.
Your very intelligent friend is paying AUM fees for future services, managing money for the spouse once he has passed.
Nice goal, but once he has passed the wife’s goals likely change. My assumption is the FA will do fine with the portfolio, but not too sure he will have the inclination to adjust to a new set of goals.
I would feel more comfortable with Johanna’s approach. A loss of spouse would require some heavy duty work to redefine goals. Maybe no changes, could be tons. Big difference in FA bs FP approach.

[JBME]

I love your approach.

Side note on financial planning. Most people would benefit from professional advice, though of course this forum skews to DIY. It is frustrating to watch my colleagues and friends pay too much though. A very smart guy I know is locked into a 1% AUM deal. (It works out to be a little less than that on a sliding scale because he has several millions with them.) It is just crazy. They do a pretty good job with his investments all things being equal, but not better than a simple three fund portfolio. And they never proactively recommend the sorts of advanced moves we commonly discuss here (e.g., MBDR, BD Roth, or DAF use to offset windfalls) all of which I have taught him to use. The interesting thing is that he trusts them for the one thing that he could never get from educating himself (which he has little interest in), advice from an amateur like me, or even a professional advice only planner: professional management of the funds for when he is gone. He is focused on a plan to professionally manage the money to preserve it and distribute it for his wife, who is actively fearful of managing money on her own. Maybe an extreme case, but it is easily worth the AUM fee to him.

why are you calling yourself an amature if the people he's paying 1% to don't even proactively recommend MBDR, BDR, DAF, etc? Is it that they don't proactively recommend it just because of laziness, or they in fact are unfamiliar with these things? Either way, it seems to me they are amatures, not you

[jfoxcpacfp]

Larry and Tim -
I really have no problem with AUM advisors as long as the client is clear on what they are getting - not a financial planner who manages investments if the client needs that, but investment management only, sometimes with an ongoing plan (not usually). If an AUM advisor can prevent an emotional liquidation in a bear or pullback, the fee is typically far cheaper than the loss. Unfortunately, many AUM advisors do the same thing that the client is tempted to do and try to time the market, stock-pick, etc. Honestly, even Nick Murray is pro-AUM, but his point is that the plan and emotion control matter more than the fee. The friend could get a lot more for the fee he is paying, but he is comfortable with his investment dude, and there are plenty of decent ones out there, even though they are in the minority. I don’t know if I would want to educate a whole universe of non-WCI doctors about BDR’s, solo-k’s, the 2 kinds of 457b’s, etc etc. Too many doctors, too little time.

Regarding your friend, Larry, if the advisor can take over for surviving spouse and help her make good decisions after death, the friend has prob done a smart thing. Clients have come to us for same. Would recommend he consider that if/when the advisor retires/dies/changes firms, whoever takes over may be lackluster, and so might want to discuss that with him. We get that question a lot, and very fair question.

To everyone -
It is not always the FEMALE who is bad with/uninterested in money management, although that is the perception. Same for the Kitces credit card thread I started, something there about a “pink amex card” for all the ladies or something😏 - huh? Is there also a baby blue for all the “gentlemen”?

[StateOfMyHead]

Appropriately-diversified does not mean tech heavy (been there, done that, had the carryover) or owning highly undiversified individual pieces of real estate (same story, 2007-2008, still working on liquidating a can’t miss real estate partnership, fortunately invested cash), but a plan to invest only the money that you do not need for at least 5 years. If you will need it during that time period (again, according to the dictates of a financial plan, which most people don’t want to bother with), again, buy bonds (I d/n look at this as an investment, but a liquidity option), CD’s, or keep $$ in savings. All we have is long-term history…and our imaginations.

If I understand you correctly I like the thought of continuing to invest heavily in VTSAX if a 5 year timeframe. I'm at the awkward 7-10 years away from retirement, provided health holds up, but without the 50, 75, 100+ million net worth you mentioned so it is important I don't make a major blunder. With a rental property and social security we'd be ok, with belt tightening, in early years if push came to shove. I'd be interested to hear what others think as I have always figured 10 years would be where I'd start pulling back on stocks but am not feeling it just yet. Since I started late and am not a high earner, mid-high 200's, being aggressive always served me well but I don't want to be left without a chair when the music stops.

[Lithium]

I love your approach.

Side note on financial planning. Most people would benefit from professional advice, though of course this forum skews to DIY. It is frustrating to watch my colleagues and friends pay too much though. A very smart guy I know is locked into a 1% AUM deal. (It works out to be a little less than that on a sliding scale because he has several millions with them.) It is just crazy. They do a pretty good job with his investments all things being equal, but not better than a simple three fund portfolio. And they never proactively recommend the sorts of advanced moves we commonly discuss here (e.g., MBDR, BD Roth, or DAF use to offset windfalls) all of which I have taught him to use. The interesting thing is that he trusts them for the one thing that he could never get from educating himself (which he has little interest in), advice from an amateur like me, or even a professional advice only planner: professional management of the funds for when he is gone. He is focused on a plan to professionally manage the money to preserve it and distribute it for his wife, who is actively fearful of managing money on her own. Maybe an extreme case, but it is easily worth the AUM fee to him.

You’ll never see an AUM based financial planner implement a 3 fund portfolio and stick with it. All that does is guarantee that the portfolio will earn the same return as the three fund portfolio, minus the AUM fee. Will some clients still do better if it prevents them from market timing and buying and selling based on emotion? Yes. But you’re still not going to retain any clients that way.

[Larry Ragman]

why are you calling yourself an amature if the people he's paying 1% to don't even proactively recommend MBDR, BDR, DAF, etc? Is it that they don't proactively recommend it just because of laziness, or they in fact are unfamiliar with these things? Either way, it seems to me they are amatures, not you

The sense I got is they are unfamiliar with anything outside of managing the investments. Perfectly capable of running monte carlo projections and distributing the funds to some AA their algorithm recommends, but not really that great with actual financial advice.

[Larry Ragman]

If I understand you correctly I like the thought of continuing to invest heavily in VTSAX if a 5 year timeframe. I'm at the awkward 7-10 years away from retirement, provided health holds up, but without the 50, 75, 100+ million net worth you mentioned so it is important I don't make a major blunder. With a rental property and social security we'd be ok, with belt tightening, in early years if push came to shove. I'd be interested to hear what others think as I have always figured 10 years would be where I'd start pulling back on stocks but am not feeling it just yet. Since I started late and am not a high earner, mid-high 200's, being aggressive always served me well but I don't want to be left without a chair when the music stops.

I am a little closer to retirement than you but otherwise in a similar situation. In good shape with retirement funds, but not 8 figures. I am 1-3 years out from retirement now, but haven't picked a date. But two years ago I decided to take the accounts I knew I would have to cash upon retirement (two 457 plans) and convert them to bonds. When I retire I will finish paying off the house with them, and the rest will go into a cash account that will float as secure source of paycheck. Everything else is still invested in equities more or less, so I am sort of 70-30 overall ignoring my rental houses and pension. The point being that I am OK with the equities taking a dive because I will have the other funds etc. set up so that they are not affected by the vagaries of the market.

So, if I were you, I would continue to accept the equity market risk for 5 more years, and then at 3-5 years out shift to create a safety fund that could provide you with say 3 years of expenses. Going to safety at 10 years out is just too soon, though you could very reasonably start a slow conversion (e.g., drop 90-10 to 80-20 then 70-30 then 60-40 every 2 or 3 years).

Just for perspective I offer that this is really just a mental accounting trick. Assuming you have enough in investments, it would not matter if it were all in one fixed stock/bond AA that you stayed with as the market went up and down. You just set up a paycheck from investments and adjust as you go. And regardless, in your case with some rental income you have a buffer. But personally I feel much more secure knowing that I have set aside what I think I need in a "cash" bucket that won't get hit by a market downturn. I'll just replenish the bucket in up years and deplete it in down years.

[Larry Ragman]

Larry and Tim -
I really have no problem with AUM advisors as long as the client is clear on what they are getting - not a financial planner who manages investments if the client needs that, but investment management only, sometimes with an ongoing plan (not usually). If an AUM advisor can prevent an emotional liquidation in a bear or pullback, the fee is typically far cheaper than the loss. Unfortunately, many AUM advisors do the same thing that the client is tempted to do and try to time the market, stock-pick, etc. Honestly, even Nick Murray is pro-AUM, but his point is that the plan and emotion control matter more than the fee. The friend could get a lot more for the fee he is paying, but he is comfortable with his investment dude, and there are plenty of decent ones out there, even though they are in the minority. I don’t know if I would want to educate a whole universe of non-WCI doctors about BDR’s, solo-k’s, the 2 kinds of 457b’s, etc etc. Too many doctors, too little time.

Regarding your friend, Larry, if the advisor can take over for surviving spouse and help her make good decisions after death, the friend has prob done a smart thing. Clients have come to us for same. Would recommend he consider that if/when the advisor retires/dies/changes firms, whoever takes over may be lackluster, and so might want to discuss that with him. We get thafears of making a mistake. t question a lot, and very fair question.

To everyone -
It is not always the FEMALE who is bad with/uninterested in money management, although that is the perception. Same for the Kitces credit card thread I started, something there about a “pink amex card” for all the ladies or something😏 - huh? Is there also a baby blue for all the “gentlemen”?

Yes, I agree that shortcomings in money management are gender agnostic. In fact, in my friend's case he freely admits his own lack of interest and fears of screwing it up. So, I think the advisor makes sense for him. I know it provides him peace of mind, but especially that his wife will be taken care of. (The advisor has a succession plan in place.) I just hate the fee structure for what he is actually getting, but I have given up telling him so.

Trigger warning: sports analogy. When the caddie says hit the 8, and the player says I feel like I can get it there with a 9, the caddie says "absolutely, commit to the shot."

[Larry Ragman]

why are you calling yourself an amature if the people he's paying 1% to don't even proactively recommend MBDR, BDR, DAF, etc? Is it that they don't proactively recommend it just because of laziness, or they in fact are unfamiliar with these things? Either way, it seems to me they are amatures, not you

I do make him pay me in beer...

[Dont_know_mind]

I don't think the issue or concern is actually that the markets will fail, at least over a term of more than 10 years. Rather, it is that a "lost" decade will alter the trajectory of the drawdown phase and put longer term retirement spending at risk. Regarding stocks versus bonds we are in a historically anomalous period of slowly rising interest rates (driving down prices) at the end of a long bull market. There aren't obvious and easy answers on where to deploy money. I plan a cash cushion of several years spending.

Speak for yourself Larry, but I was worried about the 10 year return for stocks in 2009.
Also 2020 before the government stepped in.

What surprised me in 2009 was how willing the Fed was to put all manner of sub-grade stuff on it's balance sheet.
Again in 2020.
Which makes me think they will do it again and maybe put even more & "whatever it takes" on their balance sheet in the future.

Which does degrade the value of government bonds theoretically, although this has never really been tested and hopefully never will, but the way things have evolved, one would think it will be at some stage.

I just think on some level it is odd not to value the credit risk in a bond, even a government bond.
I guess like most risks, it's fine unless it shows up.
And on some level bondholders are not being given a good deal since 2009 as there seems to be a precedent that equity holders get bailed out from systemic crashes/resets.

[CM]

All I can say is that at least for those of us who are still 10+ years from retirement, everything I've ever seen/read says never has the stock market return over a 10+ year period been negative. If I put $1m in equities in 1999 it wouldn't have been worth less in 2009. That gives me piece of mind. Just because something has never happened doesn't mean it won't in the future, but I will hurt myself investmentwise more if that scares me away.

All that said, I am a fan of Bernstein's saying that when you've won the game you should stop playing. Within 5-10 years of retirement I plan to move my AA from 90/10 to 65/35 or 60/40 AND have 2-3 years of expenses in cash. Targeting 2-3 years in cash, 6-8 years in bonds, and the rest in equities. Not sure what AA that really will come out to

US real stock market returns have been negative for up to 20 years in the past. They've also been negative for 30 years in Japan, the last leader in nat'l market capitalization as percentage of global mkt cap. US numbers below from dqydj.com (https://dqydj.com/sp-500-historical-return-calculator/)

Summary Statistics Over Period(s)

Length of Investment:	40 Years	30 Years	20 Years	10 Years
Average Return	6.519 %	6.644 %	6.633 %	6.892 %
Median Return	6.422 %	6.702 %	6.733 %	6.855 %
Maximum Return	10.282 %	11.154 %	13.612 %	19.958 %
Minimum Return	3.187 %	1.894 %	-0.219 %	-5.925 %
Standard Deviation	1.387 %	1.656 %	2.946 %	5.132 %

[CM]

If I put $1m in equities in 1999 it wouldn't have been worth less in 2009.

Actually, it was worth less.

The annualized, total (i.e., dividends reinvested), real (i.e., inflation-adjusted) S&P 500 return was -3.17% from December 1999 through December 2009: https://dqydj.com/sp-500-return-calculator/

The annualized return was -7.524% from March 2000 through March 2009 (the trough month). The total return was -50.538%. You lost half your wealth over a 9-year period.

[Turf Doc]

Actually, it was worth less.

The annualized, total (i.e., dividends reinvested), real (i.e., inflation-adjusted) S&P 500 return was -3.17% from December 1999 through December 2009: https://dqydj.com/sp-500-return-calculator/

The annualized return was -7.524% from March 2000 through March 2009 (the trough month). The total return was -50.538%. You lost half your wealth over a 9-year period.

Going from 1999 to 2021 and it was 5% real. Isnt that what many people use for their planning anyway? And who really invests once and is done?

Starting to invest and maxing out the 401k limit in dec 1999 (10k) and adjusting for inflation until dec 2021 gets you a 10.546 annualized return. Who cares about 10 years?

[StateOfMyHead]

Speak for yourself Larry, but I was worried about the 10 year return for stocks in 2009.
Also 2020 before the government stepped in.

What surprised me in 2009 was how willing the Fed was to put all manner of sub-grade stuff on it's balance sheet.
Again in 2020.
Which makes me think they will do it again and maybe put even more & "whatever it takes" on their balance sheet in the future.

Which does degrade the value of government bonds theoretically, although this has never really been tested and hopefully never will, but the way things have evolved, one would think it will be at some stage.

I just think on some level it is odd not to value the credit risk in a bond, even a government bond.
I guess like most risks, it's fine unless it shows up.
And on some level bondholders are not being given a good deal since 2009 as there seems to be a precedent that equity holders get bailed out from systemic crashes/resets.

Interesting thoughts and it makes me question if there might be less risk in the market due to the govt meddling than I would have thought? I still can't believe that the stock market, economy, housing etc. didn't tank in 2020 or 2021. Is this going to be the way the government will keep things stable at least on paper going forward? With lesser issues it would be a smaller amount than the pandemic efforts so easier to justify in comparison and therefore why wouldn't they keep printing and handing out more money? In the interest of the economy of course.