We’ve all heard the saying, “There ain’t no such thing as a free lunch.” It’s used to remind us that there is a cost to everything even, or especially, if it is hidden from view. The phrase actually comes from the once-common practice of saloon owners advertising a “free lunch” for patrons who would purchase a drink at their establishment. Of course, the fare offered at these banquets was heavily salted to induce patrons to imbibe more of the money-making beverages. Social critics at the time were keen to point out the hidden costs of this “free lunch.” The average price of drinks where a free lunch was offered were higher than at other establishments. Less obvious, but just as consequential, were the societal costs associated with higher rates of alcohol consumption. And so, as an admonition against thinking that you can get something for nothing, the phrase, “there ain’t no such thing as a free lunch” entered the American lexicon. The phrase achieved its current popularity when the free-market economist, Milton Friedman, used it as the title of a book in 1975. For sure, nothing comes for free. But when we’re talking about saving for retirement there is something that comes as close to a “free lunch” as you can get, and that is the employer match in your 401(k), 403b or other employer sponsored retirement account. As employers have moved away from providing a life-long pension to retired employees, they have stepped up with a commitment to help their employees contribute to their own retirement accounts and the “Employer Match” was born. The Federal government supports employers by making the “match” tax deductible. As of 2016, 66 percent of workers had access to an employer sponsored retirement plan, yet only 49 percent of workers participate in the plans available to them. And worse, of those taking advantage of the employer match about one in four is not getting… | Read More »
Author: Christian Peterson
The changing world of rotary phones and retirement
Time was when a pension and Social Security would provide most people all they needed for a secure retirement. But, back then, people were content with working the same job all their lives, watching just three TV stations, and using a rotary phone with no texting or video. People now have an infinite number of choices for career opportunities, entertainment and social engagement. Furthermore, today’s technology is powerful enough to meet our needs almost instantaneously. These innovations have made our lives better in ways that are almost too numerous to count, but there’s a trade-off. We didn’t have as many choices in the age before cell phones and the internet, but most of us could rely on a pension that was provided for us, risk free, by a company that assumed all of the responsibility for our retirement. So, the trade-off has been that we now have more individual freedom in the form of greater choices, but we have less security in that employers no longer take on the responsibility for providing us with a secure retirement. Under the pension system, workers didn’t have a choice about how their retirement would be funded. The company took care of everything. Those days are gone. Providing for a secure retirement is now another of the many “choices” we are free to make on a daily basis. It’s up to us and, apparently, left to our own smart devices, we are not faring well. Only a third of working Americans are saving money in an employer-sponsored or tax-deferred retirement account, according to U.S. Census Bureau’s recent figures. And, according to the Economic Policy Institute, the average retirement savings of all families in America is just $95,776. Even those frightening numbers don’t tell the whole story because many of the surveyed families reported zero savings, with ultra-wealthy families pulling up the average. A more accurate gauge may be the median savings rate, or those at… | Read More »
How to weigh portfolio risk versus reward
Although often hidden in the background, risk is interwoven into every aspect of our lives. Given this inescapable reality, it is in our best interest to cultivate a sensible, and even cooperative, attitude toward it. Toward this end it may be instructive to consider the Chinese symbol for “risk” which is a combination of two ideograms, the one being “danger” or “crisis” and the other “opportunity.” In the West we know this as the risk/reward tradeoff. The goal is never to avoid risk altogether: because that’s impossible, given the realities of the world because without exposing ourselves to risk we cannot take advantage of the opportunities that it offers. So, the question becomes, “How much danger am I willing to court, and what can I expect as a reward for the amount of risk I have taken on?” This question, and its answers, are at the heart of what we call “risk management.” As fiduciaries entrusted to manage people’s retirement portfolios, our duty is to get the best return on investments that we can while minimizing the portfolios’ exposure to danger. In other words, what we do is “risk management.” One of the most important factors when it comes to managing risk in a retirement portfolio is time. This concept of time is captured in our slogan “Investing for all seasons,” which refers to the seasons of one’s life; youth, maturity and old age. Youth, or young adulthood, is the time to take the maximum amount of risk. We leave home and either journey afar or begin a new endeavor such as starting a business or learning a craft. We have energy, enthusiasm that has not been tempered yet by life’s inevitable “hard knocks” and most of all, time. Time to recover from set backs and time to save for retirement. Young adults can and should take on the maximum amount of risk in their portfolios because they have the time… | Read More »
What the Fed’s rate hike means to you
Janet Yellen and the Fed finally raised the short term interest rate. Headlines touted the “historic” nature of the move since the Fed has not raised its benchmark interest rate in seven years. While it’s true that the Fed has never held rates so low for so long, the seemingly endless speculation of “will they or won’t they” left the actual event feeling a bit anti-climactic. Economists were quick to point out, too, that this initial rate hike is not nearly as important as the overall pace of rate subsequent hikes, how fast and how far, in determining its ultimate effects. The stock market took this mostly in stride. The sense of relief on Wall Street was palpable. Stocks rallied in the days leading up to the decision and surged again after the announcement, but don’t expect any more big moves from the market. Since the lead up was so prolonged, stocks had already “priced in” the Fed’s announcement and there isn’t much more opportunity to be squeezed out of it. Stocks have been unable to sustain any upward momentum all year and we expect that weakness to continue. As for bonds, when interest rates rise, prices fall. The Fed’s policy has a more direct impact on short-term government debt because those yields are highly sensitive to changes in the fed-fund rate. But, just like with stocks, most of the adjustment in prices has happened already so if you are in short term debt securities you shouldn’t see much of a change. The Fed’s impact on long-term bonds is more indirect. The value of those bonds are influenced by a broad basket of factors, including the global growth and inflation outlook, so here again we see little change in long-term bond prices unless the Fed quickens the pace of rate hikes. As for borrowing, there already is a large gap between the Fed rate and what most people pay on… | Read More »
Beware confirmation bias in investment decisions and in life
“A lie can travel halfway around the world while the truth is still putting on its shoes.” Mark Twain Mark Twain lived from 1835 to 1910 and the first transatlantic cable was completed in 1858, so even in Mark Twain’s day, a false rumor could travel pretty fast. How much further, then, can a rumor travel these days, what with fiber optic cables, satellite TV and cell phones? But this still begs the question of why rumors and lies travel faster than the truth. Doesn’t the truth have access to the same communication channels as those rumors? Yet we’ve all experienced situations in which false information, or a rumor, will get passed around (and believed) even though the truth of the matter was easily in reach if someone just took the time to look. There are a couple of reasons for this. First of all, the truth is usually boring, while the rumor will often be juicy and entertaining. Second, the truth is usually complex, or nuanced. Human beings and social organizations are complicated. Who of us has ever met a perfect person, or worked in a perfect organization? The truth, whatever it might be, will of necessity be a reflection of the imperfect situation from which it arose. The rumor, or lie, will often be simple – or better yet, simplistic – easy to understand, easy to communicate and easy to relate to. But there is another reason that rumors, or lies, travel faster than the truth and that is because rumors or lies travel on a glide path that is paved by our own preferences. The science of Behavior Finance calls this “Confirmation bias”, the propensity to accept any piece of information that conforms with what we desire, and the rejection of information that does not. This is a mistake that investors make all of the time. As an example, consider Bob. Bob is holding a stock that has… | Read More »