TIRED...AND NOT RETIRED

That's what a majority of Americans predict for themselves.  Why they could be wrong.
 
(note: this week's GreenThought$ is more like a "special retirement crisis edition."  What follows is a somewhat lengthy discussion and debate of the biggest issue on investors' minds. Let us know your take on this most important topic for our time.)
 
 
I read with much interest this week an article from Savita Iyer-Ahrestani in the online edition of Investment Advisor Magazine, on April 23rd.  The article, "Retirement Confidence Plummets," notes that a recent survey from EBRI, who studies among other things consumer financial behavior, shows that only 20% of those polled are "highly confident" they'll have enough income in retirement.  This is the survey's 19th year so the results and trends over time are based in reality, in our opinion.  In this issue of GreenThought$, we will take on that assumption about the most pressing financial issue of our time - will investors be able to retire?
 
I'll quote from the article (in italics), then provide feedback from the investment team at Emerald.

According to the survey, workers who say they are very confident about having enough money for a comfortable retirement this year hit the lowest level (13%) since the Retirement Confidence Survey started asking the question in 1993. Retirees also posted a new low in confidence about having a financially secure retirement: Only 20% now say they are very confident about having enough to live on comfortably in their retirement, down from 41% in 2007, the survey noted.

As the general confidence level has plummeted, so too has peoples' desire to want to try and plan for the future, (Director of the study Matthew) Greenwald said. "The time when retirement planning seems toughest is when it seems harder for Americans to focus," he said.

 
Here is some tough-love for those who may find themselves in this mindset.  Realize that if you are behind the curve on this, you don't have a choice whether to attack this problem.  You have to!  Sometimes investors feel "frozen" and don't act to improve their lot when things go wrong.  They become paralyzed by the seemingly numerous possible roads they can take to work out of the problem.  In our opinion, the shifts that have occurred in investment planning, with 401ks on the rocks, jobs being lost, etc. lead you to one conclusion: you DON'T have the option to do nothing this time.  It's too darn important to do nothing!  OK, tough love section over; let's move on to another piece from the article.

Retirement finance experts like Francis M. Kinniry Jr., a principal in Vanguard's Investment Strategy Group, believes that clients should steer the course and not give up. On the contrary, focus and clarity of thought and planning are needed more than ever, Kinniry says.  

Hey, that's what we said!  Yes, clarity of thought and planning.  That is why many investors have sought out professional advisors (not professional investment salespeople!) for partial or total help, after doing it themselves for years (or at least since 2002, when investors last threw up their hands...after throwing up their savings...in a market whose decline was as fierce as 2008's but took three years to collapse instead of one, so it hurt 1/3 as much (our scientific estimate).   

Kinniry advocates good old-fashioned investing in the stock market. "We know that the stock market has outperformed the bond market in most 10-year periods and even more so in 20-year periods," he says.  

What else would you expect a partner at one of the biggest equity money managers in the world to say?  Sorry, in our opinion, it's not that simple.  "Buy and Hope" is not a strategy, especially after the emotional letdown investors have had with the markets and many of those who participated in it.  We are generally bullish on the stock market over the next 20 years, but that's like saying I think the sun will come up 20 years from now.  If you are right, that was to be expected.  If you are wrong, no one will remember or care because they will have other things on their mind. 

Also, there is bound to be a false sense of security involving bond investments, as the long-term threat of inflation from America's deficit buildup has the potential to put bond returns into the red, big time, for a long time, at some point. 

Granted, it is not going to be easy to get people to trust in the stock market, and according to Greenwald, belief in the efficacy of equities has a taken a huge hit this year.   Call us blind optimists (no one has called us that in many years), but when people start doubting something that has been successful many times but just lost a big battle (like the stock market did), you should reach into the closet and grab your "contrarian investor" hat.  The last time we put ours on was a couple of years ago when everyone said that house-flipping and real estate in general was a no-lose situation and those who doubted that were considered out of touch.  The pendulum has swung the other way in the stock market for sure, and the crowd always overreacts at the extremes.   

But Kinniry says that one of the key lessons to take away from this downturn is the importance of nuts-and-bolts investing, "the kind of stuff we learned in investing 101." With the help of an advisor--and by and large, he says, advisors have done a prudent and careful job of getting their clients to diversify among different asset classes--clients need to get a savings plan in place, and that plan should include exposure to equities.  

OK, we take back what we said earlier about our colleague from Vanguard.  He made it up to us with that last statement.  To those of us on the Emerald investment team, the next many years will be about two things:  

1. "Renting" the stock market instead of owning it - i.e. not committing to have some set percentage of money in the stock market all of the time, as static investment plans often do.  
2. Applying a level of portfolio "risk-management" that it not only uncommon to most investors, but foreign to some of those in the money management industry as well. 
   

Balancing stocks with a good dose of high-grade corporate bonds or Treasuries is the best way to go. Anyone who had done this would have seen that the mix held up far better in the downturn, and that bonds are by far the best diversifier for stocks, Kinniry says.

As GreenThought$ readers know, we take the opposite side of this argument about how to diversify.  We think that investors cannot live by stocks and bonds alone.  To them you must add investment styles that allow you to squeeze some of the juice out of the "orange" that is the stock market, but avoid most of the rind and pits.  Combine this with more traditional long-term equity approaches and use bonds only for pure preservation of capital, if you use bonds at all.   

We think this approach makes for a more proactive response to retirement planning for all who have the courage to inquire and adopt it.  We are proud to be a proponent of such an approach (and one that is increasingly being recognized as such in our industry), and we are also very pleased that our industry is getting more innovative by the day.  We sense that the message is getting out that the way investors made money in the past may not be the way they will in the future.   

"The fact that so many people were surprised that stocks could drop so much surprises us because there have been other times when this happened," he says. "But we all have very short memories and right now, with confidence at an all-time low, it is very hard to have a memory that stocks rallied off the 2002 bottom by 100%."  

So true, and also a reminder that despite the cautious approach to growth investing that we espouse, one must always realize that the old rules could at some point return for years at a time, and the stock market could produce the kind of returns that get investors right back on track for retirement.  As Mr. Kinniry correctly states, it has happened before.   

But the question and concern this fine study and article raise is this: if the stock market fools the public again, and provides strong returns in the next decade when so many are on the sidelines, will most of them miss out, once again victims of thinking that leaves them one big step behind financial success?  When the proverbial tree in the forest falls when no one is there, we must wonder, does it make a sound?  Most critically for those interviewed for the EBRI survey, will it allow them to retire?  If investors freeze and stay frozen, they won't hear the tree or anything else (like prudent and proactive portfolio advice) and the sounds they will fail to hear are those of the investors that shook off their fears, realized that had no choice but to fight back, and achieved a satisfactory retirement lifestyle...or better.

The information herein has been obtained from sources believed to be reliable, but Emerald Asset Advisors, LLC ("Emerald") does not warrant its completeness or accuracy.  Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Further information on the firm and its advisory fees may be obtained from the firm's Form ADV Part II, which is available without charge upon request. Complete descriptions of all Emerald's products and benchmarks are available upon request.

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