Put Technology to Work to Manage Investor Expectations and Behavior

It is not often the case that you can time or identify the name of a disaster before it hits. But, when disaster strikes there is no time to prepare. The pain on the wife’s face was palpable as she described how she was managing her retired CPA husband’s retirement account. She said that she now sees she did not recognize the amount of risk they were taking when the market kept reaching new highs. She noted this was the second time since 2000 that their assets had been crushed. As if in a trance her husband became alert enough to make it clear that what was $1M became $400k after a 60% drawdown due to market loss and income taken, it means to fully recover the couple needs a gain of 150%. He went on further to say, first he didn’t like those odds of getting back to their high water mark, second what made it different this time is they needed to take withdrawals for current spending needs every year now, and third they remain so shell shocked instead of getting back into the market most of the retirement account was in cash instruments.

The Cycle of Investor Emotions

According to me, it’s not about the prediction of what may or may not happen it’s all about the preparation in advance. Once prepared, investors may improve their odds of weathering the storm no matter when it strikes or what name it is given.

Who would have thought something we learned to call after the fact those Credit Default Swaps would forever change the world as we knew it. Think of all of the companies you used to know and use that were blown away like leaves in all night storm into the history books.

The next bus that could disrupt your day when crossing the street could well be anyone of the things we have discussed here, the Sunspot Cycle, the Geopolitical Cycle, and the worst of the Baby Boomer’s Spending Wave bottom or the catalyst could be a war with North Korea, a Presidential impeachment, earnings disappointments, no genuine income tax changes, or fund manager John Hussman’s concern today about something we experienced early 2000, “the growing dispersion of stock market returns.”

You are not alone. Nearly half of retirement account participants (40%) don’t feel they know what their best investment options are, and one third (30%) feel a lot of stress about choosing their investments, according to a survey conducted by Koski Research for Schwab Retirement Plan Services, Inc., between May 25 and June, 2015. The good news is retirement savers who sought investing advice with their plan enjoyed a median annual return almost 3% higher than those who did not, including the fees paid for that advice, from a study of 14 large retirement plans with more than 723,000 individual participants and over 55 billion in assets, by consulting firm Aon Hewitt and investment advisory firm Financial Engines between 2006-12, published May, 2014.

Check to see if your (401(k), 403(b) and 457 plans have been recently enhanced with a brokerage window which allows you greater flexibility and access to a large number of high quality investment options in addition to those in the ‘Core’ account. The option is known as the Self Directed Brokerage Account (SBDA) available on over 100,000 retirement plans now allows regular participants to expand the range of investment choices beyond the Core investments and along with access to similar management styles as high net worth investors, institutions, and endowments. By incorporating both traditional and non-traditional assets classes via Exchange Traded Funds (ETFs) and mutual funds, experienced teams mathematically and methodically build and monitor portfolios that are focused on risk management. For over 30 years this time tested, dynamic asset allocation approach is well suited to navigate today’s exceedingly volatile financial markets. On the other hand, there are some disadvantages. They include possibility of additional trading and administrative costs, it may be more difficult for inexperienced investors to choose suitable investments due to the increase from which to choose, and potential loss of institutional share class options that may be available in the retirement plan.

A Self Directed Brokerage Account (SDBA) include:

Professional management

Custom investment solution

Incorporates age, years to retirement, risk/reward assessment

Minimizes portfolio overlap

Participants can move back and forth between Core and SBDA without penalty

Assets stay in the current plan at all times.

Target Date Funds vs Tailored Advice

The easy option isn’t necessarily your best option. Target Date Funds (TDFs) are designed to shift investors from stocks to bonds over time in an effort to become more conservative as retirement approaches. It sounds like a good idea, but the problem may become the shift may not reduce market losses and the move may contradict your specific goals. This transition is referred to as a “glide path” and while the concept seems reasonable, TDFs are routinely criticized for the limits of their mass market approach. TDFs cannot incorporate all the relevant personal facts that determine the ideal allocation for one’s retirement investments, and investors can find themselves either forfeiting needed growth or accepting unnecessary exposure to increased market volatility.

Account Details helps investors build pin point gain and loss expectations

“To reach a port we must sail, sometimes with the wind and sometimes against it.

But we must not drift or lie at anchor.” – Oliver Wendell Holmes

When people on a farm find themselves in a hole for any reason, one thing they know to avoid doing is to dig deeper. “Financial preparedness is a crucial component of disaster planning that addresses the actions necessary for an organization to mitigate financial losses following a catastrophic event,” wrote Allen Melton and Michael Speer, Risk Management, May 1, 2016. One of the advantages of technology today is for investors to define in dollar terms as well as percentages what loss is unacceptable so they can determine in advance what loss they can live with. Retirement account holders can then design the portfolio with reasonable expectations of gains and losses. When the account is off -20% for example, that investor needs 25% to get back to even. When investors mistakenly believe that they can live with a -50% to -60% the reality of needing that 150% gain to recover as you are taking income for life may cause indigestion, if not unnecessary regret and poverty for life. Ask your trusted independent investment advisor today to show you how state of the art, low-cost technology can provide you with a simplified system designed to transform results and improve investor behavior.

200 N. Westlake Blvd., Suite 109

Westlake Village, California 91362-3783

805.495.2077 800.266.2077 888.WHY.BEPOOR

Fax: 805.497.8342

www.westlakefinancialadvisors.com

The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Past performance does not guarantee future results. Asset allocation does not guarantee a profit or protections from losses in a declining market.

*There are certain risks and considerations to take into account prior to investing in a target-date fund. A target-date fund, also known as a lifecycle or age based fund, is a fund portfolio that helps investors saving for retirement choose a single portfolio aligned with the year closest to their expected retirement. It is designed to provide an asset mix that becomes more conservative as the date for expected withdrawals to begin approaches. Consider in addition to your age or date of retirement other factors, including your risk tolerance, personal circumstances, and complete financial situation. A target-date fund is not guaranteed and it is possible to lose money by investing in the fund, even after the target date has passed. Certain funds’ asset allocations may be subject to change and the extent to which the allocation of a target-date fund among types of investments may be modified without shareholder vote.

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