Investors—Don’t Forget That You’re Getting Older

None of us want reminders that we’re getting older. 

Hairs poke out where we don’t want them, and wrinkles start making subtle road maps of our faces.  Then we have our investments to think of.  As we age, they need to become slightly more conservative.

If you’ve been with the same investment advisor for the past five years and he or she hasn’t adjusted your portfolio’s risk levels to reflect your age, then you have yourself an “asset gatherer” instead of a real investment advisor. 

Asset gatherers probably outnumber investment advisors 100 to one.  They operate like hungry squirrels that run around, trying to stockpile as many goodies as they can before winter.  But there is no winter for a human asset gatherer.  They may call themselves “Financial Advisors” (and they’re likely certified) but they care more about increasing their numbers of clients.

In fact, a great advisor could be the man or woman who says, “Sorry, I can’t accept more clients.”   That’s golden.  After all, a financial advisor usually makes more money when they add more assets under their management.  Meeting that person who says, “I have enough clients” is a great sign.  Lean squirrels, after all, move around a lot better than fat ones.

Sadly, few people go into the money management business to help others. 

Their primary directive is to make money for themselves.  To do so, they need to be incredibly personable and kind.  After all, as product peddlers, they need to sell their personalities.  Once you buy the personality, you’ll buy their product.  And if those products are layered with sales commissions and other juicy hidden incentives, you pay the price for the salesperson’s good fortune.

Having hundreds of clients can also be hard for an advisor to keep track of their client’s accounts.  Advisors may forget to rebalance some of their portfolios when markets swing (as they did in 2008/2009) and they may forget to rebalance portfolios for aging investors—adding further safety, while reducing risk.

When we get older, we need to increase our bonds for added stability, while slowly reducing our exposure to the stock markets.  That’s textbook. 

In 2006, I gave a seminar to American teachers at Singapore American School.

The thesis:  most people pay investment fees and taxes that are too high.  Many “advisors” like selling expensive products (with hefty sales commissions) or hidden fees that put lobster and expensive wines on their own personal dining room tables.

On that seminar date, in 2006, I promised to create a simple investment portfolio with low costs and very low taxable consequences.  I also promised to track that portfolio, and rebalance it once a year.

My initial portfolio followed the suggestion of Warren Buffett; Harvard Endowment Fund manager Jack Meyer; Yale Endowment Fund manager David Swensen; Princeton professor Burton Malkiel; legendary personal finance writer, Scott Burns; and a slew of Nobel Prize winners in Economics, including Paul Samuelson, David Kahneman, Merton Miller, Robert Merton and William F. Sharpe.  Did they all offer the same investment suggestion?  Pretty much.  And your financial advisor probably won’t like it.  This kind of portfolio puts money in your pocket, not theirs.

To learn the simple details of this approach, you could check out my book, Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School.

But let’s get back to the portfolio, and the little changes I made today:

Following textbook allocation for someone without a pension, I shifted the bond component (the safe component that isn’t affected by the stock market) upwards to 38 percent of the total portfolio’s value.  My former 33 year old hypothetical investor started out with 33 percent in bonds, and I increased that allocation to match their age.  As a 38 year old without a pension, it’s a good idea to have roughly 38% in bonds.

What does this portfolio look like, and how has it performed?

I created this portfolio with a hypothetical $200,000 on September 11, 2006.  And I have tracked it ever since, using Smartmoney’s online portfolio tracker.  Today (March 21, 2012) the portfolio is worth $261,195.00, with no fresh deposits added.

Investment

% of total portfolio

Value in each fund

Vanguard total bond market index

37.59%

$98,366.63

Vanguard total U.S. stock market index

30.87%

$80,771.53

Vanguard international stock market index

31.54%

$82,546.52

 

Total profit gain since September 2006:  $61,195.00

Total % gain:  +30.6%

I did rebalance this portfolio a few times.  Rebalancing ensures that you roughly maintain the allocation you originally set for yourself.  If markets fall heavily, you’ll need to sell some bonds to buy into cheaper stocks.  When markets rise quickly, you’ll need to sell some of your stocks to buy bonds.  There’s no thought process required for this.  You just spend 10 minutes a year shifting your money back to the original allocation on whatever anniversary date you choose.

If you’re between the ages of 30 and 50, and your money hasn’t gained at least 30.6% since 2006 (with no money added) then you’re likely paying far too much money to an investment service company.

The solution is a really easy one.

If you don’t want to manage your money yourself, you can hire an advisor at Vanguard to do it for you.  Vanguard advisors are on a salary.  They aren’t paid commissions.  Few financial advisors meet that mold.

You could also use a firm like Assetbuilder which charges small fees for the service.

Here’s the bottom line:  it’s your retirement money.

Make the best of it, rather than making somebody else rich.





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (Wiley 2011) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use.

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6 Responses

  1. Or in layman terms, that's close to 4.97 percent compound annual growth rate over the past 5.5 years.

    I like to picture it this way, if this were a mutual fund with CAGR of 4.97 percent.

    Say, a mutual fund X, charges 6 percent upfront fees/sales charge, which is the norm for a Balanced Fund in Malaysia.

    Then you got, 1.5 to 2 percent of annual Management fees.

    These 2 things literally wipe out the mutual fund's return in the first and second year.

    And then, from the third years onwards, the 4.97 CAGR less the recurring 1.5 percent annual management fees leaves you with a return on par with Cash Deposit rate (3+ percent).

    The difference is, CD rate is guaranteed, fund's return is not.

    So it would have make more sense to put that amount of money into Cash Deposit instead of Mutual Fund X. 🙂

    • You’re absolutely right LCF! Fortunately for Americans, they could have bought the above portfolio without paying any commission fees, via Vanguard. When market returns aren’t particularly strong, the impact of fees (as you point out) is even more substantial. I’m sure that we both know plenty of people who have invested over the past decade, and not made a penny. Meanwhile, their brokers earned plenty.

  2. Walker says:

    This is a great example of how a sensible stock index + bond approach, coupled with rebalancing, has actually done pretty well through 2008.

    My only question: why did you go with the Total US Bond Market Index, BND, instead of an entirely Short-Term Index like Vanguard’s BSV?

    This is exactly what my portfolio looks like, except with a different bond allocation since I’m 23. However, I spent a long time debating over the most appropriate bond index to use. In the end I settled on BND, but I am still second-guessing that decision.

    I recently sold all my individual stocks, which I had painstakingly selected and purchased with leftover summer earnings throughout college. At the time, I thought I was immensely clever with my selections, and fiercely proud of them. Looking back now, I find that approach mostly amusing and steeped in stereotypical male bravado. Your book not only forced me to take a serious look at index funds for the first time, but more importantly showed how humility in investing, coupled with living well below your means, is the real sure-fire plan for achieving financial independence.

    Thanks,

    Walker

  3. Hi Walker,

    Great job on your portfolio decisions. And your alternative ETFs (compared to the example above) would be very good. I used the above index funds (rather than ETFs) for simple, educational purposes, back in 2006. And I'll stick with them, to prove that the process is simple, without the need to move things around and adjust anything (other than the odd bit of rebalancing)

    Cheers,

    Andrew

  4. Joe says:

    Wow, 30% gain in 6 years. That's something. I know this was just as an example, but do you mind having to pay the management fees that are included in mutual funds?

    I know some people that just want to invest in dividend only stocks. They get their dividends and reinvest them and this way they can avoid the management fees of mutual funds.

    Now granted a handful of stocks is quite a bit different than a MF with over 30+ stocks, so there is the diversification that you get with a MF.

    Just wondered where you stand on that. MF or stock dividends? Which do you prefer?

    • Hi Joe,

      I prefer indexes like these. The management fees are virtually nil (less than 0.12% annually). If you build a portfolio of dividend paying stocks, and it's time to rebalance, how do you select which stocks to sell? It's tough. With indexes, it's much easier. And most stock pickers lose badly to the market indexes.

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