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.

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.