January 2018

Retirement is an Income Problem

I present to you an enduring mystery related to our shared financial challenge of longer and longer retirement years. In its most simplistic form it is that we are all fully aware that, financially, Retirement is an Income Problem. I believe we all understand that the challenge is to create an Ever-Increasing Income Stream that stays ahead of the rising cost of living over our lives. But this isn’t the mystery. The mystery is that most folks invest as if retirement is essentially a problem of protecting principal at all costs. We cannot take our principal to the grocer.

Fixing our Principal often involves, fixing income. Fixing income leaves us, as retirees, defenseless against rising living costs.

The nature of successful investing, as I see it, is the practice of rationality under uncertainty. We will never have all of the information we want, in terms of what is about to happen, because we invest, in and for, what is essentially an unknowable future. Therefore we practice the principles of long term investing that have most reliably yielded favorable long-term results over time: They are: Planning, Rational optimism based on experience, Patience and Discipline. And, of course. Faith in the Future.

We very well may have ANOTHER banner year in market gains. On the other hand …. We May Not. Going back, historically to 1980, the average intra-year decline in the S&P has exceeded fourteen percent (14%). Yet even without counting dividends ( the income part of our portfolios ) annual returns have been positive in 28 of these past 37 years. As of the end of 2017 we have not had a measurable intra-year decline in our portfolio values in eight years. In an attempt to prepare you, please be reminded, the decline will come. When it does please remember … temporary market declines ( volatility ) have been very different from permanent loss of capital, and the most effective antidote to the volatility within our portfolio, is the passage of time.

It will be worth reiterating, in the context of this opening letter for 2018, the nature of my/our philosophy of advice. Generally speaking, my three plus decades of experience has been that successful investing is goal focused and planning driven, while most of the failed investing I have observed has been market-focused and performance-driven. Another way of making the same point is to say that the really successful investors I have known (and who have mentored me) were acting continuously on a plan – tuning out the fads and fears of the moment – while the failing investors I’ve encountered were continually (and randomly) reacting to economic and market related “news”.

Most of us – and I certainly include each of you in this generalization – are working on multi-decade and even multi-generational plans for such great goals as education, retirement and legacy. Current events in the economy, and in the markets, are in that sense distractions of one sort or another. For this reason, I make no attempt to infer an investment policy from today’s or tomorrow’s headlines, but rather, align each portfolio with each person’s most cherished long-term goals.

  1. The performance of a portfolio relative to a benchmark (any investment benchmark) is largely irrelevant to financial success.
  2. The only benchmark we should care about is the one that indicates whether we are each on track to accomplish our personal financial goals.
  3. Risk should be measured only as the probability that we will not achieve our personal financial goals, and
  4. Our portfolio investments should have the exclusive objective of minimizing that risk to the greatest extent practicable.

These, my friends, will continue to be the fundamental building blocks of my/our investment advice in 2018 and beyond.

2017 was a year of global growth – For the first time in this century, all of the major economic basins of the world were growing simultaneously.

Steady U.S. hiring has driven the unemployment rate down to 4.1%.

The Federal Reserve has begun to normalize by letting interest rates follow their normal course in an expanding economy.

I wish all of you a healthy and happy New Year!

Daniel D. Fencl