Ed Rempel Org

Ed Rempel – Not Sold on ETF’s and Index Funds

Why I Won’t Own an Index Fund or ETF

 Skilled Fund Managers

Many investors are skeptical that there exist fund managers who have skill and who can beat the index over the long-term. Other investors believe that there are fund managers who have skill, but that it’s impossible to identify them ahead of time.

There are skilled fund managers that can be identified ahead of time. I know quite a few of them. You just have to look using the right criteria.

Identifying Skill

When looking at funds, many investors take an objective approach and study recent returns, look at ratings or statistics, or try to forecast which sectors will perform well.

Other kinds of skill evaluations are more subjective and rely on insider judgments, e.g., doctors assessing other doctors, or even actors judging performances of their peers.

The evaluation of a fund manager falls somewhere in between those two approaches, the objective and the subjective. I believe that, to find the best fund managers, you have to study them, not the fund.

Start by finding fund managers that have beaten their index over their career or long periods of time. This could be in more than one fund. They do not need to beat the index every year – just over time. Then study them to find out how they do it. Is it because of stock-picking skill?

Outperforming the appropriate indexes is just one factor in the criteria. Top fund managers are usually not trying to secretly follow the index–they’re more likely to have an effective style (like value investing), and have high “active share,” which means that they’re investing in a way that differs from the index; they also often have great experience and have their own money invested in the funds that they manage, i.e. “skin in the game”.

My All-Star Fund Managers

One of my special skills is identifying all-star fund managers — it’s essentially my main focus related to investments. I’ve found around 50 fund managers over the years who I would characterize as having superior skill, and all of them have beaten their index over long periods of time.

Most of those 50 managers are on my “watch list”. I own only a handful of those funds. Although I’m resistant to the idea of sharing statistics about my own personal investments, mostly because my investment style may not be suitable for every investor, I want to emphasize that it’s possible to identify skilled fund managers early and ahead of time.

Why I Will Never Own an ETF or Index Fund

I won’t ever own an ETF or an index fund because I’m not happy with below-index returns. I choose investments based on the fund managers–I want to invest with the Albert Einstein of investors, the absolute best. ETFs and index funds don’t have fund managers, so I’m not interested. The goal of investing is to obtain the highest long-term return after fees, and a skilled fund manager provides enough value to pay for those fees and more.

Above-Index Returns

There are really two options when you’re pursuing above-index returns: one, you can find yourself an all-star fund manager, or, second, you can choose a portfolio manager who’s paid by performance fee. When portfolio managers are paid by performance fee, they’re motivated to beat their index. If they don’t beat the index, the fees are similar to ETFs. If they do beat the index, the fee pays for itself.

Getting above-index returns is all about finding skill.

Strategic Investment Mixology – Creating The Holy Grail Cocktail

So what do your Investment Manager and your neighborhood bartender have in common, other than the probability that you spend more time with the latter during market corrections?

Antoine Tedesco, in his “The History of Cocktails“, lists three things that mixologists consider important to understand when making a cocktail: 1) the base spirit, which gives the drink its main flavor; 2) the mixer or modifier, which blends well with the main spirit but does not overpower it; and 3) the flavoring, which brings it all together.

Similarly, your Investment Manager needs to: 1) put together a portfolio that is based on your financial situation, goals, and plans, providing both a sense of direction and a framework for decision making; 2) use a well defined and consistent investment methodology that fits well with the plan without leading it in tangential directions; and 3) exercise experienced judgment in the day-to-day decision making that brings the whole thing together and makes it grow.

Tedesco explains that: new cocktails are the result of experimentation and curiosity; they reflect the moods of society; and they change rapidly as both bartenders and their customers seek out new and different concoctions to popularize. The popularity of most newbies is fleeting; the reign of the old stalwarts is history — with the exception, perhaps, of “Goat’s Delight” and “Hoptoad”. But, rest assured, the “Old Tom Martini” is here to stay!

It’s likely that many of the products, derivatives, funds, and fairy tales that emanate from Modern Portfolio Theory (MPT) were thrown together over “ti many martunies” at Bobby Van’s or Cipriani’s, and just like alcohol, the addictive products created in lower Manhattan have led many a Hummer load of speculators down the Holland tubes.

The financial products of the day are themselves, created by the mood of society. The “Wizards” experiment tirelessly; the customers’ search for the Holy Grail cocktail is never ending. Curiosity kills too many retirement “cats”.

Investment portfolio mixology doesn’t take place in the smiley faced environment that brought us the Cosmo and the Kamikaze, but putting an investment cocktail together without the risk of addictive speculations, or bad after- tastes, is a valuable talent worth finding or developing for yourself. The starting point should be a trip to portfolio-tending school, where the following courses of study are included in the Investment Mixology Program:

Understanding Investment Securities: Investment securities can be divided into two major classes that make the planning exercise called asset allocation relatively straightforward. The purpose of the equity class is to generate profits in the form of capital gains. Income securities are expected to produce a predictable and stable cash flow in the form of dividends, interest, royalties, rents, etc.

All investment securities involve both financial and market risk, but risk can be minimized with appropriate diversification disciplines and sensible selection criteria. Still, regardless of your skills in selection and diversification, all securities will fluctuate in market price and should be expected to do so with semi-predictable, cyclical regularity.

Planning Securities Decisions: There are three basic decision processes that require guideline development and procedural disciplines: what to buy and when; when to sell and what; and what to hold on to and why.

Market Cycle Investment Management: Most portfolio market values are influenced by the semi-predictable movements of several inter-related cycles: interest rates, the IGVSI, the US economy, and the world economy. The cycles themselves will be influenced by Mother Nature, politics, and other short-term concerns and disruptions.

Performance Evaluation: Historically, Peak-to-Peak analysis was most popular for judging the performance of individual and mutual fund growth in market value because it could be separately applied to the long-term cyclical movement of both classes of investment security. More recently, short-term fluctuations in the DJIA and S & P 500 are being used as performance benchmarks to fan the emotional fear and greed of most market participants.

Information Filtering: It’s important to limit information inputs, and to develop filters and synthesizers that simplify decision-making. What to listen to, and what to allow into the decision making process is part of the experienced manager’s skill set. There is too much information out there, mostly self-motivated, to deal with in the time allowed.

Wall Street investment mixologists promote a cocktail that has broad popular appeal but which typically creates an unpleasant aftertaste in the form of bursting bubbles, market crashes, and shareholder lawsuits. Many of the most creative financial nightclubs have been fined by regulators and beaten up by angry mobs with terminal pocketbook cramps.

The problem is that mass produced concoctions include mixers that overwhelm and obscure the base spirits of the investment portfolio: quality, diversification, and income.

There are four conceptual ingredients that you need to siphon out of your investment cocktail, and one that must be replaced with something less “modern-portfolio-theoryesque”:

1) Considering market value alone when analyzing performance ignores the cyclical nature of the securities markets and the world economy.

2) Using indices and averages as benchmarks for evaluating your performance ignores both the asset allocation of your portfolio and the purpose of the securities you’ve selected.

3) Using the calendar year as a measuring device reduces the investment process to short-term speculation, ignores financial cycles, increases emotional volatility in markets, and guarantees that you will be unhappy with whatever strategy or methodology you employ —most of the time.

4) Buying any type or class of security, commodity, index, or contract at historically high prices and selling high quality companies or debt obligations for losses during cyclical corrections eventually causes hair loss and shortness of breath.

And the one ingredient to replace: Modern Portfolio Theory (the heartbeat of ETF cocktails) with the much more realistic Working Capital Model (operating system of Market Cycle Investment Management).

Cheers!

To Rollover 401k Plan Assets or Not To… That Is The Question

The major purveyors of 401k products, and those who benefit from using them remind me of politicians… they press the party line, and use their power to demonize the competition.

Their position and deep pockets allow them to get their message out while we who have neither can only shake our heads and whimper about the sacred purpose of retirement income programs.

But, in the simplest of terms, since when has 2% been better than 6% (both after expenses)? The DOL, fiduciaries, and plan sponsors are staring back at me, eyes wide shut.

LinkedIn discussion groups have been talking about the pros and cons of 401k rollovers to private IRA portfolios. Most of the articles, and not by a slim margin, are institutionally biased advertisements for low cost Mutual Funds and ETFs, despite the fact that have absolutely no “preparation for retirement income bones” in their mass marketed bodies.

When the market corrects, the results will be what they have always been for market-value-growth-only programs. This time though, the DOL will fine the Plan Sponsors (i.e., the corporations so bitterly hated by our government), for allowing plan participants to make investment judgment errors with their own money plus the matching contributions…. let hindsight reign in the 401k space!

The 401k “space” as they call it, has become a lucrative product shopping mall, totally out of touch with what should be the long run purpose of these “quasi” retirement programs: it’s the monthly retirement income that pays the bills, Charlie Brown, not the market value.

If a person were a conspiracy theorist, he or she could make a case for institutional/congressional manipulation of interest rates… keeping them near zero so that gurus will continue to predict that stock market “returns” will outpace those of income purpose securities. Hmmm.

None, absolutely none, of the products provided by the top institutional peddlers produce nearly as much after “expense-ratio” income as Closed End Income Funds. These outstanding (and income paying far longer than any income ETF) managed portfolios are never, ever, found in 401k Plans… except the Self Directed, “safe harbor” variety.

Interestingly, all the major 401k product providers, also manage Closed End Fund product lines that generate generous income, even after higher fees. These fees, so important to regulators and politicians, are never paid by the recipients of the much higher income.

CEFS paying 6% to 9% after expenses are commonplace, but not available in 401k plans. Similarly, there are no restrictions on speculation in the equity markets, where similar high quality managed equity portfolios have been available for decades.

The retirement plan (401k) community has gotten so paranoid over goose-stepping DOL auditors and other regulators armed with crystal clear hindsight, that they have completely lost site of “spending money” as the be all and end all purpose of retirement portfolios. They must “outperform” half their brethren, and be dirt cheap to boot.

Yeah, I know that 401k Plans are not retirement portfolios, but neither the regulators, plan sponsors, congressional leaders, POTUSs, fiduciaries, or plan participants seem able or willing to accept that reality… why should they?

Looking inside the multi-billion dollar Vanguard 2020 TDF, we find 60% invested in equities (no less than 7000 individual positions) and income of about 1.5%. Wake up regulators… the “unfairness” is in the “emperor’s new clothes” products provided to the plan sponsors for inclusion in employee product menus.

You the fiduciaries, you the regulators, you the witch hunters, and you the do-gooders need to look at the product providers instead of their victims.

If you insist upon looking at investment plans as retirement programs (ERISA = Employee Retirement Income Act), perhaps you need to mandate that an outside-the-mainstream, “Self Directed”, income program be a major part programs you supervise. Until the focus changes from market value and expense control to after expenses income, these plans cannot provide what is expected of them… retirement readiness.

So in answering the “To rollover the 401k or not to rollover the 401k” question, I would say: “Run like _ _ _ _, just as fast as you can, to get out of that 401k and never ever buy a low income or no income security in the Rollover IRA you move to.

As long as plain vanilla portfolios of high quality equity (IGVSI companies) and Income CEFs yielding an experienced average, net/net 6% or more, are banned from participating in the 401k marketplace by (possibly) illegal monopolistic practices, rollovers to IRAs should be a requirement, not an option.

See how they run: https://www.dropbox.com/s/b4i8b5nnq3hafaq/2015-02-24%2011.30%20Income%20Investing_%20The%206_%20Solution.wmv?dl=0

As long as regulators are blaming generous employers for the investment mistakes of their employees, self-directed, income purpose, 401k plans are a much less scary, “almost a retirement plan”, option.

The Microsoft Retirement Income Program

Reading Between the Lines

Once we recognize that all investment portfolios eventually become retirement income portfolios, we can begin to focus on the regular recurring income that they produce… retired or not, the market value of your private portfolio (or of your 401k plan) has no purchasing power.

Yet all 401k programs are performance evaluated on market value growth as opposed to income production.

In late 1999, Microsoft Corporation (MSFT) common stock was at an all time high of $58.38 (split adjusted), and there were thousands of MSFT multi-millionaires out there confident that their retirement was secure…. with a guaranteed monthly income of ?

Please send me an email with the amount of income produced by a million dollars worth of Microsoft in 1999… or your favorite ETF or TDF today.

Several years later, one of those millionaires, and a golf buddy of mine, disclosed that he had just sold the 7 series BMW he had purchased with the proceeds of his MSFT stock… the one “asset” he still had from his dot.com fortune. Pushing 65, he just couldn’t bear the memory any longer.

If only he had sold the entire portfolio… or converted enough to tax free Closed End Funds to assure a lifetime income.

Yet no 401k programs today will hold income Closed End Funds (yielding 7% or so right now). Why? Because, according to the Department of Labor, 2% after low expenses is better than 7% after higher expenses.

By September 2000, MSFT stock had fallen by almost 50%; nearly 15 years later, with the market near its highest numberl ever, MSFT (at $47.60) remains 18% below its 1999 level… it didn’t pay a dividend until 2003, and its dividend yield today is only 2.6%, after many increases.

Back then, most Mutual Fund portfolios contained MSFT and hundreds of similar NASDAQ securities…  and this was OK with all varieties of regulators and plan fiduciaries because the markets, after all, were trending upward.

MCIM portfolios contained no NASDAQ equities, no Mutual Funds at all, and a growing income component of at least 30%… hmmm.

It took more than 15 years for NASDAQ to regain its 1999 level… how many of the heroes survived?

Today, most Mutual Fund investment portfolios and ETF gaming devices contain 1999 Microsoft look alikes, and most pay very little income…

MCIM portfolios? Well, no… no Mutual Funds, and no ETFs, just IGVSI (NYSE dividend paying) equities, and an income CEF component of at least 40%.

Can you get an MCIM Income Purpose portfolio in your IRA… absolutely;  in your 401k…  it’s a long sad story.

What’s in your wallet?

Retirement Income Webinar Sign-Up

S&P 500 Index: Morning After 401k Musings

March 2000 witnessed the S&P 500 Index breach the 1,500 barrier for the very first time… seven and a half years later, it was in just about the same position.

Inter-day October 15th, after an incredible bounce from its 56% drop through March 6th 2009, the S&P was just 20% above where it had been 14.5 years earlier… a gain of roughly 1.4% per year.

Just how low will it go this time? and are you prepared… this time?

The long term chart (Google “s & p 500 chart”, look mid page and click “max”) shows the volatility over the past fifteen years. Just for kicks, see if you can find the “crash” of 1987  (October 19th).

Could any stock market image be more beautiful? Could any be more in-your-face damning… tactically?

What if your 401k investment strategy had required selling before the profits started to erode?

What if your 401k strategy made you hold equity-destined cash until Investment Grade Value Stocks fell at least 20% before selective, patient, cautious buying began?

What if your 401k investment strategy called for at least 40% of your investment portfolio to always be invested in income purpose securities?… securities rising in price so far today, in the midst of a major sell off.

Such an approach has been available since the 1980’s for a lot of happy investors who have never had to change their retirement dates; and the same program has been available to 401k investors since March 0f this year…  but you have not been allowed to know about it!

You can’t use it because your 401k plan rules don’t allow you to invest in 40 year old “makes-a -lotta-sense” strategies, just because they have a new label and/or not enough millions under management… who’s protecting whom?

This is precisely how the big operators keep new and innovative solutions on the sidelines. Tough luck investors… you’ll just have to bite the bullet and watch your “by-design” speculative portfolios crumble  for the third time in fifteen years.

Pity, but one-size-fits-all rules are every bit as bad for your financial health as one-size-fits-all products. How are those TDFs doing… and with all that experience and mega millions under management.

 

Dealing With Stock Market Corrections: Ten Do’s and Don’ts

A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, corrections adjust equity prices to their actual value or “support levels”.  In reality, it may be easier than that.

Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking.

The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty!

Mutual Fund holders rarely take profits but often take losses. Additionally, the new breed of Index Fund speculators is ready for a reality check. If this brief hiccup becomes a full blown correction, new investment opportunities will be abundant.

Here’s a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:

1. Your present Asset Allocation is based upon long-term goals and objectives. Resist the urge to decrease your Equity allocation because you expect lower stock prices. That would be an attempt to time the market. Asset allocation decisions should have nothing to do with stock market expectations.

2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of Investment Grade Value Stocks as they move lower in price. I start shopping at 20% below the 52-week high water mark… the shelves are full of bargains.

3. Don’t hoard the “smart cash” you accumulated during the rally, and don’t get yourself agitated if you buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, and selling too soon is investing brilliance.

4. Take a look at the future; you can’t tell when the rally will resume or how long it will last. If you are buying IGVSI equities now, you will to love the next rally even more than the last… with yet another round of profits.

5. As the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There’s more to “Shop at The Gap” than meets the eye, and you should run out of cash well before the new rally begins.

6. Your use of “Smart Cash” proves the wisdom of Market Cycle Investment Management; it should be gone while the market is still falling… gets less scary  every time. So long your cash flow continues unabated, the change in market value is just scary, not income (or life) threatening.

7.  Note that your Working Capital is still growing in spite of falling market values, and examine holdings for opportunities to reduce cost basis per share or to increase yield on income Closed End Funds). Examine fundamentals and price; lean hard on your experience; don’t force the issue.

8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of media hype and propaganda. Focus on Investment Grade Value Stocks; it’s easier, less risky, and better for your peace of mind.

9. Examine portfolio performance with your asset allocation and investment objectives in focus and in terms of market/interest rate cycles as opposed to calendar quarters and years. The Working Capital Model allows for your personal asset allocation.

Remember. too, that there is really no single index number to use for comparison purposes with a properly designed MCIM portfolio.

10.  So long as everything is “down”, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should NOT be discarded during general or group specific weakness.  BUT, you must have the courage to cull them during rallies… also general or sector specifical (sic).

Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional rear view mirrors. The short and deep ones are most lovable (kind of like men, I’m told); the long and slow ones are more difficult to deal with.

If you overthink the environment or overcook the research, you’ll miss the party.

Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight. Because amid all of the uncertainty, there is one indisputable fact that reads equally well in either market direction:

There has never been a correction or a rally that has not succumbed to the next rally or correction..

Pitfalls of Target Date Funds… and some proposed replacements

The LinkedIn Group Communities are abuzz with the idea that, even as popular as they have become, Target Date Funds (TDFs) are just not wonderful after all…

Several fixes have been proposed. I’ve done so myself. as you know. This one is from plansponsor.com “A Better Option than Target Date Funds” and needs some cautionary commentary.
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What to say when you agree that Target Date Funds are a sham, and do little to prepare 401k plan participants for retirement?

But what to shout out loud, when the fix for a low income, inappropriate asset allocation, is a “half-gainer” into a river of high risk speculations being promoted as “alternative investment” asset classes!

Note that “alternative investment” is a euphemism for those high risk mechanisms described in Investments 101 textbooks as “speculations”.

No matter how they are sliced, diced, sauteed, or seasoned, no recipe for speculations will ever produce the taste of a fundamentally sound investment.

Similarly, when considering ETF derivatives, the risk increases exponentially with each level, so a fund of funds is likely to be riskier than the funds it contains.

The article mistakenly merges all “Life Cycle” programs and products into the TDF category. There are at least three that are retirement income focused, and asset allocated to accommodate several different risk tolerances at retirement.

They are constructed with Investment Grade Value Stocks and Income ETFs. Not sexy at all, but they should provide lower drawdowns and higher income… and they can be converted security-for-security into a rollover retirement portfolio at any time.

Target date funds do not prepare us for retirement, though they may shield us a bit from maximum correction drawdowns.

My concern with them is that the inappropriate DOL/SEC focus on fund expenses and market value is (all good intentions aside) producing a low income retirement scenario that will only generate enough income if the market never, ever, goes down.

The popular Vanguard Target 2015, for example, is more than 50% in the stock market (with no signs of reducing exposure) and generating much less than 2% in spending money.

The fund holds positions in more than 5,000 different stocks (there are less than 500 Investment Grade Value Stocks)… clearly not a retirement fund in any sense of the word. The ideal “retirement fund” never invades principal, thus allowing for growth in the annual income provided.

But the portfolio alternative being proposed in the PlanSponsor.com article is absurd, or should be to any plan sponsor or fiduciary.

Commodities, private real estate, private equity speculations, and hedge funds may well be alternative asset classes BUT they are absolutely not investments. These are textbook speculations, nothing more, and certainly nothing that should ever be considered  suitable for a retirement program.

Inside Modern Portfolio Theory – For Emperors Only

Maybe it’s just me, but when I hear “Monte Carlo”, I can’t help but think “casino”…

My previous article post dealing with the income growing opportunities of 401k account “drawdown” elicited some interesting commentary from the MPT community.

Apparently, if we apply the proper mathematical algorithms to all stock market probabilities, including all possible cash flow scenarios, we will be able to deal with 401k participant expectations better…

I can’t control the warmth and fuzziness that has taken over my financial feelings… future predictions that possibly, maybe even more often than not, can reduce my drawdown to a less painful level than otherwise, while doing nothing to boost the income generated by my portfolio is certainly bringing on a huge sigh of relief…

What!

I’m the type of investor who cringes when he hears market analysts explain how investors are “placing their bets” but how can you possibly sleep at night when you know that your 401k selections are “probably” being designed using the “Monte Carlo” algorithm subset of Modern Portfolio Theory?

Check it out if you wish, but if you aren’t rolling-on-the-floor, LOL, when you finish, have I got a new suit of clothes for you: http://en.wikipedia.org/wiki/Monte_Carlo_method

How many soontobe retirees (including myself, eventually) would even pretend to understand it. Really, a show of hands would be appreciated. How many of you think that these probability games are “investing”.

Retirement income is not (and should not be) about gambling. A fundamentally sound (i.e., quality) portfolio that generates 6% or so income (tax free, even) is easy to put together… yes, in today’s low interest rate environment.

4% to 5% in the 401k space, convertible upon rollover to the 6% variety is doable as well. You need to make a market value drawdown an opportunity to grow the income… faster.

Once the retirement income has been secured, then you can tour the world’s casinos until the excess capital is gone.

The MPT portfolio that bursts like a 4th of July “finale” in my weakened brain is reminiscent of the magical Junk Bond Portfolios of the ‘1980’s.  Don’t worry  about it, investors, we’ve put all these fundamentally speculative securities together in such a brilliant manner that the sum of the junk has been transformed into non-junk.

As of August 31st, 2014, the Vanguard Target 2015 portfolio was still 51.8% invested in the World’s Stock Markets and generating less that 2% in spending money…

Yes, it is true, the inmates really have taken over the asylum.

401k Drawdown… OMG

“Drawdown” has become the most feared word in the 401k vocabulary, just as “Total Return” has become the most worshipped phrase. OMG, how will plan participants be able to retire if their portfolio market values stop rising!

“Well, yeah,” you might say, “isn’t that what investing is all about. If you’re in the right sectors and the right funds, your drawdown will be minimized.” Well , yeah, that could be a viable drawdown minimization scenario if we had a crystal ball that could identify the “right” vehicles.

We don’t, and a litany of supportive sector correlation statistics just doesn’t change the basic facts of investment life that still are referred to respectfully by some as the “Market Cycle”.

Can you remember how easy portfolio management once was, simply by applying basic “QDI” principles to portfolio content selection and profit taking disciplines? It was a time when navigating an investment portfolio through the unpredictable, cyclical, undulations was indeed, a labor of love and respect for economic fundamentals… with strategies based on cyclical realities.

MPT charlatans, with “Frankensteinian” creativity, have transformed text-book-defined speculation into a passive sector-timing process based on probabilities… games of chance yet to be tested through any form of market correction.

In a program with no promise of income and no concern for fundamentals, is it any wonder market value drawdown is so feared.

Place today’s ETF and Mutual Fund equity content into the three Major Meltdowns of the past 30 years, and it’s likely that you’ll see the very same drawdown numbers… or worse, because of the artificial demand for a finite supply of real securities.

Drawdown happens; corrections are inevitable. The same MPT hocus pocus that, theoretically, is placing 401k dollars in the right sectors is, perversely, exacerbating the problem by blowing up the highest security price balloon ever, even higher.

Keep in mind as well, advisors and fiduciaries all, while we wonder at the brilliance of those who have created this ethereal (surreal), market fantasy land, that it is they (not you and I) that wield the fatal “pin”.

When the bubble bursts, remember these thoughts:

Drawdown minimization is accomplished by: investing only in “investment grade”, high quality, securities (fundamentally speaking); then diversifying among them sensibly within two “purpose delimited” security buckets; and regarding realized “base income” as the primary purpose of the income allocation and the secondary purpose of the equities.

With strict buy, hold, and reasonable profit-taking disciplines governing portfolio operations, drawdown minimization, continual income growth, and rapid recovery is virtually a sure thing… a sure thing that isn’t possible in a 401k environment that has kicked fundamental quality and income growth principles to the curb.

Retirement Preparation 101

Prompted by a recent article in “Financial Planning” entitled “For Retirement Portfolios, a Smarter Glidepath”… several points in the referenced “conventional wisdom” have fingernails on chalkboard quality.

The use of “stocks” in retirement to help with portfolio growth and to keep up with inflation is the first. The main thrust of a retirement program is (should be, anyway) the generation of income… closed end income funds do this better (and historically safer) than anything else.

If there is enough income (defined as more than the retiree needs for regular monthly expenses), the transition to retirement can be easy without ever being overly concerned with market value.

If a retiree spends a max 70% of the dividend and interest (“base”) income, it’s easy to grow both the portfolio market value (which you can’t spend) and the income (which you can)… thus keeping up with inflation, something we haven’t been allowed to see a glimpse of for years.

Only when there is enough income should equities even be considered in a retirement portfolio. Stocks have nothing whatsoever to do with inflation … a measure of buying power. More income dollars = more buying power. More market value tends only to encourage excessive spending.

Another myth is “today’s low interest rate environment”… totally not true in the land of income CEFs and even some income ETFs… tax free CEFs are paying (they have been for years) over 6% on average, with taxable funds paying much more.

A retirement “glide path” that increases equity exposure “to improve total return outcomes” is another dose of illogic that stems from the idea that the market price of income securities is even more important than the income the securities produce.

It just ain’t so… ever. Take the example of the financial crisis. Investors who held income CEFs (particularly the tax exempt variety) never saw a change in spending money, while the reinvestment of the “at least 30% of the income” rule mentioned above allowed them to add to their holdings… growing yield, growing income, and reducing cost basis per share.

The problem is that the search for the holy (market value) grail makes pre-retirement investors forget the purpose of their retirement portfolios (i.e., it’s the income, not the market value).

The problem this market value, total return, focus brings to the 401k space is the millions of pre-retires, appendages crossed, genuflecting frequently, praying that their market value will be stable. Somehow their standard of living will be maintained with realized income in 2% to 3% range… so let’s add more stocks, the article suggests, because they will go up in price better than income securities.

My hope is that the vast majority of Financial professionals will reject this lunacy… no matter how you slice it, higher, even stable, market value may float your boat, but it won’t produce the income needed to run it.

A wise man once defined true wealth, not as the ability to accept financial risk, but as the ability not to need to. Wise men in the 401k 3(38) fiduciary space can be found at Expand Financial and QBox Fiduciary Solutions.