Three tips to get your retirement plan on track

Avoiding costly mistakes when handling your money can be as effective as actually making money.

By AARON KATSMAN
August 17, 2011 23:42
3 minute read.
Aaron Katsman

Aaron Katsman 58. (photo credit: Courtesy)

Do you seem to be disorganized and unconcerned when it comes to managing your retirement? Have you taken to heart conventional wisdom bandied about in the media?

Avoiding costly mistakes when handling your money can be as effective as actually making money. These three tips will help you take control of your finances and get your retirement plan up to date.

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BUY AND HOLD THE S&P 500... NOT

Go to a personal-finance website and you will inevitably be advised to stick the lion’s share of your money in some kind of S&P 500 tracking vehicle. Whether it’s an ETF linked to the famous index (SPY) or an index mutual fund that provides the same linkage, the message is clear: own the largest US companies and you will be “guaranteed” to have a comfortable retirement.


This approach was made famous by John Bogle, founder and retired CEO of the Vanguard Group. He preached and preached this type of investing approach, claiming that it was low-cost and the most efficient way to build your wealth. Well, if the past decade is any indication, the only one who got rich was Bogle himself. He became fabulously wealthy from pitching this approach.

Unfortunately, his followers have managed to make exactly no money in the S&P 500 over the last 10 years (the “lost” decade that I have mentioned many times in this column).

That’s not taking into account that these investors have seen the actual erosion of their purchasing power due to inflation.

The world is a dynamic place.

More and more economic growth is coming from sources other than the largest US firms. Over the same “lost” decade investors in smaller (IJR) or mid-sized (MDY) US companies would have had very nice returns (approximately 7 percent a year), even accounting for three market meltdowns.

Investors who looked outside the US fared even better. Not including Japan, investors in Asia (EPP) would have seen an approximate 15% annual return, and Latin American investors (ILF) would have seen a 40% annual return. The lesson: Get your portfolio global in focus.

STOP THE INERTIA

For those of you who are not do-it-yourself investors, does this story sound familiar? I recently met with a wealthy cardiologist who wasn’t happy with his investment adviser.

He said his adviser was so unresponsive to his requests that even when he instructed him to sell out his entire portfolio, the adviser failed to execute his order. As a result, the value of his portfolio proceeded to lose 20%.

Forgetting about the regulatory issues raised by the adviser’s behavior, the doctor told me this was not the first time this had happened. In fact, he has been unhappy with the level of service he has been receiving for the past three years. He was also disappointed with his investment returns and thought they should have performed better based on market performance during the same period. When I asked him why he hadn’t transferred his account to a different firm, he said he was very busy and didn’t have the time to get around to it.

By doing nothing, the doctor lost a ton of money and will have to continue working longer than he had originally planned to ensure a comfortable retirement. It sure seems like that’s worth a phone call! I can’t stress enough the importance of staying on top of your investments so that “inertia” doesn’t set in.

CONSOLIDATE

The third mistake is having multiple investment accounts with different firms and not paying attention to their performance or how they are all invested. Your financial adviser should be like a chief financial officer (CFO) who is responsible for the entire financial situation of a business. When a client has various accounts, his financial adviser should have a broader view of the situation. The professional will assess all accounts, make sure they fit into a broader allocation strategy and see how the entire financial situation fits his client’s goals and needs.

Stop relying on the media to plan your retirement and start taking control of your own situation. The more you stay on top of things, the greater success you will have in hitting your retirement goals.

[email protected] Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.


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