Retire at the Coffeehouse

Top 72. Aug 23, 2005 11:09 AM

» Normxxx - Investors' emotions

Coffeehouse Investor: Investors' emotions can get in the way

By Bill Schultheis | 23 August 2005

"Show some emotion

Put expression in your eyes

Light up

If you're feeling happy'

But if it's bad

Then let those tears roll down.

Thank goodness we are an emotional bunch. Our emotions bring a sweetness to a morning sunrise and anguish to a shattered dream. Most of us wouldn't have it any other way. Our emotions offer a richness to life that would otherwise result in a dull existence in this world.

Unfortunately, this isn't the case when it comes to building investment portfolios. These same wonderful emotions are our biggest hindrance to becoming successful investors.

The Wall Street crowd would like us to believe that successful investing is all about owning five-star mutual funds and No. 1-rated stocks. As such, we subscribe to things like Morningstar and Value Line in search of top dogs.

Here's the catch: The more we focus on irrelevant stock market things, the more we are able to conveniently ignore our own emotions that ultimately drive our investment decisions.

Lest you think I am the only one with a slanted view on this subject, last week The Wall Street Journal reported on a study in the Psychological Science Journal revealing that ``people with an impaired ability to experience emotions could actually make better financial decisions than others.''

This study is part of a growing effort by researchers to determine why so many intelligent people make so many foolish financial choices, and are discovering that unemotional investors make far better investment decisions.

For instance, why do so many ``risk-averse'' retirees continue to take on so much risk in their portfolios, even after they have accumulated enough financial wealth to see them through their retirement years?

Or why do so many younger investors, fearing a significant market decline, shy away from investing money in common stocks, when, in fact, a nasty bear market would clearly serve them well?

If you are someone who struggles to keep your emotions in check when making investment decisions, welcome to the Coffeehouse Investor.

Our investment philosophy of capturing the entire return of each asset class through low-cost index funds makes sense from a financial standpoint compared with the active stock-picking/mutual fund crowd, quite possibly to the tune of hundreds of thousands of dollars over your lifetime.

A far greater benefit of embracing the three Coffeehouse Investor principles is that it addresses the one component of investing that people struggle with the most— their own emotions.

First, the Coffeehouse Investor philosophy allows you to put the pursuit of performance in perspective. There will always be stocks and mutual funds that are generating better returns than those inside your own account. Do you switch or stay put? When you don't have a clearly defined level of expected performance with your investments, fear and greed take over, and your emotions begin to rule your choices instead of common sense.

The Coffeehouse Investor philosophy allows you to take charge of your financial destiny. There is a powerful and freeing energy attached to knowing that you are in control of your economic future.

Not some stockbroker or mutual fund manager— you!

Instead of focusing on things that are totally out of your control, like weekly economic numbers and quarterly earnings reports, you can focus on three simple investment principles that are in your complete control.

Last, and most importantly, our investment philosophy allows you to get on with your life. In reflecting on the past six years and the impressive returns generated by Coffeehouse Investor-type portfolios, I'd have thought that more investors would comment on the positive impact it has had on their financial well-being.

That hasn't been the case. Overwhelmingly, they have mentioned the renewed ``emotional freedom'' they possess to pursue those things in life that are most important to them. That is what being a Coffeehouse Investor is all about.

Bill Schultheis is the author of

<img align="left" src="http://images.amazon.com/images/P/0976585707.01._PIdp-schmooS,TopRight,7,-26_SCMZZZZZZZ_.jpg" border="0"> The Coffeehouse Investor
by Bill Schultheis
He is also an investment adviser with Pacific Asset Management in Kirkland. His column appears Sundays. He can be reached at billschultheis@pacificasset.net or at 425-820-1769.

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

Top 73. Oct 14, 2005 9:13 PM

» Normxxx - Know your burn rate

Coffeehouse Investor— First step in retirement: Know your burn rate

By Bill Schultheis | 10 October 2005

All the children are above average in ``Prairie Home Companion'' radio show host/storyteller Garrison Keillor's famous fictional town of Lake Wobegon.

Although I haven't conducted any scientific surveys on the subject, I'd be willing to bet this same ``better than average'' mentality applies to most adult do-it-yourself investors as well.

The truth is, after reflecting on the countless comments, questions and e-mails I have received at the Coffeehouse over the past eight years, I have come to the conclusion that most investors possess a Lake Wobegon overconfidence in their ability to build wealth, ignore Wall Street and get on with their lives.

This is especially true of those who are nearing retirement or are retired, and need to make their portfolios last a lifetime, or at least another 30 years. I've got a hunch that lots of these folks who visit the Coffeehouse for the first time walk away thinking that retirement planning is as simple as owning Vanguard's Standard & Poor's 500 Index fund and letting the bull market take it from there. Nothing could be more financially reckless than doing just that.

Putting together the proper building blocks and then combining these asset classes to maintain a portfolio throughout your retirement years is only one small component of building wealth. When I retire, this is where I am going to start.

No. 1 on the list, I will have a good idea of my monthly burn rate (expenses). This is the critical first bit of information to focus on to make sure I don't outlive my money. I continue to be astounded at the number of retirees I encounter who are knee-deep in Morningstar mutual fund reports and Value Line stock surveys who don't have a clue what their monthly burn rate is. I'm not talking down to the penny, but is it $4,000, $8,000, or $15,000 a month?

In discussing a monthly burn rate, I am not suggesting that you start out by creating a budget for yourself; what is important is that you move toward an awareness of how much you are spending each month, what you are spending it on, and how this spending will affect your financial well-being 10 and 20 years down the road.

Homing in on this number, especially as retirement looms large, has several benefits.

By integrating this number into my financial planning software, I can determine if I am going to run out of money in X years. If that is the case, I will work at scaling back my burn rate over the coming years, or delaying my retirement, or going to a 'partial retirement' first step.

On the flip side, my planning software might be telling me that at my current burn rate, my account value will double (or stay level) 20 years out. This awareness allows me the opportunity to increase my monthly burn rate or the freedom to take that extra vacation or purchase that much-needed new roof.

Another advantage to keeping track of my monthly burn rate is that it allows me to see if my expenses are aligned with my values. For instance, although I like going out to a nice restaurant now and then, I'd much rather spend my recreation funds on golfing or on my woodshop. If, at the end of the quarter, my dining expenses are double my golfing expenses, I need to have a little talk with myself, because I am not spending money in a manner that is aligned with what is meaningful in my life.

Beyond this, keeping track of my monthly burn rate and how it affects the value of my portfolio is essential because the next step in financial planning at retirement is to create a portfolio that is as conservative as possible while still allowing me the opportunity to sustain my lifestyle.

[Normxxx Here: It is completely irrational to risk any part of your retirement funds in order to possibly increase them substantially beyond probable inflation, if you don't have to! ]

This is critical because at this point in my life I want to remove as much uncertainty as possible from my financial affairs. In fact, when I retire I hope to be at a place where I have less than half my portfolio invested in commons stocks.

Why pursue higher returns and added risk if it isn't necessary?

Doesn't make much sense to me.

After I have established an awareness of my monthly burn rate, the next step is to allocate my assets between stocks, bonds, and other asset classes that are aligned with the risk I need to take to reach my goals.

In case you haven't noticed, we are simply working our way through the three Coffeehouse Investor principles to secure your financial future.

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 74. Oct 14, 2005 9:41 PM

» bob90245 - Re: Know your burn rate

In response to Know your burn rate posted by Normxxx:

Bill Schultheis sometimes has an off day. And this column, unfortunately, is not up to his usually high standards.

I notice Norm, that it was YOU who brought up the specter of inflation and NOT Shultheis. That was a very big miss on Shultheis' part. Good thing you caught it.

This is why I believe Shultheis' misses the mark by lowering the stock allocation during retirement. In days gone by, that would have been appropriate. But now with longer life expectancies, retirement portfolios need growth in order to last for longer periods -- most likely 30 years or more. I'm assuming here a retirement age of 65. So where will portfolio growth come from? Stocks or bonds? Maybe Schultheis thinks longevity and inflation risk won't be part of retirement -- I don't know.

-- posted by bob90245

Top 75. Oct 15, 2005 10:26 AM

» Normxxx - Re: Re: Know your burn rate

In response to Re: Know your burn rate posted by bob90245:

Well, he is only talking about 50:50, which is still substantially more than the old 100 - your age for the stock part. It is more nearly 115 - your age.

You have to figure that unfortunately, most people will be lucky just to match inflation over the next 5 years or so in the stock market. As you have probably surmised, I am not sanguine for at least the next 5 — 10 year period. (If all goes well, we should be on another upswing starting about then.) But the more dangerous problem for Schultheis is whether the yield on bonds will keep up with inflation over that period. It sure didn't in the '70s!

I don't know what to advise the about to retire or newly retired investor, who is not investment savvy or is not willing to work at it. Defined contribution retirement plans and/or non-inflation adjusted defined benefits retirement plans are not the answer (nor is relying on Wall Street). We may yet be all living off the government via inflation adjusted SS yet, if things get bad enough! (What!?! You say that's not possible?)

To be perfectly frank, I think we may not be able to afford supporting the baby boomers from 65 to (100?) as non-producing citizens no matter how we try to do it (at least not in the style to which they have become accustomed). So, they'd better plan on (at least part-time work) until 72, and more likely 75. Once we get through the baby boomers, we should be all right; the numbers start to even out and automation (which is rapidly dis-employing the unskilled and semi-skilled, and currently now even the skilled workforce) should have improved productivity to where we can cope.

Just think; in the world of 2050 (assuming we haven't blown ourselves off the earth by then) working may be a privilege which only the well endowed may be permitted to do (for free, of course)!

-- posted by Normxxx

Top 76. Oct 15, 2005 10:51 AM

» bob90245 - Re: Re: Re: Know your burn rate

In response to Re: Re: Know your burn rate posted by Normxxx:

Well, he is only talking about 50:50 . . .

Read this part again:

In fact, when I retire I hope to be at a place where I have less than half my portfolio invested in commons stocks.

I agree with you that 50:50 is still OK. When a portfolio has more bonds than stocks, the long term expected growth will be lower. So that means that the portfolio has to be larger!

I have no problem if a retiree wants a very conservative stock allocation (less than 50:50). They just need to understand that the size of a conservative portfolio will have to be larger than a portfolio that has more stocks. This point was also missing from Schultheis' article.

-- posted by bob90245

Top 77. Oct 15, 2005 4:48 PM

» Normxxx - Re: Re: Re: Re: Know your burn rate

In response to Re: Re: Re: Know your burn rate posted by bob90245:

You're right. Even the essentials would cover a good sized book. And he was just keeping it to one-page. I was giving him the benefit of the doubt and assuming the rest was covered in his book.

The reason this article appealed to me is that just this year I concluded my first year on retirement and monitoring my burn rate, which, happily, is well within my SS, Federal Retirement Annuity, miscellaneous earnings, etc. I didn't have to draw on savings or investments, not even interest. Phew! Maybe I'll spend the winter doing London— I love taking in those shows at the West End, and Christmas London!

-- posted by Normxxx

Top 78. Oct 15, 2005 5:22 PM

» bob90245 - Re: Book on Retirement Investing?

In response to Re: Re: Re: Re: Know your burn rate posted by Normxxx:

I was giving him the benefit of the doubt and assuming the rest was covered in his book.

Nope. His views on investing during retirement are not covered in his book. And you're right that the essentials would cover a good size book. Trouble is, at least in my view, is that there are no such books that I like out there. Do you have one that you like?

If I could be so immodest, I think my article here is a pretty good one to make into a book on investing during retirement. I have put on the finishing touches at this full-length article:

Retire at the Pie Shop

-- posted by bob90245

Top 79. Oct 15, 2005 6:29 PM

» SCoe46 - Re: Re: Book on Retirement Investing?

In response to Re: Book on Retirement Investing? posted by bob90245:

Bob, the best one I have found so far is Merriman's "Live it up without Outliving Your money!" I like his one portfolio for life 60/40 stock/bond. in retirement He recommends annual "fixed" 6% withdrawl rates of your starting balance at the beginning of each year with no inflation adjustments.

-- posted by SCoe46

Top 80. Oct 15, 2005 6:54 PM

» bob90245 - Re: Re: Re: Book on Retirement Investing?

In response to Re: Re: Book on Retirement Investing? posted by SCoe46:

I've read Merriman's book. And I think his 6% withdrawal rate is much too high. The time period his back-tested data covers is limited to only 1970-2004. And as you know, this period included the Great Bull Market of 1982-1999. I doubt we'll see such generous returns in our lifetime again. Otherwise, his advice on using a 'slice and dice' portfolio are in agreement with my approach here. However, I advise limiting the initial withdrawal rate to 4 percent.

You may notice that in my "Pie Shop" article, I cite this William Bernstein article. I let that be my reminder not to be too greedy or optomistic with my retirement withdrawals.

-- posted by bob90245