Thursday, February 23, 2017

Is your retirement in jeopardy?

Due to severe budget problems, Puerto Rico will have to slash its budget, as announced in February 2017 (see This includes cutting 10% from the retirement system for government employees, since that system is on the verge of running out of money completely. Sound familiar, U.S. residents?...

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A telling quote from the Business Insider piece is that "tens of thousands of retired government workers fear for their financial future."

I've written before about the foolishness of depending on anybody else to look after your retirement needs. Unfortunately, some of those Puerto Rican public servants who naively trusted in the competence of their government to look out for their financial security in retirement will soon find out in the hardest way possible that nobody will look after your money better than you will!

Sad that these people have to pay the price for the incompetence of others, as the solvency of the pension plan is beyond the control of those who will have to suffer. But it further underscores the need for total financial freedomindependence from your employer, from your government, from your pension provider, and from anybody else.

Once you've read about the Millionaire Mindset, What Billionaires Know, you've learned that it is different to truly afford something than simply to be able to pay for it, and you feel encouraged to attain financial freedom, the obvious next question is "How can I accomplish this?"

A very wise question, indeed!

Jim Collins of the excellent jlcollinsnh blog redid a scene with John Goodman and Mark Wahlberg in the movie "The Gambler." In this video, Collins takes the role of John Goodman and describes "the position of f-you" in a bit more detail. [Note that he actually says it, so make sure there are no little ears nearby if you click that link. Or co-workers or bosses, for that matter.]

Collins has an excellent post advocating putting 100% of your investments into a total stock market index fund, specifically the Vanguard fund VTSAX, if you're young and worried about acquiring wealth. As you get older, it makes sense to put 20% or so into bonds (Collins recommends VBTLX) to smooth out the bumps in the stock market road. He makes a compelling case, but many investment advisors would disagree*.

  *I'm cynical enough to suspect that investment advisors are more worried about CYA and 

    job security in the form of making investing sound really, really complicated--while also 
    pumping up profits--than actually providing the best possible recommendations. 

    While people in the investment industry always pay lip service to the observation that 

    "past performance is no guarantee of future returns," they then act like they have the 
    answer: diversification. And, that diversification almost inevitably involves higher-fee funds 
    than a simple, low-cost index fund (which is, itself, often appropriately diversified). 

    The fact is that nobody knows what the future holds. Diversification has been shown to be 

    an effective way to mitigate risk. What they won't tell you is that it's also an effective way 
    to mitigate returns as well. I suspect that Occam's razor would hold just as well in finance 
    as it does in the evaluation of scientific theories. 

If you don't believe this line of reasoning, then I like Paul Merriman's advice on page 90 of his free e-book for first-time investors. Merriman, the retired founder of Merriman Wealth Management, LLC, provides free PDF versions of three of his books, with no strings attachedno e-mail, no registration, nothing! He's committed to providing useful advice to people who need it, and he makes many good points. I'm of the opinion that his 'moderate' and 'conservative' portfolios are too conservative (i.e. too much money in safe, low-yield investments like bonds and securities). But you know what they say about opinions...

A more detailed post from Jim Collins is available here, and I strongly recommend giving it a look.

If you want to test this stuff for yourself, good for you! Your skepticism and desire for evidence should be commended and encouraged! So, here you go:

    You can set up the assumptions and the allocations as you like. Play around with it for a while 
     until you're comfortable, and also realize that just because a particular asset class has 
     performed well in the past doesn't mean that trend will continue. So just because REITs do 
     well in the simulation doesn't mean you should put 100% into REITs. But using this can help 
     inform your thinking about how to allocate your investments. You just might find that simpler 
     allocations are better...