Wednesday, August 27, 2014

Alex Murguia - Quality Control of Financial Planning webinar

I'm passing on a message for advisors from Alex Murguia of McLean Asset Management and inStream Solutions:


Calling all advisors!

I need your help. On September 10th, I will presenting a TED style talk at Bob Veres' Insider’s Forum conference on "Quality Control of financial planning." The topic addresses what I feel is the next big hurdle and a significant value proposition that advisors are facing in our evolving profession. 

In much the same way that advisors have operationalized their investment management services for clients through the use of model portfolios and technology (e.g., i-Rebal & Orion) over the last 10 years, we have only begun to tackle the institutional delivery of financial planning advice. The Implications of this range from how you provide a consistent level of planning advice across your client segments and advisors. 

While I have a good sense of the agenda, I realize that I belong to only one firm. I would appreciate your help in sharing your thoughts with me as I preview my "working" presentation. I have set up an interactive webinar on Wednesday September 3 at 3:00 PM Eastern in preparation for the TED style Talk at Insiders Forum. I would very much value your input. 

Thanks in advance for your help,

Alex Murguia

Wednesday, July 23, 2014

July 29: Educational Webinar on Bond Prices and Interest Rates

A side project which I have worked on in recent months is a bond calculator for the Annexus Research Institute. This calculator allows users to explore the relationship between interest rates and bond prices. On the left-hand side of the calculator, one can calculate the market price for an existing bond based on its characteristics and current interest rates. On the right-hand side of the calculator, one can explore the impact of future interest rate changes on the bond price. 

Bond prices are inversely related to interest rates. If interest rates increase, the prices for existing bonds will decrease so that the yield to maturity earned by anyone purchasing an existing bond would match the yields available on new bonds at the higher market interest rate. The calculator allows users to explore this relationship with realistic bond examples of their choosing.

Rex Voegtlin of the Annexus Research Institute has written a white paper to accompany the calculator, and he has also developed an educational webinar about the relationship between interest rates and bond prices. Anyone is welcome to sign up for this webinar,"The Bond Dynamic of 2014: What Every Successful Advisor Must Know." The webinar is on Tuesday, July 29 from 3 PM to 4 PM Eastern time.  I am not the presenter for the webinar, but I will be in attendance and will be available to answer questions at the end of the webinar.

Though designed for financial advisors, anyone is welcome to attend. When you sign-up there are a series of questions to answer. For those who are not advisors, you can provide the answers seen below as part of signing up:

* First Name (obvious)

* Last Name (obvious)

* Email Address (obvious)

* Company Name (obvious)

* Who is your Internal Marketer/Contact?  Brian

* Who is your Annexus IMO? Annexus

* Please Type In Your Agent Number? Pending

* Are You a Registered Rep? Yes or No


Wednesday, July 16, 2014

From Dirk Cotton's The Retirement Cafe: Half Right

Dirk Cotton recently made an excellent post which provides further background descriptions about what I was doing in a recent Advisor Perspectives column about using Monte Carlo simulations to get conservative return assumptions. Dirk's post is The Retirement Cafe: Half Right. It's also worthwhile to check his comment section.

Monday, July 7, 2014

Two Views on the 4% Rule

I've got a short new column at MarketWatch's RetireMentors called, "Retirement: Two Different Views on the 4% Rule."

The first view is the standard Bengen, Trinity-study approach of basing safe withdrawal rates on historical worst-case scenarios.

The second view is the one I ascribe to, which is that current market conditions are much better indicators of what will be sustainable than historical worst-case scenarios. Historically, Shiller's PE10 has done a good job explaining sustainable withdrawal rates.

This second view is easy to misunderstand. I'm saying that with it, 4.2% is the best guess about the actual sustainble withdrawal rate for current retirees. It's not a safe withdrawal rate. The safe withdrawal rate would be less.

This short column didn't incorporate bond yields, which are also good  indicators about sustainable withdrawal rates. The fact that bond yields are at historic lows also suggests that we will end up on the low side of that 4.2% guess.

Tuesday, July 1, 2014

New Research on How to Choose Portfolio Return Assumptions

Monte Carlo simulation is a popular tool for projecting a lifetime financial plan. When using Monte Carlo with a low failure rate, an underlying implication is that one is implicitly using a lower portfolio return assumption in order to have a plan that works in most any market environment. The plan has to work in poor market environments as well to get a high success rate. It must work even when the underlying compounded portfolio returns are low. But the portfolio return sequences are not usually seen as part of the output from Monte Carlo, and so this point may be missed.

An alternative to Monte Carlo analysis is to develop a spreadsheet with a single number for the portfolio return in order to create projections for a lifetime financial plan. In many cases, the default way to approach this is to plug in what one things to be the average or expected rate of return over the long-term horizon. The problem is that using the "expected" return is the equivalent of accepting a 50% failure rate with Monte Carlo analysis. A conservative projection will require a lower rate of return assumption.

This is one of the themes of my July column at Advisor Perspectives, "New Research on How to Choose Portfolio Return Assumptions."

The other related theme is that when developing portfolio return assumptions for a spreadsheet about a retirement plan, it is important to make further reductions to the rate of return in order to maintain the same overall probability of success. This is because of sequence of returns risk. The increased vulnerability to the returns experienced in the early part of retirement will create greater variation for the internal rates of return over a 30 year period than one would get from just investing a lump-sum amount for 30 years. These differences are further compounded if one considers that risk capacity will be less after retiring, leaving one feeling compelled to use a safer percentile from the distribution of outcomes (i.e. one might feel comfortable using the 25th percentile during accululation, but only the 5th or 10th percentile in retirement).

For the example I give in the article, if one believes that the expected arithmetic real portfolio return is 5.6% with a volatility of 11%, the implied compounded portfolio return with a 90% chance for success for someone retired and sustaining withdrawals from their portfolio is only 1.9%. If investing a lump-sum, the assumed return could have been 2.5%.  For high confidence about retirement success, the financial plan would need to work even if their wealth only grew at this rather low rate of return. Plugging in an "expected" return would expose someone to a coin flip about their retirement success.

Monday, June 30, 2014

Guyton and Kitces with Continued Discussions on Safe Withdrawal Rates and Spending Decision Rules

Today we’ll continue the master course on systematic withdrawals with Michael Kitces and Jonathan Guyton. This post is a follow-up from a previous popular post in which Michael and Jonathan describe systematic withdrawals, time segmentation, and essentials vs. discretionary spending in retirement.

These video interviews are from the New York Life Center for Retirement Income at The American College, and all of these videos are included in curriculum for the Retirement Income Certified Professional (RICP) designation for financial advisors.

In this video, Jonathan Guyton and Michael Kitces discuss further about systematic withdrawals and safe withdrawal rates. Michael explains the origins of William Bengen’s initial research on the 4% rule. They also discuss the potential upside from using the 4% rule, the inclusion of additional asset classes, the role of market valuations in guiding the initial sustainable withdrawal rate, and the impact of variable spending on the safe withdrawal rate. Michael reminds that the 4% rule was never meant to be an autopilot guide to sustainable spending over 30 years. All of these factors suggest that spending could be higher than what is defined as a classical safe withdrawal rate. Michael also discusses the idea of the safe withdrawal rate setting a “floor” for spending, though this is a controversial statement (to say the least) for many advocates of floor-and-upside approaches, with the point being that investments designed to support a floor should not be invested in the stock market. Michael is describing the floor as supported by conservative spending instead of conservative investments, but the question remains about whether any spending rate is conservative enough when investing in a volatile portfolio.


In the next video, Jonathan Guyton discusses his research on using decision rules to guide withdrawals in response to portfolio performance when using a systematic withdrawal strategy. This involves a willingness to deviate from the standard assumption of inflation-adjusted spending. Adjusting spending for inflation will continue to be the norm, in order to smooth the spending path as much as possible, but his predetermined decision rules will guide retirees about when it is appropriate to make spending adjustments.  The 4% rule applies only to the spending percentage in the first year of retirement. In subsequent years, the spending amount adjusts for inflation, and what this represents as a percentage of remaining assets in the portfolio will fluctuate over time. Guyton’s idea was to create guardrails on spending: cut spending by 10% if the current withdrawal rate (this year’s withdrawal divided by this year’s portfolio balance) increases by 20% from its initial level, and increase spending by 10% when the current withdrawal rate falls by more than 20% from its initial level. As well, an important implication of the research is that with a willingness to cut spending when markets underperform, it is possible to increase the initial spending rate above whatever has been determined as safe for constant inflation-adjusted withdrawals. The intuition for this is that cutting spending when the portfolio is down reduces some of the sequence of returns risk facing retirees using a volatile investment portfolio. 

For readers receiving this through email, please click on the post title to get to my blog. The videos are at the blog, but they don't show up in email.

Friday, June 20, 2014

Book Review: Three Simple Rules of Investing

I recently read the short and simple book, The 3 Simple Rules of Investing, by Michael Edesess, Kwok L. Tsui, Carol Fabbri, and George Peacock. Michael Edesess is a friend, and this book deserves a longer review. It includes a lot of interesting insights into basic problems or misinterpretations with a number of published and well-cited academic finance articles. But I realize that I will probably never get around to writing such a review.

Instead, let me share a few slides excerpted from a presentation I recently prepared and gave to an audience of individuals who are still in the process of learning about the basics of investing.  It was not my usual  audience, and this book came in very helpful in cutting down investing to its essence. In particular, I really liked how the book reduced the retirement income investment problem into considering allocations to three basic sources: the world stock index fund, a ladder of individual bonds (preferably TIPS), and income annuities. It can really be that simple.

Here are the excerpted slides which tell the basic story from the book in a way that I found very helpful as an educational tool: