Running On Empty

Attention: Retired Investors

Subject: Retirement income considerations

We will not be discussing pension income in this blog piece – specific income and investment strategies should be discussed with your financial planner as they can be as unique as your individual circumstances.

Last month we discussed biases or behavioral tendencies that keep investors from enjoying an excellent investment experience. A popular bias is recency effect. It’s a simple concept yet powerful and it can cost you plenty. Recency: “You recall recent events more clearly than events happening longer ago.” Well of course you do, but how is that dangerous? You expect the events (or in the case of financial markets, performance) of the recent past to continue into the future. The recent performance of the U.S. market, particularly the S&P 500 index which tracks the largest U.S. companies, has performed exceptionally well over the past few years. Unfortunately, future returns from markets are unknowable. From 2013 – 2017, the average annual return of the S&P was 15.8%, well above its long term historical average of 10.2% (since 1926)1. So investors start to consider if they should have all of their money invested in the S&P. So where is the danger? If this were 2010, we’d be writing that the S&P 500 just concluded a 10 year period that resulted in a -0.9% average annual loss – put another way, you lost 10% of your wealth over a 10 year period!

A more statistically robust method for looking at returns is by using 10 year rolling periods. For example, January 1970 – December 1979; February 1970 - January 1980, March 1970 – February 1980, etc. Here we have more time periods which gives us a greater confidence in the findings. Gregg Fisher at Gerstein Fisher found the following: Adding international stocks to a U.S. stock portfolio (65%/35%) improved the investment experience compared to just the S&P 500 (higher return, lower risk; some equate volatility or standard deviation with risk). We do not have reliable emerging markets returns data before 1988. The lesson here is that diversification benefits the patient investor.

2 RealAssets Adviser- November 2018 Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio

The S&P 500 index is a great investment…within a broadly diversified portfolio, not on its own. If capitalism “works” (certainly not perfectly), which means it provides investors with a positive return on their money over time, then it works in all free markets around the world, not just here. And while they can exhibit high correlation to each other at times (move in the same direction), there are often periods when they move independently of each other (low correlation). This is why diversification helps over the long term.

What else should retirees (or those closing in on retirement) consider to extend their account distributions? Common sense gives us the answers. We are often surprised why otherwise smart folks abandon their common sense when it comes to investing.

  1. If you’re still working, consider putting off retirement for another year or two.
  2. Consider to continue working at something for less money but greater enjoyment full or part time after your career ends.
  3. Consider relocating to a less expensive home or area of the country.
  4. A recent movement has seen retirees renting in retirement rather than owning.
  5. While we are not fans of most annuities, creating a guaranteed lifetime income stream with a portion of your money in a low cost fixed annuity is an option to attain peace of mind.
  6. A reverse mortgage with proper unbiased advice (NOT from the provider of the product) can help some investors increase their retirement income.

Here are two approaches worthy of your consideration:

  • The 4% model – assume a 4% withdrawal rate from your investments. Will this amount sustain you in retirement when added to any other income you might have? This approach maintains your wealth. Most investors will eat into their principal over time and while not a reason to panic, planning is vital so as to not outlive your money.
  • The Stanford Model – divide your money into three buckets;
    • a. Guaranteed income to cover your cost of living like mortgage/rent, food, healthcare, etc. (Pensions, annuities).
    • b. “Bonus money” to cover discretionary spending like vacations, dinner out, gifts, etc. (P/T work, investment income).
    • c. Emergency fund – money set aside in very safe accounts like a money market or bank savings account for unforeseen emergencies like a roof on the house, loans to children, etc.

Creating a sustainable stream of income to last a lifetime is no simple task but common sense is essential. If something sounds too good to be true, it is. In depth financial planning with an objective professional who acts in a fiduciary capacity is a great place to start. Keep costs and taxes to a minimum, and diversify away as much risk as possible so the unforeseen catastrophic event (the “black swan”) has minimal impact on your money. Then do some “lifestyle planning” to live within your means. Lastly, make sure you do serious planning on healthcare, for many the largest late-in-life expense. More on this aspect of planning next month, especially for single women head of households.

Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts may differ materially from the index portfolios. As with any investment strategy, there is a potential for profit as well as the possibility of loss.

Standard & Poor’s 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.

Diversification seeks to reduce volatility by spreading your investment dollars into various asset classes to add balance to your portfolio. Using this methodology, however, does not guarantee a profit or protection from loss in a declining market

Behavioral Finance

Sounds exciting, doesn’t it? In fact, the more investors hear about this school of thought, the more they come to realize why they make the (sometimes frustrating) decisions they do where money is concerned. A brief history: most of the work in this field is credited to three academics, Amos Tversky (deceased), Daniel Kahneman, and Richard Thaler. The last two gentleman, who both worked with Tversky at times, were recognized for their work by the Nobel committee, Kahneman in ’02 and Thaler in ’17 (the prize is not awarded posthumously).

This can be a very wonky and technical subject but still highly relevant for retail investors. So let’s see if we can break it down into laymen’s terms and give some insight into how this affects us all on an almost daily basis.

If asked, most people would probably say they are rational individuals who make wise decisions. Indeed, logical thinking and prudent behavior are the norm for the majority of people in most instances. Unfortunately, when it comes to money management, people who are otherwise rational often tend to act irrationally, and this tendency is quite pervasive. Regardless of our age, level of education, or occupation, from time to time, many of us make illogical decisions when it comes to our finances.

For example, how many times have you heard of an investor (maybe it’s you!) who held onto a losing investment even when the prospects for recovery seemed slim at best? What about investors who sell their winning investments prematurely, only to see the value of the securities continue to rise? And why are some people more inclined to splurge with money that they may have received as a gift or inheritance while being more frugal with money that’s been earned? And what of those who succumb to the latest investment hype - all too eager to jump on the bandwagon of the current hot trend? Indeed, most of us recall the late 1990s and the growth of the bubble as more and more investors scrambled to participate in what was being called the “new economy.” Unfortunately, the bubble finally burst in 2000-2001 effectively erasing the wealth of many.

While conventional financial theory has long held that investors are logical individuals who seek to maximize investment returns through prudent and wise decision-making, in reality, research has found that investment decisions are often guided by emotion or intuition. This realization has led to the growth of Behavioral Finance: a field of study that seeks to explain the causes of irrational and often detrimental investment decision-making.

One of the key tenets of Behavioral Finance is that as humans, we are prone to biases or “mental shortcuts” that influence our decision-making. These biases often cause us to by-pass rational thinking and instead fall back on preconceived notions or intuition.

Loss Aversion

While there are numerous biases that influence how we behave, one that affects the logical decision-making of many is “loss-aversion.” Generally speaking, most people seem to have a natural tendency to despise and avoid losses. In fact, most tend to view losses more negatively than they will view positively a similar sized gain. As it pertains to investing, loss aversion may cause an investor to hold onto an underperforming security because if he or she were to sell it, the investor would have to face the reality of sustaining the loss and the potential anxiety that may ensue. On the flip side, loss aversion may explain why some investors may be quick to cash out of an investment that seems quite promising. To some, it may be better to lock in a gain of any amount than to suffer a potential loss in the future.

To avoid the pitfalls that may come from loss aversion, we believe that investors have the greatest chance for financial success when they remain unemotional with respect to their investments. Rather than reacting to short-term market events, we believe that investors are best served when they make strategic decisions that are consistent with their overall investment goals and objectives.

Mental Accounting

While loss aversion can help explain instances of poor decision-making, “mental accounting” helps to explain why some people illogically segregate their money based on its origin, or the anticipated use of the funds.

According to mental accounting theory, people often put more or less value on different pools of money based upon its source. Earned money, it seems, is valued more greatly than money that was “found,” as individuals seem to have a tendency to protect, and use more wisely, money that they’ve earned vs. money that was received otherwise. This may help to explain why a large percentage of lotto winners find themselves nearly broke after a few years. The same can be said for many young professional athletes in regards to a signing bonus. Logically, to maximize their overall financial well-being, most would be wise to treat all money as equal in value, regardless of its origin. After all, a dollar earned or a dollar gifted carries the same utility, while contributing equally to one’s bottom line.

Some other common biases…

Overconfidence – we are not as clever as we think and we therefore underestimate risk.

Attribution – our successes are due to our smarts and our failures result from circumstances beyond our control.

Hindsight – “I knew it all along.” Sometimes called Monday morning quarterbacking, you beat yourself up because you feel you should have seen it coming.

Representative – over-weighting the recent past in decision making. “This time it’s different…” Each market event is unique to its time and place, but that doesn’t mean you should stray from your strategy.

In Conclusion…

There’s little doubt that when it comes to their finances, people often allow their emotions, intuitions or biases to overrule logical thought. In doing so, they may be making decisions that on the surface seem “right,” but when examined more closely, are actually detrimental to their well-being.

The first step in avoiding the temptation to follow emotion is, perhaps, the recognition of such as a human tendency. If we can understand how and when we might be prone to act irrationally, we may be better equipped to avoid the temptation to act rashly, and instead, apply critical and reasoned thinking to our decisions, actions and behaviors. Consider a twist on an old adage, “Don’t just do something, stand there!”


1. Shlomo Benartzi, Ph.D., Behavioral Finance in Action: Psychological challenges in the financial advisor/client relationship, and strategies to solve them, Allianz Global Investors,


Questions to Ask a Financial Advisor

We think the best chances of success for an individual investor are tied to their relationship with their advisor. Of course some may opt to do it themselves. In our experience, this takes tremendous discipline. Investors can save themselves money by taking this route, no doubt, but the majority of investors choose to work with someone. Do-it-yourselfers run some very simple but real risks, namely not identifying those biases we all share that can lead to costly mistakes. A good advisor educates investors about these biases to help them see decisions more clearly. A piece on said biases is forthcoming.

As with all professions, some advisors are better than others. How do you find the right one for you? Interestingly, many investors don’t offer up referrals of their advisor to their friends willingly. Of course there are exceptions, but many choose to keep this relationship to themselves so asking friends and family for a name is a start, but only a start. You must first decide what is important to you. Not all advisors work in the same way.

These five questions are a good place to start

Read More

Well, well, well, Wells Fargo

What’s in a name? In the case of big U.S. corporations, often times it’s a rich history, culture, values, brand loyalty, etc. So what have the executives at Wells Fargo been smoking these past few years? Fake account scandals, improper trading of retail investments, unneeded auto insurance, and apparently more to come. They’ve paid enormous fines so far in just a couple of years, including $1 billion this April.

The intent of this article isn’t to cast aspersions on Wells Fargo, they are just the whipping boy of the moment, and deservedly so. Financial scandals are as old as time. A few years ago, we wrote about J.P. Morgan, and Citigroup and Merrill Lynch before that. Wells is just the latest example of what’s wrong in financial services for Main Street investors, retail investors. Main Street has never been well served by the finance industry. That doesn’t mean that, 1) there aren’t hard working ethical people within these big firms and, 2) Wall Street hasn’t served retail investors well in certain respects.

Read More

The Darkest of Days and New Beginnings

This post was written by guest columnist Harvey Siegel, CPA. Harvey is a senior financial advisor based out of Apella Capital’s Lenox, MA office.

On Monday, October 19, 1987, the Dow Jones Industrial Average (DJIA) closed down 508 points, or 22.6%. “Black Monday,” as it was called, remains the largest one-day percentage decline in the history of the DJIA. Your writer files it as a “where were you when it happened?” moment. Less than a month later, the founding principals of the predecessor to and currently senior financial advisors of Apella Capital, Lenox, MA started their new business. 

In the last thirty years notwithstanding asset bubbles, three stock market crashes and as many recessions, political turmoil, wars, natural disasters, Eurozone crises, the rise of terrorism and the worst financial meltdown and economic downturn since you know when, the S&P 500 had a total return of over 2,000%.

Read More

Financial Planning (yawn)

Financial Planning might be one of the more boring phrases people hear. For some, the thought of it is downright terrifying. And with good reason; thinking about retirement is scary and trying to organize your household budget is a daunting task for many. Some people are fortunate and born organized. But for the rest of us, we’d rather clean out the garage. As with many things now driven by software, financial planning has come a long way. In the ‘80’s and ‘90’s, planning was done with what we’d now call a spreadsheet. It was all manual and it was largely out of date within weeks of its completion. Most planners worked on commission and for many, the plan was the vehicle used to sell expensive (and often poorly performing) products. Well, planning has come a long way. 

Read More

The Other Side of Irrationality

Irrational is too strong a word but it’s one we read about in (behavioral) finance quite a bit. Investors that panic sell in bad times or that expect unsustainable high returns forever in good times are not irrational. In fact, we can see how they come to their decisions. There’s a difference between irrational and uninformed.

Read More

Never Mind The Noise

Investors are all too often distracted by noise in markets. "Noise" is actually an statistical term to describe "unexplained variability in a data sample". Yet Wall Street gurus are ready and willing to offer explanations ad nauseam. Our wise colleague Harvey Seigel, offers his take... 

Read More

A Higher Calling

Are you associated with a not-for-profit organization? Maybe you volunteer some of your time for a cause about which you feel strongly. If you don’t do something along these lines currently, you may very well find yourself in this position in the future. Save this column for that time as it can help you understand the great responsibility that comes with stewardship.

Read More

A Column for a Rainy Day

In 1997, my colleague Harvey Siegel in our Lenox, MA office, wrote about market volatility. He cited the fact that from 1990 through 1997 the US stock market (S&P 500 index) gained 300% and that investors should not expect a move like this to continue unabated. After all, market volatility is the price we pay to get the market return. Due to market gyrations last summer, Harvey and his partners, Ed Richter and Barry Wesson, revisited that column. Considering the past few week's market moves, I thought it deserved yet another look and it's re-posted here:

Read More

The "Smart Money"

Harvard has begun exiting a large investment made six years ago in natural resources. Much of these investments were made outside the U.S. as in Central American teak forests, Australian cotton farms, a eucalyptus plantation in Uruguay, and timberland in Romania. The endowment thought they could take advantage of growing demand in scarce resources around the globe, particularly in emerging markets according to former head of Harvard’s endowment, Jane Mendillo, in a 2012 Bloomberg interview. In the past year the endowment has written down the value of its global natural resources portfolio by $1.1 billion. Over the past 10 years the fund has returned 4.4% on average. Contrast those returns with a simple buy and hold 60% stock and 40% bond index portfolio (rebalanced annually) that returned about 6.5% over the same time period.

Read More

Points and Percentages

A quick note for investors concerned about recent volatility in the stock market. That’s what a blog is good for (maybe), right? On January 26, the Dow Jones Industrial Average reached 26,616.71. The S&P 500 index reached 2,872.87 that same day. On February 5th, they closed at 24,345.75 and 2,648.94 respectively. On February 6th as I write this, the averages are back up. That’s around an 8% drop in short order.

Read More


Turmoil. An investor asked me if I was concerned about the “turmoil in Washington” and its effect on markets. I asked him, “When hasn’t there been turmoil in Washington?” Or in the Middle East…North Korea…Russia…Venezuela…you get the picture.

Read More

Death and Taxes

From time to time this blog will invite guest columnists to weigh in. Today Harvey Siegel, Senior Financial Advisor and colleaugue at Apella Capital in Lenox, MA shares his thoughts.

Read More

An Exercise in Humility...and a Promise

As 2017 comes to an end, so now begins the painful process of self-examination amongst Wall Street’s finest prognosticators. I entered this industry as a management trainee with Paine Webber in 1983 (ugh). Since that time I have noticed that Wall Street engages in a tortuous ritual where market experts make predictions on how various markets will perform in the coming year. I don’t recall when the financial print media actually began tracking and holding them accountable but it took far too long. And it doesn’t appear to have spread to the financial news shows on TV – the same tired hacks keep shooting their mouths off while the networks pay scant attention to their track records. I mean, what’s the media for?

Read More

Scams, Schemes, and Rip-offs

I don’t know why I’m still a bit surprised every time I read about an advisor stealing from clients. I suppose it’s because I’m “in the business” and I can’t fathom anyone falling for the lines these advisors use. I forget that a smooth talking advisor can make just about any “investment opportunity” sound great and coupled with the abuse of trust they’ve established, the client is often beyond saving.

Read More

Due Diligence

Due diligence. We hear this term all the time in our industry and I’m sure other industries use it as well. Here in our headquarters that houses our two firms, Symmetry Partners and Apella Capital, we host due diligence visits frequently. Visitors are independent financial advisors learning about our offering or our own advisors bringing their clients and prospective clients to learn more about the firm(s). We schedule a half or full day of presentations and meetings with department heads and key personnel. The goal is to demonstrate our capabilities in investment management, financial planning, and associated services we offer.

Read More

How To Be A Successful Investor

I’ve spent the better part of 23 years teaching people how to be better investors. I do it through educating and coaching. In hindsight it seems easy, common sense really. But when I speak to investors, I realize all over again how badly our educational system failed them. Not in a classic liberal arts or the sciences way but in how to be a financially literate functioning adult. I think the world of teachers. I have a sister who teaches and my father was a teacher before getting into finance. It comes quite naturally to me. I enjoy being in front of an audience and sharing what I’ve learned with them. If there’s one thing I do well, it’s communicate often complex topics in understandable ways. But our educational system fails us in preparing young adults to handle the money they are about to start earning as they embark on a career or trade.

Read More

The Timeline of Terrible Things

What a great title for a marketing piece. I’m not sure who came up with the name, but it’s direct and to-the-point, is it not? It’s a simple concept really: create a timeline over the past few decades or so and point out those events that frighten people along the way. For example, WWII, the Cuban missile crisis, inflation in the ‘70’s, the crash of ’87, the Asian contagion, the crash of 2000-2002, the ’08 crash and so on. These are but a few examples of events that caused investors concern, and who can blame them? This particular timeline isn’t a straight line however. These events are superimposed on the Dow Jones Industrial Average or the S&P 500 to illustrate one message: that despite the constant presence of reasons NOT to invest, markets have gone in one direction over time, up. Why is that?

Read More

Computers, Algorithms, Robots!

Self-driving cars, automated assembly lines, roombas(!), robo-advisors…where will it all end? I actually saw a national news story this week about robotic pets. Robot dogs to be precise. Talk about a responsibility-free relationship! (Don’t you wish everyone had an on/off switch?)

Read More