Be Careful with Questionable Advice
Pop culture finance is a term that I use to categorize the business of financial advice. The financial media drives this. They want you to believe that making money and retirement is easy. All you have to do is ___, and you will get _____ every time. They speak in absolute truths. For example, they will say 1 + 2 always equals 3. When in reality sometimes 1 + 2 = 4….. sometimes 1 + 2 = 5. Money is much more complicated than the world of absolute truth. Realistically there is only one absolute truth when it comes to money: There are no absolute truths.
Unfortunately, the average investor goes to pop culture finance for educational purposes. This content is preached as if it is the gospel. When in reality, it is just an opinion. Pop culture finance can put you in harm's way when it comes to investing.
I came across an article a couple of weeks ago that gave what I thought was questionable advice. If any of my listeners or readers come across this, I want to offer an alternative opinion. It starts with the same old advice that you need $1,000,000 for retirement (not everyone needs $1 million to retire - don't get me started). Then it addresses "how to position your $1,000,000 in a nest egg to last longer."
The article went on to say, "take workers with 401K accounts similar retirement savings plans run by vanguard. Plan members whose portfolios were invested 70% in stocks and 30% in bonds had average annual returns in the five years ending December 31st, 2020, 11.7%. The S&P 500 grew at a 15.2% annual pace."
Then they make the statement, "that's a reasonably represented period because it had down markets as well as up markets."
I would add that down markets are markets that stay down for well over a year. The last five years are not a good representation of up markets and down markets. It is representative of an upmarket.
Then here comes the troubling advice. The article says so in "beefing up your retirement planning, let's use an 11.7% average annual rate of return for forecasting how your portfolio would behave."
Oh man, that advice takes the prize! It is not a good idea to choose aggressive rates of return when you're trying to plan your retirement. Most investors are buy-and-hold investors and don't have a risk management strategy. Thus, they could be invested aggressively at the wrong time and stand to lose a lot of money. According to the writer of that article, you can afford to shoot for a growth rate of 11% per year, which is a dangerous assumption. Maybe I could understand using higher growth rates in an active trading strategy for up and down markets. However, that is not the norm for most investors.
The reality is that markets go through cycles of good and bad markets. It all comes down to when you need that money and the environment you are in when you need to start taking that money out. Past performance ought not to be extrapolated into the future as the norm. . Instead, the question is, where are we in the investment cycle of good and bad markets?
To encourage readers to invest aggressively enough to earn over 11% per year, in my opinion, is not the best advice. This is especially true, seeing that the last five years have been a part of a record-setting bull market. Suppose an investor were to have been that aggressively invested before the 2008 financial crisis and they were about to retire. In that case, there is a good chance that they would not have been able to retire due to the enormous losses they would have taken.
It is always a good idea to make sure that your assumptions in retirement planning are conservative.
ASK BOB about money and investment issues. Bob is always happy to visit with you. Bob Brooks is a Financial Adviser and host of The Prudent Money Radio Show, which airs daily at 3 PM CST on 91.3 FM, 97.5 FM, and 99.9 FM in the Dallas Forth Worth metroplex. Listen online at www,prudentmoney.com/radio-show. You can reach Bob at 972-386-0384 and online at email@example.com.