Consuelo Mack got personal finance specialists Jonathan Clements and Jason Zweig, who both work at the Wall Street Journal, to offer solutions on the three greatest financial challenges currently facing Americans: adequacy of retirement income, handling market volatility and getting good financial advice.
One of our biggest fears is to not have enough for living expenses in our twilight years. This is now a very real worry for many Americans because of the sustained fall in yields on fixed income instruments.
Consuelo brought this into sharp focus with this slide she presented on the show:
Chris Hohn the founder and manager of TCI Fund Management was the star speaker at this year's London Value Investor Conference, which took place on May 19th. The investor has earned himself a reputation for being one of the world's most successful hedge fund managers over the past few decades. TCI, which stands for The Read More
Consuelo pointed out that 63% of Americans were very worried about having a financially comfortable retirement and 36% feared the rising costs of inflation, according to a survey by Principal.
Use our biggest advantage: We are all going to die (Jonathan Clements)
According to Jonathan Clements, there were two solutions that could address the problem of not having enough for retirement. One was to take out a fixed income lifelong annuity by making a lump sum payment during working years. Ideally this should be taken out as late as possible, to maximize benefits.
Jonathan Clements also pointed out that Social Security payments should also be viewed as a valuable income stream. Strategically, Americans should avail themselves of Social Security as late as possible in life so as to enhance the eligibility. For example, Social Security benefits availed at age 70 could be over 70% higher than those availed at age 62.
Zweig suggested that though Americans customarily view Social Security benefits as an income stream, it would be useful also to think of these as an asset, for example, the amount of the investment needed in bonds to generate equivalent earnings. Therefore, monthly benefits of $1000 a month, or $12,000 annually, would be the same as the interest earning on bonds worth about $350,000, depending on the multiplier used. In effect, assets on retirement are that much higher.
Consuelo: “I’m richer than I thought!”
Zweig also warned against annuities that were marketed on the basis of high commissions – a sure sign that these might not be of the right quality.
Dividend-paying stocks in the context of retirement income
Zweig cautioned that investors, in their minds, equate dividend paying stocks with bonds in terms of risk. This was clearly wrong, considering that after the financial crisis most of the stocks had lost 50% or more, while Treasuries and bonds appreciated. Dividend paying stocks, are in fact just that… stocks, and should be treated as such, Zweig said.
Challenge II: Market volatility
Both Zweig and Jonathan Clements suggested, in effect, that investors should not try to take a call on market movements.
Zweig advised that investors should look back and study their market decisions in the context of the financial crisis. If they sold around that time, and if something like that event repeated, they would likely do so again – to such persons, who are prone to selling at lows, current market valuations are extremely expensive. In effect, he suggested that investors internalise their market assessments in the context of their own past record and psychology – best done by a clinical assessment of the last five years of broker account statements.
Jonathan Clements was unequivocal in his view that no one, but no one, could predict market direction. “If your decision to buy today depends upon where you think the market would be a month later, you’re already toast.”
Yes, investors could of course, control risk. And that risk is not only the one emanating from the portfolio – there is a personal one, too – how did you react to an event like the financial crisis?
Challenge III: Financial advice
Jonathan Clements: “You need to be worried about the cost, and you need to be worried about mischief.” Financial advice that is based on commissions, is laced with danger for investors, according to Clements. In such cases, all the incentives are “wrong.”
On the other hand, Zweig was rather critical about the present practice of paying for financial advice on the basis of a percentage of assets under management. The system was really divorced from the specific kind of advice the investor was seeking, though it might be cost-effective for modest-sized portfolios. For larger accounts, the alternative was to engage advisors who charge on the basis of a retainer linked to the kind of advice taken, or on hourly basis, or any other method that is linked to the actual job done.
Long-term investment choices
Jonathan Clements: WisdomTree DEFA High-Yldg Eqty Fd (ETF) (NYSEARCA:DTH) – “International dividend paying diversification with some currency risk.”
Zweig: TIPS (Treasury Inflation Protected Securities) or I Savings Bonds – “Inflation is quiet right now, but these instruments offer you protection against unexpected inflation.”
Consuelo: Even though there is no inflation around as of now…
If everyone would be talking about inflation now, then it would be the wrong time to buy, because everybody would be expecting inflation, clarified Zweig.
Consuelo: “And spoken as a value investor, as well, I may add.”
The full interview is embedded below