It’s Later Than You Think

July 29, 2010

A good bit of the practice of most financial advisors is helping clients accumulate enough assets for retirement. I was reading through a MetLife survey on retirement readiness, much of it do with the emotional side of readiness, and was struck by a couple of responses. MetLife surveyed a diverse group, starting with pre-retirees as young as age 45, up through actual retirees, who composed about 20% of the sample.

Here’s what really struck me: they asked the pre-retirees “Do you plan to retire…?” and these are the responses they got.

Earlier than you planned/expected 6%

About the same time as you planned/expected 47%

Later than you planned/expected 46%

Most people, in other words, expect to retire on their own schedule, while a big chunk also figure they will have to work longer than they thought.

But when they asked the actual retirees, who have already gone through the transition, “Did you retire…?” there was a completely different outcome.

Earlier than you planned/expected 64%

About the same time as you planned/expected 33%

Later than you planned/expected 3%

Almost two-thirds ended up retiring earlier than they thought they would, and almost no one retired later than they expected. Since the survey is current, I’m going to assume that the 64% didn’t retire early because they made an enormous amount of money shorting the market in 2008. I’m guessing they retired earlier than they expected because they had health issues, got laid off due to lower productivity relative to younger workers, or simply got sick of working and decided not to deal with it anymore. And, really, the reason for early retirement doesn’t matter.

The message is simply this: Your clients are expecting to retire on their schedule, but 2/3 of them may well have their retirement accelerated. To be prudent, they will need to have their capital accumulation completed earlier than they think. You may be planning to save for another ten years; you might only have five.

It’s almost impossible to overstate the importance of savings and a patient investment policy in preparing for retirement. Save early and often. And search out proven return factors, like relative strength, and stick with them over the long term.

Leave a Comment » | Retirement/Saving | Permalink
Posted by Mike Moody

Fund Flows

July 29, 2010

The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.

Almost $7 billion was added to taxable bonds and $1.5 billion was withdrawn from domestic equity funds in the week ending 7/21. These flows represent a substantial increase in flows to taxable bonds, and a substantial decrease in domestic equity withdrawals. For the year, $156 billion has been added to taxable bond funds while $27 billion has been removed from domestic equity funds. Hybrids, municipal bonds, and foreign equity funds have all seen modest inflows for the year.

Leave a Comment » | Markets | Permalink
Posted by JP Lee

Consumer Confidence

July 29, 2010

It’s very difficult to maintain conviction in the stock market as an investment vehicle when the economy is so rotten. (Frankly, it’s never very easy!) The market was rattled a little bit this week when it was reported that one of the consumer confidence indexes was down again. The bears aggressively took to the airwaves, discussing how the economy could not recover unless and until consumers felt better about things.

This made me curious. What actually happens to the stock market when consumer sentiment is poor? J.P. dug up all of the data from the University of Michigan’s Consumer Sentiment Index, which runs back to 1978. He broke all of the monthly observations into deciles and examined stock market returns over the subsequent five years.

(click to expand image)

Interesting, isn’t it? When consumer sentiment was low-in the bottom three deciles-subsequent five-year returns in the S&P 500 were over 12% per year, significantly higher than the 9.3% average over the entire sample period. When consumers felt absolutely fantastic about things and sentiment was in the top decile, subsequent five-year returns were actually negative! Confident consumers engage in reckless behaviors that sow the seeds for the next downturn. Fearful consumers engage in behaviors that build the foundation for the next upturn.

Right now, consumer sentiment resides in the second decile. Based on historical precedent, subsequent five-year returns are likely to be above average from here.

It is well-known that advisory sentiment indexes can be interpreted in a contrary fashion, and it seems that consumer sentiment may fall into the same category, at least over the longer term. This is one of the many reasons investing is difficult-it is an uphill climb against human nature to be bullish when conditions are poor. To buy when the outlook is dim takes a real leap of faith-and a steadfast optimism that things will improve over time. When things seem like they can’t get any worse, it just might be because they really can’t get any worse-and are about to get better.

7 Comments | Investor Behavior, Markets, Sentiment | Permalink
Posted by Mike Moody