Financial myths of retirement (part 2 of 2)
Part one (the previous post) discussed some of the most common financial myths of early retirement, including “why early retirement doesn’t work”. Here’s the conclusion:
“Your savings need to be absolutely safe.”
A huge investing epiphany for most military early retirees is realizing that their personal savings might not have to last forever. They may only need to cover the time they retire from the military until their additional pensions kick in from bridge careers, civil-service employment, or Social Security. Instead of choosing assets that may be eroded by inflation (like most bonds or certificates of deposit), ERs may decide on a budget that includes consuming a portion of the portfolio before additional pensions (or Social Security) kick in. It may be worth the volatility risk to invest in higher-return assets (like small-cap value stocks, real estate trusts, or commodities) and liquidate a portion of the portfolio every year.
“Low-cost index funds are the way to go. Active investors can’t beat the market.”
“Warren Buffett beats the market every decade and we can too!”
“Why settle for average when you can pick a great active money manager?”
Few debates generate as much controversy as these statements. The vast majority of investment managers never beat their fund’s benchmark, but one or two of them have beaten it for at least 15 years. The vast majority of investors are also unable to beat the market, but investors like Warren Buffett continue to sublimely soar above the averages for decades. So who’s right?
They’re both right, and you have to decide which path you’re going to pursue. You may have the innate skills of a Buffett, but like him you also have to be willing to make it your life. You may need to read a half-dozen newspapers a day and devour hundreds of financial reports a year while keeping in touch with dozens of business executives and investment managers. Do you find it absolutely fascinating, even compelling? Are you willing to put in at least 40 hours a week or longer in the pursuit of one needle among those haystacks of reports? Do you have Buffett’s guts to “Be fearful when others are greedy and greedy when others are fearful?”
Maybe you’re not Buffett (very few are) but you’re confident that you can find the next Buffett. Or can you? Can you find the next hot fund manager for the next four or five decades? Can you sift through thousands of funds and make sure that they won’t change their management or objectives after you invest with them? Are you willing to keep up with the research, the monitoring, and the workload for the rest of your life– or would you rather have a life?
You can beat the market if you’re willing to work at it and if you can recover from your mistakes. For everyone else, there are low-cost passive index funds.
“I’m not touching the market right now. It’s too expensive.”
“I’m not touching the market right now. It’s going down again and it won’t recover for years.”
“You have to invest with every paycheck, no matter how the market is doing, or your savings won’t grow fast enough.”
“I’m waiting until the Federal Reserve lowers the discount rate, the commodities futures index has stabilized, and the dollar strengthens against the yen.”
Every one of these excuses may be a great reason not to invest for a retirement goal, but they’re all excuses.
Research has found that the stock market rises approximately two-thirds of the time, largely in a random and unpredictable fashion. The stock market is not always driven by fundamental financial values, either– greed and hysteria are the common emotions, amplified by the media and investor psychology. Sitting on the sidelines waiting for the “perfect” moment is one of the biggest risks of all: the risk that inflation will erode the waiting cash and miss months or even years of compounding. While it is possible to time the market, it’s nearly impossible to continue to time the market correctly through decades of retirement investing.
The vast majority of investors choose to add money to their retirement portfolio whenever they get it, which is usually with each paycheck. Some investors add the same amount every time (dollar-cost averaging or DCA) while others add more to their lagging investments and less to their strong performers (value-cost averaging). Every method has its advantages and drawbacks but they all instill a discipline of routine investing that can be put largely on autopilot.
Ironically, DCA does not perform as well as “lump-sum” investing. For the best historical returns, all money should be invested as a lump sum on the first day it’s available. The reality is that this approach takes a cast-iron constitution approaching blind faith, and very few have the courage (or the blissful ignorance) to even consider attempting it. The real value of DCA is that it’s a decision to make once and then automate with a checking-account deduction.
There are thousands of other investing myths, but by now the point has been made that there is no single best way to save for retirement. Each decision has both a financial and an emotional side, and each side has to agree before the decision will stand. Your supremely logical reasoning is also wasted if your partner can’t tolerate the volatility or the other risks.
The best way to build the confidence to continue to save and invest under all circumstances is to educate yourself. As you become more educated and experienced, your temperament will evolve to handle other types of investment strategies. You’ll face the uncertainty with greater confidence and you’ll be able to ignore the market’s short-term volatility to stay focused on your long-term goals.