Developing ‘spending money’ for retirement
by Steve SelengutMr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]
401(k) Savings Plans are great opportunities to build wealth, but they are not guaranteed pension programs and there are pitfalls. What if you are forced to retire at the bottom of a market cycle, or at a time of historically low interest rates?
Qualified or not as an investor, you have to make your own 401(k) investment decisions. Eventually, you will have to either (a) create your own income portfolio or (b) enter a contract where 95% (+ or -) of your assets, plus interest, is returned to you monthly… and the whole “nut” is gone when you are.
Most 401(k) plans are product based, and the products are designed to grow in value with varying degrees of risk. As you get closer to retirement, you may (and should) choose lower risk investment products. The idea is appealing, but it has little if any focus on developing spending money. Lower risk doesn’t mean higher income… and big market values don’t pay the bills nearly as well as a growing stream of income.
The Beauty of Reinvestment
In fact, a classically constructed income portfolio (individual AAA Municipal Bonds for example) should produce a growing stream of income regardless of the market value of the bonds themselves, as long as 30% or more of the income is reinvested. Seriously.
What if you could, from the get-go, invest your monthly contributions in a medium that is designed to be less risky than average while it focuses on growing the income produced by the portfolio throughout your total investment “Life Cycle”?
What would be inside this new product that makes it so different from the collection of well meaning “passive” ETF derivatives and open end Mutual Funds that you can choose from right now?
Modern Portfolio Theory and the Emperor’s New Clothes
ETFs have become more and more popular as it has become more and more clear that mutual fund managers rarely match the performance of their “index” benchmarks. Without even explaining why (of course they know why), Wall Street went out and commissioned the development of a high tech, high hindsight, and high science theory that eliminates the need for managers completely. MPT, or Modern Portfolio Theory, takes “The Emperor’s New Clothes” to levels never before imagined.
With correlations, standard deviations, Alphas, Betas, and Crapas, they can predict the future, smooth the curves of the market cycle, and bring peace to the Middle East… and all at a lower cost than the poorly managed mutual funds. Yet they (the Wall Street product vendors) continue to sell the same funds, employ the same managers, and well, ROTF-LOL*.
Professionals should also note that Wall Street (secretly) solved the “managed by the Mob” nature of Mutual Funds years ago, and without the doctoral level mathematics. Simply put, MPT was not developed by experienced investors… or for them.
Mutual Fund managers can’t beat the averages because the managers must do what unit holders tell them to do. They can’t buy low and sell high, and they must buy high and sell low — not what you would call a winning (or index beating) combination. What do you think will happen to ETF prices when there is a correction? Are they any different, even without a manager? Inertia is inertia.
The Market-Cycle Microscope
Since there are more indices and mutual funds than there are securities inside, will they fall faster or slower than a market index in a correction? We’re going to get an answer real soon. In the meantime, it is my “academic” opinion that a sanely managed, properly diversified, growth & income, two asset class only, high quality, income paying security based, managed portfolio will beat the averages every time when looked at under a “market cycle” microscope.
And I’ve just given you an idea of what’s inside the MCIM “Life Cycle” portfolio program that is now available on a limited scale to 401(k) plan participants. In these programs, the manager chooses individual equities from a universe of Investment Grade Value Stocks and a handful of well known foreign multinationals. Less than 400 issues meet the exacting price, income, dividend, and profitability standards.
It is likely that you would be familiar with most of the companies that find their way into your take home paperwork.
Every security in the portfolio, growth or income purposed, pays you for the use of your money. In the income portion of the portfolio, managed individual security income portfolios called Closed End Funds are used exclusively… The Street’s mutual fund solution. Managed funds with long track records are traded in the same way as equities to enhance the income base in all portfolios. If you wish, you will be able to contact the management company directly to get a snapshot of the entire portfolio.
Yeah, you can’t do that yet in most 401(k) programs, but MCIM “Life Cycle” portfolios are different in a more important way. Income growth is assured through a process called “cost based asset allocation”, unique in the investment management industry (as far as we know).
Every dollar earned and every dollar deposited is invested based on the total cost of the securities and cash in the portfolio… not on their market value. This process puts the focus on growing retirement income in much the same way as the “old and ancient” pension programs did.
And then there’s one more important difference…
What if this old fashioned investment product could be duplicated for you (security by security) when you leave the plan, using the same securities and generating the same income as the fund itself… but in your very own privately managed portfolio?
MCIM “Life Cycle” portfolios are already available for use in certain 401(k) plans; they are available right now for all privately managed non-401(k) portfolios, both taxable and tax-deferred.
Today, a select few; tomorrow, the —–!