In the most recent issue of our local newspaper, The Horseshoe Bay Beacon, an article was printed from Edward Jones titled, "How Can You Help Lower Your Longevity Risk?". I thought I may weigh in on the topic since "making your nest egg last a lifetime" is a common theme on our site and our foremost priority for our clients.
The article is well written and includes some fairly well known factual tidbits such as the life expectancy of a 65-year-old is around 85.
But I fear the article misses a key factor which will determine how long your account will last, which is Sequence of Return Risk. When I was in college in St. Louis, Edward Jones played a big role in our curriculum as their headquarters was right down the street. And one of the key themes we were taught was the three factors that will determine an account's longevity, which are:
- How much you have saved for retirement
- How much you spend in retirement
- Your investment rate of return in retirement.
Unfortunately, our curriculum, which was developed by a team of Ph. D's and at least 1 Nobel Prize winners in economics, whiffed on the fourth factor, which is Sequence of Return Risk. We have a page dedicated to this factor which explains why avoiding losses in retirement is so critical to account longevity.
The antidote for Squence of Return Risk is really quite simple: DON'T LOSE MONEY! (The very first tenant of our investment philosophy.)
While simple in theory, avoiding losses is a little more difficult in practice. Having now survived three bear markets and protecting my clients' capital in all three, I have developed a battle-tested program for avoiding losses in a down market. We put a stop-loss on all positions ready to cut losses quickly to protect your capital.
For more than just the obvious reasons, I contend that this will be an even greater advantage for our clients moving forward:
1) The market appears to be entering a "stock pickers paradise" where indexes may not provide meaningful returns but certain individual stocks very well may. If you have been in AAPL or TSLA this year, you've experienced astounding gains in these positions. But several indexes are still far below their 52-week highs. Of course, while some stocks soar, some stocks will tank. Having a hard-and-fast exit point allows our winners to run while cutting our losses off quickly.
2) Increased liquidity plus increased leverage will likely result in increasingly more volatility. Because we can "hit the eject button" at a moment's notice, we can protect our clients against a drop in equity prices as we did this past March.
For various reasons, our practice of limiting losses stands in stark contrast to large brokerage firms like Edward Jones, Merrill Lynch and Morgan Stanley. Unfortunately, when equity prices start to fall, the conflicts of interest that arise between the investment client and the investment firm result in the client losing out.
I learned second-hand how this works as quite a few of my fellow business school friends from Wash U went to work for Edward Jones. One of my best friends would become their leading tech analyst during the dot.com boom. And he told us countless stories about what really went on behind the scenes and how overt conflicts at the firm influenced his work. When the NASDAQ started to crater in 2000, he was explicitly told by management to "never put a sell on a security Jones had recommended or one that Jones held in their own accounts." He even said he felt pressured to avoid putting "sells" on large positions held by their preferred mutual fund families such as American Funds (which is tough since American Funds owns about everything). Any "sell" rating he issued was to be reviewed and often vetoed by management.
Conversely, all of our firm-owned accounts are traded in sync with our clients using block order trades so if you lose money, we lose money (and I really hate losing money). By avoiding conflicts of interest and by remaining nimble, we are able to take cover when the financial storms come rolling in.