Fire-and-Forget Investment Advice

March 26, 2009 5:34 AM

Seeking fire-and-forget asset class investment advice for retirement: TIPS? Global Equities Index/Wilshire 5000? I know this is mildly controversial, but it seems like the 'common sense' approach has changed lately from "stocks for the long run" to "risk = loss." See especially here.

My wife and I are about 35-40 years from retirement. My wife may retire earlier (25-30 years) if she can get away with it. We're both professionals who would like to minimize our attention to the markets so we can focus on our careers.

1. We can and will hire an investment advisor: this question is research for that meeting.
2. I'm currently feeling less secure in stocks as an asset class than I did five years ago. Even if this was a market bottom, I'm worried that stocks may not do so well in the middle-to-long term after all this deprecation of the asset class and the US's newfound skepticism of Wall Street. I don't mind volatility, but the bond/stock return on investment profile seems to be different than it was for the last 50 years.
3. I've been thinking a little about Zvi Bodie's Worry-Free Investment advice. (Treasury Inflation Protected Securities plus Social Security to protect standard of living.) It feels horribly pessimistic, but maybe that's the right way to be about retirement? Also, I worry that Social Security may be risky as well. Hell, saving for retirement assumes we're not going to die of cancer or in a plane crash, right? Shouldn't it be a little optimistic?

posted by anotherpanacea to work & money (7 comments total)

I guess I would be wary and skeptical of any prediction that tells you what the world is going to look like 25 to 30 years from now. Stocks for the long run still seems to me a wise approach all things considered, especially now that there's basically a fire sale on stocks.
posted by spicynuts at 5:43 AM on March 26

I think you need to diversify. TIPS are probably not a bad core investment, though, especially if you want a very passive strategy. My understanding of them is that they're great for tax-advantaged accounts, because not so great for regular cash accounts, because you'd end up getting hit for capital gains each time the principal is readjusted due to inflation.

Although I can understand being wary of the stock market I think you'd be throwing away a lot of gains by not at least putting some money in.

Also: be very skeptical of "this changes everything" claims. Usually they are wrong. During the dot-com bubble, people claimed that we were in a 'new economy' and that the tech gains would never go down. They were wrong. During the RE bubble, people claimed that property values would never go down, and that the traditional wisdom of rent/mortgage ratios was dead. They too were wrong, at least about the first part, and I suspect they'll live to be wrong about the second part as well. Now, we have people running around saying that the recession changes everything and that the economy is never going to recover: my strong suspicion is that they, too, will be wrong. (This is not to say that the economy is going to get back to its pre-crash bubble high, however. Guessing where exactly it'll come back to, what sort of level is sustainable, is the rub.) The economy has a way of punishing anyone who thinks that they've happened upon a total game-changer.

Your investment advisor can give you some guidance about how exactly you'll want to break up various asset classes, but I think TIPS aren't a bad start, as part of a balanced strategy that also includes equities (both US and international).
posted by Kadin2048 at 6:47 AM on March 26

Also ... another thing just to keep in the back of your mind with TIPS is that they are indexed to CPI, which is hopefully but not necessarily proportional to your actual cost-of-living expenses. You might find that CPI doesn't track your actual purchasing very well, which would leave you in a bit of a bind. Also, there are those who believe that the CPI is or could be subject to manipulation for political reasons -- there are obvious reasons why a government might want to understate inflation, or at least understate the inflation index, particularly if huge amounts of wealth became concentrated in inflation-indexed securities.

Although I'm not quite that pessimistic about TIPS and CPI, I think it's at least something you should consider before putting a substantial fraction of your life savings or retirement into them.
posted by Kadin2048 at 7:35 AM on March 26

Vanguard has a series of Target Retirement funds that are one buy-and-forget option. For example, the Target Retirement 2035 Fund currently is about 90% stocks and 10% bonds. As you get older and nearer to retirement the fund automatically balances more towards bonds: at retirement it's about 50/50 with some inflation protection. You can read much more detail at Vanguard. Buying a single fund isn't very exciting, but it's inexpensive and simple.

You said you want to hire an investment advisor. It's not necessary if you don't have millions to invest, but if having a professional will help you start saving and investing it may be worth it. Just be very clear about how your advisor is compensated. There's a lot of crooks in the business who make their money by steering clients to lousy investments that happen to pay the advisor a big fat commission. They prey on people like you.

I'd go looking for a fee-only advisor. My first interview question would be "explain modern portfolio theory to me". I'd look for two things in the answer: that you understand it, and that the advisor doesn't spend half his time explaining how he's so smart he can beat a well balanced portfolio because he's able to pick stocks with the right timing. The other thing I'd look for is an advisor who's very clear and precise about tax-advantaged investment accounts like 401(k)s and IRAs.

The most important thing is for you to start saving and investing money for retirement. Many people get overwhelmed when they start researching options. If you find yourself getting overwhelmed, set up something very simple, even a savings account, and just start putting money into it. You can always go back in a few years and get clever about how it's invested.
posted by Nelson at 8:21 AM on March 26

As a financial advisor in the US, I can offer 3 pieces of broad advice, and 1 piece of specific advice about TIPS.

1. The most important factor to a comfortable retirement is not investment selection or asset allocation, it's investment behavior. In particular, how much are you willing to save? Are you willing to stick with an investment plan? Do you have an investment philosophy that's stood the test of time?

As show by the Dalbar, the average investor severely underperforms the average investment vehicle (mutual funds). (see www.qaib.com) Answers to the questions above can help avoid that fate.

2. Asset allocation before investment selection. Rather than focusing on TIPS or which ETF to invest in, you should first decide on what an appropriate mix of stocks, bonds, cash, and, in some cases, real estate is appropriate for you. Once you have that broken down, you should get a little more in depth. For example, in the equity side of our portfolio, what proportion in larger companies that pay dividends, larger companies that don't pay dividends, mid and small companies, international companies etc.

3. Investment policy should be driven by goals and by risk tolerance. Before you choose an asset allocation, you should calculate the goals for the money in detail, accounting for inflation, and your tolerance for sticking with your plan in periods where the short term performance of your investment significantly differs from the long-term trend.

I hope this broad advice helps.

On TIPS, one piece of specific advice here. If you purchase TIPS, make sure to purchase them in a tax-deferred account (an IRA or a 401k plan, for example). The increase of the underlying maturity value of the investment will be reported as income for tax purposes. It's a "phantom tax". If you have TIPS in a regular brokerage account, you will have to pay tax on this increase even though you did not sell the security or receive the interest payment.

Best of luck.
posted by davidamann at 8:26 AM on March 26

Thanks everyone for the advice. I should also have asked: is there a better site for financial questions than AskMe? I don't have a lot of internet questioning experience except here, but I'll go explore if that'll help.

Some responses:

spicynuts: you do realize that "stocks for the long run" is a "prediction that tells you what the world is going to look like 25 to 30 years from now," right? It's backed by a century of experience, but that was the American Century. Past performance is no guarantee of future earnings.

Kadin2048: Good points, especially around the "real" inflation v. CPI question. The Financial Times article I linked suggests that the relative rate of return on stocks periodically dips below bonds for a period approaching the average worker's productive lifetime, which is why I'm asking.

Nelson: I'm wary of the retirement target funds because the orderly shifts between asset classes seems to suggest that I'll need every penny of my retirement on the date I leave the workforce. Not to mention the fact that I plan to retire -after- the latest available target. However, the rest of your advice is very good: thanks!

davidamann: Great general advice. I especially appreciate the tip about TIPS in tax-deferred accounts. Once question though: how do I get TIPS in my 401(k) or IRA if it's not offered by my employer? Thanks!

In general, I'm getting the sense that "fire-and-forget" is a myth, and that we can't afford to completely ignore our portfolio. I guess that's probably for the best, but I'm going to need some risk-toleration therapy pretty soon.
posted by anotherpanacea at 4:38 AM on March 27

Hi,

How To Get TIPS In Your IRA (or 401k)

To get TIPS in your IRA you have at least 2 choices.

1) You can use a IRA at a mutual fund company that has a TIPS mutual fund. Vanguard has one (Vanguard Inflation Protected Securities Fund - VIPSX). Open an IRA at that fund company, and select that mutual fund as part (or all) of your allocation.

You can rollover proceeds from another IRA at a bank, or from a 401k at a company you no longer work at, into that IRA at the mutual fund company.

2) You can open a Self-Directed IRA at a brokerage firm or bank, and then select either individual TIPS, a TIPS mutual fund, or a TIPS ETF (TIP). There's usually a fee for a self-directed IRA.

As for your 401k, that's a tougher nut to crack.

1) You can ask your benefits department to talk with your 401k provider and have them include a TIPS fund. For example, if Fidelity runs your 401k, you can ask them to include FINPX. This may take awhile, and it depends on the the type of plan you have at your company.

2) If your firm allows an in-service distribution, you can rollover your 401k to an IRA, and invest in TIPS as above.

Hope this helps, and best of luck.
posted by davidamann at 4:15 PM on March 27