2 Conservative Approaches To Retirement

2 Conservative Approaches To Retirement: Financial Advisors' Daily Digest

Apr. 27, 2018 10:26 AM ET

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SA For FAs

Senior Editor, FA Content

(3,176 followers)

Summary

Laurence Kotlikoff describes a method for investing in stocks with no risk whatsoever.
Michael Lonier formulates a retirement planning system designed to squeeze out any sequence of returns risk.
Index Investing Show’s Ron DeLegge argues that an investment philosophy is essential.

In his latest Seeking Alpha column, Boston University economist Laurence Kotlikoff describes the first and last time the American Economic Association held its annual convention in Las Vegas. It’s not because the group of academics didn’t enjoy the buffets. Indeed, it was at the hotels’ initiative that they were given to understand they would not be welcome back, and that was not because they trashed their rooms like overindulged celebrities or petulant royals. It was much worse than that from the casinos’ point of view, the problem being the reluctance characteristic of the economics profession to irrationally fritter away their money on gambling.

Kotlikoff writes like a true-blue economist, with an abiding concern for investors, when he writes of a method he recommends for “How to Invest in Stocks with Zero Risk” – the rather surprising title of his new article. I do not doubt that the system he has devised (and has programmed as an option in his software) would work. It essentially entails reducing your available spending commensurate with any capital put at risk, then raising your spending floor only once paper profits are safely converted back to safe assets.

I suggest you click on the article to see the specifics. But I will quote one insight into the implications of this system, which he calls “upside investing,” as follows:

The more one allocates to the stock market, the lower the [spending] floor and the higher the upside. The less one allocates, the higher the [spending] floor and the lower the upside.”

In other words, just like the economists disapprovingly watching folks in the casino put their money at risk, Kotlikoff’s safe investors’ minimal venturing generates minimal gains.

Coincidentally, financial advisor Michael Lonier also has an article out today describing his “bucket”-based retirement planning system designed to squeeze out any sequence of returns risk endemic to systematic withdrawal-type plans. To do this, Lonier uses four distinct portfolios, each of which he describes in detail (he himself does not use the word “buckets”).

If the approach seems similar to Kotlikoff’s, it is because both are highly conservative and seek to eliminate risks. They are, however, different, as Kotlikoff explicitly disavows buckets, seeking a system where no money can be lost; let’s just say he regards buckets as leaky.

While I acknowledge that these approaches can be of great benefit to risk-averse investors, from my perspective, both approaches seem more conservative than the equal-weighted “tripod” approach I frequently recommend of allocating a third of one’s portfolio to stocks, real estate, and cash each. The reason is simply that, while I want to limit risk, for the cause of retirement security, I’m willing to take risks for the cause of retirement sufficiency.

I remember when my naturally risk-averse son was young and he would notice the sell-by date on the food he or I were then eating had been reached, he yelped, eyes bulging. I would make a joke about our final good-byes to bring him back to reality.

In other words, there is such a thing as being overly cautious. Every investor’s situation is unique, so I would never make light of a conservative approach. Some people have too little saved to afford risks. And, ironically, it is those who have an abundance of savings who won’t be hurt by maintaining such conservative portfolios – the rich can afford risk or buy the luxury of avoiding it altogether. For most people, portfolio strategy is all a matter of balancing individual circumstances. Still, taking reasonable risks within reasonable safeguards at earlier ages definitely leaves open more options at the retirement stage.