HOW SHOULD A RETIREE GAUGE INVESTMENT PERFORMANCE?

You can imagine, if somebody’s approaching retirement, and all of a sudden the funds that he or she is depending on are depleted by 50% or however many, it gives them a sinking feeling in the pit of their stomach.

– Pat Robertson

If you ask the investing public to gauge how it’s doing, it will invariably mention a benchmark: “I’m up 20% over the S&P 500 since last year.” This works fine if you’re a fund manager with a mandate to outperform the S&P. But what’s your individual mandate for your investments?

There’s no question that performance is important, but I’d say the real benchmark is how your portfolio is doing vis-à-vis your goals and needs. Many pundits in the media will say that you have to keep up with your benchmarks, while I’m saying that it’s more important that the retiree who needs to generate $20,000 each year get that much or more. For that retiree, getting more than $20,000 is “outperforming.”

A few years ago I had a client whose portfolio had generated the low income that he required and who was preserving capital. He didn’t want to take on any risk to speak of. His 25% in stocks was designed to keep up with inflation. However, the market had done exceedingly well over the previous few years, while he had made only a fraction of that.

He called me, claiming that he was underperforming the market and that he was very unhappy with his returns. I told him that he was comparing apples and oranges. His portfolio was all about capital preservation and income generation, not about aggressive growth and significant capital appreciation. Benchmarking tells people that they should be “keeping up,” and that’s not always the case.

For older retirees, it’s not about making a killing in the market, it’s about not getting killed there.

Sleeping at night

One of my clients retired a couple of years ago, and his portfolio is all the money he will ever have. In the midst of the euro crisis in 2012, he told me that on the one hand, he was very nervous that the financial markets would crater as a result of the events in Greece and Spain, but on the other hand, he “knew” that he should just sit on what he had because he “knew” that things would eventually get better.

I told him that the most important factor in all of this was whether he could sleep well at night. If he was scared about potentially losing a big chunk of his retirement money, he should lower his risk profile, sell stocks and move into cash until he was more comfortable.

If you tell that to a financial pundit, he will trot out a slew of behavioral economists who will say that my client is making a big mistake because statistically he will sell at the wrong time, and then by the time he buys back in, the market will be much higher.

Telling people how they should act is really easy for someone sitting in an ivory tower, but unless you are in that person’s shoes (or facing her across your desk), you can’t possibly know how she should react to the threat of losing 30% of her money.

The pundit may be right statistically, although I think a good adviser can help mitigate the bad timing issues. Many clients, like car engines, have “red lines,” the level that they can’t afford to see their net worth drop below and the point at which they would need to sell. An adviser worth his fees acknowledges these red lines. It’s important to note that I am certainly not advocating that retirees become day traders. I just think that there is value to opening your eyes and seeing what’s going on in the world. When there is a fundamental issue, sell.

When analyzing their portfolio performance, retirees should focus on how they are doing vis-à-vis their goals and not get hung up on how the broader market is doing.

 

The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA, FSI. For more information, visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il