Promoting “Financial Wellness” and “Retirement Readiness”

Two of the hot buzzwords today in the financial media are “financial wellness” and “retirement readiness.” While many people consider financial and investing matters confusing and intimidating, the truth is that people can simplify most matters and still be successful.

The byline for this blog states our mission and belief – the power of the informed investor. The following information can provide a good foundation for establishing one’s financial wellness and retirement readiness.

1. Care – Far too many people just give up and do not even try to take steps to protect their financial security. Others just blindly accept what ever advice they read about or hear. Decide to care and take steps to become truly proactive in protecting your financial affairs by becoming better educated in basic, financial strategies and developing your personal “investsense,” which is defined as the art of combining sound, proven investment strategies with ordinary common sense.

2. Learn – Again, take the time to make use of some of the valuable resources available       online. Obviously, we recommend reading the various white papers and posts on this blog. Other valuable resources include the Vanguard, Kiplinger’s, Money, Forbes, MarketWatch, Morningstar and Yahoo!Finance sites.

3. Use – The last step is to actually apply one’s new-found knowledge into one’s financial affairs. With regard to investments, the adage “simplicity is the new sophistication” is truly applicable. Studies consistently show that the overwhelming majority of actively managed mutual funds fail to outperform their less expensive passively managed peers, more commonly known as index mutual funds. Studies have also shown that funds that are cost-efficient in terms of their annual expense ratio and their turnover costs perform better than less cost-efficient mutual funds.

Our free metric, the Actively Managed Value Ratio™ 2.0 (AMVR), allows an investor to quickly and easily assess the cost-efficiency of an actively managed mutual fund using only basic math skills. For more information about the AMVR, click here.

The importance of cost-efficiency is also shown by the long-term impact of investment         costs on an investor’s end return. Each additional 1 percent of investment fees and costs       reduces an investor’s end return by approximately 17 percent over a twenty year               period. This fact is why variable annuities, which typically charge annual cumulative fees of 2-3 percent, or more, are rarely a good investment choice since investors can  easily lose over 50 percent of their return due to the various fees charged by most variable annuities.

One final point on cost-efficiency has to do with avoiding so-called “closet index” funds. Closet index funds are generally defined as actively managed mutual funds that closely track the performance of stock market indices and index mutual funds, but charge significantly higher fees that a comparable index mutual fund.

A quick and simple way to determine whether an actively managed mutual fund is a closet index fund is to check the fund’s R-squared score on under the”Risks” tab.  While there is no universally accepted score for closet index fund status, InvestSense use a R-squared score of 90 or above as our guideline, indicating that 90 percent of a fund’s return can be properly attributed to the performance of an underlying market index rather than the fund’s management team. Unfortunately, most 401(k) and 403(b) plans primarily offer actively managed equity-based mutual funds that are cost-inefficient, as they have high R-squared scores and thus qualify as “return robbing” closet index funds.

4. Be Proactive and Defensive – Far too many investors lose money from trying to “chase returns.” As Charles Ellis points out in his seminal book, “Winning the Loser’s Game,” investing is properly a defensive process. By attempting to avoid significant losses, an investor can fully participate in market gains and reap the full benefits of compound returns. As I like to tell clients, “you’ll never get ahead if you have to spend all your time catching up.”

Many people like to promote a static approach to investing, often pointing out that “market timing” does not work. The key here is the definition of market timing. The classic definition of market timing is an all-or-nothing approach, moving one’s money so that it is either 100 percent in the stock market or 100 percent in cash. Such an approach is not recommended due to the potential costs of such an approach and the proven difficulty to perfectly predict the stock market.

A proactive approach to wealth management does not require, or recommend, such a radical approach. A sound proactive wealth management strategy would simply involve re-allocating a portion of one’s portfolio based on changes in the stock market or the overall economy in order to reduce the risk of large losses, using an investor’s financial goals and needs as guidelines for such re-allocations.

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