Ask an author: David Loeper here to answer your retirement planning questions!

[David Loeper]

The May issue of Kiplinger's Personal Finance has a good story about high 401(k) fees and how the revenue sharing deals that are not disclosed to you might have you funding the retirement of your boss.

I thought readers of this forum might enjoy it.

It is available here:
http://www.kiplinger.com/magazine/ar...401k-fees.html

[Will]

Hi guys!

This week, the lucky winners of David's book are sancho and mcstarrett.

We're giving away two copies of the book per week so there are plenty of chances to win.

[sast]

Dave,
Thank you for your reply, You told me things I knew but didn't (and still haven't) acted on. I shall diversify ASAP.
Please help me with diversification. How does one really understand risk? As your own documents carefully state, you can't predict future performance from past performance. Since my numbers worked out to be a "balanced growth" type, how do I pick the recommended portfolio mix to maximize performance and minimize risk? Where do I find the best performing and lowest cost funds? I am assuming that your portfolio mix implies index funds for the stock portions? What about the bond in the portfolio mix? Do I buy bonds or invest in a bond fund?

[sast]

Dave,
Can you recommend a DIY guide to wealth management? Or do you recommend most people go with a wealth management consultant? Are the costs to have someone else manage my wealth offset by the advantages a professional brings to the equation?

[David Loeper]

Originally Posted by sast

Dave,
Can you recommend a DIY guide to wealth management? Or do you recommend most people go with a wealth management consultant? Are the costs to have someone else manage my wealth offset by the advantages a professional brings to the equation?

When it comes to wealth management, there are a lot of books that can teach you broad concepts, but when it comes to your specific wealth management plan the calculations are too complex to come out of a book. I made an attempt at this in the tables in my book that shows for various ages, portfolios values, allocations, fees, savings rates, retirement income, etc. the range of outcomes at rational confidence levels. But, even those tables won't provide you with much more than a directional estimate.

To really make informed decisions, you need a very powerful calculation engine that deals with all of the uncertainties and allows you to model all of your unique circumstances. (Like the one we offer to professional financial advisors at www.wealthcarecapital.com)

If you are highly skilled in statistics and understand the implications of modeling using stochastic methods, and also are well trained in capital market behavior, such tools can help you to create a well reasoned wealth management plan. I know for a fact some consumers have taken advantage of the "free client" on our platform and use the tool for their own plan even though they are not professional advisors. But it is important to note that unlike the simple retirement planners that "solve for" an answer based on the programmer's choice, professional tools solve for nothing other than what the user is creating. Think of this like a hammer. One could make a self swinging hammer but it isn't going to create much on its own. Put a regular hammer in the hands of someone skilled, say Norm Abram, and you end up with a masterpiece. The tool doesn't create the end product, the user of the tool does.

Unfortunately I have to say I have not met many professionals that are worth paying anything. There are a handful out there but the financial services industry is so frought with a culture of product sales and hype that truly honest, objective, self critical, empathetic listeners are the exception to the culture of aggressive, conflicted talkers that dominate the industry.

If you start to interview advisors, there are some questions I'd suggest asking before you hire them that I posted in response to another reader here on post #64:
http://www.wisebread.com/forums/pers...html#post12051

This post also discusses the issue of various certifications.

[David Loeper]

Originally Posted by sast

Dave,
Thank you for your reply, You told me things I knew but didn't (and still haven't) acted on. I shall diversify ASAP.
Please help me with diversification. How does one really understand risk? As your own documents carefully state, you can't predict future performance from past performance. Since my numbers worked out to be a "balanced growth" type, how do I pick the recommended portfolio mix to maximize performance and minimize risk? Where do I find the best performing and lowest cost funds? I am assuming that your portfolio mix implies index funds for the stock portions? What about the bond in the portfolio mix? Do I buy bonds or invest in a bond fund?

The product marketers have fooled many people on the notion that you can have your cake and eat it too, i.e. high return and low risk. It sure sells well, but it should be against the law in my opinion. A prudent fiduciary would diversify. That is the law under ERISA and should be the rule you follow for your own retirement.

The first thing you have to objectively recognize is that it is mathematically impossible to be both truly diversified and materially perform better. This isn't to say that funds can't out perform, some will. If I have 10,000 monkeys picking stocks from the S&P500, half of them will do better, and half worse (if I assume no costs.) The ones with the highest returns will be the least diversified (so will the ones with the worst returns.) They might have only a handful of stocks, or pick only stocks in one sector or industry. The more stocks they own across more sectors and industries, the more they weight those positions closer to the market weighting, the more diversified they will be and the closer they will be to market results.

So, the best (and worst) performers will have the least diversification and there will be winners (and losers) on both side of such bets. You happen to be one of the winners (historically) with your bet on Chevron. Congrats!

Perhaps the best example of this is looking at Legg Mason Value Trust on www.fundgrades.com which shows what the grades were for diversification, relative risk, return, and risk of material underperform three years ago. Despite the great 17 year straight record of this fund beating the S&P500, for the last three years it has underperformed by 10% a year compounded. That is the risk one takes of attempting to out perform as well. (see a report card on fundgrades for this fund compared to domestic equities and large cap equities here: http://www.fundgrades.com/securityre...x?id=2534&ac=5 )

You will notice that three years ago when Morningstar gave it "5 Stars" of praise, that relative to large cap graded from the perspective of a prudent ERISA fiduciary instead of a product peddler perspective, we graded it "D" overall, "D+" for diversification, "D-" for expense, "F" for risk, "B+" for return and "C" for risk of material underperformance.

It is now F for risk and return for the last three years. We aren't surprised...but all those that chase long term track records are, or have come up with their usual excuses.

I can't make specific security recommendations on this website, so if you contact me from the "email the author link" from http://www.401kripoff.com/contact.htm I might be able to help you figure out which securities work for you.

Alternatively, you can go to www.fundgrades.com and search for the funds with the best overall grades (I would not use a fund that has less than a C- in any criteria) for each asset class. For example, if you go to the advanced search on fundgrades (http://www.fundgrades.com/AdvancedFundSearch.aspx), select honor roll for "overall grade", then click the "+" sign to expand the list for domestic equities, and ""+" to expand large cap, select large cap blend, click search, then all large cap blend honor roll funds come up in a result that is 5 pages long. Simply click on the column heading "overall" and it will sort that list by their overall grade. There are about 25 funds graded A- on overall grade for large cap blend.

Make sure you look at the report card on the individual fund though which will expose some risks, for example look at the report on IVV (available here: http://www.fundgrades.com/securityreport.aspx?id=45251) versus VAARX (available here: http://www.fundgrades.com/securityreport.aspx?id=76960) which helps to expose some otherwise hidden risks.

The other thing you should consider is once you have your portfolio selections designed, use the portfolio feature on www.fundgrades.com (a free login is required for the portfolio feature to protect your information) and grade the entire portfolio together. (see http://www.financeware.com/homepage....t=04.09.08.wem which exposes how easy it is for investors and advisors to be fooled by the asset class labeling)

Finally, I would suggest you consider a lower risk portfolio, as I'm suspect that taking the risk of the balanced growth allocation, while it might fit your risk tolerance and liquidity needs based on our simple questionnaire is probably subjecting you to more risk than is needed.

[Will]

Hi guys!

This week, the lucky winners of David's book are ScottPax and just_kelly.

We're giving away two copies of the book per week so there are plenty of chances to win.

[sast]

Dave,
Looks like I'm the only one posting. Thanks for continuiing to answer. My company (CVX) has its 401K at Vangard. What do you think about Vangard as a Wealth Management company? Would you reccomend I stay with the or move to another firm such as Schwab (they are courting me pretty hard). Does your company offer Wealth Managment services? Thanks you!

[David Loeper]

Originally Posted by sast

Dave,
Looks like I'm the only one posting. Thanks for continuiing to answer. My company (CVX) has its 401K at Vangard. What do you think about Vangard as a Wealth Management company? Would you reccomend I stay with the or move to another firm such as Schwab (they are courting me pretty hard). Does your company offer Wealth Managment services? Thanks you!

For any wealth management advisor, it is completely dependent on the individual advisor you work with as opposed to the company. There are a hand full of good, objective advisors in most firms, and there are plenty that are nothing more than product peddlers as well. Although, some firms have tighter controls than others when it comes to the process that is used with clients.

I cannot endorse nor criticize firms overall since so much is dependent on who you work with. In our 401k plan we utilize some Vanguard funds, but I have not been privy to specific examples of wealth management advice the firm delivers, yet alone the variances that may be present among different offerings or advisors they have.

Schwab is our primary custodian for our advisory assets outside of 401(k)s but like Vanguard, I have not seen whether specific advice given to individuals is objective or connected to their life goals. We merely use them as a custodian and really are indifferent about that since we have clients we advise that use any of at least a half dozen other firms (as custodian).

There are a lot of firms out there that just identify how much pain you can bear (they call it risk tolerance) and position you into a portfolio to experience it regardless of whether it is necessary for the goals you value. I'm not saying that is the case necessarily at Schwab or Vanguard, but it is a very common and irrational practice. Be careful of that when choosing an advisor.

Most of our advisory business is through helping other advisors with their clients. We do however have a select group of friends/family/business acquaintances that retain us directly because we are a particularly good fit for what they are seeking.

[sast]

Dave,
After reading your posts and whitepapers, It would seem that the best strategy might be to:
- Balance my portfolio to the appropriate level of risk/growth based on my needs
- Purchase index funds with the least possible load / costs
- Rebalance as needed based on needs and over/under funding
- sit back (financially speaking) and enjoy my retirement.
Restated, I'm saying rebalance my portfolio as needed for my wealth management needs but invest in index funds with little to no load. I say this because from the data in your white papers, it seems that the market performs at more or less the same level over the long term so it doesn't make sense to spend a lot of time or money toward active management of my portfolio. By minimizing my costs I will get the maximum return on my wealth. What do you think?