FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.
Three Retirement Rules Of Thumb That Investors Should Banish (BlackRock Blog)
Some retirement rules of thumb should just be benched for good, according to Chip Castille at BlackRock Blog. 1. Save 3% of your salary for retirement: Castille writes that the most frequent auto-deferral rate is 3% of pay because it maxes out how much the company will match, but this isn’t adequate. “Our recent research suggests that 10 to 13% is more reasonable. If that sounds like a lot, think of it this way: paying your future self 13% of your current pay can buy you 30 years of retirement spending. It may actually be a bargain.”
2. Withdraw 4% in your first retirement and then increase it in keeping with inflation: Instead, Castille recommends “a dynamic amount, a percentage of your portfolio.”
3. The equity percentage in your portfolio should be 120% minus your current age: This doesn’t work because if a healthy 70-year-old decided to retire at 75, they still have more years of wages than someone retiring earlier. “This idea of factoring future wage potential into the allocation is actually what some investment strategies do, and why a 30-year-old (with 35 years of wages ahead of him) has more equity exposure than a 60-year-old with only five years of human capital left.“
Some People Aren’t Too Worried By Robo-Advisors (WealthManagement.com)
Robo-advisors, online firms that use algorithms to help investors create and manage their portfolios, have been creating a lot of buzz. But Raymond James’ Scott Curtis doesn’t see them as a threat. “As fragmented as it is, it’s hard to believe that online providers are suddenly going to become the dominant players in our industry, I just don’t buy it,” he told Megan Leonhardt at WealthManagement.com. He compared the current boom to that of discount brokerages in the early 1990s, and pointed out that the latter still account for a small share of the market.
“Until the online providers can replicate all of the advice that is provided by a competent advisor, they will grab only a portion of the market, and it’s [the portion] for people who are focused on and interested in an investment, sensitive to cost and don’t care if they interact with a person face to face, he says.”
From 2010 to 2012 the stock market has seen five significant, ‘hair-raising’ corrections — the worst seen during the summer of 2012 when the S&P 500 fell 19.4%. “All of these five corrections were triggered by macroeconomic events that threatened to precipitate a recession,” writes Ed Yardeni in Dr. Ed’s Blog. “When those threats dissipated, the bull market resumed. The anxiety attacks that caused the corrections were followed by relief rallies.”
The current stock market correction, however, is unique, he writes, with the S&P 500 down 0.5% from its record high, while the Nasdaq is down 5.2% from its recent high. However, lots of stocks are down 10-20% since March. “I have characterised the recent selloff as an ‘internal correction.’ Scrambling to avoid giving back the fabulous gains from last year’s melt-up rally, institutional investors have been rebalancing their portfolios away from high-P/E to low-P/E stocks. They have moved some of their portfolios out of Growth into Value stocks. Stocks with predictable earnings are outperforming the more cyclical ones. Among the losers have been lots of ‘innocent bystanders’ that have been pummelled mostly because they are included in out-of-favour ETFs.”
SEC Chair Says Third-Party Examinations Of Advisors Is Creative (Investment News)
The chair of the Securities and Exchange Commission (SEC), Mary Jo White, thinks hiring third-party contractors to review advisors’ operations is “creative,” reports Mark Schoeff Jr. at Investment News. SEC Commissioner Daniel Gallagher first made the suggestion to help beef-up advisor regulation. The SEC’s resources mean it examines only about 9% of the 11,000 registered investment advisors. The SEC requested $US1.7 billion from Congress for fiscal 2014; that’s up $US400 million from its current budget.
Estimating Long-Term Market Returns Is Important (Charles Schwab)
It’s tempting to try and time the market, and it’s also incredibly hard to do. Instead, advisors tell clients to focus on their financial goals and their long-term return estimates. “If your return estimates are too optimistic, you run the risk of not being able to retire on time or pay for a child’s education,” according to Michael E. Lind at Charles Schwab. “If they’re too pessimistic, you may needlessly sacrifice some of your current lifestyle by over-saving for retirement.”
Lind explains the twofold method that investors can use to calculate long-term estimate. 1. Estimating current risk-free rates, “by directly observing Treasury yields in the marketplace. Because we’re estimating returns for a 20-year time horizon, the risk-free rate is measured as the yield of a 20-year U.S. Treasury bond.” Of course, no investment is ever risk free.
2.Estimating asset-class premiums which in the case of large-cap stocks is the equity risk premium (ERP) — “which measures the relative attractiveness of large-capitalisation stocks versus a risk-free bond.” The ERP can be measured through “the historical long-term approach or the valuation approach.” The former “takes the historical difference in returns between stocks and risk-free bonds and assumes that the future will look like the past,” while the latter “relies on fundamental data, such as dividends, earnings, gross domestic product (GDP) growth and valuation levels and then uses well-established financial theory to estimate an ERP.”
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.