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Monitor the Money – Not the Returns
Dr. David Edward Marcinko MBA CMP™
http://www.CertifiedMedicalPlanner.org
[Publisher-in-Chief]
While taking my certified financial planner courses to earn the CFP® designation, almost two decades ago at Oglethorpe University in Atlanta, I learned that in classic retirement planning engagements the financial planner or advisor determines the client’s retirement income needs, the assets already earmarked for the retirement portfolio, the desired retirement date, how distributions will need to be made, the assumed inflation rate, and life expectancy, etc.
Then, if a shortage develops, the advisor changes the asset allocation, increases the savings rate, proposes postponing retirement, or suggests reducing retirement income expectations, etc.
However, later in business school I learned that even when the inflation rate and investment returns prove to be accurate; this approach often fails doctors and all investors.
Geometry not Arithmetic
Why? Most planners focus on the wrong thing when monitoring portfolios. Possibly, there is confusion between compounding investment returns and compounding wealth. Planners tend to compound the arithmetical average return in projecting ending wealth over multi-period horizons. But, the accumulation of wealth is determined by the geometric compounding of actual returns.
Law of Large [Small] Numbers
Still later on in B-school, I learned of the LoLN [normal distributions, parametric equations and cohorts], as well as Poisson distributions [non-normal or asymmetric distributions, and non-parametric equations and cohorts] or Law of Small Numbers.
Planners and Advisors often believe in the former Law of Large Numbers, and eschew [or are unaware of] the later — that is, that over time, average annual returns will approach ever more closely the expected return. The longer the investment horizon, the further the portfolio can wander from its expected dollar value despite the fact that it is approaching its expected return. The future value of each portfolio is determined by the unique and unpredictable pattern of compounded returns and inflation it suffers.
IOW: The longer the period over which this pattern can exercise its effects, the greater the potential divergence from its required return. In fact, while the expected range for the annualized rate of return narrows over time, the expected range for the terminal value of the portfolio diverges over time.
Assessment
Today, forward thinking advisors use “portfolio sufficiency monitoring” to adjust nominal performance results for inflation by establishing benchmarks for performance objectives, setting triggers for reevaluation of the portfolio when it wanders too far from established benchmarks, and monitoring and adjusting portfolio risk to maximize the probability of meeting retirement portfolio objectives.
It answers the question: “Will I have sufficient assets to meet my retirement income needs?” while investment performance monitoring answers the question, “Is my retirement portfolio performing well relative to other portfolios?” My doctor clients retire; not others!
Note: Monitoring Retirement Portfolio Sufficiency,” by Patrick J.Collins, Kristor J. Lawson, and Jon C. Chambers, Journal of Financial Planning, February 1997, pp. 66–74, Institute of Certified Financial Planners.
Conclusion
And so, your thoughts and comments on this ME-P are appreciated. How do you monitor your portfolio? And, how do FAs perform same for their physician and other clients. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.
Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com
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Filed under: CMP Program, Financial Planning, Investing, Portfolio Management, Retirement and Benefits | Tagged: CMP, Investing, Law of Large Numbers, normal distributions, Poisson distributions, Portfolio Management, retirement planning, www.certifiedmedicalplanner.com |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Retirement worries for the affluent?
Dr. Marcinko, did you know that a new survey released by Merrill Lynch earlier this week showed increasing concern about retirement among affluent Americans with $250,000 or more in investible assets?
But, clients with $1 million or more – like many doctors – in investible assets are also worried, and are reconsidering their portfolios and retirement planning approaches, say wealth managers.
http://registeredrep.com/wealthmanagement/retirementplan/retirement_worries_hit_high_net_worth_clients/?cid=nl_wm
Tom
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On LTCI
Health-care costs are rising faster than inflation, but sound retirement and financial planning can help, according to this essay.
http://www.fa-mag.com/component/content/article/6770.html?issue=163&magazineID=1&Itemid=73
But, since we all evaluate and carefully buy things that we consider are worth more to us than we spend to obtain, is long term care insurance [LTCI] really the answer?
Dr. David E. Marcinko MBA
[Publisher-in-Chief]
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401(k) balances lost in recession are bouncing back
Americans who were afraid to open their 401(k) statements during the recession are finding good news inside the envelope:
http://www.pittsburghlive.com/x/pittsburghtrib/news/nation/s_728520.html#ixzz1InBlgn42
And, for the most part, their accounts have come back and then some. So, what about nurses and doctors and their 403(b)s, etc?
Dr. David E. Marcinko MBA
[Editor-in-Chief]
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Putnam’s Harlow Surprised By 10% Optimal Retirement Equity Allocation
If financial advisors, like me, were stunned by a finding from the Putnam Institute that the optimal retirement portfolio’s equity allocation should be between 5% and 25%, they weren’t alone. The study’s author was also quite surprised.
http://www.fa-mag.com/component/content/article/29-evan-simonoff-fa-blog/7833.html?Itemid=291
Dr. David Edward Marcinko MBA CMP
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