The personal growth or self-improvement industry is primarily targeted at younger people and many Baby Boomers feel that the advice offered does not apply to them.

All this talk about following your dreams, quit your job today, get your side hustle going, become a digital nomad, find your purpose and so on is often lost in translation.

Nice to know and fun to read, but what does this have to do with me? I just need to maximize my 401k!

Baby Boomers are at a different stage in life and their focus is on other things — desperately hanging on to that corporate job, figuring out when to call it quits, how to save the most for retirement, keeping their health care, possibly moving to a warmer location such as Florida or Arizona.

People think that Baby Boomers are so different from Millennials or Gen X. What lessons from the self-improvement world could possibly apply to such a different stage in life?

As a Baby Boomer myself who has occasionally been dismissive of what felt like hocus-pocus advice from self-improvement gurus half my age I have become convinced that continuous personal growth is the way to live an active and fulfilling life.

The personal growth industry has much to offer Baby Boomers as they enter or contemplate retirement.

Baby Boomers are no different from Millennials or Gen X or any other generation for that matter. Our problems come in different flavors and how we grew up is certainly different (anybody remembers slide rulers and rotary phones?) but what we search for in life is not.

I just re-read Viktor Frankl’s Man’s Search for Meaning best-seller book written while Frankl was a prisoner of war in Nazi Germany. According to a survey by the Library of Congress, the book is considered one of the ten most influential books ever sold in the US and has been translated into over 24 languages.

Frankl passed away in 1997 but the book continues selling well today. Its message is timeless and enduring — life is a quest for meaning. The message applies whether you are young or old, tall or short, married with kids or not, poor or rich.

For the meaning of life differs from man to man, from day to day and from hour to hour. What matters, therefore, is not the meaning of life in general but rather the specific meaning of a person’s life at a given moment

– Viktor Frankl

Real personal growth is at the end of the day a search for meaning.

What do you really care about? What are your core beliefs? What are you willing to sacrifice for? What is your “Why” that allows you to overcome seemingly insurmountable challenges and disappointments?

Nobody is born perfect or with all the answers. Instead, we must all grow into our own skin so to speak to lead a meaningful life. Personal growth does not ever end — it continues for life.

Every generation thinks that they are unique.

The specific problems they face are no doubt heavily influenced by the context or environment in which life is taking place, but the “big” questions in life of purpose and meaning are universal and timeless.

The whole transition into retirement that many Baby Boomers are facing today is fraught with fear of the unknown, but so is starting that first job after college, buying your first home or having children.

Are the concerns of Baby Boomers and Millennials that different? The specifics and context may be different but at the end of the day, our biggest struggle regardless of age most often happens between our own two ears.

Baby Boomers and Millennials are chronologically at different stages in their lives, but that does not mean that we live in different worlds. You may not hold Maslow’s hierarchy of needs as an exact description of how you look at life but the concept still generally applies regardless of age.

Everybody has needs and desires — these don’t just vanish with age. For most people, the bottom layers of Maslow’s pyramid have been long been satisfied. Instead in modern society the focus is on the quality of our lives and fulfilling our potential.

We all strive regardless of age and economic status to lead meaningful and fulfilled lives.

Self-actualization is the desire to become more and more what one is, to become everything that one is capable of becoming

– Abraham Maslow

Not surprisingly, a huge swath of the self-improvement industry focuses on self-actualization. Maximizing one’s potential, reaching for the stars, pursuing your dreams, following your destiny.

Dismissing the self-improvement industry as hokey pokey or too “new age” is a mistake made by many people of my generation.

Retirement is the ideal time to grow not to retreat into a protective shell.

As Baby Boomers retire from their long-held careers, the search for self-actualization in the form of meaning and purpose only becomes more important. We are no longer burdened by career and raising a family. We own our time, but we also own how we spend it.

Finding that new post-career identity that reflects the real you and recalibrating one’s sense of purpose and mission is not always easy.

Surveys show that it is not uncommon for many recent retirees to first experience a honeymoon effect but that the effect wears off after a couple of years and uncertainty sets in.

A lot of people enter retirement without a life plan. They may have saved diligently and even worked with a professional advisor to device a financial strategy full of bells and whistles. But they have all too often ignored to search deep within to find meaning and purpose. They have focused on the mechanics of retirement but not the emotions and possibilities for personal growth and fulfillment.

Retirees often mention that time seems to be moving faster and faster. They feel time slipping away. Maybe that is because they don’t know what to do with their time.

You can fool yourself, you know.

You’d think it’s impossible, but it turns out it’s the easiest thing of all

– Jodi Picoult, famous novelist

Change is always happening. Some of the change around us is predictable and requires small incremental adjustments. Other times change is unexpected and requires major adjustments or an entirely new game plan.

And sometimes change is within us — what we value most, how we see ourselves within the grand scheme of life, our intended behaviors and how we want to be eventually remembered.

We are not born with a static personality. Retiring from one’s day job is the end of a phase of life but also the beginning of a period of huge freedom and learning if we choose to pursue a growth mindset.

Transitions can be hard but your’s does not have to be if you choose growth and adaptability over the fear of the unknown. The key is having a growth mindset.

So, where should Baby Boomers start to explore personal growth ideas?

The task may seem daunting given the proliferation of material, but here is a list of influential self-improvement gurus and experts.

Go to their blogs, read their books, find out who resonates given your own journey and belief system. I am not sure that anybody has all the answers and frankly I find that the ideas and concepts tend to converge to a small number of basic principles.

The key is taking small steps. Focusing intently on where you want to be instead of where you are now often leads to unfulfilled change. Take small steps. These small steps will amount to large change over time.

If you want some concrete suggestions, here are 3 books to read, 3 shorter blogs and, if you are a visual learner here are 3 videos to get you started. Time to adopt a growth mindset and truly enjoy your retirement years.

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Here are 3 books to read:

The Compound Effect by Darrin Hardy

Wonderful, short book that gives you the fundamentals of success in a no-BS way. Small actions done consistently amount to large gains. Very actionable. Read multiple times until it really sinks in.

The Charge by Brendon Burchard

In this book, Burchard talks about the ten drives that make you human and how to activate them to lead a more engaged and fulfilled life. For each drive he offers tips on how to trigger these drives to eventually lead to higher energy, engagement, and enthusiasm. Provides useful worksheets to get you thinking.

Essentialism –The Disciplined Pursuit of Less by Greg McKeown

An absolutely fantastic book that applies to everybody. The idea is that most of the time we focus on activities that don’t matter. Busyness is not the same as being effective. In this book, you can learn that it is ok to shed non-core activities. Focusing on only important matters (to you) allows you to more clearly focus and move toward your goals. The rest does not matter.

3 Blogs to get You Going while you wait for Amazon to deliver your books:

Unsuccessful People Focus On “The Gap.” Here’s What Successful People Focus On by Ben Hardy

The idea explored in this note is to focus on improvement as opposed to reaching the ideal. The ideal or goal often appears unreachable and people lose momentum as their progress does not seem to be getting any closer. Focusing on small achievements is much more likely to result in sticking with the goal

Tim Ferriss’s 7-Step Checklist for Overcoming Fear — Entrepreneur Magazine

This article goes over the approach that Tim Ferris uses to deal with fear. He explains how he seeks to quantify the likelihood and magnitude of his fears and by doing so he “sizes” up the problem. Walking through his 7 item checklist allows him to slow down. He often realizes that even if the worst outcome were to occur he would be fine. We all deal with fear — going through the Ferris approach is one of the best ways I have found to get rid of the conversations in my head.

10 Life Purpose Tips to Help You Find Your Passion by Jack Canfield

Everybody wants fulfillment but it takes thought and action to figure out what really matters to you. It is very easy to walk through life following the norm and expectations set by society. For some people that might be fine but for many following the path less traveled is an approach more consistent with who they are. Following these 10 tips will get you closer to finding out what truly matters to you.

3 Videos to watch now:

7 Habits of Highly Effective People: 80th Birthday by Steven Covey

Covey is one of the best ever motivational writers. In this video, Covey imagines what his 80th birthday party would be like. If you do the same would it lead you to live differently? So much in life is about social connections. Who would be at your party?

The Most Important Lesson from 83,000 Brain Scan by Daniel Amen

Knowledge of the brain has expanded exponentially in the last 25 years. Dr. Amen walks you through the latest research. Staying healthy in retirement is a huge priority for most retirees. Understanding how the brain works and ways to remain “brain healthy” are a core competency of your future life.

How to Control Your Mind by Toni Robbins

Toni Robbins is today probably the best known motivational speaker. He is a Baby Boomer himself. His message can sometimes be lost in a sea of mass seminars but he is spot on with his recommendation that it is up to you to create the change you seek. Removing mental hurdles is the first step toward achieving clarity. Wanting the change badly enough and taking action are essential.

Time for action. As Marshall Goldsmith writes in his wonderful book, Triggers, most of us are really good planners and terrible doers. Personal growth requires both.

Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy.

– Dale Carnegie

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If you are looking for additional perspectives to guide you as you formulate your vision check out our Retirement Wealth Checklist.

If you would like to subscribe to my blog sign up here. Thanks for reading and Pura Vida!

How our brain works:

We all think that we are fully rational all the time but in reality the way our brains operate that is not always the case.

One of the key functions of the brain is self-defense. When the brain perceives danger it makes automatic adjustments to protect itself. When it perceives discomfort it seeks to engage in an action that removes the stress.

In his book “Thinking Fast and Slow” Nobel Prize Winner Daniel Kahneman explains how we all have a two way system of thinking that we use to make decisions. He labels the two components as System 1 (Thinking Fast) and System 2 (Thinking Slow).

System 1 is automatic, fast responding and emotional. System 2 is slower, reflective and analytical.

Think of your System 1 as your gut reaction and your System 2 as your conscious, logical thought.

While we all like to think that our key life decisions are governed by our logical thought (System 2) research has shown that even major decisions are often driven by our gut feel.

Which System do we use to make a decision? That depends on the problem. If we have seen the problem many times before such as what to do when see a red light we default to our automatic System 1 thinking.

When we face a challenge or issue that we have not seen before or maybe infrequently we tend to use System 2, our more reflective and analytical capabilities.

Kahneman’s research shows that we spend most of our time in System 1. While most people think of themselves as being rational and deliberate in their decision making, the reality is that we often employ “short-cuts” or heuristics to make decisions.

Most of the time, these “short-cuts” work just fine but occasionally for more difficult or complex problems the impressions arrived from System 1 thinking can lead us astray.

Why? Above all else, System 1 thinking seeks to create quick and coherent stories based on first impressions. These impressions are a function of what our brain is sensing at that moment in time.

According to Kahneman, conclusions are easily reached despite often contradictory information as System 1 has little knowledge of logic and statistics. He calls this phenomenon — WYSIATI — for “what you see is all there is”.

The main implication from WYSIATI is that people often over-emphasize evidence that they are familiar with and ignore evidence that may be much more relevant to the problem at hand but that they are not fully aware of.

System 1 conclusions therefore may be biased and lead to decision “short-cuts” or heuristics that seriously impair the quality of a decision.

What makes making “money” decisions so hard?

When it comes to investing people often rely too much on System 1 or automatic thinking. The research shows that we are not infallible and we in fact often make behavioral mistakes. Sometimes we over-rely on our gut feel without properly evaluating the consequences of our actions.

Often our brain perceives of the dangers first and sends us a warning signal to be careful. Losing money puts us on red alert.

Behavioral finance research (for example in the book Nudge) has shown that losing money makes you twice as miserable as gaining the same amount makes you happy. People are loss averse.

Loss aversion makes people overvalue what they have due to a reluctance to incur any losses should they make a change. What they give up, sometimes unknowingly, is potential upside.

Loss aversion creates inertia. Inertia often works against investors that overvalue the attractiveness of their current holdings.

There are different degrees of loss aversion. According to Prospect Theory, all investors value gains less than losses but some exhibit an extreme dislike for potential losses that significantly hinders their long-term wealth creation potential.

Nobody likes to lose money, but taking on risk in order to compound your hard earned savings is an integral feature of how capital markets work. You don’t get a higher reward unless you take additional risk.

Most investors know that stocks do better than bonds over the long-term but that the price of these higher returns is more risk. Investors also understand that bonds do better most of the time than simply purchasing a CD at the local bank or investing in a money market mutual fund.

But knowledge stored in your logical and analytical System 2 thinking does not always make it through in the face of stress or uncertainty.

People can become too risk averse for a couple of reasons:

· Case A: They let their fears and emotions guide their investment decision making and give disproportionate importance to avoiding any losses

· Case B: They fail to calibrate their expectations to the likely frequency of outcomes.

In Case A, investors seek the perceived safety of bonds often not realizing that as interest rates go up bonds can lose money. Or they simply pile into CD’s not realizing that their returns most often fail to keep up with inflation. Stocks are frowned upon because you can lose money.

Investors in Case A let their decisions be driven by emotion and fear and will over-value the importance of safety and under-value the importance of future portfolio growth. Their account balances will not go down much when capital markets experience distress, but neither will they go up much during equity bull markets.

In Case B investors mis-calibrate their expectations for various investment outcomes and the consequences can be as dire as in the first situation. Behavioral finance research has shown that investors frequently over-estimate the likelihood and magnitude of extreme events such as stock market corrections.

Investors often become fixated on what could happen should an equity market correction occur, but they fail to properly evaluate the likelihood and magnitude of such a correction in relation to historical precedents. They also importantly fail to properly calibrate the probability of observing a recovery after going through such a correction.

What are the implications for investors playing it too safe?

Let’s consider the case of investors currently working and saving a portion of their income to fund a long-term goal such as retirement. These individuals are in the accumulation phase of their financial lives.

Somebody in the accumulation phase will naturally worry more about how fast they can grow their portfolio over time and whether they will reach their “number”. People in the accumulation phase care primarily about their balances going up year after year. They are in “growth” mode.

The Hypothetical Setting:

To make the situation more realistic let’s look through the eyes of a recent college grad called Pablo earning $40,000 a year. Pablo is aware of the need to save part of his salary and invest for the long-term. He just turned 22 and expects to work for 40 years.

Pablo will also be receiving annual 2.5% merit salary increases which will allow him to save a greater amount each year in the future.

The Problem:

Pablo faces two key decisions — what percentage of his salary to save each year and the aggressiveness of his portfolio which in turn will determine its most likely return.

He is conflicted. He has never made this much money before and worries about losing money. He also understands that he alone is responsible for his long-term financial success.

Pablo knows that there is a tradeoff between risk and return but he wants to make a smart decision. His System 1 thinking is saying play it safe and don’t expose yourself to potential loses.

At the same time his rational and informed System 2 thinking is influenced by a couple of finance and economics classes he recently took while in college.

Pablo can succumb to automatic System 1 thinking and invest in a very conservative portfolio. Or he can rely on his System 2 thinking and invest in a higher risk and commensurately higher return portfolio.

One Alternative — Save 10% of his Income and play it safe investing

For simplicity sake assume that Pablo decides to put 10% of his salary into an investment fund. The fund consists primarily of high grade bonds.

From the knowledge gained in his econ and finance classes Pablo estimates that this portfolio should return about 4% per year — a bit below the historical norm for bonds but consistent with current market interest rates.

Pablo also understands that such a portfolio will have a bit of variability from year to year. He estimates that the volatility of this portfolio is likely to be about 6% per year. Again, this estimate is in line with current bond market behavior.

He knows that this is a low risk, low return portfolio but the chances of this portfolio suffering a catastrophic loss are negligible. He is petrified of losing money so this portfolio might fit the bill.

How large will his portfolio expected to be after 40 years of saving and investing in this conservative manner? We built a spreadsheet to figure this out. At the end of 40 years Pablo’s salary is assumed to be have grown to $107,403 and his portfolio, invested in this conservative manner, would have a balance of $575,540. The growth of this portfolio (identified as 10_4) is shown in Figure 1.

Figure 1

Source: Retire With Possibilities

Pablo knows that his portfolio will not exactly return 4% every year. Some years will be better, other years much worse but over the next 40 years the returns are likely to average close to 4%.

But Pablo does not feel comfortable just dealing in averages. If things go bad, how bad could it be?

Given the volatility of this conservative portfolio there is a 10% chance of losing 3.6% in any given year. Not catastrophic but nobody likes losing money.

Figure 2 shows the 90th and 10th probability bands for this conservative portfolio. These bands are estimated based on the expected average return of the portfolio and its volatility.

The actual portfolio return would be expected to lie about 2/3 of the time within these bands. In the short-term, say 1 to 2 years out, the portfolio returns are more unpredictable. Over longer horizons the average return to this conservative portfolio should fall within much tighter bands.

Based on our calculations, the average returns over ten years should range between 6.3% and 1.4% per annum. Clearly, even this conservative portfolio has some risk especially in the short-term, but over longer holding periods returns should smooth out.

Figure 2

Source: Retire With Possibilities

Another Alternative — Save 20% of his Income and continue investing in a conservative portfolio

The final salary would have been the same but his nest egg would have grown to $1,151,080. Pablo keeps looking at Figure 1 (the 20_4 line) and starts thinking that maybe a bit of extra saving would be a very good thing.

He still has a 10% probability of being down 3.6% in any given year, but if his budget allows, he feels that he can forego some frills until later.

Now, Pablo is starting to get excited and wonders what would happen if he invested more aggressively, say in a variety of equity funds?

Yet Another Alternative — Keep saving the same amount but invest more aggressively

The likely returns would go up but so would his risk. He estimates that based on current market conditions and the history of stock market returns that this more aggressive portfolio should have about an 8% annual rate of return with a volatility of around 14% per year.

He is thinking that maybe by taking more risk in his portfolio during his working years he will be able to build a nest egg that may even allow him for some luxuries down the road.

He also knows that things do not always work out every year as expected. He is pretty confident that 8% is a reasonable expectation averaged over many years, but how bad could it be in any given year?

We conducted the same analysis on this equity-oriented portfolio as before. Figure 3 shows the 90th and 10th percentile bands for this portfolio.

Figure 3

Source: Retire With Possibilities

Given the volatility of this equity-oriented portfolio there is a 10% chance of losing 9.2% in any given year. Ouch, the reality of equity investing is starting to sink in for Pablo.

But Pablo is also encouraged to see that his returns in any given year are equally likely to be about 26% or higher. That would be nice!

Especially when it comes to equities there is a wide range of potential returns but over time these year by year fluctuations should average out to a much narrower range of outcomes. While our best estimate is that this portfolio will return on average 8% per year over a ten year window the range of expected outcomes should be between a high of 12.9% and a low of 1.6%.

Pablo decides to research the history of stock, bond and cash returns by reading our April Blog on Understanding Asset Class Risk and Return and looking at a chart of long-term returns from Morningstar (Figure 4).

Figure 4

Source: Morningstar

He is surprised to find that over the long-term equities do not seem as risky as he previously thought. He is also quite surprised by the wide gap in wealth created by stocks versus bonds and cash.

The research makes Pablo re-calibrate his expectations and he starts wondering whether the short-term discomfort of owning equities is worth it in the long run.

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The “Aha!” Moment:

Pablo’s System 1 thinking is on high alert and his first thought after seeing how much he could lose investing in equities is to run back to the safety of the bond portfolio.

But something tells him to slow down a bit and think harder. This is a big decision for him and his System 2 thinking is kicking in. Before he throws the towel in on the equity-oriented portfolio he glances again at Figure 1 to see what might happen if he invests more aggressively.

What he sees astounds him. It is one thing to see compounding in capital market charts and yet another to see it in action on your behalf. Small differences over the short term amount to very large numbers over long periods of time.

If Pablo were to invest in the more aggressive portfolio there would be more hiccups over the years but his ending account balance should be $1,440,075 if he consistently put aside 10% of his salary every year.

If he saved 20% the ending portfolio balance would double in size.

Decision Time — Picking among the alternatives

Pablo is now faced with a tough decision. Does he play it safe and go with the conservative portfolio? Or, does he go for more risk hoping to end up with a much larger nest egg but knowing that the ride may be rough at times?

Beyond the numbers he realizes that he needs to look within to make the best possible decision. His System 1 thinking is telling him to flee, but his System 2 thinking is asking him to think more logically about his choices. He also needs to deal with how much he is planning to save from his salary.

Fear versus Greed:

He needs to come to terms with how much risk he is willing to take and whether he can stomach the dips in account balance when investing in riskier assets. As Mike Tyson used to say, “Everybody has a plan until they get hit in the face”.

In structuring his investment portfolio Pablo needs to balance fear with greed. Paying attention to risk is absolutely necessary but always in moderation and in the context of historical precedents. If Pablo lets his fears run a muck he may have to accept much lower returns.

With the benefit of hindsight he may come to regret his caution. On the other hand the blind pursuit of greed and a disregard for risk may also in hindsight come back to bite him. Pablo needs to find that happy medium but only he can decide what is right for him. Risk questionnaires can help in this regard. Try ours if you like!

Consumption Today versus Tomorrow:

Pablo also needs to come to grips with how much current consumption he is willing to forego in order to save and invest. We live in an impulse oriented society. Spending is easy, saving is hard.

Saving is hard especially when you are starting out. On the other hand, over time the saving habit becomes an ingrained behavior. The saving habit goes a long way toward ensuring financial health and the sooner people start the better.

Will Pablo be able to save 10% of his salary? Or, even better will he be able to squeeze out some additional expenditures and raise his saving to 20%?

If possible Pablo should put as much money in tax-deferred investment vehicles such as a 401(k). He should also have these contributions and any other savings automatically deducted from his paycheck. That way he won’t get used to spending that money. Pablo may come to see these deductions from his paycheck as a “bonus” funding future consumption.

“The greatest mistake you can make in life is to continually be afraid you will make one”

— ELBERT HUBBARD

Lessons Learned:

This has been an eye opening experience for Pablo. He was not expecting such a difference in potential performance. He now realizes the importance of maximizing saving for tomorrow as well as not succumbing to fear when investing for the long-term.

He has learned several invaluable lessons that also apply to individuals in the accumulation phase of their financial lives

Lesson 1: The Importance of Saving

• Delaying consumption today allows you fund your lifestyle in the future
• Saving even small amounts makes a big difference over the long-term

Lesson 2: The value of patience and a long-term perspective

• In the early years you may not notice much of a difference in portfolio values
• Keep saving and investing — disregard short-term market noise and stick to a plan

Lesson 3: Small differences in returns can amount to huge differences in portfolio values

• Seemingly tiny differences in returns can result in large differences in portfolio values
• Compounding is magic — take advantage of it when you can

Lesson 4: The importance of dealing with your fear of losing money

• Letting your first instinct to avoid risky investments dictate what you own will work against you
• Investing involves risk — best to manage rather than avoid risk
• The pain and agony of losing money in any given year is alleviated over the long term by the higher returns typically accruing to higher risk investments

Lesson 5: Investing in your financial education pays off

• Gaining a proper understanding of capital market relationships is an invaluable skill to possess
• Leaning on financial experts to expedite your learning is no different than when athletes hire a coach

Now what should you do?

Avoid all risks, save a lot and watch your investment account grow slowly but smoothly? Or, take some risk and grow your portfolio more rapidly but with some hiccups?

Are a couple of restless night’s worth the higher potential returns in your portfolio?

Also, are you willing to delay some current consumption in order to invest for the future?

The answer depends on you — your needs, goals and especially your attitude toward risk and your capacity to absorb losses.

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If you are looking for additional perspectives to guide you as you formulate your vision check out our Retirement Wealth Checklist.

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If you would like to subscribe to my blog sign up here. Thanks for reading and Pura Vida!

The word retirement either brings tears of joy or looks of concern to people transitioning into this stage of life.

Some people are super eager to put their daily grind behind and look forward to their new life of leisure.

Others don’t quite feel the same. The loss of their identity associated with the role that they have played during their careers is terrifying. You are no longer what you do!

In any case whether happy or sad, retirement is a huge transition for most people. As with any transition the ending of one’s career is usually accompanied by a period of upheaval.

Even those people that so looked forward to retiring find that after a brief honeymoon there is a period of real questioning. In fact, a study by the Rand Corporation has found that 39% of retirees end up going back to some sort of work after two years.

There are many reasons why people may want to un-retire. Maybe they need a little more income? Maybe they miss the camaraderie of work?

Or, possibly they simply did not spend enough time beforehand coming up with their own retirement vision.

Wouldn’t it be better if you just got it right the first time around? Learned from the mistakes of others?

Retirement is a major life transition but many people just assume that things will work out on their own.

But that is not how life works. Why would you leave your life in retirement be dependent on chance?

Planning ahead is key.

After all you might have another 30+ years in this stage in life — wouldn’t you want to avoid some of the most common pitfalls made by people before you?

Learning from the mistakes of others can save you a bundle both in terms of lost time and frustration.

Mistake 1: Failing to come up with a personal Retirement Vision

How you frame a problem makes a huge difference. Research has shown that oftentimes people elect to work on easy problems rather than the real problem at hand.

They take shortcuts and frame the problem incorrectly. They ignore the difficult aspects of retirement such as what to do with all your newfound time and instead focus on issues that are easier to figure out.

They will consult with a financial advisor as to how to manage their assets in retirement but fail to discuss with their spouse or partner their dreams for travel and adventure.

“You’re going to go through life either by design or by default”

– Rick Warren

If you don’t choose your own Retirement Vision you will have to settle for the default option. What is that? Whatever way the winds are blowing. Despite your own unique differences you will be given the “one size fits all” retirement package.

What are you trying to accomplish during your retirement years? What is your ideal of a successful retirement?

For most people, retirement is about personal fulfillment. You no longer need to worry about raising a family or moving up the career ladder. This is your time now, but how will you make the most of it?

What is your own retirement vision and measure of success? If you are only paying attention to money issues you will probably be unfulfilled.

Think broadly about all the components of your Retirement Wealth — your physical and mental health, your social connections, work and passions, your financial security and your desired lifestyle.

All components of you Retirement Wealth are important and must be in sync with each other and be congruent with your fundamental values in life. What 3 or 4 values to you want to permeate your life with?

The first step in optimizing your retirement is to formulate your own vision of success.

• What matters to you?
• What does not and should be dropped?
• What’s the ultimate legacy that you want to leave behind?

“A good solution to a well formulated question is always better than an excellent solution to a poorly posed question”

– Hammond, Keeney and Raiffa, Smart Choices

Are you crystal clear about your bigger purpose and why?

Mistake 2: Not clearly identifying key retirement objectives

To make good decisions you need to think carefully about your fundamental objectives. A decision is a means to an end.

Too many people get lazy and do not spend the time to think for themselves. They do what is expected of them or rely on auto pilot.

If you don’t figure out your objectives in retirement you will end up like driftwood on the Florida coast.

“You made it all up. Now make it up how you would choose”

– Alan Cohen

If you plan ahead and come up with your own “retirement vision” you will be miles ahead of the pack. You will have the necessary direction for creating tangible objectives regarding your:

• Physical and Mental Health
• Social Connections
• Financial Security
• Work and Passions
• Lifestyle

What specific goals do you have for each of these components? All are important but what you value and how much is a personal decision.

For example, are you aiming to play tennis with your grandchildren into your late 80’s? Well, you’ll need to keep your fitness up with a program for cardio, strength and flexibility. You will need to keep score so your memory will need to be exercised on a regular basis. What are your overall health goals?

As people age, social connections become even more important. Have you thought about your circle of “best” friends and family that you can rely on during good and bad times? Have you invested in relationships — after all friendship is a two way street.

Many people focus on their financial security. They go to great lengths to figure out their “number”. Financial security is a pre-requisite to a successful retirement but it is not the only thing that people need to focus on. What good is money if you are sitting at home lonely and bored?

Do you have an idea how you will spend your time in retirement? Try to formulate your ideal day in retirement. Then do it for the next five days and you will most likely realize that you need some structure to your day.

The initial joy of not having anything to do quickly fades into boredom and a search for meaning. Don’t make this mistake — think hard about what activities give you satisfaction and fill your calendar with meaningful work or hobbies.

What is your ideal lifestyle? Is it one of leisure and comfort on the golf course? Or, is it one of adventure and travel?

Will you be staying in your current home or downsizing to a city apartment near restaurants and cultural activities? Do you want to shake things up at home or just keep going as is?

You alone get to make up your own roadmap!

Mistake 3: Ignoring the environment

The best laid plans can go awry if the environment you are in is not supportive. The voices of negativity will always win out.

If your goal is to get extra fit in retirement why would you live in a community where everybody socializes around the nightly happy hour?

If you are looking for mental stimulation would it not be better to live in a community of inquisitive people? Maybe a college town or urban center with loads of cultural and educational opportunities?

Environment does not just reflect your physical location but also your relationships. Have you ever noticed how being around happy and optimistic people has an effect on you?

Self-improvement guru, Jim Rohn, has said that “who you are is the average of the five people you hang around with”. Hanging around depressed and pessimistic individuals will cloud your own perspective on life

We operate in a society where ageism is rampant. Youth is prized above all else while old age is viewed as a burden.

When a person retires from work, the subliminal message is to accept your fate, move to Florida or Arizona and quietly enjoy your golden years on the golf course, enjoying early bird specials, and watching endless hours of TV.

Such an environment is highly unlikely to support a lifestyle of continuous personal growth, giving and graceful aging.

Is the environment that important?

Lots of research has shown that people tend to underestimate the importance of their environment and overemphasize their willpower.

Noted author, Ben Hardy, has recently published a book dispelling the notion that all we have to do is be stronger. In Willpower Does Not Work he summarizes recent academic work showing that willpower alone is no match to an environment unsuited to your higher level goals and ambitions.

Just focusing on yourself is not enough. Your environment must be in sync with your goals and aspirations.

If it is not you will adapt quickly and reflect the environment you are in. In the words of Viktor Frankel “a person can get used to anything, just don’t ask how”

Ready to plan a retirement with possibilities?

Most people retiring today will spend 30+ years in this next phase of life. Transitions can be hard even when properly planning ahead of time. Not planning or thinking about what you want is most likely going to lead to boredom and a generally unfulfilled life.

One of the most effective ways of learning is to look at what mistakes others have made before you and try to avoid them.

Figuring out your higher level “why” and “what” are key prerequisites for your retirement success.

The particulars of how you choose to live your life are less important as long as it is a life of your own choosing.

If you figure out these three things before you retire you will be miles ahead of the pack:

• Your vision of what your retirement will look like
• Your key objectives regarding the components of your Retirement Wealth (health, social, financial, work, passions and lifestyle)
• The type of environment most supportive of your vision and goals

If you are looking for additional questions and perspectives to guide you as you formulate your vision check out our Retirement Wealth Checklist.

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Let’s face it — transitions are hard for everybody. Retirement is no exception. For many people retirement is really stressful.

Your self-identify suffers. You don’t know how to fill your day anymore, you no longer have any good excuses why you can’t go to the gym today, you just feel a sense of loss.

One of the most effective ways to counteract this sense of loss is to prepare ahead of time.

Prepare every detail like Michael Phelps, prepare like you’re giving a TED lecture on your “retirement vision” on front of thousands of viewers, prepare as if your life depended on it! Ah, wait a nanosecond — your life does depend on it. At least if you care enough to enjoy the next 30 years of your life!

Do I have your attention, baby boomers?

Wake up before it is too late or do you want to wait until after you have gone through three bouts of depression before even collecting your first Social Security check?

You know the old saying by Ben Franklin,

By failing to prepare, you’re preparing to fail

Do you have a vision of your ideal day in retirement?

No sweat you say. I would wake up when I wanted, read the paper from front to back (yes, some baby boomers still do this), catch up on ESPN and the latest news from the “swamp”, play some golf, have lunch, relax with friends, go to bed whenever.

Substitute your own version of events and you are all set with your first day in retirement!

What about the second day? Do the same routine? Ok, not too bad so far. Still beats that 2 hour commute and reading through another TPS report (read beat-down) from corporate, right?

What about day 3, 4 and 5? Now, you sense something is wrong. The law of diminishing returns has set in — you are losing interest in playing golf every day and you start wondering what the old gang at work is up to.

You experience some loss. The loss of purpose, the loss of connections, the loss of your daily rhythm.

Who wants to feel like that? Not you, baby boomers. You are doers, right?

Bad news, boys and girls. Before you can be a doer you need to decide what you are going to be doing.

Ouch — that means thinking and planning ahead, right? Is there a pill for that? Unfortunately not, but it all starts with something you are already familiar with — a conversation.

This is not the time to keep your thoughts to yourself.

Interested in getting going?

Don’t you want everybody to be jealous when you retire to a life full of possibilities?

Time to start chatting. Let’s get the conversations going.

Here is the list of who you need to talk to:

1. Somebody that is already retired or even better a whole bunch of them — do you mind if I ask you a personal question?

It could be a family member that you trust or a long-time neighbor that has been retired for a while. These are people that have gone before you and understand the terrain.

Look for a variety of perspectives. Are they enjoying their retirement? What unforeseen hurdles did they have to overcome?

If they could do it over again, what would they have done differently? Did they prepare ahead of time?

Retirees are a resource that you should tap into. You can learn a lot from their wisdom.

2. Somebody at the Social Security Administration — I really don’t want to have this conversation but please don’t put me on hold again!

Find out what your likely monthly benefit will be under the various program terms offered. Will you take early retirement at age 62? How much will you be leaving on the table if you elect to wait as long as possible?

How is the cost of living adjustment calculated? What happens if your spouse has already filed for benefits? Will you have to pay taxes in your home state?

The more you know about Social Security the better choices you can make.

That Social Security check replaces in part that steady work-related income that you have become used to over the last 3 or 4 decades. You will come to love it!

3. Your Financial Advisor — I am here to talk about spending all my money and buying that yacht (just half-joking of course)

A lot of people dread the part of opening up their kimono and exposing their financial parts to a stranger.

Just like we often dread going to the dentist or discussing our taxes with a CPA people need to deal with their fears. It is better to know where we stand than to just obsess over the unknowns.

You might feel inadequate, you might feel judged. You’ll be asked to talk about money matters — Yuk. You really don’t want to be reminded again of that disastrous investment you made in your cousin’s startup or asked about how much money you are spending on going out to dinner and club memberships.

But nothing changes the fact that knowing the state of your financial health is a key part of a successful retirement. Deal with your fears now when you have time to make course corrections.

4. Your Attorney — I promise, I won’t make any jokes this time, they are costing me an arm and a leg given your fees

Do you have the four essential documents — a will, a living trust, a power of attorney, and an advance medical proxy? Do they reflect your current circumstances and wishes?

Again not the most pleasant conversation. You will have to face up to our own mortality. You need to think of this step as partly for you but mostly for your surviving spouse and family.

5. Your Primary Care Physician — ok, I have heard this before (eat better, lose weight, drink a bit less, exercise), now I just have to do it

Get a solid health assessment and plan to maximize the quality of your health. Take some lessons from the Blue Zones where people routinely live into their 90’s. Your health is your wealth as they say.

It’s not really about longevity — what you want is to live in the best possible shape for as long as possible.

Take care of both your engine and chassis. Plan for your overall health — physical and mental.

6. At least three real estate brokers — these people seem so friendly and they always send me the Red Sox schedule for the year

Figure out what your house is really worth should you need to tap into its equity (don’t just rely on Zillow).

You might decide to move to another city or even downsize. Knowing what your likely “net” receipts would be if you sold your home is important as a planning tool.

Also, if you need cash flow in the future and you wish to stay in your home you will likely consider a reverse mortgage. How much cash flow you will be able to generate depends to a large extent on the underlying value of your home.

For most people the value of their home represents their largest source of financial wealth. Having an accurate assessment of the value of your home will give you a much better view of your overall financial health.

7. A retirement or life coach — I have never considered this, but isn’t it great how many new professions the New Economy is spewing out?

A life or a retirement coach can help you stitch your “retirement vision” together. You’ll identify lots of areas where things don’t feel right. Fix them now because these things unlike wine don’t tend to get better with age!

With the help of your coach you can bring harmony to the plan. Addressing your fears is a big part of this exercise. Your retirement coach can make sure that everything is said and explored, not swept under the rug.

You need to feel that this is the right decision and that you and your spouse are ready.

8. Your spouse or life partner — the dreaded, honey, we need to talk

Sounds a bit scary, right? This is probably the most important conversation of all. Most likely this won’t be a one and done, but will involve a series of conversations.

Your partner could have wildly different expectations of your golden years. Some of the questions that you both should answer are:

• Where do you want to live?
• Who do you want to spend time with and how much?
• What is on your bucket list? Things you must absolutely do before you die.
• What is your comfort level with the finance or money side of retirement?
• What are your biggest fears?

It takes two to tango — retirement as a couple is a huge transition. In fact according to the Holmes-Rahe scale, retirement is the 10th most stressful event that people experience during their lifetime.

Making sure that your individual visions and expectations are aligned is very important. Discussing your fears is a critical part of this conversation.

9. Yourself — it’s back to Me, Myself (Minus Irene)

Like in the Jim Carey movie, you will find yourself talking to yourself. Just don’t do it in public. Maybe best to journal this one.

Are you mentally ready? Are you transitioning to a desirable lifestyle or are you simply making decisions based on your chronological age?

Have you sat down and thought deeply about what type of life you want?

What will your obituary say after spending 30+ years in retirement?

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Has your view of retirement changed based on your conversations?

I hope so or at least that these conversations have clarified what matters to you and your spouse/partner. After all retirement is a team effort.

Do you have that sense in your gut that the time is now? Do you feel prepared for this transition? Or maybe you need things to settle a bit and come back to them.

Maybe your vision and that of your partner are at odds? A retirement coach might be able to really help out.

Are your finances in order? Open up to your financial advisor and have them design a retirement strategy where your financial assets are aligned to your “retirement vision”.

Your retirement could last almost as long as your work life. Make it work for you and your loved ones. Plan ahead and retire with possibilities!

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The last couple of weeks have been tough on equity investors. Stock markets around the world have been down big, then up big — a real roller coaster of a ride.

After going up in a straight line over the last year equity markets suddenly went into a tailspin in early February. Going through an equity correction is really scary!

First, inflation was blamed for the market volatility, then it was the “memos” (one a total vindication, the other too long to show the public), and finally it was all the old standby of sellers outnumbering buyers.

Never mind all these rationalizations of the equity market correction. Nobody knows for sure, but one thing we can all agree on is that stock market corrections are scary and leave us with a pit in our stomach.

Investors have been taught that risk and return are tied together. No risk, no return. But somehow we all love that supposedly “free lunch” when markets go up in a straight line like last year. We feel smart and invincible.

Corrections make us feel dumb, but are we really any dumber than the day before?

We should have sold those high flying stocks that Cousin Vinny recommended last year. What about those growth mutual funds in our 401K? We all experience that uncomfortable feeling that we should have known better.

These are perfectly normal feelings, but stop beating yourself up. Nobody has a crystal ball telling them when the next correction is coming!

Don’t hold yourself up to a ridiculously high standard that even the experts can’t reach.

So, what can you do when the Bear rears its scary head?

Three things.

First, control your emotions. Calm yourself down — find your emotional equilibrium.

Second, analyze the type of correction you are in. Do your homework.

Third, come up with a game plan. Doing nothing is but one option.

Right brain, left brain, action.

The first step — control your emotions

Put the right side of your brain to work. Controlling your emotions is critical especially when there is nothing you can do about the situation.

Stock market corrections often come out of nowhere, but we beat ourselves up believing that only an idiot would have not seen the coming train wreck.

Stop right now! Stay calm, focus on the good in your life and realize that money lost or gained in the stock market is only as good as what you intend to do with it.

Money lost in a correction is what economists call a sunk cost. Despairing, feeling bad about what you should and could have done solves nothing. The market certainly does not care and neither does anybody else.

Being reactionary and selling all your stocks at the first sign of trouble requires a magician’s touch.

So, best to remain calm and find your emotional center.

Corrections don’t always turn into prolonged periods of despair and many times are short lived.

That is where doing your homework comes into play.

The second step — analyze the type of stock market environment you are in.

Not every correction turns into a nasty bear market like 2008. Most corrections last one or two weeks. Some, unfortunately last a bit longer.

Knowing what type of correction you are in is important. Nobody will come down from the sky and give you the answer.

But you are not totally at the mercy of the gods either. That would be a cop out. No excuses — put the left side of your brain to work.

You can do your homework. Read, listen, analyze and digest recent events.

Do this one trick. Go back a couple of weeks before the crisis and read what market strategists were saying at that time. If all was rosy back then, ask yourself what has changed in the last couple of weeks.

If something significant has changed such as the country entered into a war or the economy has collapsed, then some apprehension is probably justified.

If nothing has changed, then the truth is that nobody knows what has caused the stock market to react this way. It could be a lot of things, but “I don’t know” is probably the most intellectually honest answer.

Generally speaking, there are three types of stock market corrections.

• Technical — this type of correction typically comes out of nowhere and takes market participants by surprise. One bad day for the stock market turns into 2 or 3 in a row and soon enough there is an avalanche of pundits predicting the next global crisis

Technical Corrections tend to last only about a week or two. In the context of long-term capital market history they barely register to the naked eye. Boom they are gone, and people quickly forget what they just went through.

• Economic — caused by the business cycle, i.e., periods of economic expansion followed by recession and eventual recovery

Typically, the clues as to whether the economy is heading into a recession are present ahead of time.

Usually a large number of economic indicators will point in the same direction. For example, confidence surveys start showing some downward trends, and layoffs start accelerating in cyclically sensitive sectors of the economy.

• Structural — these are the most severe type and involve periods of real economic and financial stress. Something has gone off the rails and stock markets are the first to feel the brunt

The integrity of the entire economic and financial system is at stake. Without decisive fiscal and monetary policies there is a risk of total economic collapse.

Figuring out whether the stock market is in a technical, economic or structural correction has important implications for your financial health

Do you think that we are on the verge of another crisis such as the one back in 2008? Then, unfortunately, you are in a structural correction. Take cover.

Do you think that the economy is slowing down and that we are on the verge of another recession? Then, you are in an economic correction.

Is this correction a total surprise and nothing make sense? The economy is OK and until recently everybody was confident. Then, most likely, you are in a technical correction.

Each type of correction calls for a different response. Time to act.

The third and final step — take action

One option always available to investors is to do nothing. But doing nothing should be based on what your homework says.

Doing nothing is a good response only if you concluded that you don’t get what’s going on and that things seem pretty much the same as before the crisis.

In other words, doing nothing is just fine if you concluded that the equity market is in the midst of a technical correction.

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But what if you concluded that the world economy was close to collapse? Under this scenario which by the way has happened only twice in the last century, you should take immediate action.

If your analysis points to a structural correction, watch out. Things will be getting much worse before they recover. And the recovery will take a long, long time.

In a structural correction, it’s best to sit with cash or hard assets such as gold, farmland, timber— anything but stocks.

Selling everything takes guts not to mention a lot confidence in your ability to predict doom and gloom economic scenarios.

Total economic collapse is a rare event in the context of global economic history. The 1929–39 Great Recession comes to mind. Most recently the 2008 Financial Crisis could have turned out much worse had monetary policy not been as aggressive.

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Finally, what if your conclusion was that the economy was headed for an old fashioned business cycle recession?

Economic recessions luckily don’t appear overnight. The evidence slowly builds up.

First, it is anecdotal evidence. The local mom and pop store down the street closing down. More “For Sale” signs around your neighborhood and stories of people losing their jobs.

Then, the evidence appears in the hard economic numbers. Unemployment claims trend up, retail sales start lagging, etc. This is the stuff that the Wall Street Journal loves reporting.

If your homework points to an economic correction don’t panic. Safer assets such as bonds hold their value much better than stocks during the early phases of a business cycle correction.

Stocks tend to do poorly at this stage as companies struggle maintaining their profit margins and revenues usually take a dip.

No need to panic especially if you are a long-term investor. Do two things.

One, lighten up a bit on your stock holdings. If you got a bit greedy and let your stock investments run during the bull market bring your holdings back to a level more consistent with how much pain you can endure as the equity market winds down.

Second, focus your investments on sectors that do not rely to any large extent on economic growth. People still need to eat, right? Food companies, personal goods, basic necessity, and utility companies tend to hold their value during recessions.

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Conclusion:

Equity market corrections are never pleasant. How you react to them could greatly affect your financial health.

But playing the victim is not a choice. I recommend three steps to gaining control over the situation.

• First, calm yourself down. Regain your emotional equilibrium.
• Second, determine what is really going on in the economy and markets. You don’t need a PhD to do this — common sense and a level head are much more important. Figure out whether you are in a technical, economic or structural correction.
• Third, be conscious about making a decision. Maybe you don’t do anything at all. Maybe you dump all your equities. Or, maybe you do something in between. Take action based on your homework. You might not be right, but you have at least done the best you could!

Make your money work for you — your goals, your aspirations — it’s your life after all!

Be proactive about your financial health — it’s a big part of your life.

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If you are interested in a more in depth discussion of this topic please click on my original article, Corrections, Recoveries and All That Jazz.

None of this shall constitute an investment recommendation. Consult your wealth manager if you need help.

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If you are a portfolio manager or fund analyst I feel for you. You are under attack — some of it is justified, some of it is ignorance. All you read about these days is how bad your mutual fund manager is. You can’t even beat a Vanguard ETF. Unfortunately, I am not here to defend you as I am not writing this for professionals.

I am writing this for regular people too busy in their normal lives to pay much attention beyond the headlines — all of you non-financial people, you know who you are.

• The Gen X couple investing in their 401K’s without much guidance and sweating it out during periods of market turbulence.
• The baby boomers wondering if they have saved enough to enjoy a dignified retirement.
• The young parents stretching their finances to fund their kid’s college education.

Just to be clear, I am not writing an expose on the active fund management industry. If I had National Inquirer pictures, I would. But in my 3 decades in the business I have not come across many Harvey Weinstein’s.

For now, I am going to share with you several off-the-beaten path insights gleaned from my 3 decades in the investment business.

These insights will not make you rich on their own but will raise your financial IQ.

You will better understand what you are getting yourself into when, say, picking funds.

Without a doubt, you will learn to avoid making investment decisions based on some preconceived ideas that don’t hold water.

I love my work as an investment professional. It’s a craft I have been perfecting for a long time.

I have learned a lot about capital markets, investment strategies and above all else human nature especially the oftentimes complex relationship that otherwise normal people have to their own money.

One of the most difficult emotions that people struggle with is buyer’s remorse. In today’s world, most people have are left to their own devices when say picking funds in their retirement accounts. A lot of individuals are ill equipped for this task as they often rely on a set of assumptions that often do not conform to reality.

Naturally with so many people bashing mutual fund managers these days you might be having some second thoughts about your own investments. Am I doing as well as I should? What am I even invested in?

Especially when markets get volatile people start having buyer’s remorse — why did I put my 401K in this and that investment strategy? I could have done so much better if I had just picked that growth fund recommended by my neighbor. She seems smart!

Everybody is doing well so why is my portfolio not growing? It must be that the funds I picked are terrible. Dam, I should have never listened to my cousin Vinny!

Sure, there is a deluge of information online with fund factsheets and all kinds of pretty charts but without being on the inside how would you know what happens in the factory? Who has time for this?

You might have an idea, but there is always a bit of distortion when looking from the outside in. You can see some things with clarity but your view is often obstructed or the light too dim to make out much of anything.

Most individuals are not financial experts and often hold a lot of misconceptions about their investments. These misconceptions can have long lasting negative effects on people’s financial well-being

Becoming a financial expert does not happen overnight and it certainly does not happen by osmosis. You are probably already over-booked with work, kids, a new boss, fixing that kitchen, aging parents, … and now you also have to worry about picking the right funds in your 401K or you will end up eating cat during your golden years in Pensacola?

We all have these gaps in understanding and fears when dealing in areas beyond our expertise. The vast majority of people are not financial experts, but for some reason many have opinions that are often at odds with reality.

From the idea that investing is easy and anybody can do it. To the idea that everybody in the financial industry behaves like Charlie Sheen. Wall Street versus Main Street, bulls versus bears, …

I would like to share with you some of the lessons I have learned as a fund manager over the last 3 decades.

None of these insights will make you immediately rich — for that try Bitcoin or Mega Millions if you don’t mind blowing it all at ounce.

But my insights will allow you to make more informed investment decisions that will have long-lasting positive effects on your financial well-being.

Here it goes — my 7 key lessons to make your investment IQ skyrocket and allow you to gain greater control over your financial future

1. Portfolio managers in large investment houses are highly educated and smart but unfortunately the market does not care

Everybody is smart and that is the problem. Out-performing is hard precisely because of how smart and informed portfolio managers are. Everybody is competing harder and harder. For every winner, there is a loser. Net, net the competition has become fiercer as more people have entered the investment business.

When funds under-perform the blame is on the portfolio manager and when the fund out-performs it is all about the genius running the money. But if you talked to the portfolio manager of losing versus winning funds you probably would find both highly educated, smart and well informed.

Lesson — don’t pick managers based on how smart they appear on TV or the number of degrees on their resume. The proof is always in the pudding — performance matters, looks and book smarts don’t.

2. The expense structure of many mutual funds makes portfolio managers look bad

Why? Because the average expense ratio for most funds is north of 1%. Some fund categories such as foreign stock funds are even higher at 1.5% according to the Balance.

Right off the bat, portfolio managers have to out-perform by at least their expenses (say, 1%) to break even compared to market indices such as the S&P 500 or the Down Jones.

It might not sound that hard but keep in mind that the average historical equity market return is 10% a year. Making up that 1% cost differential is hard in relation to market returns.

Lesson — fund expenses matter a lot. Fund expenses are disclosed upfront so there is no excuse for picking high expense funds unless the return is commensurate.

Fund expenses are determined way up the food chain and the portfolio manager does not have any control over the matter. As the say, don’t hate the player, hate the game. Pay attention to fund expenses and costs.

3. Most fund companies do not allow portfolio managers to hold much cash in reserve

For an equity manager the number is in the range of 2 to 4 %. In my own experience, anything higher results in a call from the internal compliance police.

It is rare to see equity or bond funds hold much in cash. When you do it is usually in a smaller fund or a privately held fund company. For most of the industry the amount of cash held in funds is minimal.

According to Morningstar the average US equity fund currently holds 3.2% of assets in cash.

Why does this matter? The easy answer is that the ability of portfolio managers to play defense during difficult market environments is limited because they can only hold a very small percentage of fund assets in cash.

For example, lots of fund managers complain about equity markets being over-valued and at risk of a correction. But if you don’t have the ability to place a good chunk of fund assets into cash how can you protect the portfolio from falling along with the rest of the market during a correction? If you don’t believe me look at how many funds fell apart during the 2008 Financial Crisis.

Lesson — don’t expect your fund to play defense unless it is explicitly part of their strategy.

Some funds are designed to offer downside protection but these funds are seldom found in say 401K investment menus and represent a tiny fraction of the fund universe. Most of them have failed to deliver or they lag some much when markets recover making them at best short-term tactical holdings.

The best protection against periods of market stress is an asset allocation strategy designed for you– do not expect your equity or bond fund to save you during a market meltdown

4. Fund managers are not incentivized to care much about your tax bill

I have never seen a fund management compensation structure that rewards portfolio managers for saving taxes.

Who’s taxes anyway? The tax picture of a 75 year old retiree in Florida is very different from that of an up and coming biotech researcher in California.

Very few portfolio managers get rewarded based on their after tax performance. Some funds are designed to minimize taxes, but the universe of such offerings is small. If interested search for “tax-managed” funds in Morningstar.

Lesson — if taxes are a serious concern for you, do two things.

First, optimize your asset location. What does this mean? You should hold funds with higher potential tax obligations in tax-advantaged accounts such as 401K’s. If you are already maxed out in your tax advantaged accounts, put funds with lesser or minimal tax exposures in taxable accounts.

Second, some fund structures are inherently more tax efficient than others. For example, the taxation governing mutual funds is less advantageous than that of exchange traded funds (ETF’s).

ETF’s, in general, are more tax efficient than mutual funds. Assuming similar strategy risk and reward, pick a fund structure that is more tax efficient. The tax savings will compound nicely over the long-term. More money in your pocket. Who doesn’t like that!

5. Actively managed mutual funds used to be the only game in town but ETF’s have joined the party

Mutual fund managers have been under attack for close to 2 decades. The heyday of the active equity fund dates back to 1999 when the Technology, Media and Telecom bubble was in full swing.

From an investment perspective, the key difference between mutual funds and ETF’s hinges on the role of the portfolio manager in selecting securities for the fund.

The vast majority of ETF’s mimic the holdings of an index such as the S&P 500 or the FT 100. An index is nothing more than a listing of stocks with associated weights. Unbiased service providers such as Dow Jones or Russell use a defined set of rules to arrive at such a list.

In theory, anybody can replicate an index. That is what ETF managers do — nothing more and nothing less than build a portfolio with the exact stocks in the exact proportions. They do not deviate. There are no sex symbols in the ETF industry!

ETF’s are un-managed in the sense that there is no stock picker or bond manager making active decisions. Because of this, the fees are typically several orders of magnitude lower than those charged by mutual funds. For example, the SPY ETF which mimics the S&P 500 has an all-in expense ratio of 0.09%. Most active mutual funds are over 1%.

In contrast, an active mutual fund manager will consciously deviate from the index in an attempt to out-perform. They may, for example, emphasize cheap stocks or try to find the next Amazon or Google.

Active management funds charge higher fees in return for the prospect of higher than index performance. When active funds outperform the index, the extra costs of these funds are worth it and everybody is happy.

When active funds under-perform, buyer’s remorse sets in and you have the same feeling as during a long winter in Seattle! Very low…

Up to the mid-2000’s ETF’s were small fry in the industry but the growth especially in the last ten years has been spectacular. Investors have been moving aggressively out of actively managed funds into ETF’s.

The most recent Investment Company data shows ETF’s in the US with $2,524 Billion in assets while mutual funds held $16,344 Billion. Mutual funds still dominate, but ETF’s have joined the party.

Lesson — ETF’s are legitimate alternatives to mutual funds and you should consider them. You should also measure the performance of your mutual fund versus the appropriate low-cost ETF.

For example, if you have a large cap US equity mutual fund in your 401K compare its performance versus the SPY ETF. If you own an emerging market equity fund compare its performance versus the IEMG ETF.

Mutual fund rankings relative to peers only confuse the issue. The number of Morningstar Stars or the latest Lipper rankings are niceties. If you have the option of owning an ETF similar in strategy to that of the mutual fund, the comparison should be relative to the ETF. Find that clarity!

6. The fund name is not always a good descriptor of what the fund owns

This happens when the securities that the fund owns are no longer representative of the stated aim and strategy of the fund.

How can this happen? We have something that people on the inside call style drift. Style drift happens when the characteristics of the securities held in the fund have changed.

For example, the EJW Small Cap Value Fund (purely hypothetical) may have been so successful that its stocks appreciated wildly. All the stocks went from small to large capitalization (capitalization refers to the size of the company).

At the same time assume that the stocks went from being cheap (hence the word Value in the fund name) to expensive. There is a dis-connect between the name of the fund and the type of stocks that the fund now owns. Your fund has become the victim of style drift!

Lesson — always know what your fund owns. Do your basic research by going to, say, Morningstar to get an updated view of your fund holdings.

At the very least you should understand your fund’s economic sector and geographic exposures, its capitalization (large, mid or small), and its style characteristics (value, blend or growth). Why? Because these characteristics can have a huge influence on returns.

Does your understanding of your fund’s strategy match up to what the numbers are saying? If yes, you have done your basic homework. If not, sprint away and choose a fund that you understand.

And if you don’t understand any of this, buy a low cost ETF such as SPY (US Stocks) or AGG (US Bonds).

If you can’t tell a stock from a bond go even simpler and buy an ETF that combines both such as the AOM ETF.

7. Fund selection should be done only after you have figured out what type of overall portfolio best matches your goals and risk profile

A mouthful, I know. But actually the most important insight that I can share with you. Your financial health is at stake.

Smart investment decisions are not just about picking this or that fund. Low cost does not matter if the fund or ETF you picked makes you wake up at 3 AM in a pile of sweat. Similarly, being too cautious may be doing you more harm than good if your retirement nest egg fails to keep up with inflation.

Picking funds or ETF’s is a significant component of your financial health, but it is a distant second in importance to first figuring out what you are trying to accomplish with your money and how you feel about the inherent risk of investing

Everybody is unique in this regard. Even long-term partners can sometimes find themselves at odds when first discussing their goals and expectations.

And, it doesn’t get any easier when the discussion involves your feelings about the inevitable ups and downs created by market swings.

Lesson — before you pick any funds or ETF’s know yourself and your partner.

What are you trying to accomplish? How comfortable are you watching the fluctuations in your investment account? Are you confident of making informed financial decisions on your own?

At a minimum, figure out what proportion of your portfolio should be in stocks, bonds and cash reserves. This is a process called asset allocation and accounts for over 90% of the fluctuations of your portfolio. This is really, really IMPORTANT!

You can start with a free online tool such as that from Vanguard, but if your financial situation requires a bit more fine-tuning or some complexity the best starting point is to see a fee-only financial advisor.

Make your money work for you — your goals, your aspirations — it’s your life after all!

Be proactive about your financial health — it’s a big part of your life.

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None of this shall constitute an investment recommendation. Consult your wealth manager if you need help.

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