Money back is better than money back

Years ago, I read Charlie Ellis’ investing classic, “Winning the Loser’s Game,” and liked it so much that I reread it. My copy was the fourth edition, and its latest version is number eight, so it’s time to check out the new one. Ellis has taught at Yale and Harvard business schools and currently serves on the Yale investment committee.

Smart people change their mind when it’s warranted. When someone doesn’t, it’s often a dead gift. Speaking to the British House of Commons, Sir Winston Churchill refuted one critic: “To improve is to change, therefore to be perfect is to change often. (June 25, 1925) In a recent blog post on Humble Dollar, Ellis admitted that he misjudged asset allocation. To properly assess, you have to consider everything, how they interact and how important they are. For decades, he had looked down on his investments.

Let it penetrate. One of the brightest minds in the investment world has admitted a mistake.

Specifically, most of us don’t take all of our assets into account when making financial decisions. For example, we ignore Social Security, a large fixed income asset, as well as a pension if you are lucky enough to have one. Also, while a house is undoubtedly a durable consumer good, it can be a source of wealth. Young professionals may have little wealth, as is traditionally measured, but their earning potential can be enormous. Finally, although Ellis did not mention rental property, an income stream from rental property is similar to bond income. According to Ellis, we may be over-allocated to fixed income securities such as cash, bonds, CDs, bond funds or bond ETFs.

Ellis makes a good point, but here’s a rebuttal, at least partially. The net present value (NPV) of Social Security benefits would likely surprise many people. Yet the NPV changes with adjustments in cost of living, longevity and expected returns. Moreover, it is not an asset that you can pass on to another generation. We all know people whose retirement has been enhanced by the appreciation of home, but if you need $ 5,000, you can’t cut the porch.

Doctor Ellis is right; home value, benefits, and earning potential don’t fluctuate like stocks, and that’s part of the problem. Assuming a life expectancy in the early 1980s, the NPV of Social Security benefits for an average earning couple is over $ 700,000. Given typical retirement balances and that number, most people would be 100% invested in stocks, but very few can handle that much volatility. So, before integrating Ellis’ strategy, consider your emotional tolerance for portfolio volatility.

Nothing is more difficult than seeing hard-earned money disappear. The S&P 500 was in the red from 2000 to 2009. If you were working it was background noise, but if you were making portfolio withdrawals it was unsettling. Also, unless Congress increases taxes, cuts payments, or covers general revenue benefits, the Social Security trust fund will only pay 79% of planned benefits in 2035. Remember that the return of your money is more important than the return of your money. Once you have won the game, stop playing. This is why the teams are forming for the victory.

You can’t always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or go to 2050 West County Highway 30A, M1 Suite 230.

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