Wolfe Kobes Journal
Journal April 2022 - Fear of Failure and Too Much Choice?As financial planners, our most challenging puzzles are surrounding the issues of fear and too much choice. Boston College has a wonderful resource for Retirement Research. Some recent studies linked below provides good unbiased research of various challenges. Framing suitable assumptions on spending, long term care insurance or funding and spending resources at retirement are particularly impactful for financial planning success.
Do Retirees Want to Consume More, Less, or the Same as They Age? (bc.edu) https://crr.bc.edu/wp-content/uploads/2021/12/IB_21-21.pdf
What Level of Long-Term Services and Supports Do Retirees Need? (bc.edu) https://crr.bc.edu/wp-content/uploads/2021/06/IB_21-10.pdf
Would 401(k) Participants Use a Social Security "Bridge" Option? (bc.edu)https://crr.bc.edu/wp-content/uploads/2022/01/IB_22-2.pdf
The quandary of too much choice is also apparent in investment strategies. Recent studies show too much choice sometimes leads some to a simplification of solution. This is well documented and as we get overwhelmed, our brains attempt to simplify. As fiduciaries, it may appear we confuse with too many options while salespeople without fiduciary responsibility, may lead you to a one choice solution. Fear combined with choice can also lead us to recency bias in our decision making on investing – price momentum may lead you to investments that have worked lately but may not lead you to the best overall consistent return with well diversified strategies. We are suffering through some real changes in assumptions lately.
Assumptions that warrant a review.
1. Inflation. Significantly higher than the past 14 years – creates a challenge to all investment strategies. How to apply most recent increase to a long-term rate. Stress testing inflation on the spending and the investment strategy may prove beneficial.
2. Interest rates. The most recent policy change and the comments from the Federal Reserve Board indicate that all costs relating to financing will likely rise. Mortgage rates have jumped in the past month creating a higher cost to home ownership for many.
3. Stocks. How different sectors, industries and companies manage the above impact items will differentiate earnings in the future. The cause and effect of this may surprise investors.
4. Cash. Even holding cash for now is a loss of purchasing power. We hope that the rate increases to cash equivalents will combine with lowered inflation will lessen the loss of purchasing power.
5. Illiquid investments. These may or may not be best times to “lock in” on guarantees as investment returns will be compared to the long-term eventual inflation rate. Annual returns of 3% looked good when inflation was at 2% -- however it is “losing” with inflation at 4%.
Fear can lead us to make impulsive and sometimes simply irrational investment decision. We caution our investors to contemplate and hold large financial decisions for a 24- or 48-hour rule and warn against larger changes based on “headlines”. Our philosophy of well contemplated investment decision with balance typically avoids big errors and keeps all investors humble and honest in assessing strategy.
Stagflation, bond math and taxes. Can the news get better?
Constructively we are all just deep breathing for the stress level of the pat few years. These past years test our resiliency and general perspectives.
Stagflation – oh my this goes back to my early days in my career. GDP growth slowing while inflation impacts the price of all goods and services is not the best situation. The strange sequence of events of the past few years suggests a step back from the headline and revisit our own actions that support economic growth. Seventy percent of our GDP growth is the impact of consumer and consumption. Like post 9/11 in 2001 –more likely we will be spending more on travel, fun, dining out than the past two years and the conclusion is that we can take this latest news with some grain of salt. Conclusion – do not read too much into this (yet).
Bond math. Worst bond market in 20-30 or 50 years? What? The issue of the impact of talking up rates vs. what is really happening out there is very challenging for most investors to understand. Essentially if the bonds you hold provide a 3% coupon (rate of annual interest payment) for the next five or years but that the environment may provide a 4% or higher coupon on new bonds -then simply your 3% bond is worth less. The impact of “trades” effect pricing services on all bonds – unfortunately, all bonds have been repriced for the assumed higher rates. With inflation at 40-year highs, we suggest perspective on this as well. For now, holding bonds and collecting interest to offset that price hit may be considered. Liquidating bonds at this point in the cycle removes that interest income.
Taxes. Last year, we had some interesting comments and concerns of individual tax policy change in the works last year which never became reality – recall changes in gains tax, income tax etc. never made it to final policy. Taxes post tax season are never a happy topic to revisit but if you paid in more than you anticipated in 2021 tax filing – the IRS has created a very nice tool to check your withholdings and can help to estimate better to avoid tax bill surprises.
Finally, deep breathing is a good technique for managing stress. Money stress is rampant with inflation, markets but keep in mind, life can be much worse as we watch in real time the suffering in Ukraine. Perspective is an important reminder for all! News can improve from here – inflation may likely taper; ceasefires may occur and economic recovery may improve.