You would not know it from the mainstream financial services industry, but investing today is as easy as it has ever been and can be extremely inexpensive. And while retirement planning does have several moving parts and a few decisions to be made, it too can be made rather simple.
In order to know what to do, though, it is sometimes important to know what not to do. And that is the case in investing because the financial industry has cultivated confusing and sometimes misleading folklore and myths. The four topics below deserve focus and attention.
"Safety-Net-Plus" is our strategy to balance both the risk of market volatility and the risk of not having enough. With this approach, the investor defines the minimum amount of income desired during retirement. The investor then chooses no-risk investments to cover that minimum income amount. All other investments are placed in broadly-diversified, low cost stock funds. With the income from the safe investments designed to cover the minimum income required, the more uncertain stock investments seek to cover the remaining desired income without putting the minimum income in any risk.
As described in the Safety-Net-Plus investment strategy, our approach does not use the mean-variance optimization model used by most investment advisors to select an asset allocation. That model does not create a meaningful allocation for the investor, but an illusory one based on manipulated inputs and constrained outputs. Investors will find an improved and more understandable balance between reward and risk by following our Safety-Net-Plus approach to investing.
Portfolio rebalancing is the process of buying or selling assets in your portfolio to maintain your original asset allocation. The financial services industry and folklore has suggested that it results in higher returns and is an effective risk control measure. These myths, though they are unprovable and have been soundly refuted, surprisingly continue to be an integral part of the bedrock beliefs, practices, and recommendations of almost all financial advisors.
Tax-loss harvesting is the process of selling stocks in your portfolio that are priced lower than you when you bought them in an effort to enhance after-tax investment return. Though many advisors claim investors can achieve a 1-2% annual benefit in after-tax performance. In fact, while investors may realize a slight benefit (less than .2%) if tax rates stay the same, increased future tax rates could result in either no benefit or even in losses.
Our goal is to make investing and financial planning as simple, effective, and inexpensive as it can be. We have spent our professional lives in banking, credit, financial planning, investment management, insurance, academia, financial mathematics, and more. Compendium Finance is an SEC Registered Investment Advisor.
We provide the investment-related advice offered through the plynty app. Using our advice, plynty users can see where they may be heading and make decisions and changes along the way to improve their future. plynty identifies roadblocks to success such as damaging and unnecessary fees and costs. plynty helps users quantify the long-term effects of their choices along the road to retirement, including when to retire, when to file for social security benefits, how much income to expect, whether to take a part-time job for a few years, and more.