There is a major issue in your retirement savings plan: GMO

Americans nearing retirement are shocked. Unsophisticated “McMoney” accounting consultants told them that bonds were secure, steady, and reliable and that balancing stocks and bonds was fine in all scenarios.

To their dismay, none of these things are true in January. GMO analysts James Montier and Martin Tarlie wrote a report explaining why these assumptions are erroneous, how they might harm our retirement accounts, and what we can do.

If financial planning had an anthem, it would be “Let’s Do the Time Warp Again.” Planners develop client portfolios using old, outdated ideas. Portfolios are designed using 1952 technology and 1970s assumptions. According to a 50-year-old methodology, today’s retirees face huge portfolio risks.

These techniques are “Random walk” assumptions — market simulations. Assuming stock and bond fund returns don’t affect past performance. Montier and Tarlie debunk it. Valuations, which are based on current performance, affect future returns. Ascending must descend. Buy low, sell high.

Why presume random returns? They may question you if you don’t have orange-and-brown shag carpeting, an avocado green bathroom suite, bell-bottom jeans, or pork chop sideburns. Okay. Expect a slump if stock prices rose faster than profits, dividends, or economic growth over a decade. After a decade or more of Fed manipulation, bond prices may have risen. Financial journalists and specialists are “shocked, astounded” by the decrease in bond prices this year. Bond index funds have lost 10%, including the iShares Core U.S. Aggregate Bond Index ETF AGG, -0.35% TIP, -0.25%, and VAIPX, +0.40% have dropped roughly 9%. Long-term Treasury bonds dropped 30% today. This is the worst bond market since the 1970s. Some say it’s worse than the 1840s.

The typical “60/40” portfolio of 60% stocks and 40% bonds has lost a disastrous 16%.

Should we be surprised? Bonds enable: Price rises reduce yield or interest rate. After a generation of rising prices and falling yields, bonds entered 2022 more expensive than ever. If you purchase a 10-year Treasury bond on January 3, 2019, at a yield of 1.6% and hold onto it for ten years, I can tell you how much you will have profited.

Even if 10-year Treasury bonds have returned 5% annually historically, this is immaterial. Investing in a 10-year Treasury bond with a 5% starting yield is the only way to earn 5% yearly compounded.

TIPS are much more straightforward. Through a clever computation, annual returns are adjusted to match the consumer-price index, assuring a “real” inflation-adjusted yield beyond what inflation would offer. 10-year TIPS yielded 1% less than their nominal rate to start the year. Investing in the bond for ten years would reduce your purchasing power by 10%(without extra fees).

Error-free. Definitely. If you could earn a profit instantly, you may have traded commodities. Such enterprises’ capital loss shouldn’t have shocked investors. TIPS with a negative “real” yield were worse than cryptocurrencies. TIPS could not be held to maturity to increase wealth. The math didn’t work.

“Investors” bought Treasury bonds with 1.6%-2% yields in January. 1-year bonds yielded 0.4%, 10-year bonds yielded 1.6%, and 30-year gave 2%. When did inflation peak? It’s 7%. Burning money is a waste.

My friend was new to financial advising. I warned him to avoid “confiscation certificates.” Falling stocks are less predictable. Bonds weren’t appealing.

Valuation, growth, and yield affect equity returns, argue Montier and Tarlie. Return generator characteristics. Easy math. They use 1890s stock market data to verify it. U.S. stock prices have risen for 15 years.

Montier and Tarlie emphasize advisor risk. Risk isn’t volatility. Retirement poverty is “ruin.” “Putting it all together, you get a harsh judgment of how the financial planning industry helps folks prepare for retirement, including simplistic “glide pathways” given by a sector whose main goals are to collect assets and avoid being sued. The challenge is replacing or adding to it. Montier and Tarlie provide two possibilities.

The first is a “glide path” that avoids pricey equities and bonds. The GMO warned for years about inflated U.S. equities, but it was too early to act (and at worst, plain wrong). The probabilities favor their second idea. Reduce long-term bonds for equities and “short-term bonds” like Treasury bills or near-cash. When bonds are pricey, the short-term paper may be safer.

Warren Buffett and Andrew Smithers recommend Treasury bills or short-term bonds to complement equities.

Even minor exposure to commodities (through futures funds like DBC or resource stocks funds like GNR) may help diversify a portfolio. Simple models with basic assumptions shouldn’t be trusted.

Contact Information:
Email: [email protected]
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Bio:
Rick Viader is a Federal Retirement Consultant that uses proven strategies to help federal employees achieve their financial goals and make sure they receive all the benefits they worked so hard to achieve.

In helping federal employees, Rick has seen the need to offer retirement plan coaching where Human Resources departments either could not or were not able to assist. For almost 14 years, Rick has specialized in using federal government benefits and retirement systems to maximize retirement incomes.

His goals are to guide federal employees to achieve their financial goals while maximizing their retirement incomes.