The S&P recently released a study showing how the index beat active managers over the last 15 years. This attention to index investing may be diverting retirement savers from their real goals. “The media’s focus on market returns is highly distracting,” says Dana Anspach, Founder and CEO of Sensible Money, LLC in Scottsdale, Arizona. “Your money should be invested in a particular way because it gives you the highest likelihood of achieving your goals. That has nothing to do with what the S&P 500 did in the last week.”
No doubt financial professionals all agree with this sentiment, but it begs a far more important question: Are retirement savers aware of the retirement requirement (a.k.a. “Goal-Oriented Target” or “GOT”) necessary for them to retire in comfort? “Most have no clue,” says Ilene Davis of Financial Independence Services in Cocoa, Florida. “Sadly, most don’t even know what questions to ask or what factors are involved in the calculation.”
The disconnect between the needs of the media and the needs of retirement savers tends to distort the significant of index returns. “The job of the media is to gain attention, and with attention, certain information are left out to make the news more attractive,” says Joanna Leng, Financial Advisor in Singapore. “It is not meant to mislead, it’s just not a holistic picture. The distraction for retirement savers will be to look for what is most talked about, and overlook their own risk tolerance.”
Greg Wells, Vice President at EP Wealth Advisors, Inc. in Torrance, California, offers the following example of Leng’s point: “The media oftentimes makes small events into huge news and investors deviate from the plans that were built and designed for them. These plans also always factor in large downturns and market events, so changing a plan because of one event or news item can drastically hurt your return. Know that competent financial planners have built your plan with downturns in mind, and they are designed to withstand it. It doesn’t mean don’t listen to the news, but ask your adviser how it might affect your portfolio and if the event warrants to change your financial plan.”
“The media’s influence on retirement savers is significant,” says Dan Timotic, Managing Principal at T2 Asset Management, LLC in Oakbrook Terrace, Illinois. “When the media talks about how great things are, people will want to take more risk so they don’t ‘miss out’ on any opportunities. Retirement savers need to tune out the media and allocate their investments to meet their specific risk/return needs. They should focus on what their returns need to be to reach their goals and not listen to what the talking heads on television are saying from day to day about the stock market. The media distraction can force savers to do things they normally wouldn’t do which could jeopardize their ultimate goals.”
An exaggerated attention to short-term markets fluctuations can often tempt retirement savers to make poor choices. “More money can be lost by investors trying to anticipate corrections or outsmarting the market than when large short term corrections actually occur,” says Lou Cannataro, Partner at Cannataro Park Avenue Financial in New York City. “It has been proven over and over again that timing the market just does not work. When people feel it is ‘time to do something’ due to short term market fluctuations that is usually the time to do nothing. Most investors just cannot wait. This takes a lot of faith in your long term investing discipline and planning to stand still.”
It may appear reporting the daily changes in the Dow Jones, SEP, and NASDAQ has the same innocence as reporting the daily sports scores, but the psychological damage can be acute when it comes to retirement saving. Jay Srivatsa, CEO at Future Wealth LLC in Los Gatos, California, says the media’s emphasis on market returns is “very distracting because it switches the focus from long term investing for retirement and instead forces savers to worry about current dislocations in the market.”
Research in behavioral finance identifies several misjudgments investors make based on the timing and framing of what is believed to be important information. “If retirement savers are too concerned about day-to-day movements in the stock market,” says Calvin Goetz, Partner and Co-Founder of Strategy Financial Group located in Phoenix, Arizona, “it can cause them to make emotional decisions that can derail their long-term financial goals.”
Cannataro demonstrates how this day-to-day “noise” creates havoc on investor decision making. He says, “The media continually focus on current market news which for the long term planner/investor is just ‘noise.’ The focus on short term market gyrations which the typical American investor is bombarded with is a great challenge to their commitment to successful long term investment practices. The noise preys on the clients emotions which in the world of investing is fear and greed. The moment that an investor’s decisions are driven by either one of these emotions, their planning becomes reactive versus proactive. A reactive investor is always behind the eight ball chasing returns and anticipating large losses or gains that usually do not come to fruition. Sometimes the investor’s worst enemy is themselves. Changing strategies and chasing returns is perpetuated by the media’s constant coverage of the short term ‘noise’ and brings to light that an investor’s behavior is much more important than how their investments behave.”
Good behavior, however, requires a good foundation. Unfortunately for too many retirement savers, such a foundation simply does not exist. “I think the problem is most savers don’t know what to focus on, so they focus on market returns,” says Davis. “Unhappily, most then won’t have the tolerance for down markets to earn those overall returns, as annual studies have shown for years the difference between ‘market’ returns and actual investor returns.”
It’s tough for retirement savers to even to begin determining their GOT when they lack awareness of the critical components necessary to calculate that number. For example, Srivatsa says, “Many are unaware of their future income needs, which in turn impacts the return they expect out of their current investments.”
There’s a bigger problem, though, than simply no knowing how to calculate one’s GOT. Wells says, “Most people think they have an idea on what they need, but often times it’s much higher or much lower than reality. Also, many people are too focused on the possible downside swings they can have, and miss out on overall long term growth just from being too risk adverse.”
Leng believes retirement saver awareness of their GOT “is about mid to low.” She says, “What retirement savers always want is a higher return, yet they’re not able to tolerate the higher risk exposure that comes with it. It is a delusion on what the clients want and what is realistic. There is always a gap and many like to look for retirement returns based on ‘hear-say’ but never dive deep enough to look at both the risk exposure tied to it and their own risk tolerance.”
The value of undertaking a deliberate and comprehensive process to determine a retirement saver’s GOT can help avoid the diversion of media megaphones and the day-to-day noise of market movements. Anspach believes most people do not know their required minimum return. In her experience, however, she says “Those who have been through a thorough planning process have a higher level of awareness and can focus on the return needed to accomplish their goals over the long-term and are less distracted by current news events.”
We’ll leave the last word to Cannataro, who says of retirement savers, “I feel most are not focusing on what is important. Currently most are focusing on their current returns and if they are beating some index or some other portfolio’s return. Striving for a ‘high return’ or outpacing an index is not a financial plan.”
By Christopher Caruso, FiduciaryNews.com