A Tale of Two Portfolios – Part Two
In my last month’s article I introduced you to the Steins and the Rosens – two couples, who are parents and grandparents, in their early fifties. The details were fictional, although based on very real situations. (If you remember them well then skip ahead twenty years to the next paragraph). I outlined their professional and financial background – the Steins are a doctor and a lawyer, and the Rosens are a speech therapist and high school principal. Neither family considers that they have an extravagant lifestyle; both have saving plans and have received an inheritance. The Steins have an insurance agent who helped set up their retirement account. They keep meaning to set aside time to assess their financial situation, but as yet haven’t had an opportunity. But even though they haven’t been keeping a close eye on their finances, they figure that overall they are in an okay position as they really don’t think they are big spenders. The Rosens hired a financial professional to oversee their finances, and they meet him once or twice a year to ensure that their investment plan remains in line with their needs and situation. They are relaxed about their financial state because even though they aren’t the ones with their finger on their financial pulse, they have been financially proactive in hiring a professional and meeting with him regularly.
Fast forward twenty years
When the Steins did finally sit down to assess their portfolio, they discovered that unfortunately their retirement fund statement (eg. Keren Pensia or Bituach Menahalim policy) was almost impossible to understand. When it was time to start drawing their pension, they were very happy that the government mandated savings plan was giving them a moderate size pension, but it wasn’t as large as they had hoped because the management fees and insurance component of their policies reduced their monthly savings considerably. They also didn’t realize that they had bought into a generic investment portfolio rather than one catered towards their needs that could be adjusted over time. No changes were made in the investment style over time and the cost of the insurance grew as they aged, eating into their savings.
In the USA, their decision to exit the market during a major downturn helped them to reduce market risk but also prevented them from enjoying any investment growth over the last 20 years as their lack of confidence and a plan kept them out of the market long term. They unfortunately missed most of the growth in the market while sitting on the sidelines. They also realized too late that they lacked the 40 quarters necessary to qualify for American social security so their retirement income was unnecessarily compromised. If only they had planned properly.
Their children are all married, and they enjoy their gorgeous growing grandchildren, but are slightly resentful and very regretful that they aren’t in a position to help them more financially. The very high risk venture that they were tempted to buy into as it offered a 16-18% return unfortunately didn’t work as planned. While they were able to recover a significant portion of their investment, they still lost a considerable sum. Snake bitten they avoided all investing going forward, and kept their money in low paying deposits at the bank. They berate themselves that despite being very successful in their professional lives, they were far less successful in their financial one. The one positive aspect is that they have been open in sharing their situation with their children in the hope that they don’t repeat the mistakes of their parents.
The Rosens watch their growing family and enjoy the financial help they are able to give. Their lifestyle is all that they could wish for, and they are grateful that they can reap the rewards from the years when they were financially careful. Their keren hishtalmut and its tax free benefits have created a significant nest egg of savings especially since they never used any of it during their working years, and aggressively invested it on the advice of their financial planner (who recommended the highest risk level for tax free investing).
The speculative part of their portfolio did not perform as they had hoped but because it was only a small part of their overall portfolio, it did not severely impact on their plan while the other solid investments more than made up the loss. The inheritance they received was used to pay for weddings and give the kids a running start to their lives without compromising their retirement plan. They supplemented their modest work pensions (which grew substantially after they negotiated lower management fees) with income from social security (as they completed their necessary 40 quarters of contributions) and Bituach Leumi and supplemented this income with income derived from their investments in the US (their IRAs) and their Kranot Hishtalmut in Israel. They too have shared their experience with their children in the hope that they do similarly if they feel that they can’t manage their investments themselves.
In this article the Rosens and the Steins are fictional accounts made up of a mix of real situations. But the bottom line is that everyone who has a portfolio needs to ask themselves if their investment package is being regularly monitored and adjusted in keeping with their needs, their circumstances and market changes among other factors.
You don’t necessarily need to hire a financial professional to manage your investment portfolio and make those evaluations and changes. The information is out there if you can and will spend the time required to monitor it and update your financial plan as life changes.
As a simple example, the new pension mandated reports in Israel show the management fees you are paying for each fund as opposed to the average that is being paid. Use those figures as a tool to negotiate lower fees. There is no reason that you should be paying more than average.
Ensure that as the years pass you are adjusting your market exposure. Under normal conditions the risk profile of a sixty year old should look very different to that of a thirty year old. Make sure that your portfolio’s risk exposure reflects your stage in life and your individual circumstances.
Don’t panic and react to all the markets’ fluctuations. View your portfolio for the long term. Often the growth for a year might be contained within a two month period. Making rash uninformed decisions can mean that you risk excluding yourself from potential gains in the market.
Whether it is you or a financial professional managing your investment portfolio and your long term financial plan to stability, the most important thing is that it is being monitored and adjusted. We all live very busy lives; in some areas we can slack off but others cannot be ignored and must be worked into our full schedules. Assessing and adjusting our investments does not need to take an excessive amount of time but it has to fall clearly into the category of important tasks that we need to find time for.
Wishing all of our readers a prosperous and sweet new year full of Hashem’s bounty.