For most people, a diversified buy-and-hold is the ticket to financial security. If you're paying a money manager, know that just a small percent have beaten the S&P 500 over the last 20 years.
Following up on last weeks' romp through financially beneficial numbers, here are more useful examples for your benefit.
— A recent study showed that 92% of the rate of return in a diversified portfolio results from proper asset allocation. Market timing was found responsible for just 2%. Asset allocation is the selection of different classes (large capitalization stocks, small capitalization stocks, REITS, bonds, etc.) that do not move up and down in value at the same time together, thus reducing risk without reducing return, hopefully.
The trick is knowing how to do this, over time. And a money manager must be right 70% of the time, the study found, to offset the additional costs of trading, compared to a buy-and-hold strategy. "Over the past 20 years, only 12% of managers have beaten the S&P 500." So, for most of us, diversified buy-and-hold is the ticket to financial security.
— The traveling partner of asset allocation is rebalancing. That is the periodic selling of some of your winning sectors and buying more of the laggard sectors to keep your balanced approach. One study found that in the short term rebalancing saved an average of 6% in down years. But, surprisingly, over a longer term of 25-plus years, the benefit vanishes. Buy-and-hold, reducing transaction costs, compounded over a long time, wins again.
— For those of you fascinated with winning unspeakable sums in the Powerball Lottery, consider these numbers and save your money (in a tax-sheltered vehicle, of course). The lottery has an 80 million to one ratio (pro: someone has to win; con: "the odds on winning are roughly the same whether or not you buy a ticket…"), which means you would have to be hit by lightning 20 times or drown 4,000 times or fly in an airplane every day for 8,200 years to have a fatal crash, to equal the lottery odds of winning. Your choice.
— Statistically, 50% of Americans will require long-term care. That means either you or your spouse, so plan accordingly.
— It has been in the news that the IRS has been cracking down on foreign accounts. Why? Because the Feds are in major deficit mode. There is an estimated 7.2 million Americans either living or with accounts abroad, and yet only 825,000 have filed returns on this foreign income. This used to be ignored, but no longer. And thanks to a new law, called FATCA for short, the penalties can be draconian.
A word to the wise among you non-filers: contact an attorney who specializes in such to get a negotiated deal. It is reported that "many, many" have already done so to avoid Uncle Sam's full wrath.
— In spite of malpractice issues being doctors' favorite whipping boy for the high cost of medical care, recent info from the watchdog group Public Citizen says it ain't so. Between 2003 and 2012 the group reported a drop in awards of 29% (9,379 awards totalling $3.1 billion and averaging $335,000), probably due to state law caps on the amount of non-economic payouts.
Consequently, physician premiums fell to 0.36% of all health care costs, the lowest in a decade. During the same decade, health care costs overall rose a whopping 58.3%. We still need to fix the malpractice piece of the equation, but overall, it appears to be a paper tiger compared to the (many) other issues involved in high health care costs.
— Lastly, we know that we cannot control investment returns, but we can control our spending decisions. Spending affects our financial lives far more than even brilliant (read: lucky) investing. A recent survey of non-retired Americans found that 70% said they could reduce their expenses to save for retirement. What is more interesting is that only 18% of the exact same people surveyed said that they are very likely to do so.
Again, as the cartoon Pogo told us years ago, "We have met the enemy and he is us."