Objective vs. Subjective Evaluation

You’ve built your foundation and you’re now there!

You’ve determined just how dependent you are on your Retirement Bucket™, and you’ve forecasted out how dependent you are each year going forward (at least the next five years).

You’ve determined the investment rate of return you must earn in order to have your Retirement Bucket™ remain intact for the rest of your life, despite your withdrawals and inflation.

You’ve begun to tackle the 3rd question which is where do you position your investments to produce the long term rate of return you need to earn while experiencing acceptable levels of volatility and paying less taxes to the government?

Assuming you utilized Principle and Guidelines #1, #2, and #3, and you now have your Retirement Bucket™ holdings allocated exactly the way you need, Principle and Guideline #4 calls for you to assess your holdings on a strict timetable, and OBJECTIVELY rebalance.

‘OBJECTIVE’ vs. ‘Subjective’ Evaluation

Note that I used capital letters for the word OBJECTIVELY. The reason for this is that we have to remove our subjective emotions when investing.

It’s challenging to do, but it’s imperative if you want to be successful.

We can’t leave it up to how we feel on a given day.

For a recent example in the last twelve months, if October 16, 2014 was your pre-scheduled day to objectively rebalance your Retirement Bucket™, how committed would you have been if you subjectively evaluated everything vs. objectively?

Given the passage of time, it’s likely you now won’t recall this but the price of the S&P 500 Index fell 7.4% in just four weeks from September 19th to October 16th last year (2014).

A 7.4% drop in four weeks!

You now may remember the exhilaration of the financial media as they announced that “the correction” was now underway.

Getting back to our story, would you be able to remain objective at this point and rebalance?

Emotionally and subjectively, you’d say “no way”. “Not only do I not want to rebalance back into equities, I want to get out of them completely! Everywhere I turn they’re saying this is just the beginning of another big correction. I knew it was too good to be true!

If you were able to objectively assess the situation, however, you’d conclude that it was an incredibly opportune time (as it has certainly proven to be).

Let me give you a basic example of what I mean:

To keep it very simple, let’s assume that you’ve followed each step in The Relaxing Retirement Formula™ so far, and your carefully calculated investment mix is to allocate 30% to fixed income and 70% to equity investments. (We don’t even need to get into specific investments yet to understand the principle. Let’s simply stick with a basic 30%/70% allocation without factoring in whether that’s a proper allocation for you or not.)

If this was true for you, and you hadn’t rebalanced in six months or so, it’s highly likely that if you took a snapshot of your allocation October 16th (see above), it would look more like 33% fixed income and 67% equity investments because equity prices (in general) dropped.

If this was your pre-scheduled date to evaluate and rebalance (if necessary), what would be the objective action to take?

The objective answer is to get your allocation back to your pre-determined mix of 30%/70%, which requires you to add more money to the equity (stock based investment) side of your allocation. Take advantage of the extraordinary timing to buy your equities at low prices.

In essence, what are you doing here? You’re buying “low” vs. buying “high”, exactly what an intelligent, objective investor would do.

Fast Forward to March 20, 2015

If you then fast forward to last Friday, March 20, 2015, you would find that the price of the S&P 500 Index climbed back up over 13% since October 16, 2014.

Given this, had you rebalanced back on October 16th, it’s highly likely that your pre-determined allocation was now way out of balance the other way, i.e. 25% fixed income and 75% equity because equity prices rose sharply since you rebalanced last October.

If last Friday, March 20th was your pre-scheduled date to evaluate and rebalance (if necessary), what action should you objectively take?

The answer, exactly like it was before in the opposite circumstance, is to get your allocation back to your pre-determined mix of 30%/70%, which now requires you to sell a portion of your appreciated equities.

And, in the case of most of our Relaxing Retirement members, take the opportunity to replenish your cash positions to the level you need to satisfy your upcoming withdrawal needs for spending.

In this case, you’re selling “high”, exactly what an intelligent, objective investor would do.

The bottom line is two-fold. First, remain objective during good times and bad, as hard as that is during heightened market volatility. Emotional investors never win.

And, second, successful investing in your retirement years, when you’re dependent on your investments to provide you with monthly cash flow to cover your spending needs, is every different than investing during your “working” years.

It requires a carefully thought out, disciplined “system”. Random movement for the sake of movement is a recipe for disaster.

Criteria and Guidelines for Rebalancing

Now that we’ve outlined Principle and Guideline #4, the next step is to establish your criteria and guidelines for rebalancing.

There are many different reasons and criteria for rebalancing. Next week, we’re going to explore and expand on them.

Committed To Your Relaxing Retirement,

Jack Phelps

The Retirement Coach

P.S.: WHO do you know who could benefit from receiving my Retirement Coach “Strategy of the Week”? Please simply provide their name and email address to us at info@TheRetirementCoach.com. Or they can subscribe at www.TheRetirementCoach.com.

I appreciate the trust you place in me. Thank you!

(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)