We Begin 2018 With That Word Again

Thursday, January 4th, 2018

Good Morning Relaxing Retirement Subscriber,

While shooting baskets at the gym with my son Michael down in Chatham last weekend, I observed him do something I’ve seen him do dozens of times over the years.  Something we’re all guilty of and can learn from as I will expand on in a moment.

As I rebounded and fed him the ball after warming up for a bit, he went on a roll and hit over a dozen jump shots in a row from behind the 3-point arc.

His energy level was way up and he began every shot with his legs.  His eyes never left the front of the rim.  He was completely focused and repeated the exact same motion and follow-through over and over from different positions on the court, all ending with the same good result.  You could say that Michael was “in the zone.”

However, that didn’t last very long.  In typical 15-year-old-boy fashion, almost as if bored with the good results he was having, he then began dribbling erratically and taking all kinds of crazy, off-balanced shots like you see NBA players taking on ESPN’s Sport Center highlights.

The disciplined form and follow-through he demonstrated before was gone.  He dribbled the ball off his foot a few times.  His eyes were everywhere but on the front of the rim.  And, he clanked a bunch of shots in a row off the rim, hitting 20% of his attempts at best!

Interestingly, after sharing this observation with him (as any “good father” would do… wink-wink), and listening to him disagree with my assessment, he then attempted to get his rhythm back to where it was before.

After struggling for quite a while, it did eventually come back, but not without the pain of having to break the bad habits he developed in that short period of time.

(In full disclosure, my father was a terrific coach and a real “technician” on the correct way to shoot a basketball, so I learned everything from him. He was a classic “old school” John Wooden type who disliked any showboating, and believed in mastering the fundamentals.  Into his 60s, he could still drain 10 out of 10 from the top of the key with no problem!)

Microcosm

The experience I just described to you is extremely common among young athletes, and it’s a microcosm of what goes on constantly in team sports.  It’s the biggest reason why it’s so rare to see repeat champions.

There are countless examples of high level athletes and great teams who battle through challenging times with incredible levels of focus, discipline, and grittiness prior to experiencing a winning result.

However, after experiencing the high of the win, or the great play, they often spend a lot of time celebrating, and the focus and discipline that got them there goes out the window.  They allow themselves to become distracted and complacent, and they lose their focus and their edge.  They stop paying attention to the fundamentals and their performance falls right back into mediocrity.

The most blatant example I can think of is the 1985 Chicago Bears who dismantled and embarrassed the New England Patriots in the Super Bowl.  You may recall “The Super Bowl Shuffle” video the players created, and the dozen players who cashed in by writing books and going on the speaking circuit after the season.

That incredible collection of players never won again after that.  All of that talent was wasted.

This is why the truly great coaches (i.e. Bill Belichick – Patriots, Nick Saban – Alabama football, and Gregg Popovich – San Antonio Spurs) deserve so much credit.

Each of these coaches and their teams have experienced incredible levels of sustained success.  In the middle of all of that long term success, however, was a bunch of short term failure.  Yet, no matter what the result was, good or bad,  they don’t allow themselves, or their teams, to get distracted for long.

Just think of Coach Belichick’s famous line after reporters repeatedly wanted to talk about the Patriots embarrassing loss on Monday Night Football a few years back: “We’re on to Cincinnati.”

In a world of filled with massive levels of distractions, especially for young athletes with large incomes, the ability of these coaches to keep their players focused on what’s important is legendary.

They have a carefully designed system in place for every important detail and situation.  This is what allows them to unemotionally react to positive or negative results with a focused and winning mindset.

The Analogy and The Lesson

So, why am I sharing all of this with you?

Well, as the political banter continued at a feverish pace all year long, 2017 provided all of us with a lot of very good financial news. In addition to all major economies around the world growing in sync for the first time I can recall, market prices of virtually every asset class rose by double digits, dividends continued their upward trajectory, and our Retirement Buckets™ all grew substantially.

All of this took place with very little downward market price volatility.  While the average intra-year peak to trough drop in market prices is 14.1% annually since 1980, we barely experienced a 3% pullback at any time last year.

This, of course, is great news and you should feel proud that you maintained the discipline and focus required to capture these market returns.

After all, mutual and exchange traded equity funds, which invest in stocks, remarkably remained in “net” withdrawal in 2017.  That means that more Americans withdrew money from equity funds than bought them during a period of time when market prices soared.  Translation: many investors lost their focus and discipline and missed the boat.

While we should all allow ourselves a moment to feel good about capturing these results, there is potential danger in allowing the celebration to go on for too long.

As is the case with athletes who experience a successful outcome like I described above, there is the temptation to become complacent, lose our discipline, and forget the fundamentals.

Just like we don’t overreact when inevitable market corrections occur and prices temporarily fall like the historically severe 49% decline from 2000-2002 or the 56% decline from 2007-2009, we want to have the same reaction to our results in 2017 when market prices grew substantially, i.e. not get too high with the highs nor too low with the lows.

As your fiduciary and your Retirement Coach, my responsibility is to do everything I can to keep you grounded during all market conditions, to help you maintain your discipline so you can continue to make educated, rational, long term decisions.

In short, it’s my job to instill the discipline of adhering to the fundamentals.

The Fundamentals

An example of adhering to the fundamentals is maintaining your risk exposure to a pre-determined level through Retirement Bucket™ Rebalancing.

2017 was quite a year for technology and emerging market stocks.  Each of their respective indexes grew in excess of 30%.

While this is certainly good news to experience these sizable returns, a common emotional response is the assumption that these two asset classes have momentum, and will continue to rise in price this year thus validating many Americans’ desire to buy more.

What they forget during this emotional, and likely greedy, reaction are two very important points.  First, any level of performance, and especially outer performance in any one direction as these two experienced in 2017, is no indication or signal of continued future performance, i.e. the famous tagline: past performance is no guarantee of future results.

The second point is that there is a flip side to overexposure to any individual stock, sector, or asset class: increased risk.

Ever since we originally created your Retirement Blueprint™, your Retirement Bucket™ has been strategically designed to capture the long-term investment returns of a diversified and calculated mix of asset classes while exposing you to an appropriate level of risk and volatility.

However, as we all witnessed again in 2017, the market price of these various asset classes moves up and down a lot throwing this carefully designed mix out of balance over time.

Extensive Academic research of markets over years and years has demonstrated that out of balance investment portfolios, with asset classes that have grown beyond their target allocations, take on inappropriate risk exposures.

To deal with this issue, we strongly recommend and implement periodic and disciplined Retirement Bucket Rebalancing.

So, in order to ensure a consistent level of risk exposure for you, we continuously evaluate your current vs. your target Retirement Bucket allocation to determine if there is a need for rebalancing among all of your holdings.

The Relaxing Retirement Formula

As we begin another year together, I believe it’s critically important for us to review and implement the fundamentals of what a Relaxing Retirement entails.

Retirement Bucket™ Rebalancing is a great example of this, especially right now.

In the coming weeks, we will be breaking down and instilling the fundamentals of The Relaxing Retirement Formula™ so you can continue to do everything you want to do without any anxiety about money!

Stay tuned!

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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I appreciate the trust you place in us. 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.)