JUST PLAIN TALK: Return of money better than return on money

Buz Livingston
Buz Livingston

Years ago, I read Charlie Ellis's investment classic, "Winning the Loser's Game," and liked it so much I reread it. My copy was the fourth edition, and his latest version is number eight, so it's time to check out the new one. Ellis has taught at Yale and Harvard business schools and currently serves on Yale's investment committee.

Intelligent people change their minds when warranted. When someone doesn't, it's often a dead giveaway. Speaking before the British House of Commons, Sir Winston Churchill rebutted a critic, "To improve is to change, so to be perfect is to change often." (June 25, 1925) In a recent blog post on Humble Dollar, Ellis admitted he had looked at asset allocation wrong. To properly evaluate, one needs to consider everything, how they interact and how important they are. For decades, he had looked at his investments improperly.

Let that sink in. One of the most brilliant minds in the investment world admitted a mistake.

Specifically, most of us don't consider all our assets when making financial decisions. For instance, we ignore Social Security, a vast fixed-income asset, likewise a pension if you're fortunate enough to have one. Also, while a home is undoubtedly a consumer durable, it can be a source of wealth. Young professionals may have little wealth, as traditionally measured, but their earnings potential can be enormous. Finally, while Ellis didn't mention rental property, an income stream from rental property is similar to bond income. Perhaps, Ellis argues, we are overallocated to fixed income like cash, bonds, CDs, bond funds, or bond ETFs.

Ellis makes a great point, but here's a rebuttal, partially, at least. The Net Present Value (NPV) of Social Security benefits would likely surprise many people. Still, NPV changes with cost-of-living adjustments, longevity, and expected returns. Plus, it's not an asset you can pass to another generation. We all know people whose retirement has been enhanced by home appreciation, but if you need $5,000, you can't cut off the front porch.

Doctor Ellis is correct; home value, SS benefits, and earnings potential don't fluctuate like stocks, and that's part of the problem. Assuming life expectancy into their early 80s, the NPV of an average earning couples' Social Security benefits is over $700,000. Given typical retirement balances and that number, most people would be 100% invested in stocks, but very few can handle that much volatility. So before incorporating Ellis' strategy, factor in your emotional tolerance to portfolio volatility.

Nothing is more challenging than watching hard-earned money go away. The S&P 500 was in the red from 2000-2009. If you were working, it was background noise, but if you were making portfolio withdrawals, it was unsettling. Plus, unless Congress raises taxes, reduces payouts, or covers benefits from general revenue, the Social Security trust fund will only pay 79% of projected benefits in 2035. Remember, the return of your money is more important than the return on your money. Once you've won the game, stop playing. That's why teams go into victory formation.

You can't always get what you want, but Buz Livingston, CFP, can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.