PORTFOLIO INSURANCE

THE ALCHEMIST by ALTHOMAS PORTFOLIO INSURANCE For past few weeks market has had a very nice advance breaking out of an eight month sideways pattern. Then brick wall. Several days of slamming down taking back some of nice profits that have been accumulating. Now what? We know which way is up, but we don’t know how high is up? Don’t think you are confused. So am I and I am considered a professional trader. The market is giving mixed signals. Some technicians claim their signals are bullish and others say their signals are bearish. The fundamentalists (those folks including many economists) are also on both sides of fence. Is there anything folks can do to protect their investments? Wall Street says buy and hold. We have seen what happened with that scenario in 2000. Many investors lost their shirt, pants and underwear. Less than 1% of brokers called their clients to tell them to sell. They did not know either because they have not been taught how to protect portfolio profits. Many investors said I can’t sell here because I will have to pay huge taxes. Well, they didn’t have to pay any taxes because they gave back all their profits and in some cases much of their original investment. Can that happen again? You betcha sweet bibby it can. Has your broker learned anything since 2000? More importantly have YOU learned anything from 2000 debacle?

HOW LONG WILL MY MONEY LAST ?

First Published in Balanced Report Fall 1991 This is central question of retirement planning. When people come to see us, that is what they are asking us to answer for them. The question is usually phrased as. "Can I afford to retire? When can I afford to retire? How much income will I have at retirement? Will inflation cause me to have to work longer or reduce my standard of living?" Very simply you want to know, will you have enough. This is no different than planning a trip. You need to try to figure how much money you need. How much cash / travelers cheques, will you need for journey? When you have figured that out you will probably still take along some credit cards just in case you miscalculated. We feel more comfortable with a safety cushion in case we run out of money. At retirement most people want to know that their pensions and investment portfolio will provide an adequate income. Their capital is their safety cushion and they usually prefer to leave it intact.

The difference between retirement and a vacation is that you don't have to worry about price of your purchases increasing between beginning of your vacation and end of it. But, you sure do in retirement. If you spend too much on your vacation you can always earn more to pay for it. In retirement you are unable to earn more income, in most cases. A person retiring today at 65 years of age can expect to live an average of 22 years, or age 87 based on current mortality tables. This is one third of your life and figure is improving all time. With that length of time in retirement, perhaps longer if you retire earlier, inflation becomes a serious matter to consider. At 5% inflation it will take three times as much monthly income in twenty two years to provide same purchasing power it did year you retired.

In order to answer question how long will my money last it now becomes a little more complicated as we need to factor in an assumed rate of inflation. Most Financial Planners that I talk to like to use a figure of 5% in their forecasts. Any assumption under 4% is in my opinion irresponsible. Over a long period of time such as retirement, you can expect that some periods will be higher than others but it will level out over time. It is my experience that many people will experience a fair amount of inflation in their expenditures in early years of retirement. This is because they are now traveling more or making a major purchase such as recreational vehicle or equipment to enjoy their retirement. But as they get over 80 years of age they start to spend less. So inflation of expenses is greater in first ten yours of retirement and less after.