RETIREMENT PLANNING: Remember Buffett’s rule | Business |


September 27, 2013; 11:33 AM

Warren Buffett, universally recognized as one of the world’s greatest investors, is widely believed to have just 2 simple rules on investing. Rule No. 1: Never lose money.

Rule No. 2: Never forget rule No. 1.

You’ve worked hard to earn and save your money. You don’t want to lose your money, or worse, have a diminished retirement lifestyle, because you put money into an investment with inherent, but unrecognized or unquantifiable volatility and risk.

There are investment instruments that will allow you to keep your principal and earnings protected from loss. One of my core tenets is that you should never have to worry about whether the market is up or down. Your retirement lifestyle should not be dependent on whether or not the market is doing well. A prudent retirement plan should seek to eliminate the roller coaster ride. Your plan should remove the ups and downs, year after year, that allow one bad year wipe out half of your money, all of your previous gains, and impact your lifestyle.

Which would you prefer, an investment with an average annual return of 3 percent or 25 percent? Are you certain?

$100,000 grown at an average annual return of 25 percent, with a 100 percent gain becomes $200,000. A 50 percent loss brings it back down to $100,000. Another 100 percent increase and back to $200,000 it goes. Finally, another 50 percent loss and we settle back to our original amount of $100,000. What was our average return… 25 percent! What was our real return…0 percent! The losses make it impossible to have real returns that are anywhere near the average. The losses have to be recovered in subsequent periods. You have to dig out of the hole! Or you simply go backward and lose previous gains.

Principal protection, therefore has to be the primary focus of any investment strategy or retirement plan. Additionally, principal preservation can’t be accomplished with any investments that put your assets at risk. No supposedly-safe bonds, or conservative dividend paying stocks. This principal protection can only be accomplished with investments that truly guarantee and protect principal.

$100,000 grown at an average annual return of 3 percent, with an average return each year of just 3 percent, for 5 years, grows into $115,762. Slow and steady, no negatives, and a far superior investment, without all the emotional baggage as well.

So don’t be fooled by the average annual return numbers that most mutual fund companies use when describing or promoting their funds.

For example, a common fund in many retirement portfolios, the Franklin Income Fund, managed by Franklin Templeton, sports an impressive 10-year average annual return from 2001 thru 2010 of 8.64 percent. However, when you take into account the negative years of 2002 (-1.06 percent) and 2008 (-30.51 percent ouch!), the real return for that same period actually is more like an average of 7 percent.

The negative returns skew the averages, not to mention create an emotional hardship for those who may be depending on the mutual fund’s performance for lifetime income.

Taking income from a portfolio while it is declining creates the very real danger of exhausting that pool of assets prematurely, or in laymen’s terms, running out of money in retirement.

A portfolio that is pressured in the years just after retirement, with declining values and regular planned withdrawals, has little chance to recover. Predictions about portfolio performance over time are useless once distributions begin, because nobody knows when market declines will occur, just that they will occur.

A more prudent retirement strategy is one that that puts a floor under your investments, allowing you to sleep at night knowing your assets and your retirement lifestyle are not subject to the ups and downs of the markets.

Darren Vilardo is an independent financial adviser specializing in retirement income planning, and the owner of Inland Retirement Advisors in Rancho Cucamonga. Vilardo can be reached at (888) 944-6266.