Steve Forbes Interview: Experts On Building A Retirement-Ready Portfolio? ~ MAKE MONEY BLOG$

Ken Kamen (President, Mercadien Asset Management)

Reclaim Your Nest Egg

Forbes: You have a book, Reclaim Your Nest Egg. I’ll hold it up for viewers. You, in effect, say investing should be similar to driving an automobile. Certain things you have to know, but you don’t have to be a mechanical engineer to be able to drive a car. How do you apply that to an investor? What should they know? What questions should they ask? What should they just say, “I don’t need to this to make a good decision.”

Kamen: The point is when you’re driving a car, your family counts on you to know what the red light means. But they don’t need you to know what a combustion engine does and how it works. The same in the financial world. You need to know enough about your own situation so that if someone recommends something to you that doesn’t fit, you go, “Huh? Roll that by me again.”

So many people outsource all these decisions. The concept of Reclaim Your Nest Egg came from the fact that there are so many unknown things about growing older and funding your retirement years. You don’t know how long you’re going to live, what your health is going to be, what the economy’s going to be, what the market’s going to be, how much money you’re going to have.

So when there are all these unknown factors, we have ways of — just human nature — disengaging. If it can’t be known, I’m not going to waste time with it. And the point of the book is saying there are a lot of things you can know. I mean, you might not know how long you’re going to live, but there’s a whole bunch of planning tools out there that if people just start looking at it and engaging, they’re going to start being able to answer their own questions. And that’s the whole point of the book.

Forbes: Can you give a couple of hypothetical examples?

Kamen: Sure. I try to provoke questions in people’s minds. One of the things I talk about there is maybe the concept of wealth insurance — the long-term care insurance. I’m not saying it’s right for everyone. But you could have the best planning in the world, but if some catastrophe happens that blows a hole in the side of your ship and you have to fund catastrophic illness or something, that could really crush you.

So taking the time to learn whether that’s something that makes sense for you is important. People hear things all the time about asset allocation. Should they just buy ETFs or a particular style of management? And what are the benefits of diversifying? And do I have enough capital to diversify into certain types of things? Getting to know the basic questions that are important to you is really the key to getting your own financial house in order.

Forbes: So these in terms of information that the investor should take to heart. You’re really saying if you have the right time horizon, the rest falls into place?

Kamen: Well, I think it’s important that people have different buckets, I call it. There has to be that short-term money for things you’re going to need next month or next year — if you know you’re going to need a car. But when you come to that retirement, the nest egg funds, you have to really put things into context.

And I do believe that it’s not a set it and forget it. I’m not making the claim that you could just buy things, close your eyes, and wake up one day like Rip Van Winkle and it’ll be there. But on the other side of the coin, sometimes too much tinkering isn’t a very good thing. But it is important to understand what you own. That is important.

Investing As You Age

Forbes: There’s a rule of thumb, as you get older, that you should have more money in bonds. Does that hold true today when the bond market’s been twisted like a pretzel with what the Fed is doing?

Kamen: Well, I think it’s a good rule of thumb that your investments should get more conservative. In today’s market environment maybe that means more higher quality dividend paying stocks. Because at least if we get inflation — when/if — companies can increase pricing. And maybe their stock prices could keep up. Where if you buy a bond, you made your deal. You’re going to get your $1,000 back in ten or 15 years from now. So I think that’s something.

But I think also that people have to look at, again going back to their own time horizon, that there’s room for conservative investments. And you have to know the role they play. And if you need cash flow there are certain bonds, or even CDs in the short run, that make sense for people.

Forbes: Does it make sense to buy annuities with all the expenses in them?

Kamen: I’m not a huge fan at the moment. I know that products are evolving and they’re having more bells and whistles in them. The problem is, the more bells and whistles — they charge you for all those nice sounds that they make.

The problem with the annuity world is that the pitch, basically, is that it’s going to help you protect lifestyle, because you know the money’s going to be there. If someone has enough assets, they can put together a well-diversified portfolio on their own. They can do that with the same dynamic and diversification that the annuity company’s doing. And they just don’t have that guarantee that comes with it.

But many annuities, just like social security, aren’t going to protect your lifestyle. They might protect some base things for you. But I don’t know too many people that are taking their entire nest egg and putting it into annuities. So it does have a place for some people. And to some people it helps them sleep at night, that they know that there’s a guarantee.

But I always caution people the guarantee’s only as good as the company on the other side of the contract. And we saw in the market meltdown in 2008 that we’re all holding our breath that a whole bunch of companies that we thought were rock solid remain that way. And I’ll leave the listener to decide which of those companies were.

John Bogle (Founder, Vanguard)

Portfolio Allocation

Forbes: Now, you make a point in terms of portfolio allocation, especially as you get on in years. Social security, you may think the system’s been financed in a junky way, but you make the point, it will be around, and therefore, you ought to count it as part of your allocation.

Bogle: Yeah, I think. In other words, you can’t really look at your investment program in a vacuum. The way I would express it is let’s say you’ve been lucky enough to accumulate, let’s say $300,000 in your personal investment account, and the capitalized value of your social security at a certain age is also going to be $300,000.

It’s a great investment, I have to admit, as long as it’s great, it’s going to be great if that isn’t too oxymoronic for you. But so you know, it’s basically a bond position with an inflation hedge. So it’s nice to have there. So you’re at 50/50 if your $300,000 of your own money is entirely in equities.

Now, we don’t really run our investment portfolios, most of us, I don’t think, as a unity. So I wouldn’t be that aggressive in the equity portfolio. But I also wouldn’t say that you need 80% if you have the social security in a manner that’s equivalent. You’d factor social security into your retirement income and your retirement capital. And you should also factor any solid, of which there don’t seem to be so darned many, corporate pension funds that you have, or any other sources of recurring retirement income.

Forbes: Now, when people turn 60 they start to think, obviously, short term. But if you’re an example of it, we’re living longer. So you know, equities may have to play a large role, 20, 25 years.

Bogle: No, equity should play a large role. And I try to use general rules as rules of thumb. They’re a place to start thinking about things. And then you factor in your own financial position, your own wealth, your own risk tolerance, and put it all together, and think about what it is you really want to accomplish. What are your goals?

And it’s not easy to do. You can do it yourself, you don’t need any help. And because this is an imperfect world, and you can get all the help in the world, and do worse than you would’ve done on your own. It’s not at all clear that an advisor can consistently deliver 1% above the market return, that being the one percent he charges, which is the typical charge in that business. So be careful even there about cost.(Contiued)

source: forbes.com
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