Randy’s Financial Plan of a Lifetime – 2020 results

The Financial Plan of a Lifetime

I’ve been telling you about my Financial Plan of a Lifetime for 18 consecutive years. I suspect that the first item many of you ever read from me was the annual results of my Financial Plan of a Lifetime. So….it’s that time of year to do it again.

First, I will tell you I am exhausted. I only work about one hour a year. I don’t do chores at home. I don’t have any “work” or “chore” responsibilities. I just don’t. I’m no good at ‘em. As an example, I haven’t mowed a blade of grass since 1983.

So what does make up my one hour a year of “work”? I rebalance my stock and bond retirement portfolio with Vanguard. I’ll talk to you about “rebalancing” a bit later. However, a fella can get pretty exhausted with an hour (maybe….probably less) of that kind of mental gymnastics.

Wait. Just to be clear my wife Carol is always working behind the scenes to get even more work out of me. However, I am clever. When she attempts to assign me chores I try to make sure that my productivity doesn’t quite meet her exacting standards. This frustrates her and soon she stops asking me to do that particular piece of work.

However, over the years she has gotten me to do one other chore. I have to do this every month. She pays the bills at our place. Once a month she leaves a “stick it” note on my desk. This morning’s note read, “We need $16,000 in checking A/C by 10/14/20 (prop. tax)”.

So off to work I headed without leaving the comfort of my office chair. I went to our PurePoint Financial online account where we keep our petty cash of sorts. I did an electronic transfer for the amount she requested. This entire process took less than a minute. Then I took a cellphone photo of the transaction from my computer screen and texted her the photo. Done! For another month no more chores. No more work. I could rest up.

A most later, I did have to answer her text asking me what I wanted for breakfast. You see she makes me breakfast every morning that I’m home. Breakfast is served in my office. It’s just how we do things.

Now before anyone jumps to the conclusion that I am taking advantage of my wife I will tell you a few things about our relationship. For nearly 49 years of marriage, I have fed and clothed her. I don’t feed her too much. That wouldn’t be good for her or me. I kick her out the door pretty much each morning so she can get herself down to the health club to work off any excess calories. I don’t supervise her doing any of her chores. If she wants to hose off the driveway when guests are coming in two weeks who am I to say what needs to be done and what doesn’t.

I could tell you how I have opened every door for her for nearly 49 years, how I take her out to dinner pretty much every other night or how I am constantly complimenting her, telling her how beautiful she is and telling her I love here…..but wait! This is not a message about how well I treat my wife….this is a message about my Financial Plan of a Lifetime. Let’s get started.

From the age of a teenager, I worked so I could get money to trade for stuff. That working objective never really changed much for my entire employment life. A good deal of the time I enjoyed the work I was doing and there were times when I didn’t. I had a simple plan. As soon as I earned enough money where I didn’t need to work for money….I retired. My situation was really as simple as that.

Back in 2002, I walked into the boss’ office and submitted my retirement papers. I was 52 years of age. I had concluded that I had enough money to never have to work for money again. That was 19 years ago. It is true. I have never worked for money again.

By the way, I never had a big inheritance. I never worked for anybody but Procter & Gamble during my 30 years of full-time employment. My wife and I borrowed $200 of our full $500 wedding expense. We paid the other 300 bucks in cash.

Nope. It was just go to work every day, get some money and trade it for stuff. Along the way, I hoped that we could retire someday and live off of our savings.

So…back in 2002 I took the money that my employer, Procter and Gamble, had given me over the years in their very generous profit-sharing plan and “rolled it over”. Yep. I just rolled it over. I sent all of the money to Vanguard. I trusted ‘em. I still do.

You should know that I was not jumping for joy that I had been able to retire at the age of 52. All along my plan was to retire at forty. Then “life” came along and we had kids, and they wanted to go to grade school, then junior high and high school and finally to college. We bought expensive houses and other stuff… you know the drill. So when I retired at the age of 52 I thought of myself as being twelve years behind schedule.

Although I retired on June 30, 2002, I didn’t get my Financial Plan of a Lifetime pulled together until October 11, 2002. Yes, it took me 103 days to get everything done administratively.

I had some great financial advisors when I retired. I got some advice from one of the financial firms that P&G paid for me to use when I retired. I can’t remember their name. Vanguard gave me advice. But…the most valuable advice came from a fellow named William Bernstein. Mr. Bernstein was a financial theorist and neurologist. I figured if he was smart enough to become a neurologist he was probably smart enough to figure out financial theories.

In the year 2000, he wrote a book titled “The Intelligent Asset Allocator”. It was this book (my financial bible) that I used to create my entire financial retirement plan.

I bought that book, took notes and then somewhere down the line lent the book to my nephew Joe. Joe is now a financial planner himself. According to Joe, and I can vouch for him on this, he never returned the book to me. I wish that were not the case but it is.

My financial strategy was simple. I would follow the investment theories of William Bernstein that I gleaned from his book, “The Intelligent Asset Allocator”. What were those theories?

I would invest my money in a series of broadly diversified, low-cost stock and bond, mainly index, mutual funds. I would not be a market timer. To get the “broadly diversified” part of things going I chose, with the help of my advisors, just eleven mutual funds. To this day, now 19 years later, I still have the same eleven mutual funds and the same percentage allocations within each of those mutual funds.

Let me explain how this works.

To begin with, and this is super important to remember, I am not trying to beat the market only to match the market. If you think you are smart enough to beat the market in the long run I say good luck. If you are too afraid of trying to match the market that you sell out for a guaranteed rate of return, which are returns that are less than the market will give you, you are going to lose. You are going to lose big!

Let’s say I had $1 million to invest. That’s a nice round number. If your investment fund is more than that or less than that you can adjust as appropriate.

Should you invest with an outfit like Vanguard or pay a financial planner to manage your money? That’s a complex question that primarily depends upon your own strategies and financial skills. This is how I think about it.

Most financial planners will charge you 1-1 1/2% of your total funds for them to manage your money. Let’s take the average of that range, which would be 1.25%. Using a rate of 1.25% your financial planner would charge you $12,500 to manage a $1 million account….each year.

The average weighted cost to manage all of my eleven funds with Vanguard is 0.138%. Track with me in the next paragraph or two. It’s really important.

At 1.25% a financial planner expense on your million dollar investment would be $12,500. With Vanguard and my 0.138% annual expense rate, their charge to manage a million bucks is just $1,381 each year. That means I would be paying a financial planner an extra $11,118 to manage my money annually.

Let me show you a pretty interesting calculation. How much would that extra $11,118 that you would pay your financial planner each year be worth after 18 years if you earned exactly the same rate of return I’ve earned over 18 years?

I’ll do that math for you. The answer is $48,681. How much would that $11,118 you paid the financial planner in your second year of retirement for the next 17 years be? The answer: $44,847. You get the drill.

Let’s just say you paid your financial planner $11,118 every year for the same 18 years that I’ve been retired. How much would ALL of the $11,118 per year expenses be worth over a period of 18 years? The answer is $476,902!! Yes, you would have to pay long term capital gains tax on that amount. But hey…would you really mind paying taxes on nearly a one-half million dollar gain if you had invested your money with Vanguard and not paid for a financial planner?

I know it sounds as if I am throwing financial planners under the bus. Let me be clear. If you don’t feel qualified to select a major finance brokerage firm like Vanguard or someone similar don’t do it. If you don’t think you could get the advice from someone on which eleven low-cost, mainly index funds, would give you a broadly diversified stock and bond asset allocation…don’t do it. Just understand what a financial planner who charges a fee based upon the value of your assets really costs. If you can get a financial planner to charge you for a specific service, like tax planning, estate planning and the like it would probably be well worth it.

Please don’t get me wrong. I pay professionals for services they provide that I can’t do myself. I pay my dentist for his excellent work and never ask for a discount even if he does get some very profitable ideas from reading my newsletter/blog. I pay Apple for providing me with a MacBook Pro, an iPad, an iPhone, an Apple Watch and Apple AirPods. I pay my wife, intrinsically to do chores. Wait, I can’t believe I even said that.

I believe that with rare exceptions, a Nebraskan named Warren Buffett comes to mind, that financial advisors cannot beat the market. It’s important to note that I’m not trying to beat the market either. I only want to match the market. Since my investments are in various stock and bond categories via mostly index mutual funds in the long run I will match the market…..because I am the market. Only about 10% of all actively managed mutual funds can actually beat the market in the long run. Do you feel like you can identify that one fund in ten that’s going to be the super winner?

I strongly believe and this comes from studying Bernstein that virtually no one can beat the market. That means that whatever someone pays a financial planner is simply an added unnecessary expense. That expense will not generate any more return than if someone simply put their money in a broadly diversified stock and bond portfolio of low-cost mainly indexed manage mutual funds. You won’t get any extra return but you will get the extra financial planner expense.

It’s important to know this. Not everyone is going to take the initiative to find financial planning advice, like I did with Bernstein, and implement it in a very strict and disciplined manner. In those cases, people may benefit from employing a financial advisor.

Bernstein is also anti-market timing. I don’t market time either because I try to do everything Bernstein recommends. I’ve read that a very large number of people got out of the stock market during the financial crisis of 2008/2009…..and never got back in. Those people missed all kinds of profitable returns that have occurred since the financial crisis.

I will tell you this right now. I believe the stock market is overvalued at this point in time. What am I going to do about that feeling? Absolutely nothing! I am not qualified to determine whether or not the market is undervalued or overvalued. I will be in the market all the time and will never play a hunch.

I used to manage the money, at no charge, for a lady friend of mine. I have always had a stock and bond ratio of two dollars of stock for every one dollar of bonds (roughly 64/36). Just to make things a little bit more secure and financially conservative for her I invested her money in my funds at a 50/50 ratio.

Over the years she had a hard time with the perceived volatility of a stock/bond ratio that was even more conservative than mine. I am not saying that a 50/50 stock and bond ratio in the mutual funds I invest in is a conservative financial plan. However, it’s not like buying pork bellies either.

Then one day she told me that she was going to go with a much more conservative approach, sort of like an annuity. She liked the guaranteed return albeit at a lower rate of return. That change was made nearly 10 years ago. As I look back on things this woman has lost at least tens of thousands of dollars if not hundreds of thousands of dollars by seeking a more guaranteed return that what she would have received had she followed my, no… Bernstein’s, financial strategies.

Bernstein‘s recommendations have evolved over time. I think he would like to see people, as they age, put a bit more money into bonds rather than stocks. I’ve been following Bernstein‘s recommendations for 18 years.

If I had ignored his initial recommendations and invested all of my money in only stocks from day one I would have an even healthier portfolio. However, I would have also seen my investments decline by nearly 50% during the financial crisis. I don’t think I would have like that. I like the stability of bonds for at least a part of my portfolio.

Now that I’m 71 years of age should I move to a more conservative plan than my 2 to 1 stock and bond ratio? Maybe. However, it’s very conceivable I could live another 20 years. In the investment world, 20 years is a very long time. The longer you invest the less volatile your investments in stocks become.

I’m going to stick with my 2 to 1 stock/bond investment ratio. If stocks dropped 50% tomorrow I could simply withdraw bond money for six or seven years and live just fine. If stocks went down by a large amount and didn’t come back within seven years we would probably all be in the shitter.

My 2019/2020 fiscal year results.

My eleven mutual funds, and therefore my entire stock and bond retirement portfolio, earned an annualized rate of return of 16.91% for my FY ending October 11, 2020. That’s my third best year out of the 18 years I’ve been doing this. Given the pandemic and our nearly 100% volatile economy, I’ll take it!

Below is my table of results from the time I began investing, using the Bernstein method in 2002, through 2020. I’ve had some great years and some pretty good years. I’ve only had one losing year in 18 years of investing that being during the financial crisis of 2008.

FY Ending    Annual ROI  Annualized ROI
2003              22.9%           22.9%
2004              10.3%           16.4%
2005              9.6%             14.1%
2006              11.4%           13.4%
2007              15.9%           13.9%
2008              -24.1%          6.5%
2009              24.6%           8.9%
2010              4.1%             8.3%
2011              1.3%             7.5%
2012              11.0%           7.8%
2013              15.3%           8.5%
2014              5.00%           8.2%
2015              5.7%             8.0%
2016              5.5%             7.8%
2017              15.4%           8.3%
2018              4.3%             8.1%
2019              8.5%             8.1%
2020              16.9%           8.6%

Re-balancing.

I do something every year on October 11 that’s very important. I re-balance. Rebalancing simply means that on a consistent basis, it’s annually for me, I sell my winners. I take the money from the winners and I put it into the loser’s group.

By the way, the date, “October 11” is an important time in the Lewis household. Our oldest son, J.J. was born on October 11. He also follows the financial plan I endorse. We bought our house on October 11. And finally, every October 11, or the next business day I rebalance my stock and bond retirement portfolio.

Today wife Carol popped her head into my office asking what she could bring me for lunch. O.K., ladies, I don’t make this stuff up. I just report the facts. I reminded her that today was October 11 (actually Monday, October 12) and that I was re-balancing today. At first, she asked if we were “going down the drain” and before I could answer she told me she “knew we weren’t”. Then she went on to run down the list of luncheon menu items that were available. I shooed her away saying that each of you was anxious to get this year’s annual edition of The Financial Plan of a Lifetime. As she parted she couldn’t help herself and asked what I was looking for at dinner. Yep. Almost 49 years.

Rebalancing, in terms of a sports analogy, is a lot like knowing that your baseball team wins six games out of 10 but in the last 10 games they have won nine times. If your team is good enough to win six games out of 10 all season long and they just won nine out of 10 do you think they’re going to win quite a few games in the near term or lose a few? That’s rebalancing.

Household budgeting.

I couldn’t have a re-balancing plan without having a gold standard household budgeting plan. Probably 30 years ago or more I simply used pen and paper to establish and track household budgets and our performance against those budgets. Then I moved into a custom-built household budgeting electronic spreadsheet. I like custom-built in just about everything I do.

Every dollar that we spend falls into one expense category or another in my spreadsheet. Next, I use an inflation factor based upon my best guess as to how one expense category will increase in the future.

Let’s say I spent $1,000 a year on telephones. Then let’s say that I assume my telephone expense category will increase by 5% a year. That means that next year that $1,000 expense will be $1,050 and the year after that it will be $1,102 etc. I do that for each expense category. That way I can project out some 10-20 years or more what my future expenses will be. It’s not absolutely perfect or foolproof, but it’s a good guide.

Spending retirement savings principal.

Again, let’s say I have $1 million in my retirement savings account. I use my long-term average rate of return (8.6%) as my expectation for future returns. If I have $1 million and I earn my annual rate of return of 8.6% I will have annual earnings of $86,000. I could spend that amount of money and never touch my principal amount of $1,000,000.

But….what if I want to or need to spend more than $86,000? Let’s say next year’s budget called for me to spend $100,000. That means I would be overspending my investment income by $14,000. That’s not a huge problem and here’s why.

In this example, I have a $1 million investment account. I plan to overspend in a particular year my annual investment income by $14,000. Where does that money come from? The $14,000 comes out of the $1 million retirement account. So next year I only have $986,000 to invest. That’s still not a problem.

Why is this not a problem? I’m 71 years old. I am not going to live forever although I plan too. To be clear I wouldn’t want to have a $1 million investment account and overspend my income in a year by $300,000. The next year I would have only $700,000 to invest. If my investments went down for a couple of years and I widely overspent then I could find my retirement balance could be dreadfully low very quickly.

However, it’s OK to drive down the principal by relatively small amounts given the fact that you’re in the fourth quarter of your lifetime. Here’s a newsflash. People in retirement worry they will run out of money. In point of fact, people in retirement should be more concerned about having too much money when they take the checkered flag from the sky.

Order of Returns.

It’s important to understand the “order of returns” financial principle, which is sometimes called “sequence risk”. My research tells me this about sequence risk.

“During your retirement years, if a high proportion of negative returns occur in the beginning years of your retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime. This is called the sequence of returns risk.”

For me, there was a certain “order of returns” from the time I retired in 2002 through today, 2020. A person who did exactly what I have done during a different time frame would get a different result. They might do better they might do worse.

I won’t deny that I’ve been lucky from 2002 through 2020 because we’ve been in generally a very bullish type stock and bond environment. You could certainly find other 18 year periods where the annualized rate of return was not 8.6%. Sometimes it’s more important to be lucky than good but if you can be lucky AND good you should do really well.

Risk.

There is also the matter of risk. Often times the level of risk is unknown. How much more dangerous is it to drive all year without wearing your seatbelt compared to wearing your seatbelt? We know that it’s safer to wear a seatbelt. But how MUCH safer is it? That’s the level of risk.

I have an indoor basketball court. I know that it’s much riskier to make a three-point shot than a layup. However, there are times that if I attempted just one three-point shot and one layup I might make the three-pointer and miss the layup.

Does that mean it’s less risky to attempt a three-point shot than a layup? No, it does not. It’s just that sometimes the riskier play beats the less risky play. Each person has to quantify to the best of their ability, first exactly how much risk they are willing to accept and secondly how much risk they are actually taking. Accurately identifying what it takes to assess and manage risk is a very difficult thing to do.

Calculating investment rates of returns.

I use the “Modified Dietz” method to identify my annualized rate of return. What is that? It’s a way of measuring my return based upon having various contributions and withdrawals in your investment account during the year.

Let’s say on January 1 I start with $1 million. Then on March 13, I add $37,821. Later in the year on July 7, I withdraw $10,402. Then I make one more addition on October 16 of $48,111. Now let’s say at the end of the year on December 31 year my account balance is $1,217,048.

What is my rate of return on an annualized basis by starting with $1 million and ending up with $1,217,048? I use the modified Dietz method to calculate that result. If you’re interested in doing that sort of thing I recommend you Google the process and build your own spreadsheet as I did.

Social Security.

While I’m at it I might as well “kitchen sink” my financial idea-sharing. I think taking Social Security early at age 62 is a good idea. From everything I read the age of 78 is pretty much the break-even point when it comes to deciding when to take social security. If you live longer than 78 you will get a bigger return from SS and if you die before age 78 you will have gotten more return from SS if you took the money as soon as possible at age 62.

I am not disputing the fact that if you live to be quite a bit older than 78 you will get more money out of the plan. However, I maintain I would rather have the government’s return of my money at age 62 than at 82 or 92. I’m even thinking that the money I get from social security from age 62-78 is replaces the money I might need to take from my fully taxable retirement account. Thinking about it that way makes me believe the real break-even point is age 80 and maybe a bit more.

In summary…..I don’t understand.

I got to be honest with you. I really don’t understand why everybody doesn’t just do things the way I’m doing them. Of course, if you support the Republicans or if you support the Democrats or if you support the Libertarian party you’re probably thinking that if these other idiots would just support your candidate the world would be a pretty nice place.

I think that people when it comes to the topic of financial investing sort of fall into two groups. There are people who don’t know enough about this stuff to follow my recommendations. Remember these aren’t really my recommendations they are Bernstein’s recommendations.

The second group pretty much sticks with this philosophy.
“Randy, you’re O.K. but I think I’m just a little bit smarter than you. I’m gonna do it my own way.”

I’ve been an investor in retirement funds for 18 solid years. I have achieved an annualized rate of return using the Modified Dietz method of calculating that return of 8.6 percent over those 18 years.

I would submit that very few people truly know what their own personal investment rates of returns has been during their investment timeframe. I know that number.

I told you that over an 18-year period of time I have earned an annualized rate of return of 8.6%. Is it a big deal to earn 8.6% versus 7.6%, one point less? Sort of.

Using our hypothetical $1 million investment account here’s what the difference between just a simple one percent rate of return actually is. If I earned 8.6 percent after 18 years that $1 million would be worth 4,415,062. However, if I earned one point less, 7.6%, the $1 million would be worth only 3,737,842. That’s a difference of more than $677,000!!

Let’s say the difference was 2%. Using my annualized rate of return of 8.6% the $1 million remains at 4,415,062 in 18 years. However, if I earn 2% less in returns over an 18 year period of time, 6.6%, that $1 million is only worth $3,159,582. If I had earned just 2% less on that million bucks, over 18 years of investing, I would have $1,255,480 less to buy Tesla automobiles and the like.

And now in conclusion.

I’ve told you what I have been able to do in the investment world over the past 18 years. It’s important to remember that Randy Lewis didn’t come up with any of this. William Bernstein did.

It’s also important to note that what happened in the previous 18 years has little bearing on what will happen in the next 18 years or the next 18 months or the next 18 days. You’ve all heard that past performance is not indicative of future performance. Just about anything can happen in the short run. Heck, in the short run we could even see a pandemic.

In summary, I couldn’t be happier about how my retirement financial plan has turned out. With the money earned from these financial strategies, we have traveled to nearly 100 countries. I have averaged more than 165 nights of overnight vacations for every year of my retirement. I’ve been able to feed and clothe my wife and show her a good time. Gosh knows she deserves it.

I think I had a strong influence on the outcome of my finances. I did the research and followed closely the plan of having a broadly diversified portfolio of stocks and bonds in low-cost primarily index mutual funds.

I never sold based upon a hunch. When the market crashed I didn’t sell. Every year I rebalanced down to the penny. I played all the strategies that are expected to work. That doesn’t mean those strategies will work every time but there is a better chance of them working than not when practiced religiously. This is a similar strategy when it comes to wearing your seatbelt. A seatbelt will not guarantee you won’t be injured or die in a crash. It’s just that doing the right thing is likely to pay off.

I didn’t give tens and/or literally hundreds of thousands of dollars to have a financial planner/stockbroker tell me what to do. I didn’t need that. Some people do. Those folks can pay dearly for their not being able to do it themselves.

It is said that virtually no one changes the way they plan to vote based upon watching a presidential debate. From what I know of people I think that’s probably true.

My saying of the year and possibly saying of the decade is that people don’t really care what they see, read or hear they care about how they feel. Someone can see the results I have achieved in black-and-white but if they “don’t feel it” they’ll continue to do what they’ve been doing.

If you’re already pretty far down the investment line lifestyle-wise what I am sharing today is not going to help you all that much. However, if you’re in your 50s or younger or your kids are in their 50s and younger or your grandkids are in their 50s and younger they still have a chance.

Actually, William Bernstein is now recommending just three mutual funds that can do the same work that my eleven mutual funds have being doing for me. Here’s what he says,

“Would you believe me if I told you that there’s an investment strategy that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90 percent of finance professionals in the long run, and make you a millionaire over time?

Well, it is true, and here it is: Start by saving 15 percent of your salary at age 25 into a 401(k) plan, an IRA, or a taxable account (or all three). Put equal amounts of that 15 percent into just three different mutual funds:

• A U.S. total stock market index fund
• An international total stock market index fund
• A U.S. total bond market index fund.

Over time, the three funds will grow at different rates, so once per year you’ll adjust their amounts so that they’re again equal. (That’s the fifteen minutes per year, assuming you’ve enrolled in an automatic savings plan.)

That’s it; if you can follow this simple recipe throughout your working career, you will almost certainly beat out most professional investors. More importantly, you’ll likely accumulate enough savings to retire comfortably.”

Then…this information comes from a site called bogleheads.org which is a nod to Vanguard’s founder Jack Bogle. They list the advantages of the three-fund portfolio.

· ADVANTAGES OF THE THREE-FUND INDEX PORTFOLIO

·       Diversification. Over 10,000 world-wide securities.
·       Contains every style and cap-size.
·       Very low cost.
·       Very tax-efficient.
·       No manager risk.
·       No style drift.
·       No overlap.
·       Low turnover.
·       Avoids “front running.”
·       Easy to rebalance.
·       Never under-performs the market (less worry).
·       Mathematically certain to out-perform most investors.
·       Simplicity

Thanks to son J.J. for offering up this excellent alternative. He also points out this information regarding costs,

“The expense ratios VTSAX (0.04%), VTIAX (0.11%) and VBTLX (0.05%)—a 2/3 stock, 1/3 bond portfolio could be had for an expense of 0.067%—which is half of even your excellent expense rate (and you’re buying the whole market, so not giving up any diversification.)”

It’s always a good idea to have smart kids. I’m thinking cutting my investment expenses by 50% has to be a good thing while at the same time sticking to my investment philosophy of diversification.

Lastly, if you prove you can beat my results and you really can I say go for it. If you’re not even sure what your results have been in the past or you think that your results are not as good as what I’ve shared with you today you might want to consider other options.

I’ll talk to you about all of this again….on October 12, 2021.

Randy Lewis
San Clemente, California