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WalletPop:

Filed under: Extracurriculars, Retire, Saving

This is part of a new series of columns called “The Naked Truth,” by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

If you are investing for retirement, you should be focused on the long term. Your primary concern is the amount of money you will accumulate for your retirement.

It is easy to lose this focus when the steady drumbeat from the financial media if rife with predictions of financial doom and gloom.Our economy has serious problems. I have no idea whether the markets are headed for a precipitous decline or major gains. Nevertheless, given all the news about how terrible the markets have been, it might be helpful to have a reality check.

A reasonable asset allocation for many investors is 60% stocks and 40% bonds. This is the allocation used by most trust and pension funds.

If you had a globally diversified portfolio of low cost index funds with this asset allocation, you would have incurred a loss ranging from 1.5% to 2% year-to-date, depending on the mix of your funds. Not great, but certainly not worthy of all of the hand wringing about markets collapsing.

What if you held that portfolio for the previous five years? Your returns would have been between 12% and 13% on an annualized basis. You could well afford the losses you have incurred so far this year.

If you go back 10 years, you would have had…

WalletPop:

Filed under: Extracurriculars, Retire, Saving

This is part of a new series of columns called “The Naked Truth,” by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

You are supposed to be able to trust and rely upon your broker or advisor, right? The securities industry spends hundreds of millions of advertising dollars to convince you that your reliance is justified.

The legal obligation of these “investment professionals” is very clear.

They cannot fail to disclose any fact “material” to your decision to make an investment.

Every day brokers recommend actively managed mutual funds to their clients. When making these recommendations, they do not disclose:

1. Only 1 in 3 of these funds will equal or exceed their benchmark in any year;

2. Over a 10-year period, less than 5% of actively managed funds will equal or exceed their benchmark;

3. Index funds will equal their benchmark (less low expenses) every year;

4. The cost of index funds is anywhere from 300% to 1000% less than the cost of actively managed funds.

If you knew these facts, would you buy the more expensive, under-performing, actively managed fund? Would you consider these facts to be “material” to your decision making process?

Why do “investment professionals” fail to disclose these critical facts?

Because it is in their financial interest–but not yours–to do so.

Caveat emptor!

Dan Solin is the author of The Smartest Investment Book You’ll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You’ll Ever Read. Visit his website…

WalletPop:

Filed under: Retire, Saving, Investing

This is part of a new series of columns called “The Naked Truth,” by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

An overriding concern of investors is saving for retirement. Yet the data indicates that, when you consider the ravages of fees, inflation and taxes, the average equity investor actually loses money.

These investors would have been better off not investing at all.

The first rule of intelligent investing is not to lose your money. Here is one suggestion: Don’t invest in hedge funds.

I have never understood the underlying premise of these funds. We know that only a small percentage of traditional mutual funds equal or beat their benchmarks over the long term. Is it really possible that hedge fund managers have some special insight that has eluded the best and brightest on Wall Street?

Not according to the data.

One study showed that on average every major category of hedge funds provided lower risk-adjusted returns than the S&P 500 from 1995-2003.

Another study demonstrated that, after fees, 80% of the hedge funds studied provided no added value.

As if that was not bad enough, a recent study concluded the huge fee structure of hedge funds could attract “mediocre managers and con artists” to the market.

Recently, we have seen a number of large hedge funds implode. More are sure to follow.

When investing for retirement, don’t be seduced by the promise of excessive returns made by hedge…

WalletPop:

Filed under: Extracurriculars, Retire, Saving

This is part of a new series of columns called “The Naked Truth,” by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

I am sure you wouldn’t entrust your health to a medical professional who didn’t have a complete knowledge of her area of expertise.

Yet millions of investors rely on “investment professionals” who can’t define risk, much less measure it. If you don’t know the risk of your portfolio, you can’t invest intelligently for retirement.

Long term returns are determined by your asset allocation. Your asset allocation is a function of your capacity for risk. How do you determine your risk capacity?

Take an asset allocation questionnaire. There are many of them on the internet, Or you can find one on my web site.

Compare the asset allocation indicated by the questionnaire to your present asset allocation. If they are not comparable, consider changing it.

Next, find out the risk of your current portfolio. This is the tricky part. Start by asking your “investment professional” how she measures risk (let’s give her the benefit of the doubt and assume she actually does measure risk. Most brokers and advisers in my experience don’t).

There is only one right answer to this question: standard deviation. Standard deviation is a statistical measurement of the historical volatility of your portfolio. Ask her to compute your three-year standard deviation.

For conservative investors, the standard deviation should be no more than…