Good reads from around the Web.

One of the things I’m least proud of – aside from my D grade in French and my habit of laughing aloud at my own “hilarious” jokes – is my fascination with the financial media.

I read the news websites and blogs avidly, and watch a fair chunk of CNBC and Bloomberg, too.

If you’re an active investor (for your sins) then I’d argue the former can be a good source of ideas, although only as a starting point for doing your own research.

But I can’t remember ever making money from an idea I got off the TV.

I’ve consoled myself that I watch CNBC and Bloomberg like other people watch football, or that I use the endless procession of talking pundits as a contrary-indicator.

(Seriously: I think they put Nouriel Roubini (a.k.a. “Doctor Doom”) in a cupboard under the stairs between market wobbles).

When rising markets bring you down

It seems though that even this light telly watching could be dangerous, according to researchers from Kansas State University’s Financial Planning Research Center.

As reported by Advisor One, these academics found:

… stress go up when watching financial news, and hearing that the market went up causes stress levels to rise even higher.

“Specifically, 67% of people watching four minutes of CNBC, Bloomberg, Fox Business News and CNN showed increased stress, while 75% of those who watched a positive-only news video exhibited an increase in stress,” they wrote.

Yes, you read that right – stress levels actually rose with the market for most people. So making sure you switch off during a meltdown might not be enough to protect you from rising anxiety, and all the poor investing decisions that could come with it.

The researchers believe that this rising stress is caused by the fear you’re missing out on even better gains.

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Are you saving enough for retirement, and will your retirement plan survive a damn good buffeting by an uncertain future? Obviously nobody knows, but you can stress test your strategy with a Monte Carlo simulator.

A Monte Carlo simulator takes your predicted pension pot and pits it against multiple visions of the future. It subjects your portfolio to random return sequences to determine the chances of your money running out before you breathe your last.

Staying in the black until you cark it is a win.

In contrast eating dog food in your eighties is not shown, but is the unsavoury implication of failure.

Retirement roulette

In some return scenarios, the 1980s dream sequence for equities will bubble into the dot.com boom and turn you into a multi-millionaire.

In other possible worlds, you’ll get hit by the Great Depression then World War 2 then the 1970s oil crisis, coming one after the other, like the three buses of the Apocalypse.

The main interest lies in the big % number written on your scorecard at the end. Handed out, as if Death himself was a Strictly judge, this shows the likelihood that you haven’t emptied your pot before you’ve completed the waltz of life.

To run a stress test on your own retirement plan, head to Vanguard, which hosts a free Monte Carlo retirement calculator that’s very simple to use.

The calculator wants to know:

Your total pension pot – I used the figure projected by Hargreaves Lansdown’s calculator based on my existing salary and contributions (as we’ve previously discussed). Ignore the Vanguard calculator’s request for your portfolio’s balance today. Instead insert your projected pot as it will stand on the day you retire (but in today’s terms).

The annual income you require 1 – I used my current budget because I’m already a money-saving maven. I’m not going to spend much less in retirement unless I’m afraid to leave the house. If you’ve never imagined what your retirement income might look like, try this suggest-o-tron.

How long you plan to live – Use the national averages, or try a life expectancy calculator, or accept the 30-year default.

Your asset allocation – Use your current risk tolerance and these rules of thumb to guesstimate your likely asset allocation when you’re retired. Once you start playing with the calculator you’ll discover that there’s much less room for manoeuvre than you might imagine.

Place your bets

Run the simulator, let the digital dice roll, and you’ll end up with something like this:

The green zone represents all the time streams in which I lived happily after. The orange area shows the scenarios in which I bitterly regret not having children. In the worst-case scenario, the money tap runs dry after 16 years.

The important number is 78%. That’s the probability of my portfolio lasting for 30 years based on every scenario in the sim.

That’s not great. I’m not prepared to risk a 1-in-5 chance of hitting the skids.

Options for remedial action

So what am I to do?

Well, I could plan on cashing in my chips earlier.

Hmm.

What else? I can spend less, retire later, save more, and invest more aggressively.

Sticking with the moveable parts of the calculator, I try upping my equity allocation. But I can only hit an 81% success rate even with portfolios of 50 – 75% in shares. Not good enough.

Time to pinch the pennies. I can reach an 88% survival rate by spending only £18,000 a year. 10% less than I planned. This I can live with.

To hit the magic 100%, I either need to exit the stage after 20 years or get austere on my ass and only spend £12K a year.

A kick in the assumptions

For simplicity’s sake, I haven’t taken into account my state pension or the fact tax would reduce my £18K spending money to £16.5K. Do work these factors into your own retirement plan.

UK investors should bear in mind that this is an American calculator that uses historical US asset return data (from 1926 to the present day).

Many commentators argue that this was a golden age for US assets that’s unlikely to be repeated. On top of that you can knock off about a point of growth every year to represent UK returns lagging the US.

As the returns data is based on indices, there’s also every chance that the simulator doesn’t take into account investment fees (although it doesn’t say so in the fine print), which will deplete a pot even faster.

Not including my state pension makes my results conservative enough to allow me to feel comfortable about the above issues, however.

Another thing to keep in mind is you don’t know how often you ran out of money with, say, less than 24-months on the clock. Quality of life may not matter as much near the very end.

Lastly, this kind of calculator assumes you draw down your portfolio until it runs out or you do. In reality, you may want to annuitise a large proportion of your pot and take the guessing out of the game. But that’s a different story.

This is the end, my friend

For all these reasons and more, you shouldn’t treat these numbers as gospel. At best they enable you to circle within the vicinity of your retirement destination. They’re not exact co-ordinates.

Darrow KirkPatrick from the excellent Can I Retire Yet? blog advises using several different retirement calculators. That way you’ll get a range of answers that would make an astrologer sound precise. The process should dispel the notion that there’s one, ‘true’ number to shoot for.

I highly recommend trying Firecalc – it’s an excellent Monte Carlo sim with all kinds of tweakable options. Too much fun.

The vagaries of these calculators become a metaphor for the uncertain future ahead. Because however your retirement plan turns out, for better or worse, it won’t return the same answer as the calculator.

Take it steady,

The Accumulator

1. Again, enter your desired income in today’s money. [↩]

Good reads from around the Web.

A post of the week. Here’s Josh Brown at The Reformed Broker warning about an inevitable crash in the bond market:

I’m going to say this here and now for posterity and I hope you bookmark it:

There’s going to be such a brutal bond investor slaughter at some point over the next decade that the streets of Boston’s mutual fund district will run red with blood, the skies will be shot through with the lightning and thunder of unexpected capital losses and those who manage to survive will envy the dead.

Now a slaughter in bonds will not look like an equity market crash, the volatility characteristics are different and bonds eventually mature. But in some ways it will feel much worse than a stock crash because the money parked in bonds is thought of as low or no-risk.

The fixed income guys know what’s going to happen, too. Why do you think the Bond Kings at PIMCO and DoubleLine are pushing into equity funds? They’re getting three-year track records under their belts for when the big switch comes.

One reason Josh Brown is an excellent writer and pundit is because he doesn’t prevaricate. It may not be good advice – I have no idea about his track record, either way – but it grabs you right in your special interests.

In contrast, while I happen to think Brown is likely right about bonds, I’d feel duty bound to caveat it with warnings about deflation, Japan, market timing, and 20-year bear markets.

In fact, I already did. Some of my readers may have ended up wiser for it, but I suspect a few of them ended up asleep.

Brown’s is the strategy of a Wall Street professional. If he’s right, he can point to his prediction for years to come. If he’s wrong, nobody will ever remember – maybe not even Josh Brown, thanks to hindsight bias.

Perhaps even Google will forget his page eventually.

It’s a great post – and I think likely a good call – but it’s not necessarily correct.

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