What is your take on The Coffeehouse Investor approach to building emotional and financial wealth?
Does it work for you?
Looking back over the past ten years, I have been pretty vocal in expressing the overwhelming benefits provided to those who have embraced the three Coffeehouse principles.
Not only has the diversified portfolio offered exceptional returns during the “lost decade” of investing, but it has allowed investors to invest with confidence during a tumultuous time in capital markets.
What happens, if over the next ten years, interest rates remain low, the price to earnings ratio on the stock market goes from 16 to 8, causing another “lost decade of investing,” and the same Coffeehouse portfolio generates a .65% return instead of the 6.5% return (as it did the previous ten years)?
Will I still feel the same way? Will I still feel The Coffeehouse Investor is a successful way to build a portfolio to reach my long term goals?
In communicating with all types of investors over the past decade, I sense there has been a tendency on the part of some to place too much confidence and reliance on the “actively” passive approach to building wealth through low-cost index funds.
There is no magic formula at The Coffeehouse Investor, It is quite possible (though not likely) that the above scenario of ultra-low returns will unfold. If it does, I will be monitoring it on a regular basis, year after year after year, and addressing it, not so much from a portfolio adjustment standpoint, but from a saving and lifestyle adjustment standpoint to reach my goals.
The thing I like most about The Coffeehouse philosophy is that I am in charge of my destiny. It allows me to accept full responsibility for my actions today and live with results of my actions down the road.
What does all this have to do with yesterday’s blog, and the failure of 401K plans?
401K-type plans have largely failed because there are so many moving parts to most plans, at least from the participants’ standpoint, that they hardly know where to start. How much should I contribute? How much should I save in tax-deferred versus taxable accounts? Should I buy company stock? What investments should I choose for my portfolio? What happens if these investments underperform? What happens if the plan is too expensive? What happens if the company plan changes its investment options, then which funds should I choose? How much risk should I take? What happens if the market crashes?
Help me!
It borders on absurd that our society expects people to come up with intelligent answers to the above issues. They should deal with ONE component to building wealth that matters most of all;
“Am I saving enough to reach my goal?”
On the road again, just can’t wait to get on the road again.
In the words of Willie Nelson, I am on the road again, but this time I am heading home.
Getting away from work (the office), even if it is for work (visiting friends and clients), allows for a chance to reflect on many things, but especially in regards to the unfolding landscape of investing and planning for one’s own retirement.
Here are some ponderings, some of which I have already shared in this space, but worth repeating.
As a society, our current model of saving and investing for retirement is broken. No, I am not talking Social Security. I am talking about workplace retirement plans, such as 401K and 403B type plans.
The only reason the current structure has continued on for as long as it has (created, circa 1982) without some fundamental changes is because for the first 17 years of its existence, the stock market return almost doubled its long-term average.
When the stock market is generating those types of numbers, you can do lots of things wrong, including totally ignoring the most important retirement issue of all (saving), and still come out ahead.
It couldn’t last, and it didn’t. The problem is that, as a society or as an individual, it takes a long time to unwind a bad habit (like following the stock market), and start creating a good habit (like focusing exclusively on a saving target based on your financial plan).
How do we accomplish this as a society and as individual investors? I have a few ideas, and will be discussing them in days to come. But I’ve never thought I could do it alone, and I can’t. We need to collectively come up with some solutions on this important topic, so send me your thoughts and let’s get going!
I am on the road this week, so haven’t been able to get my blog out early in the morning, but wanted to follow up on this blog of April 26, as George from New York started out with the reflection below, and brings up some interesting points to ponder.
Actively or passively managed funds both suffer the same fate in a really bad bear market. 2008 for example. This is really the crux of the matter and the expense ratios fade into insignificance by comparison. Losing 30%-50% of one’s nest egg just before retirement by “staying the course” is a total disaster.
First, George is right. Whenever there is a bear market, active and passively managed funds suffer the same fate, even though the financial press, along with those who pull strings in the actively managed world, come out in hordes suggesting that actively managed funds offer downside protection in bear markets. I have never seen any statistical data showing that to be true, but even if it was true, it would hardly be a reason to switch to actively managed funds.
When you invest in common stocks, the goal isn’t to try to best a benchmark by a percent or two on the downside over the short run; it is to capture the market’s entire return over the long run. That is where expense ratios of mutual funds play a huge role.
To address the rest of George’s comment, losing half one’s portfolio just before retirement IS a disaster. I encountered many investors who experienced this disaster, back in 2000 and also in 2008, simply because their portfolio allocation didn’t match their need and ability to take risk.
Too many people get freaked out over bear markets (a decline of 20% or more), instead of accepting them as a fact of life. Of course it is never fun to watch portfolios decline when markets drop, but bear markets are a lot more palatable when you are emotionally and financially prepared for them, and have an allocation that allows for short term declines without signficantly affecting your lifestyle or retirement goals.
If you are getting ready to retire and uncertain about your “risk tolerance” level, the first step is to create a financial plan that analyzes this very issue. If you don’t feel confident doing it yourself, hire a financial advisor to help you accomplish this all-important task. You don’t want the next bear market to be your “total disaster.”
A couple of days ago I posted this blog, and received back some wonderful, thought-filled responses. I didn’t want these comments to get lost in the shuffle of future blogs, so am highlighting them today. Care to add your reflections? It’s easy to discuss things like small cap funds and sector weightings and bond duration. Are you up to the challenge of discussing things that matter most of all?
“Get out of that
slow lane.
Shift
into that
fast lane.”
Not sure if I can buy into this one, Bill. So much of that “fast lane” stuff is an illusion (material or business ambition). Risks and challenges don’t have to be hi-stress, hi-speed investments, whether financial, social, spiritual, etc). Living large doesn’t have to be pedal to the metal.
I find that, speaking literally as well as figuratively, driving in the slower lane gets me to where I want to go without the stress and energy usage that can make the journey a real chore rather than a fun part of the endeavor.
Of course, some people really thrive on those adrenaline rushes, but most of us just get higher blood pressure. :)
Steve
Thanks for sharing those reflections Steve, you are right, much of the fast lane stuff is an illusion, doesn’t really bring fulfillment, only an emptiness at always wanting more.
I guess the reason I posted it is because I think our society is overloaded on pursuing “things”, instead of pursuing that (whatever “that” is) which ultimately brings fulfillment in life.
I have noticed that my greatest fulfillments have been as a result of taking a leap into the unknown, as uncomfortable as that is -even though the fulfillment doesn’t always materialize right away,- often associated with lots of pain, disillusionment, frustration.
In my daily work, I am constantly connecting with people who want to do something meaningful with their lives, but, for whatever reason, are afraid to go for it.
I am constantly telling them to “go for it – what have you got to lose!”
With that said, I agree with you wholeheartedly that the “slow lane” is often the “best lane” in our journey through life.
Your words remind me that I need to embrace the same in my own daily activities. On Saturday, for the first time, I got out and dug weeds in my flower bed, it was exhilerating, and a reminder that I have been spending a little too much time in the wrong lane the past couple of months.
Bill S
Agree with Steve. Society is pushing the fast lane and fast life style. Taking the risk is to not pursue these paths but to march to your own drummer- which is what Bill is really saying.
Munir
I have a little different take on your quote of “Get out of that slow lane. Shift into that fast lane. If you think you can’t you won’t. If you think you can there’s a good chance you will.”
I think it was Henry Ford that said, “If you think you can or if you think you can’t, you are probably right.” To me it is all about my attitude. I control that, nobody else. So to realize my potential, certainly, I rely on the help of others, but it ultimately comes down to me in terms of what I believe in and how I go about achieving those dreams of mine
John
Munir, your response articulated the thoughts that I could not – in response to Steve’s original post. Often times the greatest challenge IS to step away from life’s hectic pace to pursue that what is in your heart and soul. I know I struggle with this mightily at times. The most difficult time of my life was the first eight months I stepped away from my career at Smith Barney in downtown Seattle, moved 70 miles north to a little town called La Conner, to figure out my life. Every day I fought with emptiness and alone-ness.
Ever so slowly, I began to embrace what John wrote in his comment above. I quit blaming everyone else in my life and started accepting full responsibility for my own actions. In John’s words, “To me it is all about my attitude. I control that, nobody else. So to realize my potential, certainly, I rely on the help of others, but it ultimately comes down to me in terms of what I believe in and how I go about achieving those dreams of mine.”
We are presented with the challenge of slowing down enough to tune in to what is inside of us, the gifts we want to share with the world, and then putting that energy into action. I still struggle mightily with this challenge. There is so much I want to get done in my life, I often tell others “I wish there were 48 hours in the day.” But my greatest challenge is not to get more done, it is to slow my life down to be more present to those around me – and in the end I am convinced I will get “more done.”
Bill
Dear Coffeehouse Investor,
Actively or passively managed funds both suffer the same fate in a really bad bear market. 2008 for example. This is really the crux of the matter and the expense ratios fade into insignificance by comparison. Losing 30%-50% of one’s nest egg just before retirement by “staying the course” is a total disaster.
What is needed in the investment industry, active or passive, is a strategy to minimize the Left Fat Tail effects on the investor. The diversified portfolios almost universally recommended today are out of date in this global world and a new approach is needed. Most of us I wager, would give up a bit of long term performance in order to avoid most of the bear markets losses we seem to get every decade or so.
Staying the course is not an appropriate strategy for those within 10-15 years of retirement or actually in retirement.
I do enjoy the newsletter. Keep it up.
George – NY
Thanks for sharing your reflections George, and lots to discuss in your comments.
First, there has been an abundance of material written about “Left Fat Tails” and the impact it has on investors, especially since the nasty bear market of 2008 when blue chip stocks of the S&P 500 Index dropped 37%.
I have never looked at the 2008 bear market as a “fat tail” event. OK, OK, it might be considered one in the truest sense of statistical analysis (one of my least favorite classes at Texas A&M), but it certainly wasn’t one in the sense it was “unexpected.”
Anyone who wasn’t prepared for, or thought a 35 to 40% drop in the market couldn’t happen, has an awful short memory. Thirteen years earlier, in 1995 to be exact, the stock market INCREASED 37%, even though we didn’t hear people screaming about “Right Fat Tails.”
You want to talk “Really, really, really Right Fat Tails?” Try the four years following 1995, when the market returned 22, 33, 28, and 21%, for a total return of 250% over that five year stretch. Now THAT is a fat tail! It’s just that this tail happened to be on the other side of the bell – everyone’s favorite side.
You comment on the 35 -50% loss retirees experienced during the decline of 2008. In the spring of 2009, CBS’ 60 minutes program ran a segment discussing the same, lamenting at the failed 401k plans by retirees.
I thought to myself, that isn’t a “stock market” problem, that is a lack of “diversification” problem.
Contrary to a portfolio approach being “outdated” as you infer, for investors who, with a Coffeehouse portfolio, heeded the second Coffeehouse principle, “Don’t put all your eggs in one basket,” (with their age in bonds – 65%), their losses were minimal in the downturn, and back to breakeven in 2009. This is hardly a financial disaster the financial media made it out to be.
Forget about the past – what about the future? Is there a better approach to building portfolios and managing financial resources than what the Coffeehouse Investor has offered up?
I’m staying the course with the 3 principles that have stood the test of time, and encourage you to do the same.