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#YORO You Only Retire Once

#YORO You Only Retire Once

| February 10, 2021
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Since the end of January, #YOLO—You Only Live Once—has been a rallying cry on internet message boards, where it appears that amateur investors may have driven up stock prices for video game retailer GameStop and movie theater chain AMC at the expense of sophisticated and well-funded professionals running powerful hedge funds. And while everyone should have opportunities to build wealth via the markets, we don’t believe that the Reddit WallStreetBets group has uncovered a new wealth-building strategy. In fact, as of this writing, GameStop has fallen 88 percent from its January 28 peak of $483 per share down to $60, and continues to be extremely volatile. Many traders who piled into this momentum trade on the way up are certainly underwater now. I believe that the prospect of this kind of speculation working in the future seems unlikely.

Of course, it is true that “you only live once,” and during this time, you need to make the most of the financial opportunities available to you. That is why we, at Stewardship, only engage in disciplined and measured long-term financial planning for the majority of our clients’ financial resources. Some clients do enjoy trading and speculating, and our view is that these activities are not necessarily incompatible, but that the client’s plan should not depend on trading success, and limits should be placed on the percentage of a client’s net worth allocated to these higher risk activities. In my own case, I do invest in some private deals, but I never invest more than 10 percent of my liquid net worth into these riskier, concentrated bets.

Short-Term Gains or Long-Term Prosperity?
While making a couple thousand dollars overnight sounds exciting, sporadic gains and losses are no match for the wealth-building power of a balanced, patient and diversified financial approach. The 1990 Nobel prizewinning economist, Harry Markowitz, famously stated, “The capital markets offer two free lunches: diversification and mean reversion.” Harry’s work showed that a portfolio’s risk is not defined by the riskiness of its individual assets, but by the extent to which the portfolio’s assets’ price movements correlate, or move together. Diversification is a way to combine different kinds of less correlated assets to build a lower-risk portfolio from higher-risk components. Free lunch! Mean reversion, on the other hand, means that stocks whose prices have been trending upward or downward will, at some point, reverse direction and head back toward their average values. Rebalancing is a very powerful strategy that systematically combines diversification and mean reversion by periodically trimming assets that have outperformed (and, according to mean reversion, are more
likely to underperform in the future) and adding to assets that have underperformed. Buy low, sell high!

The small investments that the #YOLO crowd are cashing out today could be compounding by 10 percent annually had they been invested in the S&P 500 rather than the hot stock of the moment. Hopefully, some #YOLO investors will reinvest their earnings in plans that will help them create a more secure financial future instead of just trying to “stick it” to Wall Street and shake up a system they perceive as rigged against them.

Matching the overall marketplace, by definition, is not losing a rigged game. Nor is lacking the opportunity to own hedge funds. The 10-year return for Eurekahedge Hedge
Fund Index through Dec. 31, 2020 was 5.2 percent annualized. That performance not only sharply trails that of the S&P 500 Index, but it also lags the result for average targetdate funds found in retirement plans.

Quite literally, an employee who doesn’t even realize that they own a 401(k) account—that is, one who was defaulted into a target-date fund upon joining the company and who never checked the paperwork to realize that their paycheck was being docked—would have earned higher profits over the past decade than the typical hedge fund investor! How is that drawing the short end of the investment stick?

What’s Your Plan?
All this news got me to thinking that we should create a new hashtag, #YORO—You Only Retire Once. For most people, the financial decisions surrounding transitioning from living off a steady salary to living off your investments can be very stressful and confusing. For most people making this transition, their life savings and investments represent a non-renewable resource that simply can’t be recreated. Incorrect assumptions or understanding may lead to imperfect decisions that can be very difficult or even impossible to unmake. Our life-centered financial planning process focuses on YOU and enabling you to live the life you deserve and avoid unnecessary risks and mistakes. It is a time-tested and yet bespoke plan that is based on both theory and experience and refined over many years and many retirements. #YORO!!

Can We Help You?
We have a process to help you clarify your vision of an ideal retirement that leads to a milestone-oriented implementation plan to transition and optimize your current financial universe to best support your vision for the rest of your life. If you are interested in learning more, feel free to give me a call at 303.500.1931 or schedule a virtual meeting at go.oncehub.com/StewardshipColorado.

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