Help Your Retirement Planner Improve Your Performance (Part 1)

Includes: MDY, SDY, SLYV, SPY
by: Kurtis Hemmerling

Retirement planning requires the practitioner to be proficient in many fields such as the following:

  • forecasting the future cost of living (including healthcare)
  • life insurance
  • estate planning
  • tax implications
  • equity and income investing strategy
  • diversification and asset allocation

I could go on for a couple more paragraphs but you get the point. As there are so many moving parts that need to be oiled for a smooth running retirement plan, hiring a competent planner makes sense. However, be aware of your advisor's limitations and be ready to pitch in and help meet your target sooner. What do I mean when I say help your advisor? Let me explain…

Jack of All Trades

You may have heard the saying that someone is the “jack of all trades, master of none.” A retirement planner needs to be competent in so many fields to be a well-rounded advisor that he likely is not a specialist in all fields – a polymath would be an exception to the rule. Therefore, can you help your retirement planner speed up your retirement date (or pad your account) by becoming well-versed in a specific field of equity investing? Even if your advisor is an expert in building your diversified stock portfolio he probably does not have the time to use active management techniques treating each of his clients' accounts like tiny hedge funds considering that equity investing is only one small portion of the overall plan.

What can you do to help speed up your retirement? Two areas to consider are stock-picking strategy and timing. This first article in the series will look where to find a suitable stock-picking strategy.

Low-Ball Approach to Your Retirement Strategy?

I listened to a financial advisor on the radio a few days ago state that he tells clients to target between 3 to 5% long-term annual growth in their portfolio. Clank! That was the sound of my jaw hit the steering column. 3 to 5% as a long-term target? A Seeking Alpha contributor mocked me last year for setting a target of 14% - which requires due diligence, careful stock selection, active management and a dose of good timing that most advisors are either incapable of or unwilling to achieve due to the time intensity. But to set a target for 3 to 5% is low-balling expectations in my opinion and can lead to lazy stock selection.

Now there may be more to the story that I am not seeing here and I will leave that door open.

  1. Perhaps the advice was geared towards someone entering retirement.
  2. Maybe this was the combined result of ultra-defensive equity investing plus current low interest bond yields.
  3. Possibly the advisor was setting the target low to be the perpetual bearer of good news when the strategies outperformed.
  4. The advisor could be factoring in a very high long-term inflation factor.
  5. He maybe read his page wrong and this was the withdrawal rate and not the total growth rate.

I cannot say for sure but this seems low for a long-term annual growth rate in my opinion. In fact, I would hazard a guess that you could just about close your eyes and pick from a variety of index-copying ETFs (such as SPY, MDY, or SLYV) and expect a long-term return over a 20 year horizon that equals an annual return of 3 to 5%. Pick the SPDR Dividend ETF fund (NYSEARCA:SDY) that closely matches the S&P High Yield Dividend Aristocrats Index for a decent set of stocks with a high probability of achieving that goal by simply buying and holding.

What other methods could you use to generate sound stock picking ideas?

Following Model Portfolios

Some high profile and trusted sites have model portfolios that they rebalance regularly to keep them up to date. One site, American Association of Individual Investors (, uses real money to buy a broad portfolio of micro-cap stocks with quarterly rebalancing.

At this point your first instinct might be to say, “Whoa, whoa, whoa! Micro-caps are risky and not suitable for retirement investing.” You’ll need to do your due diligence into the methodology of the model portfolios to determine if you are comfortable with the techniques and risk employed. But before you write off smaller stocks, have a look at what risks might be real and which are myth in the report Equity Risk Premiums (ERP): Determinants, Estimation and Implications – The 2011 Edition, particularly from page 31 on as regards small cap stocks. There are many other model portfolios that you can follow on a variety of reputable sites (I stress the need for solid reputation here) that should suit just about any need.

This chart below shows the annual returns since the AAII Model Shadow Stock Portfolio fund's inception in 1993 alongside a few benchmarks.

click to enlarge

Following Seeking Alpha Contributors

Another way to follow a 'model portfolios of sorts' is to track a few well-respected SA authors that frequently write about some low-risk investing strategies suitable for retirement planning. The list of most read authors may not be your best bet as some contributors write catchy titles for a quick look without getting into the mechanics of a solid system. My recommendations?

Follow David Van Knapp for exceptional retirement strategies. I give him 11 out of 10 stars in his field.

Use the worthy lists provided by David Fish for the following (another 11 out of 10 in his field):

  • Dividend Champions - companies paying higher dividends for the last 25 years such as Abbot Laboratories (NYSE:ABT), Proctoer & Gamble (NYSE:PG), and McDonald’s (NYSE:MCD)
  • Dividend Contenders - companies paying higher dividends for the last 10 – 24 years such as Avon Products (NYSE:AVP), Microchip Technology (NASDAQ:MCHP), and ConocoPhillips (NYSE:COP)
  • Dividend Challengers - companies paying higher dividends for the last 5 - 9 years such as Shaw Communications (NYSE:SJR), CenterPoint Energy (NYSE:CNP), and L-3 Communications (NYSE:LLL)

Another author that merits your consideration is Norman Tweed.

Investigate Various Strategies

I am not an advocate of any one strategy since many are suitable but which one is best depends on the personality and 'risk comfort level' of the investor. Three portfolio strategies I make publicly available at Portfolio123 have generated decent gains last year considering the market was flat.

  1. Defensive Portfolio (Utility and pipeline MLPs) – 22.3% total return for 2011
  2. Healthcare USA – 23.29% total return for 2011
  3. Modified Graham Value Investing (including market timing filters built-in) 31.54% total return

These are only a few strategies that you can use.

This is a list of 63 investment strategies (if you don’t count indexes) and their annual performance over the past 14 years tracked at AAII. You can emulate various styles including Graham, Buffett, Lynch and Piotroski. Keep in mind that these portfolios are rebalanced monthly with no regard as to liquidity restrictions and you’ll need to read up on each strategy to ensure the methods and risks are suitable for you personally. This can generate many strategic investing ideas and accompanying pages show a wide range of statistics including risk ratings and max portfolio loss and gains.

Working With Your Advisor

The point of this article is not to bash retirement advisors. On the contrary, help him to achieve your retirement goals by learning about equity investing strategy. You’ll need to talk to your retirement planner as to how you can gain more control over stock selection and rebalancing once you feel comfortable (and knowledgeable) to do so. A fee-based advisor may be more flexible in this regard as he is not paid commissions – but I am not entirely sure on this point. But if you can clearly explain the goals and strategies for the equity portion of your overall retirement plan, I am sure a reasonable advisor will work out a way to make it happen one way or another.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.