Retirement Advisor: Servo Wealth's Eric Nelson Critiques Risk-Averse Investing (Podcast)

by: SA For FAs
Summary

Eric Nelson of Servo Wealth Management argues that retirement investors are too risk-averse.

In this interview, he critiques target-date funds with high bond allocations; income annuities with low payouts; index funds concentrated in large-cap U.S. stocks; and dividend stocks.

He recommends the higher long-term return of small-cap and value stocks and the behavioral coaching of an advisor who can help investors realize their goals and stop worrying about investing.

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Eric Nelson of Servo Wealth Management argues that retirement investors are too risk-averse.

In this podcast interview (16:20), the highly opinionated advisor argues that retirement investors assume they cannot afford the risk that they might lose money in the stock market, when in reality, what they cannot afford are the low returns of an overly conservative strategy.

Specifically, Eric argues that:

  • By trying to protect your principal in retirement, you are actually increasing your risk that your portfolio won't provide you sufficient growth over a retirement lasting decades.
  • Portfolio volatility and bear markets and losses - what we've become conditioned to believe is risk - is actually what we need to experience to earn sufficient returns over time to support our multi-decade, rising income needs.
  • Planning-focused investors and advisors are allocating assets to annuities that guarantee an ongoing income, albeit with low payouts, typically not adjusted for inflation, and with nothing left for heirs.
  • Target-date funds are fatally overweighted in low-returning bonds at retirement.
  • Dividend-based stocks are typically clustered around one asset class: US large-cap stocks, which can go long periods of time with poor returns and could expose retirees to unnecessary concentration risk.
  • S&P 500 and U.S. Total Market Indexes, the popular "low expense ratio" index-fund strategy that has attracted so much in assets, are similarly concentrated in U.S. large cap stocks and don't represent sufficient diversification for retirees.
  • Small-cap and value stocks in the U.S. and non-U.S. markets represent a tremendous growth opportunity for long-term portfolios.
  • Some of the biggest mistakes in retirement entail buying and selling at the wrong time, chasing performance, and making long-term decisions based on short time periods.
  • The role of a retirement planning advisor is to craft a well-diversified portfolio that can achieve reasonable retirement goals, and then serve as a behavioral coach who keeps clients from doing the wrong thing at the wrong time.
  • Retirees can align themselves with a retirement-planning advisor and not have to worry so much.