Bob’s Journal for 2/8

The Case for Being 100% Invested in Stocks During Retirement

The investment principles most people follow are wrong, according to a recent academic paper. We should always be 100% invested in stocks, 50% in U.S. stocks and 50% in international stocks, according to the researchers.

Standard investment advice is that people should have diversified portfolios with risk levels that are appropriate for their ages.

Younger people can take more risk by having more of their funds invested in stocks but still should own some bonds. Older people should take less risk by reducing their stock allocations.

The new paper concludes that a 100% allocation to stocks throughout one’s lifetime delivers significantly more wealth than other strategies and increases consumption during retirement.

The paper simulated spending during retirement using the 4% rule. The retiree spends 4% of the portfolio the first year and increases that dollar amount the next year by the preceding year’s inflation rate. Spending is increased by the previous year’s inflation rate each year after that.

The academics say regulators and financial advisors focus too much on short-term and intermediate-term losses. According to the paper, maintaining the 100% stock allocation results in higher lifetime wealth despite periodic stock declines.

The paper makes some interesting points, but it has some shortcomings.

The advice can work for someone who began investing 100% in stocks at an early age and maintained that practice for life.

But it’s riskier for people who don’t start serious saving and investing until later in life because they don’t have as long a time to benefit from long-term stock returns and are more likely to be hurt by those short-term and intermediate-term market declines.

Related to that, the paper focuses on long-term returns. As individuals, we don’t live in the long-term. We live in a specific period that makes up a portion of the long term.

In the first edition of my book, “The New Rules of Retirement” (Wiley: 2004), is a chart from a study by T. Rowe Price. The chart shows that someone who retired in 1968 and used the 4% rule to spend would run out of money shortly after 1982.

The retiree spent all of his or her money during the long bear market that began in the 1960s and didn’t benefit from the stock and bond bull markets that began in 1982.

The chart showed the retiree invested 60% in stocks, 30% in bonds and 10% in cash. Perhaps the portfolio would have lasted longer if it had been 100% in stocks. But given how much stocks lost relative to bonds and cash during that period, I’m skeptical.

Retiring with a 100% stock portfolio in the late 1990s or 2000 and spending using the 4% rule also would lead to some financial distress.

Retirees must be aware of the financial environment they’re in and adapt their portfolios to it. We can’t rely on earning the long-term average return for the next 10 years, because we’re potentially subject to what economists call sequence of returns risk. I discuss sequence of returns risk in more detail in the February 2024 episode of the Retirement Watch Spotlight Series.

There Now Are More Assets in Index Funds Than in Non-index Funds

In 2024, total assets in index funds exceed those in non-index funds for the first time, according to data from Cerulli Associates, which said it used Morningstar data.

As of Dec. 31, U.S. investors had $13.244 trillion in non-index funds and $13.252 trillion in index funds, according to the firm, which predicted for several years index funds soon would hold most U.S. investor assets.

The data include both open-end mutual funds and exchange-traded funds (ETFs). Other data indicate that in mutual funds, non-index funds still dominate while index funds dominate among ETFs.

The report refers to the index funds as passive investing funds, but I believe that’s inaccurate. The indexes are created by people, and the composition of the indexes changes over time based on decisions people make. Most indexes change at least annually. To me, that’s active investing.

Cerulli attributes the surge in index investing to the acceptance by investment advisors. As more investment advisors moved from broker dealers where they worked for commissions to fee-only registered investment advisors, the advisors became more likely to select ETFs and other index funds for their portfolios.

The switch to index funds has reduced the fees paid by individuals by more than 50%.

More Original Medicare Members Are Being Shifted to Accountable Care Organizations

Most Medicare beneficiaries believe their main decision is a choice between original Medicare and Medicare Advantage. But that isn’t quite true, and the Centers for Medicare and Medicaid (CMS) hope it’s less true in the future.

Within the original Medicare are providers known as accountable care organizations (ACOs). These are alliances of hospitals, doctors and other providers who serve Medicare beneficiaries.

ACOs are known as value-based care models. They are supposed to be a way for Medicare to control costs. The providers retain more of the money they receive from Medicare if they can hold down expenses.

CMS revamped the program in 2022, because providers were losing interest. A major change was to make advance payments to providers in rural and underserved areas who join.

The move seems to have worked, at least in the short term. In 2024, there are 817,000 providers in ACOs, compared to 700,000 in 2023. There are about 480 ACOs.

The number of Medicare beneficiaries in ACOs increased by 3%.

The administration stated its goal is to have all original Medicare beneficiaries into some form of value-based care model by 2030, and ACOs are the main vehicle for doing that.

You can be in an ACO without choosing it. When you choose a provider, such as a doctor, and that provider is in an ACO or joins an ACO later, you are in the ACO.

ACOs are supposed to deliver better care at lower cost by coordinating a patient’s care between different providers. Original Medicare beneficiaries in ACOs are not supposed to lose their ability to choose their providers and the care they want.

The Data

The Consumer Sentiment Index from the University of Michigan jumped to 79.0 at the end of January from 69.7 at the end of December. The January level is the highest since July 2021.

There were significant increases in sentiment about both current economic conditions and consumer expectations.

The index has increased 21.7% over 12 months.

The ISM Manufacturing Index increased to 49.1 in January from 47.1% in December. This is the highest level since October 2022. Though an improvement, a reading below 50.0 still indicates the sector is contracting.

The ISM Services Index increased to 53.4 in January, the highest level in four months, from 50.5 in December.

The PMI Manufacturing Index improved even more to 50.7 in January from 47.9 in December. This is the best reading for this index since September 2022.

The PMI Services Index registered 52.5 in January, up from 51.4 in December.

The PMI Composite Index for the economy was 52.0 for January, compared to 50.9 in December. The index was at 52.3 in mid-January.

The number of jobs in the economy increased by 353,000 in January, according to last week’s Employment Situation reports. That’s up from a revised 333,000 in December. January’s jump in jobs is the largest one-month increase in 12 months.

In January, the Department of Labor makes annual revisions to its data. The revisions increased 2023’s total job growth by 359,000 jobs. On average, 255,000 jobs were added each month in 2023.

Average hourly earnings increased 0.6% in January, up from 0.4% in December. Over 12 months, average hourly earnings increased 4.5% through January and 4.4% through December.

Factory orders increased 0.2% in December after rising 2.6% in November. But excluding the volatile transportation sector, factory orders increased 0.4% in December, the highest gain in three months, after rising 0.2% in November.

Productivity increased by 3.2% in the fourth quarter, compared to 4.9% in the third quarter. Output increased 3.7% in the fourth quarter, while hours worked increased only 0.4%.

Unit labor costs increased at an annualized rate of 0.5% in the fourth quarter, up from a 1.1% decline in the third quarter. Hourly compensation increased 3.7%, while productivity increased 3.2%.

New unemployment claims increased by 9,000 to 224,000 in the latest week. This is the highest level since mid-November.

Continuing claims, which lag a week behind new claims, increased to 1.898 million from 1.828 million. This is the highest level in nine weeks.

The Markets

The S&P 500 rose 0.63% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.15%. The Russell 2000 lost 2.04%. The All-Country World Index (excluding U.S. stocks) added 0.34%. Emerging market equities advanced 2.54%.

Long-term treasuries lost 0.39% for the week. Investment-grade bonds fell 0.30%. Treasury Inflation-Protected Securities (TIPS) dropped 0.36%. High-yield bonds retreated 0.27%.

In the currency arena, the U.S. dollar gained 0.90%.

Energy-based commodities fell 2.88%. Broader-based commodities dropped 2.53%. Gold rose 0.03%.

Bob’s News & Updates

My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. You can be among the first to write a review.

My previous book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” is receiving mostly five-star reviews on Amazon for telling you clearly what your benefit options are in different situations and how to determine the best choice for you. You can find it on amazon.com or Regnery.com.

The number of regular viewers for my Retirement Watch Spotlight Series continues to increase. You should sign up because I make in-depth presentations of key retirement finance topics. You can watch these online seminars from the comfort of your home or office at times you choose. To learn more about my new Spotlight Series, click here.

A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

P.S. We are excited to invite you to a free, live webinar with George Gilder on Thursday, Feb. 15 at 10 a.m. Eastern Standard Time. In this Startup Investing Masterclass, George is teaming up with Jon Medved, the founder of OurCrowd, to discuss investing in private placements. George and John Schroeter from Gilder’s Private Reserve will be interviewing the CEO of George’s latest AI startup pick… so you’ll be receiving a great startup pick just by attending! Click here now to attend this amazing event.