Strengths Finder 2.0 – Review

If you are like me, you have had the opportunity to take countless personality tests, communication style exams, and skills tests. The business world is full of them, and full of reasons and times to take them. Some people think they are completely useless and others swear by them. My experience is that they, like most things, are best in moderation. You can garner useful information and insights but you should never underestimate the immense complexity that is the human mind.

 

Enter my next book for review: Strengths Finder 2.0 by Tom Rath. The book is fairly short, as it mostly a description of the different personality strengths that Mr. Rath uncovered in his studies. The book comes with a code that you can use to take the personality quiz online. Afterwards, it gives you a list of your top 5 ‘strengths’. These can be found in the book with a description, some examples of those traits and some “ideas for action” that help you learn to use your strengths, along with some ideas for working with someone with those strengths.

 

I found the insights to be pretty helpful and spot on. But the downside is that there are so many strengths, with five selected for each person, that they are difficult to put into practice easily. Other tests I have taken, that break things down into, say, a weighting between four styles, are easier to grok and therefore use on a daily basis.

 

So, with that being said, I am adding this to the Guru reading list, but would recommend that this book be used as part of an annual planning day. If you have a small company or a management team, this might be a good way to match team members to specific goals or projects, based on strengths. If you are doing some team building, this might be a good way to make stronger teams and discover reasons why some teams are have issues with dysfunction.

 

As a day to day management tool though, I recommend checking out the Kolbe A test or the Meyers Brigg test.

Retiring is Simple – The Stunning Conclusion

I think this is my favorite section, because I let all the air out of the people who sell the “best” investments or deride “bad investments”:

Reduction of Risk

Understand the fundamental difference between accumulation and retirement

In retirement, risk is a far greater enemy than lack of returns. In accumulation, diversification is your main method of reducing risk. The biggest challenge that you face is losing too much because all your eggs are in one basket. But in retirement, you are looking at inflation risk, interest rate risk, market risk, liquidity risk, longevity risk, sequence of return risk, and more. Balancing between these can be tricky. In retirement, you also don’t have nearly as much earning potential. In accumulation, you have the benefit of dollar cost averaging because you are an “income statement” person. This means that your greatest value is your human capital that allows you to earn an income. Retirement is almost entirely a “balance sheet” game. Your human capital is nearly depleted and has been turned into physical capital. If you lose it, there are very few options for replacing it!

 

If risk is reduced properly, your plans have a higher chance of working. It has been shown in numerous studies that if you are taking constant withdrawals; a 90/10 portfolio, which will typically have a higher long-run return, has a lower success rate than, say a 70/30 portfolio. But if you take some of that 90/10 portfolio and buy a pension like investment, you could get the same probability of success, but at a higher rate of return. This is not because one investment is better than another; it is simply because the risks have been reduced. And reducing risk does not always mean reducing return!

 

There are no “bad” products, just bad uses

Different products have different characteristics. You most likely need different products to accomplish your retirement goals. I typically advise to clients to avoid ‘one-trick ponies’. If all I have is a hammer to sell you, all your problems look like nails! There is NO single product that can solve all your retirement goals. And that is the only thing about investments that I can guarantee! Every product has its own strengths and weaknesses. A fixed annuity is great because you can get a fixed, guaranteed income stream which eliminates market risk. But you have to give up your cash so your liquidity risk is very high. Buying mutual funds are a great way to get professional stock and bond management and a diversified portfolio can reduce your inflation risk and interest rate risk. But it exposes you to a great deal of market risk! A variable annuity can be great investment that can compromise between both of these types of products, but it is typically more expensive. Is this extra fee worth it? Maybe, it depends on your situation! A savings account will completely eliminate market risk. But what about inflation or longevity risk? You might not realize it, but judged in terms of inflation risk, a savings account is VERY risky!

 

You need a mix of all these different products to reduce the risk. You can have money in a savings account, a mutual fund, and a fixed annuity and they will each reduce the risks of the other investments. The old adage it true here, the whole CAN be greater than the sum of its parts!

 

Retiring is Simple Part Deux

Ok, here is the continuation:

Simplicity

Clearly defined goals

Whether you are at retirement now or not, having clearly defined goals can mean the difference between retiring comfortably, and working forever, never know what you are working for. What is your goal for retirement? To save ‘some’? Did you pick some arbitrary number, like say $1 million, that may be unattainable (by the way, less than 3% of Americans have a net worth above $1M) or unnecessary?

 

I tell my clients all the time, “if you don’t know where you are going, how will you know if you get there?” Goals are also very rarely as simple as one number. I wish that retirement and savings could be that simple, but unfortunately it isn’t. You have to save for retirement, but maybe you are saving for your retirement home as well. You are probably saving for a college expense for kids or grandkids. Perhaps you want to travel for a year once you retire. All of these goals have distinct time frames and distinct levels of necessity (i.e. buying yourself a Ferrari when you retire is a great goal, but not as important a goal as say, having enough income to pay your monthly bills.) Because these goals have distinct characteristics, how you save for each one could be very different.

 

Once you create your goals, you want to assign specific assets to each. This gets a little more complicated, but can still be conceptually simple. This IRA is invested aggressively, for retirement in 25 years. This brokerage account is invested moderately for college in 5 years. Etc. If you have multiple goals (and we all do!) why do you only have one investment strategy?

 

Easy to understand investments

Sometime I wish investments were easy. A lot of clients get so frustrated with the complexity that they just do nothing. But this doesn’t need to happen! Even if you don’t understand all the intricacies of an investment, you should still have a solid understanding of the basics of your investments. My advice to clients is this: “if you can’t explain, at a basic level, how your investments work to someone like your neighbor do NOT buy them”. There are two things involved in getting to this point. The first is, if your advisor can’t make you understand the investment, there is a good chance he or she doesn’t fully understand it either and you should avoid them. The second has to do with trust. An advisor can explain the basics to you, but it is unrealistic to expect that you will fully understand every detail of that investment. We spend days and weeks studying these things and some of it just can’t be distilled down for a lay-person. You MUST believe that your advisor has your best interest at heart, because a certain amount of trust in this case is going to be mandatory. My advice? Understand how your advisor gets paid and you will understand how (or if) they are incentive to help you.

 

With that being said, you should still know the basics. What are the potential rewards? How much is this expected to earn in the long run? What are the potential risks? How much could I lose? What would have to happen for me to lose 5%, 10% or 50%? Is this investment more expensive than another? If so, what benefit am I getting for that extra cost? There are very few ‘bad’ investments out there. It is much more common for a good investment to be used in a bad way.

 

Once you understand the risk and rewards, you also need to know how these risks and rewards work with your goals. You might have an investment that has a great return potential, but could be down 20% in a given year. This would not be a good investment for your 15 year-old’s college fund, but could be very appropriate for your goal of retirement in 30 years. You might think that, because you are retired, you should be conservative and put lots of money in the bank. This might be appropriate for some money, but these accounts will always underperform inflation.

 

If you do this properly, it becomes very simple to have a good handle on your financial plan! I have been told that it works like magic… You know where you want to be and why. You know what assets are working for you towards those goals and how. So with a couple quick updates (remember clarity?) you can easily see if and how much progress you are making towards your goals.

 

Retiring is Simple

So I wrote this article to turn into a presentation for a couple speaking engagements I am doing. It turned out pretty good so, in keeping with my whole theme of “this stuff isn’t that hard, just keep it simple” i thought I would post it here.

 

It is long, so I am going to break it into three parts, so make sure to stay tuned:

The three tricks to retiring in any economy:

Clarity, Simplicity, Reduction of Risk.

 

Simple! These are the most important things you need to be focused on when thinking about retirement. Not how many stars a fund got from Morningstar, not what the past 10 years of yield have been on a particular bond, not on which insurance company has a + or – next to their rating.

 

Most of my clients are so confused by retirement because they are being overwhelmed with investment product information. So much so, that they forget that THEY are supposed to be the center of their retirement universe, NOT the investments.

 

Clarity

Knowing what you have.

Most clients come to me with a mess. They have IRAs they opened years ago, a couple small 401(k)s, maybe an ETrade account. I even had a client that didn’t know that you could add money to an IRA, so when they went to open one each year at the bank, they opened a new account. At retirement they have 40 IRAs with between 5,000 and 10,000 in each one! When you ask them what their net worth is, they stare blankly. They don’t know if they can retire, because they don’t even know what they have, let alone what they can do with it. Clarity is the first step to a good retirement plan. Knowing what you have and what the goal of that money is allows you to sleep at night.

 

It should take no more than 5 minutes to see your entire net worth. In this day and age, there is no reason that you should not have the ability to view your financial information quickly and easily. But understanding how much you have in assets is only half the battle. More and more people are going into retirement with some sort of debt still: mortgages, credit cards, car loans, business loans, etc. Sometimes we tell people to pay their debt off ahead of time, sometimes we go into retirement with the debt, but not knowing about it makes it impossible to plan for. Having debt isn’t a non-starter for retirement, but NOT KNOWING can be. You have to have solid understanding of what the payments look like, over the entire life of your retirement, so you can plan for them and ensure that the money will be available to pay those debts.

 

It is also critical to understand your income streams. An income stream (like Social Security or a pension) are an asset, just like anything else. Many people dramatically underestimate the value of their pension. Did you know that if you wanted to buy the pension that a typical teacher gets at retirement, say, $50,000 a year at age 65, it would cost you more than $675,000? If you retired at 60 that number would be more than $760,000. That is a major asset! What about Social Security? The typical retiree gets about $1700 a month and that translates into an asset worth $275,000. That is an awfully big asset to throw away! Other people dramatically overestimate the value of a pension plan as well. If you underperform inflation by just 1% a year, in 20 years you will have lost nearly 20% of your purchasing power! Knowing what you have coming and how long it will last is critical, as it is easy to make mistakes on pensions. I once had a client, when offered his choice of payouts options at age 60, selected on of the highest amounts. He didn’t realize that this limited the time frame. Fast forward 15 years and now he is 75 and the pension STOPS! Without assets to replace that income, that could be a REAL problem.

 

Knowing what you need

Once you know what you have, you also have to know what you need. Before retiring, we are going to design an income stream to support your lifestyle. If the numbers work, you can retire comfortably. There are lots of ‘rules of thumb’ for how much income you need. But do you really want to bet your entire retirement on guessing what income you will need in retirement?

 

There are many big expenses that can come up in retirement. I once did a plan for a client. They were not wealthy, just typical middle class people. We did a great plan, and they had enough money to retire on a budget that they were comfortable with, with some extra ‘emergency’ money set aside for those unknowns in life. What they neglected to tell me during their planning phase was that they had told their three grandkids that they were going to help pay for college. They assumed that, because they had $500,000 in assets, that taking out 25 or 30k for wouldn’t be a problem. After all, what was $25,000 next 500k or even 750k? What they didn’t realize is that, taken together, that was 10% of their investments. Just because an account has money in it, doesn’t mean it isn’t doing anything. Those accounts were all being used to produce their income. So take 10% of it out, and they just gave themselves a 10% pay cut FOREVER. And it isn’t always big chunks like $25k or 30K. I have seen clients bleed themselves dry because their son or daughter got into trouble again and “just needs $4,000 or $5,000 to float them”.

 

When looking at retirement expenses, clarity is important. You need to make a budget. You need to clearly understand how much money you will have each month in retirement. Only then can you make decisions about whether or not you can or want to retire.

 

Ups and downs happen in life, retired or not. Any good retirement plan needs to take that into account. If you need every dollar you have to produce income, then you probably can’t retire. “Stress-testing” your plan is critical. Can you afford if the market is down 10%? What about 40%?