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(318) oh how soon we forget
1. Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • info@gf-pc.com
SYNOPSIS
• The strong investment gains seen in the
broader equity indexes over the past six
years are frustrating many conservative
investors who feel that they have not
participated.
• The Investment Committee strongly urges
investors to remember that it’s not about
the total return, but rather how much risk
you are comfortable adding to your portfolio
to get that return.
• Those in retirement should aim for
consistent returns rather than highly volatile
ones, particularly since we are living longer
than prior generations.
Oh How Soon We Forget
THOUGHT FOR THE WEEK
WE ARE LIVING LONGER
Pensions were popular decades ago because they
were an incentive to attract and keep employees,
which effectively guaranteed an income stream
throughout their retirement. Retirees could sleep well
at night knowing that their former employer hired
a professional money manager to look over their
investments to ensure that income would be paid on
a regular basis.
Today, pensions have been replaced with “Defined
Contribution” plans (DC), where an employer will
pay cash into an investment product but bears no
responsibility for the future performance of that
account. One example of a DC is a 401K, which is a
fund that is owned and controlled by the employee
that gets funded on a periodic basis by the employer.
The key point here is that the onus on having enough
savings in retirement to pay the bills has shifted from
the employer to the employee. Unfortunately, the
chart below indicates that this responsibility is only
getting more difficult.
This chart shows the average life expectancy of men
and women since the 1950s, and both are growing
at a pretty fast pace. According to the Centers for
Disease Control and Prevention (CDC), American men
who reach age 65 will live another 17.8 years on
average, while women will live 20.3 years.
Although this is a trend that arguably most are
happy to see, it also represents a challenge for the
first wave of retirees who are now subjected to the
“do-it-yourself” world of 401Ks and IRAs. They are
being forced to learn on the fly to do what pension
managers did for their parents, which was shielding
them from outsized risk and greed.
NOTE: This responsibility is especially challenging
since the days of using bonds and/or certificates
of deposit no longer work in an era of increased
longevity and depressed interest rates. The days of
easy income are gone, and generating income will
require advanced skillsets for decades to come.
2. Global Financial Private Capital, is an SEC registered investment adviser principally located in Sarasota, Florida. Investment Advisory Services offered on a fee basis
through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC, Member FINRA/SIPC.
2080 Ringling Boulevard, Sarasota, Florida 34237 • Tel: (866) 641-2186 • Fax: (941) 918-0405 • www.gf-pc.com • info@gf-pc.com
THOUGHT FOR THE WEEK
Pension funds are mandated to preserve capital at
all costs, and investors in these products did not
have the authority over allocation changes since the
assets were pooled together. In essence, retirees
were protected because they could not move their
capital into riskier strategies as they can in a 401K
or an IRA. Hence, pension funds were usually able
to shield investors from the emotional greed that is
commonly felt during rising markets.
However, as investors are now left to fend for
themselves, it’s up to them to control their emotions
and avoid the temptation to shoot for higher returns.
Combine this reality with the fact that we are living
much longer than past generations, and retirees have
a far greater responsibility to remain prudent so their
nest egg can last longer.
DON’T FORGET THE GOAL
We have experienced an impressive bull run in
global equity markets since the financial crisis of
2008. Many conservative investors are now currently
feeling that they missed out on most of the gains,
particularly over the last 18 months.
The Investment Committee strongly urges
conservative investors to remember that outsized
returns are only possible by accepting outsized
risks. Sure the S&P 500 was up over 30% last year,
but don’t forget that the index was down almost
40% in 2008.
NOTE: A $100,000 portfolio that loses 50% in
year 1, and then rises 50% in year 2, will not bring
an investor back to even ($100,000 - $50,000 +
$25,000 = $75,000). Simply put, big losses can
take several years to recover, and most retirees
cannot stomach this amount of risk in a portfolio.
Volatile swings in equities may not scare younger
investors, but for someone in retirement, these
violent moves can cause tremendous duress,
particularly when statistically speaking they will live
10-15 years longer than their parents.
As a result, we manage our conservative portfolios to
achieve consistent returns year-over-year in order to
shield our investors from the inherent risks involved
with trying to outperform equity benchmarks. Capital
preservation is paramount because “swinging for
the fences” risks the nightmare scenario for retirees,
which is outliving their money.
The bottom line is that retirees are living longer, and
as pension funds fade into distant memory, it’s more
important now than ever to keep focused on the end
game. Greed is a very powerful force, but remember
the most fundamental principal of finance states
that a higher return is only achieved with more risk.
Therefore, we continue to strive for consistent returns
because slow-and-steady will win this race.
This commentary is not intended as investment advice or an investment recommendation. It is solely the opinion of
our investment managers at the time of writing. Nothing in the commentary should be construed as a solicitation to
buy or sell securities. Past performance is no indication of future performance. Liquid securities, such as those held
within DIAS portfolios, can fall in value. Global Financial Private Capital is an SEC Registered Investment Adviser. All
charts courtesy of Yahoo! Finance.
Sincerely,
Mike Sorrentino, CFA
Chief Strategist,
Aviance Capital Management