Stacking investment returns against index performance is an inherently flawed approach to benchmarking. The forward-thinking innovators at Flexible Plan Investments give clients a more realistic way to assess performance.

Founder and President of Flexible Plan Investments Jerry Wagner posed two questions:

1. Do you care about risk?
2. Are you investing to reach a goal?

If the answer to both is yes, then it isn’t sensible, he says, to use the Standard & Poor’s 500 or any other index as a benchmark of success. First, regarding risk, the S&P 500 was no stranger to steep market declines in the last decade. And when it plummets 50 percent or more, which it has done twice in recent history, it’s not an index one wants to be mirroring.

“Return is important, but you can’t ignore risk,” says Wagner. “Think about a lottery ticket. Your return can be almost infinite, but your risk is almost 100 percent. You always have to view potential performance in terms of relative risk.”

Second, if you’re investing to reach a goal, which most investors are, then does it make sense to gauge your success against an index that isn’t relevant to that goal?

“The definition of true benchmarking is whether or not you’re on target to reach your goal, not whether you measure up to an arbitrary index,” says Wagner.

OnTarget Investing: Customized Benchmarks

Defining realistic goals and setting appropriate benchmarks is the premise behind the OnTarget Investing system at Flexible Plan Investments, a nearly four-decade-old active investment management firm that holds more than $2 billion in assets under management.

Based on financial goals and time horizons dictated by the client at the onset of the investing relationship, the firm produces regular, color-coded charts that show clients where their portfolio stands in relation to their long-term goals.

The key here is long term. Subjecting oneself to the unfair expectations of short-term results can lead to emotional, knee-jerk decisions. In a perfect world, Wagner says, investors would be encouraged to only review returns once a year, not even quarterly. Reason being, true market highs and lows are only fully known in hindsight, and often results cannot be properly evaluated in quarterly—much less daily—snapshots.

“If you’re measuring against an index, most investors get overly confident at market tops and overly discouraged at market bottoms,” he says. “But when they can evaluate their progress based on a simple chart that tells them whether or not they’re on target to meet their specified goal, it’s easier to sleep at night.”

My firm, Richard Oxford Financial, works with Flexible Plan and offers the OnTarget Investing program to clients.

“Plan Early and Plan Often!”™

As Seen In Bloomberg Businessweek, Fortune & Money

The information provided is intended to be general in nature and should not be construed as investment advice from Flexible Plan Investments Ltd., Richard Oxford Financial or Dutch Asset Corporation.  Inherent in any investment is the potential for loss as well as the potential for gain. Prior to investing, read and understand the risk considerations in our Brochure Form ADV.

I met with a potential client this week and realized that we were speaking a different language.  This isn’t the first time that I’ve seen the confusion on investment terms.  I’ve always tried to be careful to not devolve into “Work Speak”.  Work Speak is that alphabet soup of acronyms and terms that all professionals share among themselves.  Outsiders do not normally understand and sometimes we need to step back and use explanations.

Here are a few terms that I find myself explaining on a regular basis.  As you can see above, in my community, we’ve got thousands!

1. A fiduciary is obligated to act in the best interest of their client and avoid any conflicts. They cannot make a recommendation based simply upon higher compensation.
2. Investment Advisor Representative (IAR). This acronym refers to people who work for investment advisory companies and provide investment-related advice.  They are regulated by either their state or the Securities Exchange Commission (SEC), registered by the states in which they do business, required to act as fiduciaries to their clients, are compensated with fees, and must work through a Registered Investment Advisor (RIA) firm.
3. Registered Representative (RR). This acronym refers to individuals working for a brokerage company and conducts transaction-based (commission) services for their clients. They are regulated by FINRA, registered to a sponsoring firm (Broker), not required to act as a fiduciary (but may), compensated with commissions from client transactions.
4. Registered Investment Advisor (RIA). This is a financial firm that has registered with the SEC or state authorities. By law, RIAs have a fiduciary duty toward their clients.  This means they have a fundamental obligation to provide suitable investment advice and always act in their client’s best interest.
5. Fees are the charge incurred for investment advisory services.  Fees are typically a flat percentage based upon total assets managed.
6. Commissions are a transaction-based charge for services rendered during securities and insurance transactions.  In a securities or variable annuity transaction, the commission usually reduces the total number of shares/units purchased.  In a fixed insurance transaction (fixed life or annuity), the commission is paid by the insurance company and does not reduce the money paid into the policy.
7. Risks are typically the quantification of the chance that an investment outcome will not be as expected.
   1. Interest rate risk is the possibility that interest rates will rise during a holding period and drive down the value of the security.
   2. Market Risk is the chance of a decline in investment value because of a development that affects the entire market. Think Tsunami, a plane crashing into a building, etc.
   3. Sector Risk is a similar risk that affects a specific sector of the market. Think Soybean tariffs.
   4. Company Risk is the chance that bad governance, poor decisions, declining earnings or other factors drive down the equity value.
   5. Credit Risk is the risk that a company or government entity will issue a bond or note that they cannot pay. Think of Italy, Greece, Brazil, or Venezuela.
   6. Inflation risk is the potential loss of purchasing power because your investments do not keep up with inflation.
   7. Reinvestment risk is the possibility that at the time for reinvestment, you cannot secure a similar rate of return on your investment. Think: Selling a 5% bond and only able to buy a 4% bond at the time of reinvestment.
8. Risk Tolerance is your ability to withstand negative market swings in order to get the highest overall long-term return. Typically, the higher your required return, the higher the necessary risk tolerance.
9. Securities are fungible (tradable with similar assets), negotiable financial instruments that represent some type of financial value. They are often in the forms of stocks, bonds or options.

If you have an unusual one, try to stump me.  Send me a note and I’ll try to help.  You can find more terms scattered throughout here.

“Plan Early and Plan Often!”™

A Story of 403b v. 457

People who work in the public non-profit sectors may have a choice in the Defined Contribution Plan (403b or 457)from their employer.  We’re often asked which is better or what makes the most sense for me and my family.  Like most things in the financial world, “It depends!”

Defined Contribution plans come in many flavors.  But, for public employees, it basically boils down to 403(b) Plans, 457(b) Plans (both shortened herein). Federal employees have access to Thrift Savings Plans (TSP). I’m going to explain the features and benefits of each of the first two plans and save TSP for a separate article.

A 403b plan is typically offered to government employees, employees of privately owned nonprofit businesses and churches. This would include government employees at almost any level including public school employees. Like the well-known 401k, 403b plans are a type of “defined-contribution plan”. All of these plans allow employees to shelter money on a tax-deferred basis for retirement. You put untaxed money into the plan and it grows “tax-deferred” until withdrawal. These plans became law in 1958. Originally known as tax-sheltered annuities (TSA) or tax-deferred annuities (TDA) plans, they could only be invested in annuity contracts at that time. These plans are most commonly used by educational institutions.  I can remember my mother-in-law having those as late as the 70’s.

457b plans are offered to state and local government employees and are a form of deferred compensation.  In other words, you defer your current compensation to a future date.  In addition, you can invest the deferred compensation and grow it tax-deferred until you withdraw at a future date.

Both plans have two types of deferral:

• Non-Elective Contributions are contributions made by the employer in the employee’s name.
• Elective Deferrals are contributions determined by the employee and withheld from their paycheck.

PROS

• Both plans offer deferral of current taxes and tax-deferred growth
• 403b plans have a maximum employee contribution of $18,500 for 2018
• 403b plans can have additional matching funds added by the employer raising the aggregate total to $55,000/year in 2018
• 457 plans have a maximum total contribution of $18,500 for 2018
• Both plans have Catch-up provisions for people over 50.  Allowing an additional $6,000/year
• 457 plans are not ERISA governed plans and have no early withdrawal penalty
• 457 plan allows for a double catch-up ($12k/yr.) for people who have under contributed over the life of their plan
• Many 403b plans have loan provisions. The maximum under the law is $50,000 or ½ of your account (whichever is less)

CONS

• 403b plans have a 10% tax penalty for pre- 59 ½ distributions (in most cases)
• Both plans require a minimum distribution (RMD) each year after the year you attain 70 ½ years of age. The percentage of distribution goes up each year after that.
• You must take your RMD whether you want to or not
• Not taking RMD subjects you to a 50% tax penalty on the amount you did not withdraw. OUCH!!
• RMDs can subject you to the extra taxation of Social Security Benefits
• You may have limited investment choices (more later)
• Withdrawals are treated as ordinary income when much of the growth is actually capital gains

SUMMARY

All of this is informational and not an attempt to dissuade anyone from joining a plan.  These plans are probably the best any of us will see for saving toward retirement.  As I said earlier, the plan you pick will depend upon many things, including Marital Status, age, health, prior savings, future plans (ie: financial plan), spouses access to a plan, intended retirement age, part-time work in retirement and more.

Your employer may offer both plans.  But, inside each plan is a host of offerings from various annuities to brokerage plans.  Each of these plans has their own pros and cons.  Wading through this muck often requires professional advice.

“Plan Early and Plan Often!”™