Thursday, May 8, 2008

THE CONSPIRACY OF "YOUR NUMBER"

The latest scam promoted by investment firms is “What’s Your Number” and by that they mean how much money you need to keep living the lifestyle you currently have when you retire. Their question focuses on saving enough money to achieve your number. The investment banking firms love the concept and have ads about “Your Number”, books about “Your Number” and it is rapidly becoming a part of the Boomer culture. I call it a conspiracy because it focuses on the percentage of earned income being saved and set aside for retirement and ignores by far the most important factor, which is, how well are those savings performing as an investment; what was their yearly return? Investment brokers want to focus on the amount of savings being set aside for them to invest rather than the return on investment that they are earning with the savings portfolio.

The concept of “Your Number” exists in a static world, an unchanging place where it is only a matter of saving the exact amount of money and then you are done. In fact, the world is a volatile place with times of rapid inflation, times of stagflation, and times of usually great investment opportunities. A more useful question is how skilled are my investment advisors at getting me high gains with low risk to my savings? Do my current brokers spot the opportunities to invest in the Wal-marts, Microsofts, and Berkshire Hathaway’s of tomorrow? Are they focused on getting the highest return for themselves or for me? The easiest money a broker can make is to put all your savings in a mutual fund that pays them a high commission and roll it over yearly to keep their commissions coming in. While we were in Silicon Valley, working ridiculous hours, our broker made more money off of our saving then we did. He invested all our savings into mutual funds that in total performed less than 1% a year and yet his commissions were 6% of our portfolio a year.

The question is will you be able to live frugally enough to let your investments grow and have excess savings to weather times of inflation or times of low investment returns. Unless you have a guaranteed pension, the most important thing to focus on is improving your skills at investing and learning to reduce your cost of living so you can live happy lives with less money. The sooner you start practicing investing and measuring your resulting returns, preferably long before you retire or lose your job, the greater your understanding and realistic view of income from your investments will be.

After studying investing with an AAII group in Silicon Valley and switching to making investment decisions ourselves, we have improved our returns by 20 times, to 20% per year and reduced our brokerage costs to less than 1%. At the same time we have lowered the risk of losing all of our savings by not being at the effect of mutual fund managers controlling when to buy and sell and by not being impacted by massive numbers of Boomers cashing out of their mutual funds to get to their money or being forced to roll their 401K after being laid off. We have minimized the risk to our portfolio by investing in a highly diversified group of well managed, growing companies that we really believe in and feel good about owning.

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