Reprise – My 4 Assumptions about Retirement Investing

This is the retrospective piece of my 7 part article on how to invest in a retirement portfolio.  Click here for the original article.

When I began my research into how to invest for retirement, I wasn’t trying to prove a point or convince anyone to use a particular method.  I simply wanted to make the best and most logical investments.  But I have discovered, mostly by talking things over with my friends, that what is best and most logical to me is not always the most logical to everyone else.  As a result of this realization I took a closer at what I had written in an effort to draw out the underlying assumptions of my work.  I determined – after some soul searching – that I have made four basic assumptions about retirement investing that influences every investing decision I make.

1.       Over a 20-30 year period, I will not beat the market with individual stocks.  You can call it low self esteem, I’ll call it smart.  I have neither the time nor the ability to handle the stress required to invest on my own.  Even if I did, the research shows that consistently beating the market is VERY rare.

2.       Mimicking the market’s returns will allow me to achieve my retirement goals.  I firmly believe that I don’t need to hit it big on the stock market in order to be able to retire.   If I can simply match the market’s return I will be able to retire comfortably.  I don’t assume that the market will return 8% over the long run.  That would be nice, but I am comfortable with whatever the market’s average annual return will be.  The way I look at it is this:  if it is rare to beat the market, then matching the market is the best you can do no matter what.

3.       As a passive investor, my role is to minimize expenses.  Since I don’t have to pick funds or individual stocks based on anything other than asset allocation, my only responsibility is to minimize the amount of money taken out of my portfolio by fees.

4.       Investing for Retirement is stressful.  Whether I beat the market every year, match its returns, or loose big,  I will be stressed during every moment that I think about my retirement portfolio.  It is one thing to invest in a discretionary portfolio, its another thing to invest in a portfolio that will be your means of living after age 65.  The importance of the retirement portfolio means that every investing decision has enormous weight – and only compounds my fear of making a decision that could cost me thousands of dollars.  I want to minimize the time (and therefore stress) I spend on my retirement.

Hopefully these assumptions help to explain the thought process I went through on my way to buying a target date fund, but in case its still not clear, here is a recap of how they influenced my research.  Assuming that I can’t beat the market put me on the path towards mutual funds and index funds. Both the  “investing is stressful” and the “average returns will allow me to retire” assumption led me to index funds.  While the second assumption has an obvious connection to index funds, the “investing is stressful” assumption led to this train of thought:  At the end of the day, even if the market averages only 6% a year, I can still look back at my investment decisions and say I did the right thing.  Index investing is the equivalent to being a smart poker player.   Sure, you might occasionally do better if you stayed in a game with a bad hand only to win on the river, but 9 times out of 10, if you play smart and play the percentages, you’ll be the guy at the final table.   Knowing that you made the smartest and safest decision you could helps to alleviate the stress in my opinion.  The third assumption resulted in my obsessive analysis of expense ratios and account fees.  Finally, the “investing is stressful” assumption led to me choosing target date funds over a more time consuming index fund portfolio.  If you are using these four assumptions, I don’t think it is possible to arrive at a solution that is anything other than “buy Target Date Funds.”