The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Not Accumulating

A well-trained investment advisor has been taught concepts like asset allocation, Modern Portfolio Theory, re-balancing, etc.  Younger advisors tend to view these tools are revealed secrets of the investment gods.  While older advisors respect these tools, especially the time-worn wisdom of the tools, some have become suspicious that these tools work better during the accumulation phase of a person’s life than the “decumulation” phase or retired phase.

Investment research has focused on accumulating assets or building a nest egg for retirement, but do those same rules apply when a retiree begins consuming the nest egg for income?  For example, Modern Portfolio Theory shows that returns can be maximized and risk reduced, by investing the portfolio into many different asset classes.  But, why does it make sense to invest any of a retiree’s nest egg into small cap growth stocks which never have dividend income for the retiree, instead of large cap value stocks, which is the “happy hunting ground” for dividends?

Another questionable rule-of-thumb is that retirees should be protected from the stock market, but what is their protection from inflation?  Assume a 60/40 portfolio that is 60% stocks and 40% bonds..  Wouldn’t it make more sense to spend the bonds first, allowing the stocks to appreciate as long as possible?  I know, I know . . . but what if we had another 2008/9 crash?  Have you noticed the stock market has doubled since then?  Have you noticed that many, many stocks pay higher dividends than bonds?

Just because inflation is not a problem today, we cannot assume it never will be.  With increased life expectancy, shouldn’t retirees have as much protection from inflation and that permanent loss of purchasing power it causes, as from the temporary loss of principle during a recession?

For some reason, research into decumulation is mostly from Canada, not the U.S.  Canadian friends tell me they are not as consumed with leaving money for their kids, compared to Americans.  They like to “help your kids with warm hands, not cold ones.”

Rules during the accumulation phase of a person’s lifetime are fairly well accepted.  That body of knowledge is the conventional wisdom of accumulation.  The conventional wisdom of decumulation is still being developed.  Stay tuned . . . .