Week 12 of your 14-week Bermuda Plan** to Improve Your Financial Lifestyle

Readers, your review plan is almost finished — just two weeks to go — don’t give up now. This week’s column focuses on final review of your pension, while translating that knowledge into setting up an individual investing plan outside of your pension planning for the future.

What average returns should you be looking for in long-term appreciation of your pension and your personal investing?

The chart shown demonstrates on a statistical basis the average return for stocks, bonds over 20 years through year end 2013.

We see that the S&P index (made up of the weighted values of the 500 largest publicly-traded US companies by market capitalisation) returned 9.22 per cent, the Barclays Aggregate Bond Index (representing most traded US investment grade bonds) returned 5.74 per cent. These indexes are not adjusted for fees. Yes, there is another set of numbers in that chart. We will discuss them later in the article. For now, take a guess what they represent.

Thus, using simple math assumptions for a pension balanced fund of 60 per cent stocks and 40 per cent bonds, the average return — without taking into consideration any fees for management, administration, sales commissions, custody fees, etc — would be an estimated 7.8 per cent. Using ordinary assumptions, then, a more conservative portfolio (more bonds than stocks) would generally have a lower return than the balanced fund, and a more aggressive fund weighted toward stocks will be closer to the stock index. Keep in mind, that these are average returns — meaning that on the proverbial bell curve, some securities under-performed while others will reach higher than the average.

Fee-adjusted rates of return. Now comes the more difficult section because different pensions firm, different portfolio managers calculate fees in different ways.

What does this mean to you? Fees affect the growth of your pension portfolio (or any portfolio) over time. You want your pension portfolio to have competitive fees with the real fee-adjusted rate of return reported on your statement so that you know where you stand.

I was unable to determine, based upon website information currently available, what the total fees are charged by Bermuda pension administrators/managers. So, it is up to you when meeting with your pension adviser to obtain fee clarity.

Calculating an illustrative real fee-adjusted rate of return. Let’s assume that the total fees are 2.3 per cent (this percentage was actually charged by one Bermuda pension administrator/manager — a reader provided a redacted copy of an individual pension statement). Taking our assumed average rate of return for the illustrative balanced fund of 7.8 per cent minus all fees of 2.3 per cent, equals a real adjusted rate of return (RoR) of 5.5 per cent.

A very simple calculator to track how your investments are accumulating is The Rule of 72. Take an illustrative accumulated pension example. An individual worked for ten years, and accumulated $70,000 in a pension. Divide 72 by the 5.5 per cent rate of return = 13. The answer means that the accumulation of $70,000 will double in 13 years without any additional pension contributions (or appreciation) at all.

Critics will say this is not realistic, but the long-term appreciation bears this out. Imagine adding in additional contributions as well. Most important, this number also assumes that you do not move your pension in and out of various allocations.

Do yourself a favour. Think long-term, always with the exception of the close-to-retirement individuals. Be willing to be a little more aggressive with investment when you are younger, then taper off as you age, accumulate other savings and investments (your first home, an individual investment account). Why? Because time is on your side. Do not focus on short-term investing results.

Why? Every market crash in living memory has recovered.

Market crash date / Time to recover

1987: 456 trading days

1997: 46 trading days

2000: 1,015 trading days (this in spite of the tech bubble blow-up and the terrible tragedy of September 2001)

2008: 230 trading days

2011: 116 trading days

See complete article. Thirty years of stock market crashes – and the signs they were coming by Kyle Caldwell, The Telegraph, October 17, 2015. http://goo.gl/6UrslT

Can you translate understanding your pension investments to taking tentative steps as an individual investor. Consider do-it-yourself investing, or taking the passive investor approach with high-quality, low-cost mutual funds.

Do-It-Yourself

• Pluses. Should you think about just buying individual stocks or bonds, since you have more control, and can possibly save fees? The process requires much investment educational reading, opening an individual investing account here in Bermuda or online, keeping your emotions in check when markets are crazy and monitoring of your security positions.

• Minuses. Don’t feel you can be a successful DIY individual investor? There are valid reasons: individuals cannot afford to buy sufficient securities to diversify investment risk; they react emotionally, making poor decisions during market downturns; since they have barely enough energy to focus on family, working and living, DIY just becomes another life stressor.

Investment mistakes. You will make them. According to various industry sources, the biggest errors that investors make are these:

• Too aggressive a portfolio for your comfort level, especially close to retirement age.

• Young investors who are far too conservative.

• The worst of all, reactionary pension (and individual) portfolio moves in and out of aggressive to conservative allocations when markets crash, thereby locking in losses, reducing your portfolio capital, sometimes never to fully recover.

And, that is what the second set of numbers represent on the Dalbar chart. The average equity (stocks) and fixed-income (bonds) investor do not come close to index returns — all due to impulsive investor behaviour.

You guessed it! Investors sell out at market low values and pile into investments when markets are at high prices. Time after time.

I urge you to continue to learn about your investments. They are so important for your future.

The Bermuda 14-week plan started on August 1, 2015 in The Royal Gazette Money pages each Saturday. To find the prior articles, simply type Martha Myron into the RG search engine.

Each week — for more than 761 weeks — I’ve written finance articles for you, the RG Reader. Enjoy. Learn. Use them to become more financially literate.

** The original idea for the 14-week series came from Business Insider “Take our 14-day Plan to radically improve your finances” by Libby Kane, May 20, 2015.

*** Dalbar’s 20th Annual Quantitative Analysis of Investor Behaviour 2014 Adviser Education, compliments of Russell G Thornton, CDFA, Wealthcare for Women. http://wealthcareforwomen.com/dalbar-2014/

Martha Harris Myron CPA PFS JSM, Masters of Law: International Tax and Financial Services. Appointed to the Professional Tax Advisory Council, American Citizens Abroad, https://americansabroad.org/. The Pondstraddler* Life™ Consultancy providing financial planning, publications, presentations for Bermuda residents, their multinational families and connections. Contact: martha@pondstraddler.com