Investing

Is there a financial equivalent to the maxim “first do no harm?”

What if one of the guiding principles of medicine was applied to the world of financial advice?

What would the financial services landscape look like if product manufacturers and advisors were required to play by rules similar to those that exist for physicians?

First, my guess is that the financial corollary to the application of primum non nocere (first do no harm) would be:

Morningstar recently published findings from a study that ranks U.S. fund managers based on the amount of wealth they have created or destroyed for their clients over the past decade.

The decade ending this past December 31 was difficult for most investors.

One of the broadest equity indexes--the S&P 500--declined by more than 10 percent during the 10 year period that began on January 1 2000.

After adjusting for inflation, the decrease during the previous decade was more than 30 percent.

However, as discussed by New York Times columnist Ron Lieber, most investors did not begin the decade with a pot of money that remained static from the standpoint of inflows and outflows.

Capital market volatility is a critical factor in the financial lives of retirees and near-retirees.

Volatility plays a major role in the pricing of many different types of annuities, and volatility is the major driver of sequence of returns risk.

2009 was a year of extremes in terms of volatility.  Consider, for example, an exchange traded fund (VXX) that seeks to replicate the CBOE volatility index (VIX).  This ETF hit a high of 119 in February of 2009 and then went as low as 32 in December 2009—a decrease of 73%.

It turns out that many target date funds are juiced by high yield or "junk" bonds.

The issue is that target date funds (which presumably become more conservative over time as participants age) are riskier than what is generally perceived by consumers, regulators and financial advisors.

This higher level of risk is consistent with the higher than expected volatility and losses experienced by many target date funds during the financial crisis.

Longevity risk has existed as an asset class for quite some time but has primarily been the focus of larger institutions.

In a recent Financial Times article, the author discusses the recent proliferation of longevity and mortality related investment products.

The range of product options include:

There is a great piece in the Wall Street Journal--in the form of a quiz--that reveals survey results on a range of questions related to retirement planning.

Many of the questions and answers are eye opening.

All questions are framed in the general context of the financial crisis and are intended to shed light on how pre-retirees' knowledge, views and plans have changed over the past couple of years.

Well worth the read.

Source: Wall Street Journal

There is a great op-ed piece in the Washington Post that discusses what the authors refer to as the "retirement problem."

In a detailed article, the authors lay-out a case for why it may not be so wise--from a public policy perspective--to leave all retirement planning decisions in the hands of individuals and the free market.

In a nutshell, the authors point out that:

The U.S. Supreme Court is currently listening to arguments (which happen to have support from Vanguard founder John Bogle) regarding the ability to sue fund managers for passing along excessive fees to individual investors.

A favorable ruling could put a dent in the $90 billion of fees generated by the industry annually. 

Warren Buffett's first rule of investing is "don't lose money."

His second rule is "don't forget rule number one."

In a rather odd whitepaper on retirement planning titled "Risk: How Much is Enough," the financial services firm UBS lays-out a road map of sorts for "moving forward" with retirement planning "in a changed world."

What seems clear is that the primary catalyst for the whitepaper is the fact that many financial advisors ignore or forget Buffett's first rule of investing when it comes to retirement planning.