The financial world today – adjusting expectations and planning rules

Has investing changed in the last few years? A recent Morningstar post began with this statement:

BlackRock’s Larry Fink says be 100% in equities. PIMCO’s Bill Gross claims equities are dead. Vanguard’s Jack Bogle preaches stay the course with a balanced portfolio. To read the headlines, it seems that three of the best and most trusted names in finance are decidedly at odds with one another. In truth, their forecasts are far more similar than dissimilar. [from Should I Stay or Should I Go? – Don Phillips, 10/11/2012]

His point is that neither extreme, 100% stocks or 100% bonds, is rational. Instead, we have to realize that returns will be less for now and yet still invest well.

**Expect less: ** Interest rates are at all-time lows, making fixed income returns meager, and equity investments may depend directly or indirectly on renewed growth and employment, which is not rebounding significantly any time soon regardless of who our next President is.
**Diversify more:** The correlation among asset classes is closer than before, making diversification more challenging. As Feifei Li said in a recent Morningstar post, it is not a question of having all your eggs in one basket but of having too many eggs. This would mean adding market-neutral, commodities, and real estate, to a portfolio of just stocks, bonds and cash. Among other ideas, writing calls could even be a good strategy to create income so that you have a positive return in an otherwise flat market.
**Cut back withdrawals:** Where we used to say, as a rough rule, a 4% rate of distribution would allow the portfolio to grow to face future inflation, while any higher withdrawal rate would eat into principal quickly. Today, the rule may be a 3% rate, or we may need to use other ways to analyze the proper rate of withdrawal, such as the Withdrawal Efficiency Rate from a recent Morningstar post [see below]
**Tax planning: ** As we indicated in a recent post, taxes will have more impact so tax planning to achieve even a 3% rate of return is essential. With the changes coming in 2013, good planning could add to your returns over time. **See** [[http://sab-esq.com/2012/10/20/2012-year-end-tax-planning-2012-vs-2013-tax-strategies-requiring-action-now|Year-end-tax-planning-2012-vs-2013-tax-strategies-requiring-action-now]]

**References:**
**Should I Stay or Should I Go?** – Don Phillips, 10/11/2012
It seems that three of the best and most trusted names in finance are decidedly at odds with one another. In truth, their forecasts are far more similar than dissimilar.Eggs Are Not Enough: The Truth About Diversification – By Feifei Li | Posted: 10-22-12
**Eggs Are Not Enough:** The Truth About Diversification – By Feifei Li | Posted: 10-22-12
Diversification means not putting all your eggs in one basket. But do you own too many eggs?
**Retirement-Withdrawal Strategies Quantified** – David Blanchett, CFA, 10/19/2012
According to a new Morningstar metric, the best approach incorporates portfolio value and life expectancy.