July has been and will be a busy month for me. I just returned from a two week stay at Lake Barkley in Kentucky. This stay included the ninth in a series of extended family gatherings at the lake. (More about this awesome event later this week.) Towards the end of the month I am traveling to Ithaca, NY for my 45th high school reunion. Finally, I have been busy with an updated assessment of my retirement plan and net worth performance as of the end of the second quarter.
My net worth is up 6.4% since the second quarter of 2013, up 4.3% since the beginning of the year, and up 2.2% during the second quarter. Not great but not negative and still exceeding the inflation rate.
My portfolio of TIPS has done well. If you think about it, the fact that stocks and TIPS are both on the rise is an enigma and perhaps a warning to us all.
Stock values seem to be increasing because buyers expect continued economic growth and higher corporate profits.
Bond prices are also increasing, apparently because the market is concerned about a slowdown in economic growth. Perhaps these bond buyers are thinking about the surprise 2.9% decline U.S. GDP in the first quarter.
Stock buyers and bond buyers cannot both be right. Our economy is either going to grow, decline or hold steady. This means that one or both of the stock and bond markets are providing a false indication. This has me worried – enough that I am considering making even more moves toward conservative investing.
My concern about overvaluation of stocks and/or bonds caused me to take a hard look at my retirement plan. I updated my investment asset data using the Financial Engines analysis tool that my 401k provider makes available for free. I then let the tool do its thing and predict my retirement income based on average and poor market performance scenarios.
The tool concluded that I have a greater than 95% probability of reaching my retirement income goal, even if market performance is poor. However, it also told me that I could probably “do better” if I was less conservative in my asset allocations. Financial Engines gave me recommendations for changes in my investments and based on this “what if” scenario, gave me new income predictions.
I am not going to follow the recommendations because the numbers don’t justify it. According to Financial Engines, if I add more equities to my portfolio (it recommended specific funds), I could probably increase my retirement income under average market conditions by 1.4%.
The problem is that if the markets perform poorly with this revised portfolio, my predicted retirement income would be 2.3% lower compared to maintaining my current allocation.
Also, Financial Engines warns me that there is a 5% chance that the value of my current investment portfolio will decline by 4.4% over the next 12 months. For the proposed new portfolio, the warning is for a potential 8% decline.
I think you will agree that the potential gain of changing my investment allocations is not worth the risk. By making the changes that Financial Engines recommends, I have a potential retirement income gain of 1.4% but my risk profile almost doubles. Only if the market performs at average levels do I come out ahead, and then only slightly.
The Fed is going to let interest rates rise eventually. This will affect stock and bond prices. I will probably be making some changes in my investment plan to prepare for that because I like where I am now financially and don’t want to experience a big hit. Stay tuned.