AskDong

A few weeks ago, I took over management of my parents rollover IRA plans (rolled over from 401ks). The volatile market was causing undue stress for my dad, and I thought his portfolio was also far too risky. I had been arguing that either I or my brother should take over the portfolio for the past two years. My Dad is not the next coming of Warren Buffet. Not that I am either, but at least I have a better sense what the appropriate risk level should be given where my parents are in life. They’re happily retired, and are not looking to amass riches. I want my parents to enjoy their retirement. I don’t want them stressed because the market is suddenly down 3% that day. My Dad was stressed, and my Mom even more so not just from taking market losses but also from having deal with a grumpy husband if it were particularly bad day or bad week.

My parents want to have enough money to allow them to do things they want to do without too much worry. Their portfolio in some regards is underfunded, but hopefully enough. I also like to think that both my brother and I would assist in whatever manner we can if the markets are not helpful. What they can’t afford is if the portfolio were to suddenly lose 30% of it’s value. Given the composition that was not an impossibility.

However as I take over management of their portfolio, I find myself adjusting to managing a portfolio that is very different from my own. My ideal asset allocation has very little in terms of bonds, less than 10%. My parents should have about half their portfolio in fixed income, I think. That’s the main problem, I just think. I don’t actually know as I haven’t done that much research into what the proper asset allocation is for someone of my parents’ age.

Most Americans including myself assume that we’ll retire.  We think of retirement as natural stage of our lives, not too different from puberty. Everyone goes through it we assume.  The fact is retirement is a modern concept. Historically, and in most areas of the world people have worked up until the day they died.  Of course historically speaking, people have died fairly young. In Zambia the average life expectancy is a mere 37 years of age.  If I could only expect to live 37 year, I can’t imagine I would be thinking much about saving for retirement.

It’s well publicized that Americans are not saving enough for retirement. True enough if most Americans want to stop working and live off retirement savings, they don’t have enough. Over the last generation we’ve seen some reversal in the age old trend of the younger generation taking care of the older generation as an increasing number of younger Americans have become reliant on the largess of previous generation - they’re living at home to a greater degree in the least.  A bountiful retirement is and will be out of reach of many if not most Americans.

At the end of the day, however, I think as society we must accept that not everyone will be playing shufflepuck on 21 day cruises.  Retirement is in the end just another product to be consumed.  Just as I can’t afford a 60 foot luxury yacht, for many retirement is just another one of these luxury goods that they can’t afford.  Of course for some they have chosen or at least haphazardly chosen to consume other luxury good today instead of retirement later.

April and the 1nd Quarter of 2008 started off with bang. All three major U.S. Indexes were up well over 3%. My investments were up as well, just not quite as much. My portfolio given the hedges has a better relative performance when the market is down. However, I won’t complain too much about the rally.

Much of the performance on actively managed brokerage accounts came from the speculation. I brought calls on AAPL in February when the stock traded near $120. AAPL is now back to nearly $150 a share. Those options have so far returned nearly 100%. Of course they could also be near worthless had AAPL tanked further. I’m biased though, I’m a devout Mac user and Apple aficionado.

Last month I also introduced a historic performance chart, but given that I’ve only begun tracking all my investment in accurate detail since January of this year, the revised chart is somewhat limited at this point. As I accumulate more data, this chart should become more meaningful.

After reading this article on CNN, I felt sick in my stomach about the current state of American values. As the current mortgage crisis continues to unfold, I’ve become more cynical. I had my reservations around the bail out of Bear Stearns, especially after JP Morgan quintupled it’s offer to $10. I still feel for many the Americans who are struggling in souring American Economy with mortgages they can’t afford. I have no such sympathy for the Copes whom CNN profiled.

It’s not because they worked in the heart of the subprime mortgage industry in Orange county. Employees are often as much victims of short sighted business practices as customers. Ask the numerous ex-employees of Enron.

I’ll let quotes from the article speak for themselves with some help from my own commentary

• “The two didn’t say exactly how much money they made at their last jobs but Kent admitted they each had six-figure incomes.”
• ‘”We’ve used up most of our reserves, cashed in her 401K,”‘ - Given they were making over 200k, you would think they wouldn’t have to resort to dipping into the 401k
• “Today, they’re trying to get by on his unemployment benefits of about $450 a week, which covers only about an eighth of the basic payments they owe every month” - If basic payments are almost $10,000/month, I hate to think what their total expense are.
• “And they’ve made cutbacks: trading in Kent’s Corvette for a Suburban and getting rid of the gardener, for example” - A Suburban is a cutback?
• ‘”You know you could take a roller coaster ride down,” he said. “But you never envisioned it could be a free fall.”‘ - Aren’t you basically in a free fall on roller coaster on the way down

I feel bad for coming away from the article so critical of Copes. I actually don’t particularly like casting judgement, even though I do it all the time. We all have our financial shortcomings. I’ll be the first to admit that like the Copes, I eat out too much. However, having just come back from Southern California and Orange County, I readily see how things have gone wrong.

Orange county is amplification and microcosm of America. We’ve become a country too concerned with immediate gratification rather than long term satisfaction. The Copes are in their predicament not because they didn’t earn good money. They did. They are in their predicament because they had neither a contingency or sustainable plan. If you know you’re on a roller coaster, then you should know that you need to build and save energy (money) on the way up to use on the way down.