Real returns and purchasing power

We always emphasize purchasing power over nominal dollars when analyzing the probabilities that a portfolio allocation will have an acceptable chance to support a client's financial goals and objectives. Over the past year of atypical volatility and negative returns some clients have been driven from or dramatically reduced their equity positions in exchange for the relative safety and low volatility of fixed income. One of our greatest responsibilities as advisors is to effectively communicate the risk/reward equation to clients. It's always important to remind them that inflation is an ever present factor constantly eroding purchasing power. The overriding question any (especially retired) client has is, "Will I outlive my money?" Exchanging volatility for stability can alleviate short term anxiety, but is it a viable long term strategy? In the video linked below, David Booth presents a series of observations about the efficacy of a "run away" strategy with some surprising statistics about the real returns of T-Bills vs. equities. The historical real returns available from a safe (Government) fixed income portfolio have rarely been sufficient to support typical portfolio cash demands for a significant length of time. The net effect of abandoning equities will likely be to dramatically increase the risk of portfolio failure (zero purchasing power). It may "feel safe" to eliminate risk by sheltering assets in short term Government instruments, but clients then increase the exposure of their portfolios to another risk dimension: the risk that assets won't maintain a rate of growth sufficient to support the client's lifestyle desires. Please take a few minutes to view David's video. It can be shared with clients. If you have difficulty opening the link please contact me.

Byron


http://dfaus.com/u/yx

What's important to discuss?

In order to ensure that we address issues and questions that are relevant to our partners (in addition to issues of general practice interest), we'd like to solicit your input on some specific posting subjects. We've listed topics below we believe will be of particular interest. Please take a few moments to register on the blog through the "Comments" section at the end of this post and then to rate the topics in order of greatest to lowest interest. If you have difficulty with the registration process, contact us and we'll be happy to assist. Should there be items of particular interest not listed, feel free to add them to your response! We appreciate your participation.

Byron


1. Building a business continuity plan for disaster recovery

2. What happens to my practice and to my clients if I am incapacitated?

3. How to evaluate and choose a CRM

4. Should I worry about tracking error?

5. How will DKE's transition to the Black Diamond Portfolio Management System impact my practice?

6. How can I use technology better to improve practice productivity?

7. What is the best way to present the DFA story?