The Terrible Truth About Your Retirement Portfolio

Your portfolio has too much risk and probably none of these essential ingredients

I have bad news. Virtually everything you’ve ever been told by your broker or money manager or the financial media, about investing for retirement, is dead wrong. Your portfolio is likely exposed to far more risk than you think it is, and it is not delivering you a real rate of return that is higher than real inflation.

The Terrible Truth About Your Retirement Portfolio
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This is the reason I launched The Liberty Portfolio, which is designed to achieve a risk-adjusted real rate of return that does beat inflation.

Real Rate of Return and Inflation

Real rate of return is the return required on your regular or retirement portfolio, after subtracting fees, taxes and cost-of-living increases, in order to not lose purchasing power. If you don’t earn enough from your investment portfolio to keep up with inflation, you lose purchasing power.

If you lose purchasing power, then you cannot maintain your style of living. You will have to downsize, spend less on the things you like and you won’t be able to travel or visit nice restaurants — all the things you want to do in retirement.

If inflation is only 3-3.5%, why should achieving a real rate of return of 3.5% be all that difficult? Because inflation is not 3.5%. It’s closer to 10%. That is why your retirement portfolio is in real trouble because it’s being “safely” invested for that 3.5% goal.

How can inflation be closer to 10%, when we are all told it is 3.5%? For that, you have to understand how the U.S. has calculated Annual Cost-of-Living Adjustment (“COLA”).

From 1940 to 1975, Congress adjusted social security payments 11 times to offset inflation, so the average was 5.7% per year. In 1972, Congress decided that COLA would be automatically increased each year based on the increase in the Consumer Price Index, or CPI. Adding in 5.7% extra every year was not a big deal in 1973.

Except, in 1980, the CPI hit 14.3%. Congress had to do something to keep these massive increases from getting more out of hand then they already had. What if it could reduce the amount of the annual increase? It did … by cheating.

It changed how the CPI was calculated, so the reported increase in the prices of goods and services that form the CPI was much lower than what reality showed. Now the CPI was designed so that, even if inflation really hit 10% or more, it would appear as though it was only about 3.5%.

Except the average American did not know about or understood this rule change, so we all believed we were only losing purchasing power at a 3.5% rate instead of what it really was, which was closer to 10%.

How do we know inflation is closer to 10%? The Chapwood Index reflects the true cost-of-living increase in America. Updated and released twice a year, it reports the unadjusted actual cost and price fluctuation of the top-500 items on which Americans spend their after-tax dollars in the 50 largest cities in the nation. ShadowStats also calculates the CPI based on pre-1990 criteria.

I guarantee that if you ask your broker about any of this, he will deny it or he won’t know what you are talking about. It’s a lot easier to claim you beat inflation when that number is 3.5% and not 10%.

Risk to Retirement Portfolio

Your retirement portfolio is almost certainly carrying far more risk than you believe. That’s because your retirement portfolio is probably stuffed with a lot of bonds, some stocks and a few high-yield products. However, your retirement portfolio, therefore, likely has a very high beta — meaning it is highly correlated to the overall market. That is, your portfolio is likely to move up and down in conjunction with the market. If the market goes up or down 7.2%, your portfolio will likely move the same amount, or even more.

That’s bad.

You want your portfolio to have enough non-correlated assets that it does not move lock-step with the market. You want your retirement portfolio to truly be an all-weather portfolio, and not what is advertised as being one. Non-correlated assets are alternative investments that don’t move in conjunction with the market.

In fact, Wharton professor Richard Marston, in his book Portfolio Design: A Modern Approach to Asset Allocation suggests that most portfolios should have at least 40% allocation to alternative investments.

I guarantee that if you ask your broker to show your portfolio’s allocation, you’ll be lucky if there are any alternative investments. I doubt you have any if you constructed your own retirement portfolio. With the market 25-30% overvalued, we are going to have a nasty correction at some point and your retirement portfolio is probably highly correlated to the market.

What Next?

You need to check with your broker and get him on board with a proper allocation, or rejigger your portfolio yourself. The Liberty Portfolio just launched and I’m building this kind of portfolio now. In the meantime, read Marston’s book. Start hunting around for publicly traded vehicles that truly offer non-correlated investments. Consider a self-directed retirement account, which permits you to make private investments. Do anything, but don’t just stand there.

Your retirement is not safe until you act.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at [email protected].

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