The Securities Litigation Expert Blog

Sustainable Withdrawal Rates - Revisited

Posted by Jack Duval

Nov 11, 2013 4:02:16 AM

William Bengen, the financial advisor who created one of the most heavily cited studies on sustainable withdrawal rates, is backing off his previous findings.  (Barron's)  Bengen's 1994 study (Journal of Financial Planning) concluded that a portfolio balanced 50/50 (stocks/bonds) could sustain a four percent withdrawal rate though almost all market scenarios.  (Importantly, Bengen's analysis assumed the four percent was set off of the initial premium amount and then was adjusted each year for inflation.)

Bengen's hedging should be obvious to anyone in the financial planning business.  Yields on stocks have fallen and yields on bonds have plummeted, making it very difficult to create the required returns without capital appreciation.  This simple fact requires advisors and investors to make a difficult decision:  settle for lower withdrawal rates, or take more risk.

From the big moves in junk bonds, master limited partnerships, and other high-risk investments, it appears that many advisors and their clients have opted to take more risk.

As many have warned, this has usually ended badly.  See here, here, and here for our previous discussion of yield chasing.

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Topics: yield chasing, sustainable withdrawal rates, investments, risk, fixed income

Yield Chasing in Complex Products will End Badly

Posted by Jack Duval

Feb 13, 2013 2:42:00 AM

This blog post continues our expert analysis of complex investments and their regulation.

Retail investors are reaching for yield in complex products, a New York Times article reports. (NYT) The result has been a wave of litigation and regulatory concern.

Regulators across the country are confronting a wave of investor fraud that is saddling retirement savers with steep losses on complex products that until a few years ago were pitched only to the most sophisticated investors.

The victims are among the millions of Americans whose mutual funds and stock portfolios plummeted in the wake of the financial crisis, and who started searching for ways to make better returns than those being offered by bank deposits and government bonds with minuscule interest rates.

Tens of thousands of them put money into speculative bets promoted by aggressive financial advisers. The investments include private loans to young companies like television production firms and shares in bundles of commercial real estate properties.

 


See our previous coverage of complex products here, here, and here.

 

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Topics: Master Limited Partnerships, FINRA, yield chasing, fraud, Investment Advisors, litigation, complex products, investments, SEC, fixed income, Compliance, regulation., Complexity

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