Tuesday, January 8, 2013

What is Retirement Anyway?

The Oxford Dictionary provides a definition of retirement as “the action or fact of leaving one’s job and ceasing to work.”

I suppose it would be fair to look at the definition, decide that the first part (leaving one’s job) is at least somewhat redundant, since ceasing to work would infer that one has decided to stop working. 

For almost all people, the concept of ceasing to work would in itself be redundant, because it is very likely that if one were to leave one’s job in order to cease working, one may still have work-related activities like cooking, cleaning, etc. that would be ongoing?  A counter may be “I like cooking”, and that may be true, but that doesn’t eliminate the work effort required, as related to preparing a meal, and perhaps cleaning up afterwards.  And… even if you like cooking, does that also mean you like doing laundry, ironing, gardening, etc.?  It is highly improbable that anyone would simply cease working, entirely!

So, what is then implied by retirement?  After all, all working people are encouraged to save and plan for their retirement, as if this term has the same implied meaning to all people.  Some people will offer that they would like to retire in order to be able to travel, paint, write, read, relax, etc.  Generally speaking, if someone says something like that and you ask “and then what?” you should expect a blank stare in return.  What I mean is, if someone says they’d like to travel the world when they retire, ask him or her what they will do once they return.  Most people don’t let reality get in the way of their retirement dreams and vision!

Philosophically, retirement means:
1.     Self-sufficiency; not having to rely on others (god forbid you’re hoping that the government will take care of you in your old age!),
2.     The ability to sustain myself financially for an indefinite period of time, because I cannot know how long I will live,
3.     Leaving my loved ones financially secure, safe and without concern for their wellbeing and sustainability, that I had previously accepted responsibility for, and
4.     Freedom from having to answer to others in a formal work environment, for your daily actions, presence, efforts, performance, etc.

I cannot control # 1 above, because I may need care and assistance in the future that I cannot predict today.  The other 3 points are absolutely within my control!

More rationally, retirement may mean:
1.     That I have reached a level of financial sustainability that will allow me to support myself for an indefinite, hopefully long-term period of time,
2.     That I have reached a stage in my life where I would revert to self-sufficiency in terms of employment, or my day-to-day occupation.  This simply means that instead of being stuck behind a cubicle in a dull, neutrally painted office, I expect to build something, write, work part-time at Starbucks, volunteer my time and effort in support of my favorite charity, etc.

Many people have discovered new skills, talents, enjoyment and great pleasure in ‘retirement’.  Oftentimes, these people are busier in retirement than what they had been while working!  More importantly, their communities, society at large, and people generally surrounding them have been enriched by their ongoing contributions. 

Whatever you plan to do… please don’t cease working… you have too much to offer, disqualifying you from doing nothing with all that experience and knowledge you’ve managed to gather over your first 75-80 years!

Sunday, January 6, 2013

What is a Concentrated Position?

Defining a concentrated position:  A concentrated position occurs when an investor owns shares of a stock (or other security type) that represent a large percentage of his or her overall portfolio.  The investor’s wealth becomes concentrated in the single position.

According to R.W. Baird (Wealth Management), depending on the volatility of the stock, and the size of the client’s portfolio, a position is often considered to be concentrated when it represents [even] 10% or more of one’s portfolio.

Perhaps we all have friends and colleagues who have an investment portfolio heavily concentrated in one particular asset class.  They may hold a concentrated equity position in one stock/asset for a number of reasons, for example:
- A lack of knowledge and/or experience in asset diversification management
- A lack of knowledge regarding general investment risk management
- Lack of liquidity to acquire other assets; i.e. buying company stock in small quantities that add up over time, e.g. via a share purchase program (payroll deduction)
- A feeling that they know their employer better than other corporations, and that holding their employer’s stock is therefore less risky than investing in other equity
- Personal emotion related to control and/or a sense of belonging – i.e. the more of my company stock I own, the more obvious my commitment to the business, the lesser my risk of termination, better my chances of promotion, higher pay, etc.

Family wealth created by holding a single stock that appreciates substantially in value over time is fairly common.  For example, senior company executives receive stock or stock options as part of their compensation, investors benefit from superior appreciation of one stock relative to the rest of their portfolio, or family members inherit a large position in a single stock.  Regardless of how the concentrated position is acquired, it results in a disproportionate allocation of wealth, which exposes the family to undue risk that should be understood and managed.

Whether investors understand the risks of holding a concentrated position or not, there is a tendency to hold onto these positions.  Corporate executives may also face insider selling constraints or concerns about how a sale would affect the market price of their company’s stock.  Other investors simply have an emotional attachment to the stock.

Many investors are concerned about the tax implications of selling.  Despite these seemingly valid reasons, there is a critical point for most investors and families where the desire for wealth, income and lifestyle preservation outweighs the need for further wealth creation.  This is especially true when investors approach retirement or life events during which they will more heavily rely on their accumulated wealth.

If you have a concentrated position representing 10% or more of your investment portfolio, speak to your investment advisor in order to come up with a risk mitigation plan, and a diversified portfolio that will be better suited to your beneficiaries in the medium- to longer term.  There are several advisors who specialize in exiting concentrated positions; find the one best suited to your financial goals and address this common investment challenge while you’re able to do so.

“The chance of gain is by every man more or less overvalued, and the chance of loss is by most men undervalued” – Adam Smith, Wealth of Nations

Vanguard white paper:  Investment Solutions and Alternatives for Addressing Concentrated Equity