Part 2: Developing A Long-Term Plan For Your Retirement

Putting The Odds In Your Favor In Part 1 of this 3-part series, I identified the 3 main questions that need to be considered by those planning for their retirement and developing a long-term financial plan: What is most important to you personally and financially? Do you have the right financial plan and savings to […]...
David Roberts
August 7, 2021
Home » Investing » Part 2: Developing A Long-Term Plan For Your Retirement

Putting The Odds In Your Favor

In Part 1 of this 3-part series, I identified the 3 main questions that need to be considered by those planning for their retirement and developing a long-term financial plan:

  1. What is most important to you personally and financially?
  2. Do you have the right financial plan and savings to get there?
  3. How will you stay on track to the end?

In this follow-up article, I would like to look specifically at question #2 – do you have the right financial plan and savings to get there?

“A goal without a plan is just a dream” – Dave Ramsey

One of the biggest drivers of your retirement plan will be your portfolio, which will provide the growth and future income your plan requires. Even though there are no guarantees in investing or in life, you can still strive to put the odds in your favor in a way that matches your comfort level with risk and market volatility.

But here’s the problem: to put the odds in your favor, you must minimize or eliminate the things making it more likely that you will experience portfolio underperformance – potentially compromising your long-term goals.

To tackle this problem, we’re going to look at what decades of research from economists and behavioral psychologists have to offer. It’s fortunate we have these powerful insights into how portfolios should be constructed, so we can strive to minimize and eliminate the obstacles leading to portfolio underperformance.

What Are Your Obstacles?

Obstacle #1 Is Active Management.

Active management is where professional investors attempt to beat market returns through calculated stock selection and timed trades, attempting to gain excess returns on an investment relative to a benchmark or index (like the S&P 500).

In my article “Market Timing Has Always Been A Terrible Idea,” I describe how trying to predict pricing movements and acting before they occur is regarded by economists as irrational behavior which often leads to results opposite from those the average investor is trying to achieve.

Decades of academic research has shown that market timing is hard – if not impossible – to do consistently over the long-term, even for professional investors.

As studies by SPIVA have shown repeatedly that 70% – 80% of active managers underperform their benchmarks every year. And the longer the time horizon, the higher the likelihood of underperformance. Even top performing managers struggle to maintain outperformance over time. And in some cases, their average performance has been significantly below the benchmark. Still, some investors believe they can pick those few top managers who will consistently outperform.

Unfortunately for them, top performing managers rarely persist, as the U.S. Persistence Scorecard (December 2020) shows.

“The Persistence Scorecard measures that consistency and shows that, regardless of asset class or style focus, active management outperformance is typically short-lived, with few funds consistently outranking their peers.” (p. 1)

Obstacle #2 Is Passive Investing

Passive investing is a rules-based, transparent strategy which attempts to replicate the performance of a specific benchmark or an index like the S&P 500. This strategy hopes to maximize returns by minimizing the costs and underperformance threat from frequent buying and selling (market timing). Passive investing is the opposite of active management, and you could make a good case that a passive investment strategy would be a suitable alternative to active management. Despite this truth, underperformance is still almost certain since management fees and expenses can directly lead to underperformance of the benchmark or index being replicated.

Obstacle #3 Is Investor Behavior

Investors are “normal” but vulnerable to decision-making biases and errors leading to behaviors that could prevent them from planning for and achieving their goals. In my article “Market Timing Has Always Been A Terrible Idea,” I cover some of these and how they affect investors’ behavior with their money.

The Evidence-Based Approach

So, we’ve seen some of the things that can lead to underperformance. Now, using the key findings identified by academic science, let’s look at what can potentially help you outperform the market over the long-term. Past performance is certainly no guarantee of future results, so what we’ll be looking at is a strategy attempting to tilt the odds in your favor with an evidence-based approach to building an investment portfolio.

Diversify Globally

While it may seem that the US market is outperforming many of the countries comprising the international “developed” and “emerging” markets, the long-term picture still points to a need for global diversification. Nobody knows what the future will bring. But if you own a diverse mix of companies from around the world, you can worry less when any one company or country experiences losses, and you won’t have to fret about picking those countries who are likely to outperform in the future.


An evidence-based investment strategy also involves tilting to the factors that help drive returns. Very simply, factors are sources of expected returns that have been identified in the capital markets and which are both available – you can invest in them – and attainable – their ownership cost does not negate their value. So, it follows that if factors are significant drivers of asset class returns, you should target the return opportunities of multiple factors by broadly diversifying across multiple asset classes.

You will have, no doubt, heard of a few of these factors:

  • Stocks tend to outperform bonds
  • Small company stocks tend to outperform stocks of larger companies
  • Cheap stocks tend to outperform expensive stocks
  • Stocks which tend to out-perform in the near-term tend to continue doing so
  • Minimum volatility stocks tend to outperform high volatility stocks while offering better risk-adjusted returns
  • Stocks of high-quality companies tend to outperform those of lower-quality companies
  • Bonds with lower credit quality tend to outperform bonds with higher credit quality
  • Bonds with longer durations or maturities tend to outperform shorter term bonds

Long-Term Approach (Stay The Course)

Diversification and a factor-based strategy will require patience and discipline. Over time, markets have historically rewarded patient and disciplined investors.

“Money is like soap, the more you handle it the less you will have.” Eugene Fama, Nobel Laureate

“The stock market is a device for transferring money from the impatient to the patient.” Warren Buffett

As an example, the chances of losing money in the S&P 500 is a bit above 50% on any single day – basically a coin toss. Over any 5-year period your chances of losing money slim down significantly, and we’ve never seen a negative 20-year period.

Plan For Your Goals

I know you want to have the odds tilt in your favor. My goal is to help you avoid being the “average investor” who barely outpaces inflation, but rather the investor who captures the returns that the markets have to offer. One of the ways we’ll do this is with an evidence-based investment strategy which is neither passive nor active, but rather includes some of the best elements from both approaches:

  • The funds are rules-based and transparent (passive)
  • The funds feature factor, risk, and behavioral tilts (active)

(Diversification and asset allocation strategies do not assure profit or protect against loss.)

Once we have a plan and portfolio in place, we will then work closely together to make sure you stay on track.  As your life and circumstances change, we can make the adjustments required at that time. I am committed to being there with you every step of this journey and helping you to make it as successful as it can be.

I hope this information has been helpful. I am happy to answer more questions or to help you design a financial plan that will give you the confidence about the future you want. Working with me is easy:

  1. Schedule a phone call
  2. Get the right financial plan for your situation
  3. Keep your plan on track with ongoing support from me

Get in Touch

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Many have no financial plan for retirement. At Plan For Your Goals, my mission is to help both the newly retired and the nearly retired take control of their finances with an evidence-based plan so they can retire with confidence.


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