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Rethinking Risk — Common Barometers for Measuring Portfolio Performance
Your 401K Plan May Be Selling You Short
For Your Retirement Preparedness, Go to CAMP

  RETHINKING RISK — Common Barometers for Measuring Portfolio Performance
by lukedmelendez

If you are researching new investment avenues, chances are "evaluating risk" tops your checklist. Financial experts have developed many methods for measuring risk, but beta and standard deviation are two of the most popular and useful options.

Beta calculates how much (or how little) an investment's price varies relative to a specific benchmark. For stocks, the S&P 500 is often used.1 For bonds, it might be the Barclays U.S. Aggregate Bond Index.2 The mechanics of beta are fairly simple: The benchmark is always assigned a risk rating of 1.0. So, if a stock has a beta of 1.1, for example, it has been 10% more volatile than the general market. If the market has a return of 10%, an investment with a beta of 1.1 would be expected to return 11%.

Similarly, if the market declines 10%, the investment would be expected to drop by 11%. Since it is calculated in relation to a benchmark, beta may provide a more accurate risk reading for specific asset classes and certain types of mutual funds than for individual securities.3

Standard deviation measures how much an investment's return fluctuates from its own longer-term average. Higher standard deviation typically indicates greater volatility -- but does not necessarily indicate a greater risk of loss. How so?

While standard deviation quantifies the variance of returns, it does not differentiate between gains and losses. Consistency of returns is what matters most. For example, if an investment declined 2% every month for a specified period of time, it would earn a seemingly positive standard deviation of zero. Alternatively, an investment that earned 8% one month and 12% the next would have a much higher standard deviation, but by most accounts it would be the preferable investment. The lesson to be learned? Greater volatility in and of itself is not necessarily a bad thing.

One of the key strengths of standard deviation and the reason it is the most commonly used risk barometer, is its universal applicability across asset classes and types of securities.

While understanding the role that risk plays in your portfolio is important, no amount of knowledge can eliminate risk entirely. That's why it is important to manage risk through diversification and other strategies.4 Contact your financial professional to learn more about managing risk in your portfolio.

Investing in stocks involves risks, including loss of principal. Standard & Poor's Composite Index of 500 Stocks (the S&P 500) is an unmanaged index that is generally considered representative of the U.S. stock market. It is not possible to invest directly in an index. Past performance is not a guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. The Barclays U.S. Aggregate Bond Index is considered representative of most U.S. traded investment grade bonds.

Investing in mutual funds involves risk, including loss of principal. Mutual funds are offered and sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest.

For more complete information about any mutual fund, including risks, charges and expenses, please contact your financial professional to obtain a prospectus. The prospectus contains this and other information. Read it carefully before you invest. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a nondiversified portfolio. Diversification does not ensure against market risk.

image credit: unsplash


Is 3 percent some magical retirement savings number? When companies with 401(k) retirement savings plans enroll new hires automatically, many set a default contribution rate of 3 percent of salary. Why not 4, or 5.5, or 6? Are companies saying you can afford to retire if you save just 3 percent of your salary a year?

Hardly. Less than 22 percent of large companies surveyed by Towers Watson even provided 401(k) participants with a suggestion about how much to save. Of the companies that did, 39 percent recommended 10 percent or more. Increasingly, retirement experts say 15 percent is more like it.

While few plans dare set default rates that high, more are moving to 4, 5, or 6 percent. A few use 8 percent, including General Electric, which is tied at No. 13 on Bloomberg's interactive 401(k) ranking, and at least one company, Google, sets it at 10 percent.

If your plan enrolled you at 3 percent, there is a reason. It’s just not a very good reason. Three percent may be the norm simply because it was used in an example the government gave to employers early on, said Rob Austin, Aon Hewitt’s director of retirement research. The other reason it’s common, he said: Plans mimic their peers.

Since most plans match employee contributions of up to 6 percent at 50 percent, anyone who’s kept their contribution at 3 percent purely out of inertia should bump it up to at least meet the company match. That may sound painful, but studies of plans that upped their default contribution rates from 3 percent to 6 percent found that people didn't abandon the plan. If you’re lucky enough to be looking forward to a raise, time the increase in your contributions to coincide with that, so the cash flow hit isn’t as painful or obvious.

If your plan has an auto-escalation policy, it will raise your salary deferral rate into the plan automatically every year, usually by 1 percent. Plans tend to stop those 1 percent increases when workers hit 6 percent. But as with the default rate of 3 percent, some companies have realized they may be sending the wrong message in suggesting that 6 percent of salary is enough to save for retirement. More companies are letting the cap rise to 10 percent or even 15 percent. It costs companies nothing, since after 6 percent employees have usually met the company match.


by Roger Roemmich,

Over the years, it’s amazed me how many people don’t look closely at the big picture of their future retirement plans. They tend to fixate mostly on accumulating assets and retaining assets.

So how should you measure your retirement readiness? That’s hard, but I’ve found that developing what I call a “CAMP” score will help you do it.

What CAMP Stands For

A CAMP score is a function of four key retirement concerns:

C is for Cash flow. Retirement cash flow is measured as a percentage of your pre-retirement cash flow. If you need cash flow of $5,000 per month to meet expenses while you are working and you project your retirement cash flow at $4,500, then you are only 90 percent covered. You need to match your working cash flow (what you’re bringing in now to meet expenses while you’re working) to get a CAMP score of 100.

If you don’t score 100, then you can’t afford to retire with enough of a safety margin to head trouble off at the pass. Working part-time can allow you to make up the difference.

The other three factors that go into your CAMP score are all likely to create declines in your cash flow or your assets. But they must be taken into consideration when deciding whether you can afford to retire. Failure to account for them builds risk into your retirement years that could prove financially damaging and could impinge upon the quality of your life.

These sustaining factors are:

A is for Aging protection against potentially ruinous long-term care needs.

M is for Medical and other health care costs.

P is for Purchasing power, which declines due to inflation. Purchasing power erosion causes cash flow to be inadequate to meet cash expenses or results in using your assets to pay expenses.

Addressing the A, M and P Concerns

Very few retirees will have enough retirement cash flow to self-insure the sustaining factor risks, so measures should be taken to protect against the risks of Aging, Medical and Purchasing Power. Even if your initial retirement cash flow is good, these three key sustaining factors must be addressed, or our retirement quality of life could be at risk.

Aging: Most people have a longer retirement horizon than in the past, due to health care advances. So the odds of large long-term care expenses have risen significantly. This longevity allows for a long, wonderful retirement but also dramatically increases risks related to long-term care needs.

Medical: Most people have reasonable health insurance while they’re working, but make the mistake of trying to save a few dollars each month on Medicare costs when they retire. Unfortunately, this actually leads to higher medical costs and more risk.

Purchasing power: Most corporate pensions, if you’re lucky enough to have one, do not include an annual inflationary increase. Thus, $3,000 per month at age 66 may look great, but at age 86, it doesn’t look as good.

So you can see why an asset-based retirement planning system is seriously flawed. It depends way too much on future investment returns. If investment returns decline, retirees will experience serious declines in retirement cash flows and quality of life.

That’s why I believe cash flow, not assets, is the better way to determine retirement readiness. The CAMP score measures your ability to maintain net monthly cash flows during retirement and meet the inevitable increases in medical costs, long-term care costs and the inflationary pressures of the future.

Do you think you can afford to retire? Determine your own CAMP score and assess your situation honestly. I’ll soon let you figure it out through an online retirement readiness evaluation tool at Provide your email address on my site and I’ll notify you when it’s ready.

Good luck!

(This article is adapted from the new book,Don’t Eat Dog Food When You’re OldHow to Solve Your Retirement Cash Flow Puzzle by Roger Roemmich.)  



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