Where to Start if You Don’t Have a Retirement Plan Yet
When it comes to retirement and planning, I’ve heard them all:
“I love what I do. I can’t imagine doing anything else.”
“I’ll never have enough money to retire, so I’ll work until I die.”
“I have no hobbies, so I might as well work.”
“I’d be bored outta my skull if I didn’t work.”
“Ha, why should I plan? Man plans, and God laughs.”
“I have children to raise and aging parents to worry about. Retirement? Ha!”
The statements go on and on, all of which recite the same underlying messages that cover important issues. As you think about your retirement plan, consider the following:
- Very few people actively devote time to consider their life in retirement. Basic questions like the “where,” “when,” “how” and “why” need to be clearly considered.
- You can’t predict the future. Unless you consider what life might hold for you, there’s no way to even quantify how much you might need to sustain your financial needs or desires.
- Retirement may not be a choice. Physical health, mental health, and the type of job and economic considerations play a significant role in your life plan.
- We are controlled by fear. Fear plays a significant role in trying to “pin down” something in the future. The sentiment here is, it’s better to do what you know than to face something for which you are untrained and untested.
- For many, their job is how they define themselves. They are Executives, Bakers, Lawyers, Plumbers, Doctors, Salesmen, Architects—their occupations become who they are. When facing retirement, that identity becomes lost; they’re just, Barbara, Sal, Mark or Felice. Their status becomes reduced, at least in their own minds.
Of course, there’s resistance to approaching the process of mapping out a period of life that could be years or decades away. Your life is immensely complicated and filled beyond capacity in the present. It seems that endless responsibilities and actions need to be taken in just one day: Work, putting dinner on the table, getting enough sleep, and maybe catching up on life’s daily tasks.
Then come the broader, but still essential life responsibilities: Addressing immediate needs of family, managing the current state of your finances, taking care of your health. And only then come the pure pleasures and rewards: Maybe getting in a vacation here or there, catching up with friends. So thinking about, what may seem like, an arbitrary time in the future, feels as untouchable as some distant solar system.
The fact is, it’s never too early to start thinking about it–just like saving for retirement; the earlier the better. When considering your retirement plan, here are some topics to consider and discuss with the stakeholders in your life:
- What are some things you’ve always dreamed of doing or being? Don’t be afraid to be creative; let it go. Write down all those ideas. Is it further education? Working in a bookstore? Writing a book? Teaching a class? Painting? Building furniture? Running a marathon? Be bold!
- Which of your goal activities or endeavors have a financial cost, and which ones are relatively dollar neutral? If your goal is to buy an island or a small nation, you might need to rethink that idea; unless that’s your driving desire. You never know what you’re going to find on eBay! Write a clear list of the expensive, less expensive, and dollar neutral items.
- What variables might derail your plans? Poor health, change in employment, severe economic decline or assumptions that are just too aggressive—the variables can be countless. It’s important, however, to consider as many as occur to you.
- What does your current lifestyle look like today and how might it change when the paycheck ends? This question leads to the idea of having a written and well-conceived financial plan that is built on conservative assumptions, realistic outcomes, and as many potential disruptions as possible.
The fact is, if you are fortunate enough to live long enough to have choices about your life, you want to be sure of the following:
- Whether or not retirement is your choice, it is vital that you’ve discovered what can give your life meaning and reason to get out of bed in the morning.
- Studies have shown that people who are active, engaged and have purpose lead healthier, happier, and longer lives.
- Being forward-thinking provides focus and incentivizes our actions today to make choices that benefit us over the whole of our lives.
We don’t know is what our futures hold. We don’t even know what the stock market is going to do tomorrow. But tomorrow always comes, and the best way to approach it is with an open mind and a willingness to tackle some of the challenges and opportunities that will provide us with the highest level of security and satisfaction.
Alternative Beta Strategies: Alpha/Beta Separation Comes to Hedge Funds
Written by: Yazann Romahi, Chief Investment Officer of Quantitative Beta Strategies, J.P. Morgan Asset Management
A quiet revolution is taking place in the alternatives world. The idea of alpha/beta separation has finally made its way from traditional to alternative investing. This development brings with it a more transparent, liquid and cost-effective approach to accessing the “alternative beta” component of hedge fund return and a new means for benchmarking hedge fund managers.
The good news for investors is that the separation of hedge fund return into its components—rules-based alternative beta and active manager alpha—has the potential to shift investing as we know it. These advancements could democratize hedge funds and, at long last, make what are essentially hedge fund strategies available to all investors—even those who aren’t willing to hand over the hefty fees often associated with hedge fund investing.
A benchmark for alternatives
With respect to traditional equity investing, we have long accepted the idea that there is a market return, or beta—but this hasn’t always been the case. Investors used to assume that to make money in the stock markets, one needed to buy the right stocks and avoid the wrong ones. The idea of a market return independent of skilled stock selection seemed ridiculous to most market participants. Yet today, we would never invest in an active manager’s strategy without benchmarking it against its respective beta.
Interestingly, hedge fund managers have been held to a different standard. Investors have been much more willing to accept the notion that hedge fund strategy returns are pure alpha, and that their investment returns are based entirely on the skill of the fund manager. That notion explains why investors have been willing to accept a “two and twenty” fee structure just to access what has been perceived as one of the most sophisticated and powerful investment vehicles available.
In thinking about the concept of beta, consider its precise definition—the return achievable by taking on a systematic exposure to an economically compensated risk. In traditional long only equity investing, the traditional market beta has been further refined as a number of other risks have been identified that are commonly referred to as “strategic beta.” These include factors such as value, momentum, quality and size. But no one ever said that these risk factors must be long-only.
Over the past decade, as more hedge fund data became available, academics began to disaggregate hedge fund return into two components: compensation for a systematic exposure to a long/short type of risk (alternative beta), and an unexplained “manager alpha.” What they found is that a significant portion of hedge fund return can be attributed to alternative beta. That fact has turned the tables on how we look at hedge fund return. With the introduction of the alternative beta concept, hedge fund managers will have to state their results, not just in terms of total return, but also as excess return over an alternative beta benchmark.
Merger arbitrage—an alternative beta example
The merger arbitrage hedge fund style can be used to illustrate the alternative beta concept. In the case of merger arbitrage, the beta strategy would be the systematic process of going long every target company, while shorting its acquirer. There is an inherent return to this strategy because the target stock price typically does not immediately rise to the offer price upon the deal’s announcement. This creates an opportunity to purchase the stock at a discount prior to the deal’s completion. The premium that remains is compensation to the investor for bearing the risk that the deal may fail.
Active merger arbitrage managers can add value by choosing to invest in some deals while avoiding others. Therefore, their benchmark should be the “enter every deal” strategy, not cash. In fact, the beta strategy explains the majority of the return to the average merger arbitrage hedge fund. And it doesn’t stop there. Other hedge fund styles that can be explained using alternative beta include equity long/short, global macro, and event driven. Note that the beta strategy invests in the same securities, using the same long/short techniques as the hedge fund strategy. The difference is that the beta strategy is a rules-based version that can become the benchmark for the hedge fund strategy. After all, if a hedge fund strategy cannot beat its respective rules-based benchmark (net of fees), an investor may be wiser to stick to the beta strategy.
Implications for investors
What does all this mean for the end investor? Hedge funds have traditionally been the domain of sophisticated investors willing to pay high fees and sacrifice liquidity. Alpha/beta separation in the hedge fund world means that investors can finally choose whether to buy the active version of the hedge fund strategy or opt for the passive (beta) version. Hedge fund strategies can be effective portfolio diversifiers. Now, through alternative beta, virtually all investors can access what are essentially hedge fund strategies in a low cost, liquid, and fully transparent form. For investors who haven’t had prior access to hedge funds, this could be welcome news. Not only can investors look at an active hedge fund manager’s strategy and determine how it has done compared to the systematic beta equivalent, they can also invest in ETFs that encapsulate these systematic strategies.
When looking at one’s traditional balanced portfolio today, there are plenty of questions around whether the fixed income portion will achieve the same level of diversification it has provided in the past. After all, with yields still low, there is little income return. Additionally, the capital gains that came from interest rate declines are likely to reverse. With fixed income unlikely to adequately fulfill its traditional role in portfolios, there is a need to find an alternative source of diversification. This is where alternative strategies may help. For investors seeking to access diversifying strategies in liquid and low-cost vehicles, alternative beta strategies in ETF form are one option.
Looking for an alternative to enhance diversification in your portfolio?
For investors looking to further diversify their overall portfolio, JPMorgan Diversified Alternatives ETF (JPHF) seeks to increase diversification and reduce overall portfolio volatility through direct, diversified exposure to hedge fund strategies using a bottom-up, rules-based approach.
Learn more about JPHF and J.P. Morgan’s suite of ETFs here.
Call 1-844-4JPM-ETF or visit www.jpmorganetfs.com to obtain a prospectus. Carefully consider the investment objectives and risks as well as charges and expenses of the ETF before investing. The summary and full prospectuses contain this and other information about the ETF. Read them carefully before investing.
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