Serenity for Tortoise Investors

As long as I can remember, my sister always had a plaque in her bedroom containing the Serenity Prayer. For those of you unfamiliar with this particular prayer, it goes something like this: "God, grant me the serenity to accept the things I can not change, the courage to change the things I can, and the wisdom to know the difference."

The first time I was old enough to actually read and comprehend this statement, I found the message to be profound. I have realized through the years that the first two parts of the prayer are important, but they are meaningless without the wisdom to distinguish between what can be changed and what cannot.

When it comes to preparing for retirement, it's surprisingly simple what is placed in our direct control:

1. The % of our income we save
2. Our portfolio's allocation
3. The costs we incur

If nothing else, these 3 aspects of a retirement plan should be well understood, so let's look briefly at each one individually.

The largest engine to a successful retirement is savings. You could outperform the market for many years, but if you've only saved a small amount, that performance won't mean nearly as much concerning your lifestyle in retirement. In 2007, the Fidelity Research Institute found that the typical working American household is on track to only replace 58% of their working income in retirement. They also found that they would have to start saving 12% of their income today to be able to replace 85% of their working income in retirement. As a society we have gone way too long without saving for the future. It's time to make saving as common in in our lives as buying staples.

The performance of the stock and bond markets in October and November this year has been a wake up call for the very real risks of investing. As an efficient market guy, I recognize the difficulty of trying to time the top and bottom of market cycles.....so I we're left with portfolio allocation as a strategy to manage risk and return. There are multiple empirical studies which state 90%-95% of a portfolio's volatility can be directly attributed to it's allocation. If you're like me and think that volatility is an acceptable measure of risk, then your portfolio allocation is the best way for you to control risk. Having a portfolio allocation containing downside risks you are comfortable with is crucial.....as no one minds the upside.

With investing, there are costs chipping away at your portfolio from every direction. Nothing in life is free, so every investor should expect to pay something, but the size of that something matters a great deal. Investing passively is the best way to keep costs low. Passive investing has very low portfolio turnover compared to active investing. This means that the transaction costs and tax impact of passively invested dollars is far less than that of actively managed dollars.

As tortoise investors, if we focus on the things that are in our control, we'll experience far less anxiety and place ourselves in a much better position to retire with our desired lifestyle.