Financial Planners Rethink Monte Carlo Simulation Tools
Most mutual fund companies and financial planners rely on Monte Carlo simulation tools to help investors plan for their futures. The tools run portfolios through hundreds, even thousands, of investment scenarios to predict the success rate of various returns given contribution rates, investment mix and risk tolerances. But virtually none were ever designed to take a year like 2008 or the current extremes in the market into account-which has prompted many statisticians to go back to the drawing board, The Wall Street Journal reports.
In the bell-shaped curve that Monte Carlo simulations currently use, "the probability of getting one of these extreme outcomes [like we saw last year] is basically zero," explained Paul Kaplan, vice president of quantitative research at Morningstar. He noted that the Standard & Poor's 500 Index has declined 13% or more in one month at least 10 times since 1926. Thus, Monte Carlo simulators should be updated to include a larger number of scenarios that assume greater volatility, say critics, including the Retirement Income Industry Association.
Fidelity Magellan Fund Up 10.6% Year-to-Date
Harry Lange, manager of the $18.6 billion Fidelity Magellan Fund, appears to be back on track, delivering a performance of 10.6% so far this year after a brutal 2008, Dow Jones reports. Large technology and financial bets sank the fund nearly 50% last year.
While Lange hasn't changed his heavy allocation toward large growth, the market is turning around to favor these plays, said Christopher Davis, an analyst with Morningstar. "Things that were disastrous last year have been really helpful this year," Davis said.
As of last November, Lange explained to shareholders that he believed in the bargains he was buying: "While I think it could take a while to work through our difficulties here in the United States, it's often when sentiment is gloomiest that you find the best bargains."
Investors Believe Balances Will Be Restored by 2016
Investors haven't given up on retirement savings, but they aren't expecting their portfolio balances to be restored anytime soon, Age Wave and Harris Interactive found in a survey of 2,082 investors they call "Retirement at the Tipping Point: The year That Changed Everything."
"A new era of cautious self-reliance is emerging from a truly unnerving fiscal dilemma," said Dr. Ken Dychtwald, founder and CEO of Age Wave. "For many people, their retirement dreams have vaporized. Each of the four generations polled is trying to alter its game plan in fascinating ways to seek peace of mind and to make the best of the years ahead."
Respondents, 60% of whom have lost money in the market over the past year, believe it will take seven years for their investments to return to their pre-crisis levels. The single-biggest worry among those age 55 or older, cited by 46% of respondents, is that they won't be able to afford medical expenses. This is now a greater concern that lack of personal savings (18%) or uncertain entitlements (11%).
Americans expect to delay retiring by an average of 4.2 years. Eighty-one percent said teaching children to live within their means is the most important financial advice parents could pass on to their children, up from 69% who said so a year ago. That was followed by 65% saying the best lesson to teach children is to begin saving at an early age.
Ninety-five percent believe that financial management should be taught in high school as a standard subject, and 56% said the best thing about having money saved is having a sense of security.
Nonetheless, 58% said having a loving family and relationships is the most important thing in life, whereas only 33% cited being wealthy.
Despite the dire outlook for the markets currently and what it has done to Americans' savings, 60% said they view retirement as "a new, exciting chapter of life," up from 52% last year. Seventy percent hope to work in some capacity in their retirement, not just to pay the bills but to remain stimulated and to continue to contribute to society.
"While we discovered both disturbing and encouraging signs about retirement from each generation," said David Baxter, SVP at Age Wave, "there are indications that of all cohorts, it's the Millennials [Gen Y] that are coming out of this financial storm a wiser, more cautious and more responsible generation."
Younger Boomers, Gen X Vastly Underserved
Only 18% of individuals between the ages of 28 to 53 seek out financial advice, even though they are in the prime savings and asset accumulation stage of life, according to a survey of 800 investors conducted by Sway Research and Mast Hill Consulting. Most of this group-younger Boomers between the ages of 43 and 53, and Generation X, aged 28 to 42-turn to family and friends for advice on key investing decisions.
A full 60% of the investment industry's focus is concentrated on near- and post-retirees. Thus, they are losing out on the 57 million households in the 28-53 population, who have more than $5.2 trillion in investable assets in their bank, taxable brokerage and retirement accounts.
"This unheralded demographic is quietly looking for new products and services to support their savings goals, but most are not seeking professional advice," said Chris Brown, of Sway Research, and Laura Varas, of Mast Hill Consulting, who issued a report based on their survey findings called "Capturing the Hearts & Wallets of Peak Accumulators."
Fifty-four percent said it is difficult or very difficult to find the right resources for getting help, and 78% consult friends and family because they "seem to know how to invest."
And this group is very unsure of their financial future, with only 9% saying they are on track to accumulate the savings they will need to retire, and 84% concerned or very concerned about the future of Social Security. Only 5% believe their employer is responsible for providing for their retirements.
"The core financial task of mid-life is to establish stability and accumulate savings, but core workforce investors don't feel they can rely on their employers, the government or the financial services industry to help them, so they are turning to themselves, friends and family for advice-even as they recognize the limited value of that advice," Brown and Varas said.
Thus, those firms that can find a way to resonate with this group of investors between the ages of 28 and 53 will have "first-mover advantage," according to the report.
Rebuild Investors' Trust, Speakers Tell Asia Forum
The only way the financial services industry will recover from the brutal market and financial crisis of the present is to concentrate wholeheartedly on rebuilding investor trust. That was the overriding theme of this year's Fund Forum Asia.
"High-profile frauds such as the Madoff and Stanford cases have made investors very nervous," said David Seymour, global head of investment management for KPMG. "The investor community is rattled, and confidence will not return easily."
To counter this sentiment, Seymour said, "Rebuild trust and confidence through strong customer relationship management. Historically, the most successful investment management firms have been those which focus clearly on their customers."
And while the market outlook currently remains weak, Seymour is convinced that investment management will bounce back in a "tremendous" way. "Those investment funds which keep their nerve, concentrate on improving transparency and communication with customers, and get themselves in shape for the new financial world order stand to enjoy an exciting and profitable future indeed," Seymour said.
Investors are currently seeking regular income-generating, low-risk products," added Lester Gray, CEO of the Asia-Pacific arm of Schroders.
73% of Canadians Call Mutual Funds a Good Investment Vehicle
Although their investments may have lost as much as 40% to 50% of their value, Canadians are resilient in their faith in mutual funds, PricewaterhouseCoopers found in a survey of 867 people who own mutual funds.
Seventy-three percent said they believe mutual funds remain a good investment vehicle, 75% trust their financial adviser, and 73% said their adviser has done a good job over the years. Further, 65% believe their adviser is looking out for their best interest when suggesting investments.
However, only 38% believe their mutual fund investment portfolio will improve in the next two years. Twenty-three percent think it might take three years, and 27% believe it will take five years.
When asked to name three types of mutual fund that will meet their retirement needs, they most frequently cited balanced funds, guaranteed funds and fixed income funds-not equity funds.
"Investment products are generally complex, especially given the myriad of offerings and providers from which to choose," said Raj Kothari, leader of the investment management practice at PwC Canada. "Investors today are forced to make sense of the daily barrage of conflicting messages. It's no wonder the value of advise is crucial to investors."
Kothari said it is very encouraging that investors still trust mutual funds in a "climate of failed companies, corporate scandals, government bailouts, staff redundancies and decreased corporate profits."
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