We are among a select group of advisors who directly trade with Dimensional Fund Advisors (DFA). This mutual fund family was started in 1981 by alumni of the Booth School of Finance at The University of Chicago with the idea that stock markets are efficient and reward long-term investors.
Most investors have never heard of them because DFA limits the advisors who can offer their funds to groups who are willing to go through education, trading restriction, and reporting requirements.
We manage Dimensional Fund portfolios for long-term client accounts because of their scientific approach of applying academic research to practical investing works. They have a long history of strategies that have successfully delivered higher returns with minimal fees.
To ensure that their use of academic research was thorough, they first reached out to Professor Eugene Fama, known as “one of the fathers of modern finance”. He became a charter shareholder and was later awarded the Nobel Prize for Economics in 2013. Next, they asked Merton Miller (also a Booth School professor) to join the board. Miller won the Nobel Prize in 1990. The next office over was Myron Scholes, who also agreed to join them and received his Nobel in 1997.
The Science of Investing
As an example of their research, they show that $1 invested 95 years ago in U.S. Large Cap stocks would now be worth almost $11,000. The same $1 invested in U.S. small company stocks would be worth $32,800. So, the portfolios are overweighted to small-cap stocks!
The same is true for Value, that more often outperforms Growth, and International Stocks adding additional returns without a lot more risk. So, these portfolios are overweighted to Small Caps, Value and International. They tend to outperform more evenly balanced strategies, especially in times of economic expansion like we have now.
Each Integras Partners client has a custom blend of our strategies intended to align appropriate risk to each timeframe. By securing short-term needs in lower-risk investments, we can insulate the remainder and employ strategies including DFA funds to seek truly long-term growth.
Meet Paul, age 56, whose employer of almost three decades offered him early retirement. He’s afraid that if he doesn’t take it, the offer will be smaller next time. His wife, Maria (age 57) has a consulting practice, and would like to see Paul slow down for his health and sanity. They came to us for clarity on their retirement readiness and advice on strategies for moving forward.
In our Discovery Meeting, we learned that the couple has two grown children, who appreciate some financial help on occasion. Their parents are financially stable today but likely will need assistance as elder care needs increase. Eventually, they will downsize their home and dream of a small lake house, if possible. Their only debt is their home mortgage with eleven years remaining. Maria will need a new car soon and hopefully there’s a daughter’s wedding on the horizon.
Paul consistently contributed to his 401(k) and is eligible to receive a pension starting as early as age 60. His offer is for six months of severance pay with health coverage. Maria has some retirement savings from previous employers and the couple has accumulated some non-retirement investments and savings. They agreed that Paul could find work he enjoys and does not need the stress that goes with a six-figure income. Since he wants to see an endgame, we started by exploring strategies for taking Social Security.
Paul’s Social Security check will be the largest, which we suggest deferring, while feasible, so the surviving spouse continues receiving a higher income. (Social Security income goes up about 8% for every year delayed and maxes out at age 70.) We recommend Maria taking a reduced benefit immediately upon retirement, as early as age 62. We also suggested a small business health plan for Maria’s consulting business, which can be replaced by Medicare and Supplemental Policies after age 65.
In facilitating a conversation with his pension administrator, we learned that Paul has a “lump-sum” option, to take an immediate payout in lieu of a lifetime pension. He liked this idea and wants to invest the proceeds in an IRA. This can provide multiple benefits: potential increase in value, flexibility to use the funds when he likes, and protects any remainder for his heirs. These funds won’t be available without penalty until Paul turns 59 ½, which is fine because employees attaining the age of 55 before the end of their last year of employment are eligible to take 401(k) distributions without penalty.
Paul did elect to leave his company, and after a few months accepted some consulting work, which paired with Maria’s income to meet their monthly expenses. They have flexibility to draw moderate 401(k) distributions, as needed for extraordinary expenses. Their goal is to let retirement plans grow for now and eventually take a distribution and use some savings for the down-payment on a lake house, which they might even rent occasionally.
Paul and Maria are more careful about spending for now but are happy and see a comfortable retirement when they downsize. We will help them realize that dream when they have only the lake home mortgage, supported by income from the retirement accounts and two social security checks. We also introduced them to Generational Conversations, our initiative to support adult children and parents explore plans for senior housing options, elder care, financial continuity, and legal strategies.
When faced with a layoff or early retirement, this can be the most difficult decision. We’ve helped hundreds of clients weigh the options, so here are some questions that may be of help to you.
Is my former employer financially stable and is the pension well-funded? When companies have major layoffs, they’re trying to stop bleeding cash. Pensions are rarely completely funded and rely on the continued profitability of the company.
Do I take a reduced benefit to provide for my spouse? Consider your family longevity and personal health habits. If you take the larger amount upfront for the retiree, will you save any of the monthly payments? Women typically live longer and in 25% of couples aged 65, one spouse will live to 95.
How Do I Evaluate the Lump-Sum Option? Many employers offer a Lump-Sum Benefit to “buy-out” their pension obligation. Factors to consider include your personal health status & family longevity, interest rates and inflation, your current situation, the number of years until benefit eligibility, and your feelings about leaving assets to your heirs.
Could I generate more income by investing the money?
Meet Pete and Sandra. They have seen both sons married, purchased their retirement beach home and want to retire soon.
Pete has enjoyed a successful career and built considerable savings and miscellaneous investments to complement his 401(k). They came to us for help to define a sustainable retirement income and professional investment management.
Pete and Sandy elected to work with us because they found comfort in our process, appreciated our Service Model and after firing a brokerage firm, no longer want to make investment decisions. In our first meeting, we discussed how to balance their desire to reduce investment risk while achieving the portfolio growth required for distributions to keep pace with inflation
Integras Analysis
Our answer to this dilemma is our Time Horizon Investment philosophy. We advocate reserving conservative assets for near-term income, which allows longer-term assets to be increasingly oriented to growth. We know that the longer growth investments can stay invested, it becomes more likely for those assets to achieve desirable returns.
Together, we defined anticipated expenses and explored strategies for maximizing Social Security. This enabled us to determine the supplemental cash flows needed from investments. Next, we explored timely investment ideas, long-term care protection and caring for parents. We set a time to share our analysis of current investments, recommendations going forward and visual models of their projected annual situation. We use both comprehensive planning tools and proprietary models to determine how to allocate each client’s resources to our Investment Strategies, providing an increasing income for the first 15 years and ample time for the remainder to pursue long-term growth.
Recommendations
Since Pete is a few years away from retiring there is no need for immediate distributions
Rebalance their investments and established a new account targeted to provide initial income needs and reduce their overall stock exposure
As retirement approaches, migrate to more stable assets to fulfill their earliest income needs
Results
We were able to address their desire to reduce risk, both by educating them on the need to outpace inflation and insulating long-term growth investments with adequate time
They also found value in addressing potential long-term care needs and our Generational Conversation services to facilitate discussing elder parent’s finances, care management, etc.
Our paradigm intentionally avoids the practice of drawing across all investments for income, which can rapidly deplete savings in a down market cycle. For an insightful look at why this is important, review our piece on Why Systematic Distributions are Destined to Fail
Meet Megan. She’s in her early 30s, single (for now) and fairly stable in her career, although she may change employers.
Like most younger professionals we work with, Megan was unsure how to get started. She had a couple of previous company retirement accounts and a Roth IRA she started years ago. She had accumulated a sizable bank account but was unsure how to invest, especially after seeing her parents experience mixed results.
Integras Analysis
Our conversations determined that she was living within her means, needed a cash “safety net” (for unexpected car repairs or job search) and besides retirement hopes one day to start a family and own a home.
Recommendations
A modest increase to her retirement contributions, to better fund her primary goal, retirement. A 2% increase for someone earning $100K typically lowers bi-weekly take-home by about $50
Set aside a “safety net” savings account for unexpected expenses
Allocate her remaining cash into two strategic accounts. First, a moderate account seeking 4% to 5% returns for goals in the next 3-5 years. Then, a growth account seeking appreciation over the 5-10 years it might be before settling down
Consolidate her former company plans
Results
With her “safety net” in place, Megan started an automatic bank draft of $100/month to her moderate account and is comfortable making the monthly maximum (currently $500) to her Roth IRA. Besides tax-free growth, once you’ve owned a Roth for five years you can withdraw up to $10,000 without penalty towards a first-time home purchase!
We consolidated her former company plans and helped allocate her current employer’s 401(k)
Now, her retirement investments complement each other, and she has a track to meet her primary goal
Structured Notes typically combine two or more futures contracts to generate cash and pay it as yield.
There are thousands of contract variations designed to help reduce or exploit market uncertainty. There must be a buyer and seller on each side, one being defensive (bearish) and the other optimistic (bullish).
Farmers sell future contracts on their produce or livestock to lock in the price.
Airlines buy contracts for future fuel deliveries to ensure that fares will cover costs.
Companies buy currency futures to protect from unwanted price changes.
Investors buy put options insuring a minimum value for a stock position.
Speculators buy call options to capitalize on a stock’s possible upswing.
The more prices fluctuate, the greater a seller’s risk, so contract premiums can get very expensive. So, the turbulent markets of 2020 have provided unusual opportunities.
Integras Partners has tailored three different notes to provide attractive income during this recession.
The first was issued mid-March when oil prices collapsed. Our Chief Investment Officer, Keith Johnson, believed that the largest energy companies were unreasonably discounted. So, he designed a note based on the price movement of Exxon Mobil [XON], Conoco Phillips [COP] and Chevron [CVX]. Exxon, for example had dropped 34% since the beginning of the year. If none of the stocks fall another 40%, this note pays 4% every quarter (16% APY). The note will pay for six years, or full principal will be returned if all three stocks are above their benchmark after the first year.
The second note was issued mid-April when hospitality companies were getting crushed. For this one, Keith selected Marriott International [MAR] which was down 48% for the year and Darden Restaurants [DRI], which had dropped 41%. With dramatic uncertainty for hotels and restaurants, the contracts on these stocks at the time generate a 35% yield for this note! Today, both stocks are above their thresholds and the note will payout at the anniversary. Otherwise, unless they drop more than 50% from today’s prices, it will payout for three years.
The most recent note is based on four prominent electric utilities, paying a monthly coupon at a 10% annual rate. It will also pay up to three years and redeem at full value if none of the stocks have lost 40%.
Utilizing these notes reduce portfolio risk without owning the stocks, and greatly increases the yields vs. dividends. The impact on risk-adjusted portfolio returns are significant when markets are volatile and individual stock price moves are extreme.
Integras Partners works with successful individuals and families to align investments with personal goal timeframes. This is solely an illustration of strategic investing and not an offer to sell or promise of performance.
