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Finding The Bullet Holes
Throughout World War II, our aerial bombing campaigns were a significant and costly part of the overall war-effort. Unfortunately, the size and scale of these efforts created an opportunity for the axis powers to attack and shoot down nearly 50% of bombers out on missions. It took anywhere from 5-11 airmen to crew these aircraft, so losing almost half of a bombing mission represented a tremendous loss of life and resources. The Army and Air Force contracted a statistician, Abraham Wald, to look for ways to reduce these losses. He asked the returning air crews and commanders to document which areas of the planes had bullet holes when they landed. After taking some time and building models of areas that these bombers were typically hit, the Army added armor plating to these areas. The losses continued. After contacting Mr. Wald to find out what had gone wrong, he let them know they were doing it backwards. They had added armor to the areas of the plane that came back with bullet holes. Those were the area’s that could take bullets, and still come back to land. The Army needed to put armor in the places of the planes that had no bullet holes. Had a bullet hit those areas, it would mean a loss of the aircraft.
What parallel’s can investor’s take from Abraham Wald’s statistical work on bomber aircraft in World War II? Most investors focus on the risks they deem apparent, what they can see, usually the gain/loss from market fluctuations or plain market risk. While your investment return of course is important, how about inflation? Taxes? Spending? Think of your portfolio as the wings with the bullet holes. Despite what you may hear from various investment professionals or media personalities, there are no magic bullets (no pun intended) to portfolio construction. We live in a world where most diversified portfolios can bear the markets short-term volatility and return home safely. However, not thinking about your overall strategy, how inflation may affect your increasing spending, or wildly underestimating your tax liability or having huge RMD’s could be more harmful in the long-run. The difference in success rates of a 5% and 6% withdrawal rate can be significantly worse over the course of 25 years. Not having a detailed budget before you retire could be catastrophic. How about inflation? Do you have the right amount of resources that will grow to accompany things like the rise in health-care or travel costs over your retirement, yet keep a certain amount for liquidity? Again, not having enough liquid or conservative assets in a downturn can be catastrophic, especially if one of those large unforeseen expenses comes up at the same time. How about taxes? Having a plan for how you will withdraw your retirement assets from taxable accounts, or tax-deferred accounts can have a huge impact on the size of your RMD’s and potential net-worth later in life. Again, something that can be much more harmful in the long-run that isn’t so readily apparent.
Understanding the critical areas to a successful retirement are important. Simple security selection and asset allocation may be an area that can take a few bullets, but not understanding your overall retirement strategy and all the critical areas can be catastrophic. Ensure you are working with a professional that is identifying the not so obvious area’s but critical components of your financial life.
Robert Jeter, CFP, CRPC is a Certified Financial Planner with InFocus Financial Advisors, Inc. He specializes in working with retirees on the lower shore of Delaware and Maryland. The opinions expressed above are those of Robert Jeter and are not intended to be advice. Securities and advisory services offered through Cetera Advisors LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity. Investments in securities to not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive more or less than originally invested. No system or financial planning strategy can guarantee future results.