Think Twice?

The sales piece presents the information on the basis that you could be making a “costly mistake” and giving up “valuable benefits available to you only in the Investment Plan”. Which benefit can FRS offer that no one else can? Let’s review the claims one by one.

We have received several calls over the last week or so in regard to a new “alert” that appears on the MyFRS.com website, under the “alerts and hot topics” banner.  The piece is titled “THINK TWICE BEFORE ROLLING OUT OF THE INVESTMENT PLAN”. Some of the calls were questioning a few of the points made in the “alert”, and several were more interested in why FRS would post such an “alert” in the first place.

Let’s start with the last question first.  Why?  Why would the Florida Retirement System post such a letter on their Pension website?  We can only imagine it is a sales piece produced by the administrators of the Investment Plan for the purpose of “selling” participants on the idea of maintaining their Investment Plan with FRS as opposed to participants rolling their lump sum out of FRS and into a “rollover IRA” with an independent investment firm.   It is likely the administrators of the assets are paid based on the total sum of the assets they administer, so keeping more money in FRS is beneficial for them.   While it is understandable, it does bring up a few other questions that are interesting.

The sales piece presents the information on the basis that you could be making a “costly mistake” and giving up “valuable benefits available to you only in the FRS Investment Plan”.  This point was the impetus of many of our calls.  Which benefit can FRS offer that no one else can?  Let’s review the claims one by one.

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Your Nest Egg in Volatile times

Seems like wherever we turn, we are at risk of losing our hard earned savings. Interestingly, it is just that volatility that makes them attractive. We have all heard the adage, no pain no gain.

We have spent a great deal of time lately dwelling on potential changes in Florida Retirement System benefits.  Since the legislative session is over until next winter, we can breathe easy at least until then.  In the meantime, the news is full of dire financial news and predictions.  We are in year three of a terrible recession, and the devastating crash in real estate prices has set us all back a few years.   So what is a person to do to try and protect their nest egg?

In order to discuss how to protect one’s nest egg, we should probably start with trying to figure out what risk is, and how do we deal with it.  For this discussion, let’s define risk as the possibility of losing money!  Does that sound fair?  The legislature has added risk to our pensions by threatening us with the loss of benefits we thought were secure.  The real estate market has become risky as the value of our homes has declined, and the stock market goes up and down on a regular basis.  Seems like wherever we turn, we are at risk of losing our hard earned savings.  Interestingly, it is just that volatility that makes them attractive.  We have all heard the adage, no pain no gain.  Without risk, there can really be no reward!

Over the last twenty five years, I have witnessed some seemingly cataclysmic events – all having dire consequences on savings and investments.  Remember the stock market crash of 1987?  That was probably my first real taste of risk.  I was old enough to have some assets and investments and remember being horrified that they were losing money so quickly.  When something like that happens, it is easy to err on the side of fear, and sell into the panic.  The fight or flight mechanism kicks in and since we don’t really understand what is going on, we run!  Unfortunately, as often as it happens – we know it will be a mistake.  The average investor buys when they should be selling, and sells when they should be buying.  After several hundred years of experience, we know that time will cure most of the markets ills.  The crash of 1987 was regained in a mere two years.  The fall after 9-11 took less than six months.  Even the devastation after the fall of Lehman Brothers in September of 2008 triggered the worst financial panic in our history was regained in about 18 months.  The Florida Retirement System Pension plan has rebounded to $118 billion from a low of $83 billion (Current FRS Plan Balance).  Had you sold into the panic, those losses become real, with no real way of regaining your losses.  On the contrary, had you maintained your holdings in a well diversified portfolio, you would have been made whole in relatively short order!

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