Destination Retirement: Women Take the Wheel

Women have many decisions to make when approaching that point in life called retirement. There are critical decisions that will help them arrive safely at a financially secure old age.

Women retiring today are more financially independent than their mothers and grandmothers were. They have spent more time in the labor force than their forbears. Many have held highly paid jobs. As a result, many more women are eligible for their own Social Security and pension benefits than ever. In addition, the Retirement Equity Act helps to ensure that married women will not unknowingly miss out on survivor benefits from pensions for which their husbands might be eligible.

Even so, women face financial challenges. For instance, intermittent work history and part-time employment with few benefits have been the norm for millions of women who are now about to retire. Women have also generally earned less than men over their working lives.

The result is that women generally have lower savings accounts, Social Security benefits, pension benefits, and 401(k) accumulations than men. This has long-term implications since the life expectancy of women is longer than that for men. It is compounded by the fact that women typically marry men older than themselves, so many spend more years alone in old age. Their retirement years frequently include periods of caring for spouses and other older relatives as well.

Urgent: All women need to get a big picture understanding of their family finances, even if not directly involved with managing the money. This prepares them to handle not only everyday finances but also the future financial challenges of retirement.

Getting Papers in Order
The decisions women face in retirement range from choosing the family and personal papers to keep in a safe place to deciding how to handle special needs and situations.

Paperwork gathering is especially critical when retirement is approaching. Women should know the location of all important papers. They should also tell the location to their adult children (or key relative or friend).

If they already have a will, they should update it. If they do not have a will, now is the time to draft one.

A married woman should make sure her husband has a will and know its location. But ideally, married couples will make out wills together, and each spouse will know how the other intends to dispose of property. Both should also have a living will and durable power of attorney for health care, which are documents providing guidance on end-of-life preferences.

Figuring Out How Much Retirement a Will Cost
Women who are thinking about retiring should take a careful look at how much money they are likely to need in retirement and the possible sources of this money. They should be aware that, if they spend resources too fast, they may encounter serious financial problems later on. That is especially so since women live longer than men on average, and most often outlive their husbands and a few will live beyond age 100. A financial planner/adviser can provide personalized assistance and advice. Online calculators can help as well.

Many retirement experts recommend that retirement income replace 70  percent to 80 percent of pre-retirement earnings to maintain pre-retirement living standards. That can work well if the woman has moderate retirement savings, stable health care premiums and little change in consumption. Unexpected expenses or an active retirement could require a higher replacement rate.

Retirees also need supplemental health insurance plus a contingency fund to pay for health care costs not covered by primary insurance (typically Medicare). For couples, retirement resources must last for the lives of both. For singles, estimate the need at about 75 percent of the need for a similarly situated couple.

Unfortunately, few options exist for retired women who do not have an assured, adequate stream of income and health care insurance. One thing they can do is opt for a lower standard of living - for instance, by moving to a smaller home or less expensive community. They can also strive to stay healthy and thus avoid out-of-pocket health and long-term care costs.

Another option: Women can work longer. This has many advantages. Women will gain more time to save, may have higher earnings that replace lower earnings years in the Social Security benefit formula, and will need to finance fewer years of retirement. In addition, for each year they work between age 62 and age 70, they will receive higher monthly benefits from Social Security. This can make a big difference later in life when out-of-pocket health costs often soar.

Reviewing the Retirement Plan
Because women live longer than men and have, on average, lower Social Security and pension benefits, women should pay a good deal of attention to survivor benefits. Here are some factors to review:

• Defined benefit (DB) pensions. These are also called traditional pensions. They typically pay out retirement benefits as monthly income. DB plans may also offer a lump-sum distribution option. Married couples with DB plans should consider taking a joint and survivor income if they want benefits to be paid to the survivor after the first spouse dies. Since women tend to live longer then men, electing this option could make a big difference in a woman's later years.
• Defined contribution (DC) plans. These plans allow workers to deposit money into various investment accounts, where it grows tax deferred. An example is a 401(k) plan. At retirement, retirees can opt to take money out via an immediate lifetime annuity (which makes monthly payment to the retiree for life) or take a lump-sum distribution. Those having no source of monthly income other than Social Security may want to consider the annuity option, at least for part of their money. Those with additional sources of monthly income might benefit from either option.

Starting Social Security
When should one start taking Social Security? This is one of the most important decisions women can make. Social Security accounts for half or more of the retirement income of nearly six in 10 older women (aged 65+) in beneficiary families. For about one in six older women, it is the only source of income.

Here is a general guideline: The later the start date, the larger the monthly benefit. However, women need to consider several other factors too.

For instance, married women and divorced women who had been married for at least 10 years to a worker eligible for Social Security can be entitled to Social Security benefits in one of three ways: 1) As a retired worker. 2) As a spouse or survivor of an eligible worker. 3) As a dually-entitled beneficiary.

Men can qualify for benefits in the same way. But due to their generally higher career earnings, they rarely receive spouse or survivor benefits.

Important: Husbands who delay collecting Social Security until they are age 70 will ensure that their wives have the largest survivor benefit possible.

Assessing Divorce and Other Special Situations
Women face a number of retirement decisions that don't fit the broad categories above. The following are examples:

• Divorce: As noted, if married for at least 10 years, a divorced woman is eligible for Social Security benefits and, if her ex-husband dies, survivor benefits based on her former husband's earnings record. She will receive either her own retired worker benefit or the spouse or survivor benefit, whichever is higher.Women who are in the process of divorcing can generally secure rights to pension benefits of the husband, but this is subject to negotiation. They need to understand their husband's benefits and know which benefits have legal protections that apply to them. Divorcing women should also make sure their lawyer has expertise with Qualified Domestic Relations Orders (QDROs). It is very important that a QDRO be written correctly; the format varies by state. Public employee benefits have different rules, but the benefits can be divided on divorce as well.
• Women living with a partner: Unmarried women living with a partner generally lack the same protections as spouses except in states that recognize common law marriages. Common law marriage requirements vary by state. Cohabiting couples should work with a lawyer and financial advisor to ensure that the surviving partner inherits, retains, or acquires the rights to specified assets. They should make these decisions well before retirement.
• Women in second (or subsequent) marriages: Remarriage raises complicated financial planning decisions, especially when children and/or substantial assets are involved. Seeking the advice of a financial planner and tax advisor is a good idea.
• Long-term care insurance. this is a particularly important consideration for women, since it is common for women to live many years alone in old age. Some women have no family members available to help them, at least not on a regular basis. The insurance will help pay for their home and nursing care when they are frail, and it may provide access to care advisors  who will offer guidance.

The road to retirement can be a bumpy one for women. Fortunately, many resources are available to provide guidance on the decisions that lie ahead!$

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Managing Retirement Decisions: Designing a Monthly Paycheck

"Where's My Paycheck?" That is a common question for new retirees and near-retirees when they start mapping out the retirement journey ahead. In their working days, many had regular pay checks coming in to cover ongoing expenses. But what will take its place in retirement?

Social Security checks provide a portion of monthly income for most older people. Some also receive monthly checks from a traditional pension plan. These sources typically form the foundation of a retiree's income plan. But to maintain their standard of living, many people also need additional monthly income during retirement. How to build that additional income stream is the challenge.

For many, the discussion revolves around two questions: "Should I just take withdrawals from my savings and investment accounts whenever I need money beyond my Social Security or pension check? Or, should I purchase financial products - like annuities - that will pay me a guaranteed income stream?"

The choice between taking withdrawals and purchasing an income annuity involves many trade-offs, so it pays to look at the issue from many angles before reaching a decision.

A good place to start is to assess how much flexibility you are likely to need. Early in retirement, for example, people may have considerable flexibility to spend discretionary funds on hobbies or vacations. In the later years, however, this flexibility may decline or uncertainty may rise concerning health care costs or long-term care costs.

Early Steps

An early step in the retirement planning process is to project future sources of income and estimated expenses. Sources of future income may include Social Security, work-related pensions, or income from continuing to work.

Some income items will adjust for inflation, like Social Security, and others, like most corporate pensions, are fixed for life.

For future expenses, experts suggest splitting them into two categories: 1) required living expenses, including taxes; and 2) discretionary expenses.

Individuals who have mortgage debt at the time of retirement need to decide whether to pay down all or part of the debt. A key decision factor is the amount of assets and liquidity that will remain after paying down debt. Ask this question: Will the pay-down of debt be too constraining?

Those who have work-based retirement plans may have decisions to make before considering purchase of any retirement products.

Prior to separation from the company, retirement plan participants will likely be given a choice between: 1) Leaving your money parked in the plan; 2) Take a lump-sum distribution; 3) Roll the money into an IRA; 4) Take periodic distributions; or 5) Purchase an annuity through an insurer recommended by the plan sponsor.

Keep in mind that employer offers usually come with a fixed time frame for making a decision. Also, if the participant is married, they will have to consider the impact their choice might have on their spouse.

Products with Lifetime Guarantees

Once an individual chooses an approach and income plan, he or she will need to scope out the available products that can help implement the plan. To the extent that future required living expenses exceed future income, people may decide to fill the gap with a product containing guarantees. Some examples follow.

Income annuities. The most straightforward choice would be an income annuity. This is an insurance policy. The purchaser pays a certain dollar amount up front and the annuity pays a fixed amount per month for life. Income annuity products come with various features that make them adaptable for individual situations. For example, income annuities:

• Cover either single or joint lives. 
• Come with various refund options - for example, a guarantee that payments will last at least 10 years even in event of death of the payee. (The more attractive the refund feature, the lower the monthly payment.)
• Pay a flat monthly amount for life, in most cases, or make payments that step up by a set percentage each year. 
• May adjust the monthly payments each year for actual inflation. Not all income annuities do this. 

Other products.  Annuities, including variable annuities with a guaranteed lifetime withdrawal benefit (GLWB) , fixed annuities and fixed indexed annuities with guaranteed income riders, also 

offer lifetime income that retirees may want to consider. 

Bottom Line

When comparing regular investments versus products with longevity guarantees, retirees and their advisors will find some very attractively priced regular investment products available. These include index funds and exchange-traded funds, both of which cost a fraction of 1 percent a year. 

Some retirees and near-retirees may prefer to invest in products with guarantees. The market for income annuities is competitive, and low-cost products are available. 

In choosing these products, they will need to pay attention to the tax effects. Tax treatment varies among the different financial products, so after-tax results may look quite different from before-tax results. They should also pay attention to the financial strength of the insurance company selling the product. 

It is essential to work with advisors who are experts in this market and who understand tax effects. Advisors and individuals who use financial projection software in their planning should check to be sure the software takes tax considerations properly into account.$

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Financial Risks in Retirement: A Clear and Present Danger

In a recent survey conducted by The Society of Actuaries, U.S. retired and pre-retirees were surveyed regarding their understanding and management of post-retirement risks. 

Concerns About Retirement Risk

Respondents were asked to indicate their level of concern about eight post-retirement risks. The respondents expressed high levels of concern about having enough money to pay for adequate health care.  In addition, their next four concerns were:

• Depleting all of their savings
• Having enough money to pay for long-term care expenses
• Maintaining a reasonable standard of living for the rest of their lives
• Maintaining the same standard of living for their spouse/partner, if the respondent should die first (among those married or living with a partner)

Three risks that were less important were:

• Their financial ability to stay in their current home for the rest of their lives
• Leaving money to children or other heirs
• Relying on children or other family members to provide assistance

Income, health and gender

Concern about these issues, in general, is inversely related to household income and health status. Those respondents who have higher levels of income or enjoy better health tend to have lower levels of concern while those who have lower levels of income or suffer poorer health tend to have higher levels of concern. Females are more likely than their male counterparts to express concern about many of these issues. More females are likely to have experienced some of the adverse consequences of these risks, either personally or through a friend, because females have longer life expectancies than males. 

Inflation

Over two-thirds of the respondents indicated that they believe inflation will have a great deal of or some effect on the amount of money they need for retirement. 

Many respondents will still recall the high levels of inflation experienced during the late 1970s and 1980s. Many may recall the effects of these high levels of inflation on their parents' or grandparents' financial security. Those with a high household income will have a level of descetionary expenditure that can act as a buffer against the ravages of inflation. Those with a lower level of household income will have less available protection against high inflation. Because women live longer than men they are more likely to be concerned about inflation eroding their financial security over time. 

Impact of Death of Spouse/Partner

At least half of the respondents indicate that the death of their spouse would have little impact on them financially. Similarly, more than half say that their own would have little impact on their spouse's financial situation. The remaining respondents were split about evenly between those who think their financial situation would worsen and those who think it would improve. 

The fact that most respondents say the death of a spouse would not materially effect the financial well being of the survivor may indicate that many couples have not seriously considered this issue. On the other hand, but considerably less likely, it may indicate that they have arranged their financial affairs so that the first death does not create financial hardship for the survivor. 

Gender

Pre-Retired female respondents are more apt than their male counterparts to indicate that they would be worse off after the death of their spouse or partner. 

Females are more likely to say that they will be worse off after the death of their spouse because the male partner is more likely to be or to have been the main contributor to the financial well being of the couple during his working lifetime and after his retirement. Partnerships where both partners have full uninterrupted careers outside the home and partnerships where the female income is higher than the male are fairly recent developments. Couples in this situation are still the exception and few of them have already reached retirement. 

These are some of the main concerns regarding retirement. Having a solid plan in place will help ensure that you are prepared for these and other retirement risks. It is also very important to involve your spouse/partner in every step. With the proper planning and preparation, you will have a less stressful and more enjoyable retirement!$

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Balancing Growth and Income in Retirement

If you are nearing retirement or are already there, one of your most important tasks will be balancing your investment choices between income production and growth potential to stay ahead of inflation. 

Today's retirees are facing higher costs for fuel and food, an increasing share of growing medical costs, and lower housing values. How will they manage their retirement income given these pressures? What options are available to them to help them adjust to these changes?

For many Americans, retirement, once viewed as a time of relaxation, travel and enjoying life with family and friends, has evolved into a time of financial uncertainty and fear. In a poll of over 3,000 people ages 44 to 75, more than three in five (61 percent) said they feared depleting their retirement assets more than they feared death.

Need For Informed, Integrated Decision Making

Over the past twenty years, the continuing shift toward personal responsibility has placed increased pressure on individuals. Given the continued importance of individual responsibility in accumulating and managing retirement assets, there is a greater need than ever before for education and guidance. Individuals who do not fully understand their situation can be unduly influenced by emotions. Research indicates that retirement decisions are often influenced by behavioral factors - such as fear of the unknown, lack of trust, and desire for control.

According to the most recent data from the Federal Reserve, more people turn to friends, family members, or associates for financial information than to any other source of information on borrowing or investing.

Research shows that some people fail to plan and others plan for too short a time.

Hueler Companies: "The Retirement Income Challenge: Making Savings Last a Lifetime."

Hueler Companies, an independent consulting firm known for independent research, analytical reporting, suggests that if retirement plans offer access to low cost, transparent annuitization and lifetime income options through an institutional framework, lifetime income payments from these converted retirement savings can provide a reliable level of financial security while reducing risk and enhancing quality of life. Lifetime income options can create significant financial benefits for participants who use a portion of their retirement savings to create a supplemental "paycheck for life" and can help avoid the three primary financial risks in retirement: 1) longevity risk, or outliving one's retirement savings; 2) investment risk, based on market performance; and 3) inflation risk, or the erosion of buying power over time. Plan sponsors are often wary of offering access to lifetime income or annuity products because they fear that this increases their liability or creates the perception that they endorse a particular approach.

Bottom Line: Ensuring Income Throughout Retirement Requires Difficult Choices

As life expectancy increases, the risks that retirees will outlive their assets is a growing challenge. There is increased responsibility for workers and retirees to make difficult decisions and to manage their retirement assets so that they have enough income throughout retirement. If you feel that you are not getting the absolute best advice for your particular situation, use the contact us button at our website.$

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Do Your Advisors Have The Eye Of The Tiger?

"It's the eye of the tiger
It's the thrill of the fight
Rising up to the challenge of our rival
And the last known survivor
Stalks his prey in the night
And he's watching us all with the eye of the tiger"
Eye of the Tiger by Survivor. #1 Hit 1982

It's The Little Things That Can Get You
In the wild, being aware of the little things can make the difference between life and death, feast or famine. The predator has to use stealth, surprise, speed and quickness when pursuing its prey. One little sound or even approaching from the wrong wind direction can lead to failure and an empty stomach.

In life, it's also the little things that can trip us up and cause unintended consequences. A surgeon does a fantastic job performing a surgery. The surgery is successful. But what happens if someone in housekeeping didn't do their job, or someone in food service? They didn't handwash properly? The patient could end up with a MRSA infection. So that great surgery was severely compromised. Why? Because of the surgery, which was the big thing? Or what was the thing that got the patient? Yes, the little thing.

The "Little" Things in Personal Finance

Most people have good advisors, attorneys, accountants and brokers. These advisors do all of the big things. Unfortunately, they often overlook the little things. One such area is Powers of Attorney(POA). Of the thousands of POAs that we have looked at, although they were all perfectly legal, they were missing important things.

For example: The Social Security Administration, Veteran's Administration, and the IRS will not honor your POA unless it has specific language pertaining to those areas. Knowing what you know about the government, what's the likelihood that the language used by these entities are all the same? Exactly, none of them do! That's just one of nine things that we find that basic POAs are missing. Why is this important? Because you use POAs to withdraw money.

Banks and Brokerages

Even though a POA is completely legal, if it's missing these nine things, many banks and brokerages will turn them down. What's the advantage to a bank or brokerage for turning down a POA? They get to hold on to the funds longer and continue to make more money. They have no financial reason to honor it. It's actually negative financially for them to honor it. In fact, if they honor it and find out later that it wasn't the most current or correct POA, they could end up getting sued.

21-Point Checklist

If you're going on a long roadtrip, it's important to make sure that your vehicle is checked and ready. You take it to a mechanic, and they would perform a 10-or-12-Point Check. Similarly, you should have your personal financial situation checked out. There are actually 21 common "little" things that can bite you. And they can cause BIG problems. These 21 different things are important items that your bankers, brokers, attorneys and accountants miss.

Don't let the "little" things trip up you and your family. Make sure that the Eye of the Tiger is watching out for you!$

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Outlive My Retirement Savings? I Can't Go For That (No Can Do)

"I'll do almost anything that you want me to
But I can't go for that,
No can do."
Hall & Oates, 1981 #1 Hit



Prior to 2007, whenever Americans were asked about their retirement goals, the most common responses boiled down to "retiring early" and "accumulating as much wealth as possible." Asked the same question today, however, and the dominant answers are likely to be "dealing with healthcare expenses" and "not outliving my income."



Today, investors are demanding a smarter balance of growth and security to achieve their retirement goals effectively and to create a sustainable stream of lifetime income. The old "60/40" investment mix in retirement (bonds/stocks) will not sustain a retirement that can last 20-30 years.

A leading independent actuarial consulting firm studied the effectiveness of three popular investment strategies in creating a sustainable retirement income for various joint and single life retirement scenarios. Success was defined as annually meeting the needs of an inflation-adjusted income. The study assumed a $1 million investment, an initial withdrawal rate of 4.5 percent and annual inflation adjustment every year until death. The base case analyzed systematic withdrawals form hypothetical mutual fund portfolios comprising a combination of equity and fixed income. Next, the mutual fund portfolio was paired with an annuity providing a Guaranteed Lifetime Withdrawal Benefit (GLWB). Using a Monte Carlo analysis, the study sought to determine the best allocations to optimize chances for success in each case. Risk was defined as the probability of running out of money while still alive. Return was defined as the average amount of remaining assets upon death.

Mutual Fund Spend-Down Strategy

A balanced portfolio of 60 percent equities and 40 percent fixed income provided a maximum probability of success (82 percent) when using a mutual fund-only strategy. The best-case scenario for a mutual fund-only strategy suggested that one in five retirees could run out of retirement income prior to death.

Mutual Fund Spend-Down Strategy + Variable Annuity

Combining the mutual fund stratgegy and a VA with GLWB revealed that a 45 percent allocation to the VA with GLWB revealed that a 45 percent allocation to the VA and, for the remaining 55 percent of assets, a fund portfolio of 55 percent equities and 45 percent fixed income would be the most effective or optimal mix. However, the likelihood of success increased by just 3 percent to 85 percent. Withdrawals from the mutual fund portfolio would provide income during the first 10 years. Thereafter, lifetime benefit withdrawals from the VA combined with withdrawals from the mutual fund portfolio would fund the income stream. While there is improvement over the mutual fund spend down alone, there is still a one out of six failure rate, meaning a one in six chance of outliving your income.

Indexed Annuities (IAs) Enhance Odds of Success to 97.5 Percent

Finally, the study examined mutual fund systematic withdrawals paired with a contemporary IA with GLWB. The probability of success greatly enhanced, to 97.5 percent, when a 50 percent allocation to the IA was combined with a mutual fund mix of 25 percent equities and 75 percent fixed income. As with the VA/.mutual fund strategy, mutual funds would provide income for 10 years before lifetime withdrawals from the IA were initiated. With retirees seeking retirement income, this strategy provides the greatest probability of success, moving from a one in five or one in six failure rate to a one in 40 failure rate. That is a significant improvement as compared to the VA with GLWB strategy.

Know Your Options!

The significant improvement in the probability of success should capture the attention of pre- and post-retirees. Being in position for little to no market risk, a guarantee of principal, potential for portfolio growth and retirement income requires a series of well-executed plays. Improved retirement outcomes, flexibility to respond to a variety of needs and market conditions, and retaining control of the assets are driving today's retirement game. All these goals are achievable by combining the mutual fund drawdown strategy with a contemporary IA with GLWB.$

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Advisors: "Gotta Give the People What They Want"!

"You got to give the people,
Give the people what they want
Well, well, well, well."
The O'Jays, 1975 #1 Hit

I was listening to a national Investment Advisor's radio show this morning (Saturday). A listener called in and asked the following: "I'm 55 and have $200,000 in a 401(k) that is invested in a fixed annuity. I'm getting ready to retire, and cannot afford to lose this money. What should I do?"

The hosts' response: "It depends, what is your risk tolerance? On a scale of 1-10, where would you say you fit in on the risk scale?" The caller replied "about a 4". The hosts went on about asset allocation and fund selection to help him meet his objective. And typically, they described how it was a bad decision to put a qualified savings vehicle inside of an annuity. "You already have tax-deferral, and now you are adding more fees to your investment". "Anyone that recommends that you should rollover your 401(k) into an annuity is just after a commission." And of course, the hosts were more than willing to get his contact information and help him with that $200,000!

At the very beginning of the call, the caller stated that he could not afford to lose ANY of this money. He already answered the risk tolerance question. This individual would not sleep easy knowing that he was exposed to any loss, no matter how small. There is not an asset allocation model that can guarantee against a loss of principal due to market conditions. Fixed/indexed annuities are a viable solution to risk-adverse savers who are concerned with outliving their retirement income. Americans need credible and reliable information on financial services products now, more than ever. There is no excuse for the perpetuation of inaccurate information. Consumers deserve the most appropriate product for their needs.

It is important to note that the radio show hosts are investment advisors. Their background is in the securities business, not the insurance business. This is important to readers and listeners to know because registered representatives' solution for "safety and accumulation" is offering stocks and bonds (which are securities products that carry risk of loss). By contrast, the insurance agent's solution for the same problem is a fixed or indexed annuity (which are insurance products with no risk of loss due to market volatility). Why isn't the registered representative/advisor a fan of the fixed/indexed annuity? For starters, he is familiar with the processes and routines that are associated with the SEC's regulation (which is very different than those of insurance products' NAIC regulation.) In addition, securities products pay generous, consistent commissions (trails and AUM) where fixed/indexed annuities pay commissions only one time, at point-of-sale. For this reason, it is very likely that the financial advisor does not sell fixed/indexed annuities at all. And if he/she is not selling fixed/indexed annuities, then he/she is competing against insurance agents and advisors that do. Our nation's financial advisors and insurance agents have long fought a battle to control 100% of their clients' assets. It is a shame that everyone cannot learn to "play together" and ensure that the client has ALL of their financial needs met, using THE most appropriate products for their needs, regardless of whom is able to sell it to them.$

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Algorithmic Trading: How Algorithms Came To Rule Our Investment World

Algorithmic trading is a system that uses very advanced mathematical models for making transaction decisions in the financial markets. The system attempts to determine the optimal time for an order to be placed that will cause the least amount of impact on a stock's price. Algorithmic trading is widely used by investment banks, pension funds, mutual funds, and other buy-side (investor-driven) institutional traders, to divide large trades into several smaller trades to manage market impact and risk. Sell side traders, such as market makers and some hedge funds, provide liquidity to the market, generating and executing orders automatically.

The main objective of algorithmic trading is not necessarily to maximize profits but rather to control execution costs and market risk.

Algorithms started as tools for institutional investors in the beginning of the 1990s. Decimalization, direct market access (DMA), 100% electronic exchanges, reduction of commissions and exchange fees, rebates, the creation of new markets aside from NYSE and NASDAQ and Reg NMS led to an explosion of algorithmic trading.

Algorithims Replacing Wall Street Analysts, Investors

Computerized algorithms are quickly replacing single-stock analysts and investors, leading to big changes in the way the stock market will value companies and increasing the chance that software glitches or hack attacks will jeopardize market stability. Algorithmic trading may be used in any investment strategy, including market making, inter-market spreading, arbitrage, or pure speculation.

A third of all European Union and United States stock trades in 2006 were driven by automatic programs, or algorithms. As of 2009, studies suggested High-Frequency Trading (HFT) firms accounted for 60-73% of all US equity trading volume, with that number falling to approximately 50% in 2012.

Technological forces - including HFT, an explosion in exchange-traded funds and the proliferation of free information via social media - are behind this shift.

The changes that started with high-frequency and algorithmic trading are just the first step to an entirely different process of determining stock prices. Computers and decimalization have chipped away at the ranks of human traders in the past decade. Now, smarter machines are taking aim at the very people who analyze a company's merits and who make buying and selling decisions based on that analysis.

These algorithms tend to see the market from a machine's point of view, which can be very different from a human's. Rather than focus on the behavior of individual stocks, for instance, many prop-trading algorithms look at the market as a vast weather system, with trends and movements that can be predicted and capitalized upon. These patterns may not be visible to humans, but computers, with their ability to analyze massive amounts of data at lightening speed, can sense them.

Boon for Individual Investors

For individual investors, trading with algorithms has been a boon. Today, they can buy and sell stocks much faster, cheaper, and easier than ever before. But from a systemic perspective, the stock market risks spinning out of control. Even if each individual algorithm makes perfect sense, collectively they obey an emergent logic - artificial intelligence. It is simply, alien, operating at the natural scale of silicon, not neurons and synapses. We may be able to slow it down, but we can never contain, control, of comprehend it. It's the machines' market now; we just trade in it.$

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Wall Street: Rise of the Machines

The Future Has Arrived - On Wall Street!

Can professional money managers still beat the market? It has always been a difficult task for investors to consistently beat their index benchmarks. Lately, it has been nearly impossible. The reason: the rise of sophisticated computer-trading programs.

There were 51 advisers out of more than 200 on the Hulbert Financial Digest's list who beat the market in the decade-long period ended April 30, 2012, as measured by the Wilshire 5000 Total Market index, including reinvested dividends.

Of that group, just 11 - or 22% - have outperformed the overall market since then. Over the past year, on average, the group has lagged the Wilshire index by 6.2 percentage points.

Chasing Performance
In other words, going with a recent market beater doesn't increase your odds of future success. Before the era of computer-dominated trading, it was a bit easier to identify wining advisers. You could more easily understand and evaluate what they were doing.

Rise of the Machines
One major reason why machines are winning is our inability to process lots of financial data, which is getting more complex and voluminous every year. Also, there used to be another human being on the other side of the trade when a stock was bought or sold . Now it's a supercomputer that is competing with traders. Even if you are a Grandmaster, you are bound to lose competing with "Deep Blue".

Man consistently loses out to machine in a wide variety of pursuits, ranging from medicine to economics, business, psychology and even things like predicting the winners of football games and judging the quality of Bordeaux wine. In each of these domains, the accuracy of experts was matched or exceeded by a simple algorithm.

Betting on the Pros
Some traders hold out the hope that they can beat the market by following the lead of an investment adviser. But it is close to impossible to identify these advisers in advance. The average reader of financial publications simply cannot identify these market-beating advisers. Repeated studies have shown that even the best institutional investors have been unable to identify them in advance.

There's another reason why it is so hard for top-performing advisers to beat the index over the long term. Once the adviser turns in impressive performance, lots of new money flocks to his fund, diluting the ability to continue performing well.

This appears to be what contributed to the downfall of legendary fund manager Bill Miller of Legg Mason Value Trust. At the end of 2005, Mr. Miller had one of the hottest hands in U.S. mutual-fund history, beating the Standard & Poor's 500-stock index for each of the previous 15 years. His fund attracted lots of new money, and he found it impossible to continue his remarkable record.

From 2006 to 2011, he lagged the market in all but one year, and in 2012 he resigned as manager of that fund.

The Trading Trap
So, what's an individual investor to do? Where do you turn? For one thing, don't trade. Short-term trading has become so dominated by Wall Street's computers that individuals - and professional managers - almost certainly will lose out to them over time. The alternative: to buy and hold diversified index funds with very low expenses.

Age Matters
An important note: When you are young and in the accumulation stage, you can afford to be aggressive while building up your assets. You have time to ride out the market's ups and downs. But as you near retirement, it is time to go into protective mode. Time is no longer on your side to make up steep losses. Your serious money, money that you absolutely cannot afford to lose, should not be tied up in risk assets. In poll-after-poll of pre- and post-retirees, the most common retirement goals include guarantee of principal, potential for portfolio growth and a steady income stream.$

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