Tag: Investments

Investors are well aware that financial markets go up and down.  That is the essence of business and economic cycles.  What is difficult for individual investors to master is how to act in the face of market advances and declines.  Unfortunately, most people become very tolerant of risk and increase their exposure to the stock market when the market is advancing.  Similarly, they avoid risk and clip their exposure to stocks when markets are declining, or after a large correction.  It is human nature and “recency bias” that create this visceral response to market perturbations.  Recency bias occurs when investors believe that the most recent performance of their investment portfolios will continue indefinitely in the future.  It is just one factor that results in investors consistently underperforming the stock market.

Brad M. Barber  and Terrance Odean, in their 2011 study “The Behavior of Individual Investors,” conclude that individuals routinely underperform benchmarks through 1) selling winning investments and holding losing investments, 2) being heavy influenced by most recent past returns (repeating investment behavior that coincides with pleasure and avoiding behavior that is painful), and 3) holding undiversified portfolios.

Dalbar studies have also shown that most individual investors typically trail the market rate of return, and they typically do so by a fairly wide margin.

The message from Dalbar since its first study in 1994 is that investment results are more dependent on investor behavior than fund performance and that mutual fund investors who tend to buy and hold are more successful than those who attempt to time the market.

Investors who attempt to time the market are often acting irrationally out of fear of a potential loss.  Stocks and investment funds happen to be the only assets that people buy less of when they become less expensive. Let’s think about buying food at the supermarket, if the price of steak rose considerably, you would be more inclined to reduce your purchase of steak or buy something else, but if the supermarket suddenly reduced the price of the steak by 30%, you would stock up.  However, you do the opposite when it comes to stocks and other investments.  The stock market can foster a gambling mentality.  When you are on a roll you hate to stop, but that is exactly when you should cash some chips in.

So how does an investor counteract the tendency to time the market and invest based on most recent results?  Rebalancing is great way to fight the effects of recency bias.  Rebalancing to your target asset allocation is a mechanistic and unemotional way to fight these counterintuitive emotions.  I sometimes get an odd look from my clients when I suggest that they rebalance after a market run-up.  “Why would I want to do that, the market is hot?” might be a typical comment.  But that is exactly why rebalancing is so important.  It removes the emotions, market noise, and other extraneous factors, and reminds the investor of their original financial plan and goals.

The best value-added proposition a financial advisor provides is to set the target allocation and then monitor and adjust it based on the client’s personal goals and life events.  The asset allocation is set within the investment policy statement and the portfolio is rebalanced yearly, or as needed, after large market advances or declines.  The asset allocation is revisited periodically, at least every 3 years, and is adjusted in response to a client’s retirement goals, change in health or marital status, or market valuations.

Rebalancing in this way, will not only help the client attain rates of return closer to the respective benchmarks for his or her portfolio, it can actually be a source of additional return.  In a recent article in Financial Planning magazine, “Portfolio Rebalancing: Get It Right,” Allan Roth underscores the incremental benefit of rebalancing.  His analysis shows that “over the past 15 years, the portfolio that stuck to its allocation earned 1.54 percentage points more each year than the average portfolio that tried to time asset classes.”

Rebalancing is just one area where advisors add incremental return and why it is essential for our clients to commit to the annual review and rebalance exercise.   Emotions can be hard to control, let your re-balancing take them out of the mix, so you can maximize your long range returns.

Read Full Article

Most people think they’ll be ready to retire when they hit a certain age or accumulate a set amount of assets. Unfortunately, they rarely do the math to determine whether their savings will sustain them after they retire. According to the 2015 Retirement Confidence Survey by the Employee Benefit Research Institute, only 48% of workers reported that they or their spouses have tried to calculate how much money they’ll need to live comfortably in retirement, and people who did attempt this calculation generally ‘guesstimated’ the numbers.

The EBRI found that most Americans spend more time preparing for the holidays than for retirement.

To stay out of financial trouble after you retire, it’s important to start planning well ahead of time. And that involves taking a hard look at the numbers.

Work the problem

Retirement projection is a big math problem, and to get the right answer, you must plug in the right figures. To start, you must have a good grasp of how much income you can expect from retirement income streams such as Social Security and pensions.

The next step is crucial: understanding how much you’re going to spend in retirement. This can be much tougher to predict, but accurate projections can mean the difference between having adequate funds for the rest of your life and outliving your savings. Neglecting this important step before making the decision to retire is unwise; deciding when to retire should be based on your financial capacity.

That’s because once you’re retired, your main source of income ends, and expenses will be covered out of savings, investments and retirement income streams. Spending is perhaps the biggest variable in retirement planning calculations. It’s easy to be complacent during working years, when a steady paycheck is coming in. So it makes sense that a huge paradigm shift occurs when the paychecks stop and cash flow shortages have to be covered from savings. Creating your own paycheck from your savings can be overwhelming.

Set a retirement spending plan

For all of these reasons, establishing a realistic retirement budget is critical. To do this effectively, consider these steps:

1. Envision your life during retirement. Make a list of what you’ll be doing and how you’ll be living. What will a typical day look like? What kinds of hobbies or volunteer work will you participate in? Will you embark on a second career? How much will you travel? Will you move to another location or maintain two residences? How much support will you provide for your kids and grandkids? What is on your bucket list and how much will realizing it cost?

2. Keep track of your current spending for at least three months. Be sure to include expenses that occur less frequently, such as insurance and dues.

3. Review this spending record. My clients are often surprised to see where they’re spending their money. This exercise enables them to align their spending with their goals, values and desires. They’re more committed to a spending plan once they have determined where their money is going because this prompts them to set priorities to ensure that they don’t spend frivolously or on items that aren’t priorities.

4. Make changes in your spending now to reflect the retirement lifestyle you envision. How will your expenses change upon retiring? Does your spending jibe with the goals you identified in the first step? Be sure to revise entries for certain expense categories, such as travel, entertainment and housing, to reflect these goals. Don’t forget to account for uncovered medical expenses and supplemental health insurance premiums, including Medicare Part B.

Watch your withdrawal rates

Once you have put together a spending plan, you can determine how much of your expenses would be covered from your investments. Most financial planners recommend that people who retire at 65 withdraw no more than 4% of savings annually. If you withdraw much more than that, you’re likely to outlive your funds, so you might need to work longer. If you retire earlier than 65, you will likely need to adjust that withdrawal rate downward, as you’ll be making withdrawals longer.

Consider working with a financial planner who specializes in retirement planning. He or she can walk you through the planning process and potentially give you confidence about the capacity of your investment portfolio to provide adequate income after you retire. The planner can also help you realize that you’re not on track and need to make changes.

Read Full Article

Americans strive to do “better than the Jones’” by earning enough money (and accumulating debt) to buy fancy McMansions, nice cars, and family vacations. But the never-ending pursuit of the trappings of wealth can get in the way of the truly important things in life such as relationships, job satisfaction, and extracurricular pursuits. Debt accumulation is often the end result of aspiring to acquire “stuff and things” so we can impress others and make ourselves feel like we have succeeded. Acquiring material possessions rarely leads to happiness. In addition to increased debt, it impairs our ability to provide adequate savings for retirement. In fact, research shows that the average American has very little saved for retirement.

According to research from the 2014 Retirement Confidence Survey (RCS) conducted by the Employee Benefit Research Institute, 58 percent of workers and 44 percent of retirees report having a problem with their level of debt, and a sizable percentage of workers have virtually no money in savings and investments. Among the workers that responded to the RCS, 60 percent report that the total value of their household’s savings and investments, excluding the value of their primary home and any defined benefit plans, is less than $25,000. Only roughly 22% had savings over $100,000.

Mr. Anthony’s article offers some advice to live debt free and counterbalance the materialistic slant of today’s world.

First, he mentions a tip his father taught him– that he should always try to live on only half of what he earns each year.

Most Americans will need to save far more than they anticipated for retirement. Whereas a 10% savings rate was appropriate in the past when workers had robust pensions and could count on receiving Social Security, a retirement savings rate of at least 15% is now more appropriate. If you include additional annual saving for an auto reserve, future college expenses for your kids, and six months of cash for an emergency reserve, a number closer to at least 25% might be more practical. His father’s point was that you should try to live way below your means so that there would be a cushion of safety as well as turbo charged savings for future goals like retirement. If we live a frugal lifestyle, we won’t get too addicted to a cushy lifestyle.

Second, it is essential that we relax about what our “position” is in life and not fall prey to the belief that “we are what we own.”

The key concept here is that true happiness is “wanting what you have.” As we get older and start to reflect on our lives, we realize that health, relationships, and experiences are far more valuable than all of the physical things that were once so imperative for us to acquire. In fact, we have learned by experience, that just because we bought that truck or went on our dream vacation, it did not fundamentally change our lives. Learning to love exactly where you are in your life at any one point in time is a concept that will result in great joy, peace, and satisfaction. Mr. Anthony writes, “life does not consist of the abundance of things, but of the abundance of enjoying where we are and who we are with.”

Finally, Mr. Anthony suggests that we should not place an unrealistic burden on ourselves regarding where we “should be” at certain ages or stages of our lives.

You should live the life that YOU want, not the life you think your parents, friends, or colleagues think you should live. You have the power to write the script of your life.

Our life goals, and especially our retirement goals are very important, as they help define our lifestyle and determine how much money we need to achieve our heartfelt desires. If we can live by the principles that Mitch Anthony outlines, we can have control over our money as opposed to our money and debt having control over us.

If you want to read more about goal setting for retirement, I suggest that you read Mitch Anthony’s book The New Retirementality. It will inspire you to be more intentional about planning for that next phase of your life. The book also provides valuable exercises to help you determine how you will spend your time and money to live a purposeful retirement. The Millionaire Next Door is also a great read to inspire you to downscale your life. The book, written by Tom Stanley and William Danko, presents research on the habits and lifestyle of wealthy Americans and how they accumulated millions by not flaunting their wealth, but instead by living a practical life.

Read Full Article

Investors are well aware that financial markets go up and down.  That is the essence of business and economic cycles.  What is difficult for individual investors to master is how to act in the face of market advances and declines.  Unfortunately, most people become very tolerant of risk and increase their exposure to the stock market when the market is advancing.  Similarly, they avoid risk and clip their exposure to stocks when markets are declining, or after a large correction.  It is human nature and “recency bias” that create this visceral response to market perturbations.  Recency bias occurs when investors believe that the most recent performance of their investment portfolios will continue indefinitely in the future.  It is just one factor that results in investors consistently underperforming the stock market.

Brad M. Barber  and Terrance Odean, in their 2011 study “The Behavior of Individual Investors,” conclude that individuals routinely underperform benchmarks through 1) selling winning investments and holding losing investments, 2) being heavy influenced by most recent past returns (repeating investment behavior that coincides with pleasure and avoiding behavior that is painful), and 3) holding undiversified portfolios.

Dalbar studies have also shown that most individual investors typically trail the market rate of return, and they typically do so by a fairly wide margin.

The message from Dalbar since its first study in 1994 is that investment results are more dependent on investor behavior than fund performance and that mutual fund investors who tend to buy and hold are more successful than those who attempt to time the market.

Investors who attempt to time the market are often acting irrationally out of fear of a potential loss. Stocks and investment funds happen to be the only assets that people buy less of when they become less expensive. Let’s think about buying food at the supermarket, if the price of steak rose considerably, you would be more inclined to reduce your purchase of steak or buy something else, but if the supermarket suddenly reduced the price of the steak by 30%, you would stock up. However, you do the opposite when it comes to stocks and other investments. The stock market can foster a gambling mentality. When you are on a roll you hate to stop, but that is exactly when you should cash some chips in.

So how does an investor counteract the tendency to time the market and invest based on most recent results? Rebalancing is great way to fight the effects of recency bias. Rebalancing to your target asset allocation is a mechanistic and unemotional way to fight these counterintuitive emotions. I sometimes get an odd look from my clients when I suggest that they rebalance after a market run-up. “Why would I want to do that, the market is hot?” might be a typical comment. But that is exactly why rebalancing is so important. It removes the emotions, market noise, and other extraneous factors, and reminds the investor of their original financial plan and goals.

The best value-added proposition a financial advisor provides is to set the target allocation and then monitor and adjust it based on the client’s personal goals and life events. The asset allocation is set within the investment policy statement and the portfolio is rebalanced yearly, or as needed, after large market advances or declines. The asset allocation is revisited periodically, at least every 3 years, and is adjusted in response to a client’s retirement goals, change in health or marital status, or market valuations.

Rebalancing in this way, will not only help the client attain rates of return closer to the respective benchmarks for his or her portfolio, it can actually be a source of additional return. In a recent article in Financial Planning magazine, “Portfolio Rebalancing: Get It Right,” Allan Roth underscores the incremental benefit of rebalancing. His analysis shows that “over the past 15 years, the portfolio that stuck to its allocation earned 1.54 percentage points more each year than the average portfolio that tried to time asset classes.”

Rebalancing is just one area where advisors add incremental return and why it is essential for our clients to commit to the annual review and rebalance exercise. Emotions can be hard to control, let your re-balancing take them out of the mix, so you can maximize your long range returns.

Read Full Article

Can We Still be Smart Investors?

Any other week would be a better one in which to write a financially-themed article. While this article will be in the November issue, the context from which I write is immediately following the announcement that the House of Representatives voted NO on the Bailout plan. We all know that this sent the stock market tumbling, causing many people to feel fear— perhaps the first real time in our generation’s adult life (except maybe some from the dot com bust but that was “fun money” before we had families!!).

While a revised Bailout Plan will likely pass and a few more banks may fall by the time this is published, the events of the past few weeks have made many people question whether or not they are handling their money the “smartest” way.

As a fee-based financial planner who does not manage portfolios, I cannot recommend individual stocks or funds to buy and sell. Nor do I think that will help the families with whom I work at this juncture. I can, however, help you take a macro-perspective on what is smart for you and your family.

“Smart” begins with the basics:

  1. What is your family’s vision and what are you creating?
  2. What is your relationship with money? How do you handle fluctuations? How anxious are you?
  3. What are your financial goals? When do you need the money?

VISION:

You’ve heard me say it time and time again if you read my column with regularity. What is the life you want to create for your family? What does it look like? How do you define success?

Are you living in a hillside cottage with a large yard or do you have an apartment with a home in Tahoe? Do you pick a new country to visit with your children every year? Do you want to settle into a community where you will root for the next 20+ years? Do your children walk to the locale public school or will they be attending a private school?

The vision you create for your family trickles down to the types of investments you make also called an investment vehicle (such as stocks, bonds, mutual funds). Before you can decide into which vehicle you will invest, you need to know for what you want the money.

YOUR MONEY PERSONALITY:

A fascinating area of financial planning is how people relate with money. This alone can fill pages upon pages of articles and keep me reading for weeks (I am endlessly intrigued by this topic). At the very fundamental level, you have to know what is commonly talked about in the financial planning world as your “risk tolerance.” I find that concept hard to grasp, so with my clients I like to hear more about what keeps them up at night. What makes them anxious?

Is it any negative movement in a 401k or is it not having enough money in cash in a savings account? Do they ride out the drops like the one on Sept 29th with grace and ease saying “it’ll come back” or “this is expected” or do they run for the bank and hide their money in their mattress? Everyone is different and understanding your level of anxiety with investment fluctuations is an imperative input factor to deciding how to invest.

YOUR FINANCIAL GOALS:

Taking your vision and translating it into financial goals is where I find the financial planning process helps the couples with whom I work the most. This makes the softer airy vision a dollars and cents reality. Smart investing requires that you know:

The amount the goal will cost
The Time horizon over which you are investing (that is, when do you need the money)?
The amount of money you are starting with for the goal
The amount you are contributing along the way

All of these factors will let you know what the return you need for your money will be. To say that another way, it will tell you how much you have to make each year on the investment to reach the goal. And different investment vehicles offer different possibilities for returns. Holding investments in cash will probably stay within a few % points, while stocks can jump all over the chart — in both directions. To get higher returns, you also will take on higher risk. The return you need combined with your personal tolerance for fluctuations will determine the investment vehicle.

For example:
If you already have $100,000 that you want to put toward a home down payment in one year, you only need a very conservative investment vehicle. Keeping that cash in a money market account would give you the best assurance that your money will be there when you want it.

I see many clients who come to me with next year’s house down payment in stocks or equity mutual funds. Perhaps that is how they built up the money or maybe they just like to participate in the market. In a week like the ones of late, however, a portfolio may drop 10%, making a $100,000 down payment now a $90,000 one. For the exceptionally daring individual, this may be okay, but as a financial planner, I advise people to match their investment vehicles with their time horizons.

If you want access to your money soon, keep it in a cash-equivalent vehicle. This way the market can jump all over the place and you can rest assured that you have what you need when you need it (caveat from the recent events: up to the FDIC insured limits of $100,000 – or more if you set up a certain kind of account designed to expand this limit) . The longer you have before you need the money, the more fluctuations you can likely tolerate. So while you may not be thrilled that your 401k invested in a mix of mutual funds, for example, has decreased, you will likely have more tolerance if you do not need the funds for another 30 years.

PARTNER FOR SUCCESS:

Granted there are those among us who will feel compelled to switch to other asset classes if ours are not performing just because of their personality and risk tolerance. Whether or not this is the smart way to go depends on your personal situation only. To help you handle the next bump, I encourage you to be prepared to act with knowledge and not emotion. The best way to do this is to partner with a financial professional who can help you ride out these rough times and stick with a “system” that works for your anxiety level and your goal achievement timeline. With a plan in place, you can approach the times when everyone else seems to panic with the desired calmness that comes with real knowledge of your own smart investing strategy.

Read Full Article

The economy appears to be making strides as it emerges from critical condition and enters into rehabilitative mode. Some positive signs include increasing bank lending, auto sales, and consumer confidence. Unemployment is also declining, especially for skilled labor. Both the US budget deficit and state budgets are improving. Corporate infrastructure such as plants, buildings, and equipment are overdue for upgrades, suggesting substantial future increases in capital expenditures.

Headwinds from the Euro debt crisis have subsided to a large extent, with credit spreads collapsing. In fact, spreads seem unusually tight given that Spanish bond yields are currently lower than US Treasury yields. This is quite unusual, and likely due to the European Central Bank’s announcement that they will engage in more aggressive monetary easing policies to halt disinflation and spur growth.

Japan and China are still muddling through their own economic malaise attempting to establish equilibrium. In short, the global financial landscape seems eerily quiet, especially given the growing geopolitical pressures. Increased tensions in the Ukraine, civil war in Iraq, and continued presidential scandals have failed to disrupt financial markets. The US stock market, in particular, is experiencing reduced volatility. We are now going on almost three years with no correction of 10% or more (since August of 2011).

The current situation reminds me of my garden. This year I made a vow to finally grow vegetables. I decided to start with something easy and small. I filled a cement container with soil and compost and planted two tomato plants. The plants grew tall quickly; and before I knew it, I had about 15 shiny green tomatoes. I was so excited that I started to plan my recipes, who I would share my bounty with, and what I was going to add to my garden next year. Then one day when I went to check my plants; I found a shriveled up tomato and one that had brown rot on the bottom. Uh, oh. I researched the disease online and now realize that I may not be able to save my tomatoes. I am taking steps to reduce the risk of further rot, but I am concerned that I may be fighting a losing battle.

I may lose a lot of my tomatoes, or I may be able to minimize the losses and still have plenty of tomatoes for weeks to come. The same may hold true about the financial landscape. Although the economy is starting to improve, the stock market seems to have gotten a bit ahead of itself. The market appears frothy, with little room for future growth, but a correction may come in days, months, or maybe years.

Why are stocks and investors so complacent?

The Fed Reserve’s policy of printing money has resulted in a massive increase to their balance sheet from $800B in 2007 to over $4.5T today.

This massive flood of money into the system has drastically devalued the dollar and has forced investors to put their cash in riskier investments. This has been the main reason for the overly ebullient markets since the Great Recession of 2008. In this zero interest rate world, desperate retirees and savers are reaching for yield in risky areas of the market in order to get more return on their money. This has resulted in overvalued fundamentals. Valuations are rich for US equities using metrics that have traditionally been highly correlated to market performance.

Using the CAPE (Cyclically adjusted PE) ratio developed by Robert Shiller from Yale University, the market may be signaling that US stocks are possibly overvalued by 50%, as the ratio is approximately 51% above its average (arithmetic mean) of 16.5.

Of course, valuations can’t be used as market timing techniques, as markets can stay overvalued or undervalued for long periods of time. But at these levels, it does suggest that loading up on equities, especially if you are a new or soon to be retiree, may not be a good long-term move.

According to John Hussman, “The median price/revenue multiple for S&P 500 constituents is now significantly higher than at the 2000 market peak.” He is currently forecasting weak returns over the next decade with negative returns for period of 7 years or less.

Similarly, James Montier from GMO expects that large U.S. stocks will have a return of -1.6% a year for the next seven years.

Mebane Faber in a recent conference suggested that not only US stocks, but particularly dividend stocks are severely overvalued. He also warned that “home bias” skews our portfolios in favor of our own country’s stocks. Right now international markets, especially certain emerging market countries, have better valuations.

The point is that shocks occur when you least expect it. They are often caused by some triggering exogenous factor and are met with disbelief, which in turn leads to unpredictable human behavior.

We need to prepare for inevitable corrections as they are part and parcel of business cycles.

Since this rally is particularly long in the tooth and has created severe overvaluations, it may be a time to mentally and financially prepare for a market setback. While I do not espouse market timing, I do think it is prudent to reduce exposure by 10-20% in the event of extended markets, impending retirements, or in the event that you have reached or surpassed your target financial goals.

Times like these also underscore the importance of re-balancing your portfolio. Re-balancing is the best way to keep yourself unemotional, since you invest based on your target allocation as opposed to market noise. This is why I always urge my client’s to be faithful regarding their annual reviews.

When you re-balance or take some actions to reduce risk, you not only enhance your awareness of your financial well being, but you feel more in control of your situation. When it comes to investments, we can’t control the economy or the direction that the markets will turn, but we can and should control the things that we can, such as reducing costs, planning to avoid tax spikes, and maintaining an exposure to the stock market that is consistent with our risk profile and market valuations.

In order to reduce the risk of losing more tomatoes to disease, I bought some gypsum and added it to the soil in my tomato plant container. I don’t know if it will work, but I at least feel better that I did all that I could to help prevent the spread of the disease. I hope to have an abundant garden this summer, but only time will tell.

Read Full Article

If you are like most workers in South Carolina, you probably have procrastinated saving for retirement. Now that you have put your retirement planning on the front burner, you realize that you’ll have to aggressively ramp up your savings rate. You wonder if you can make up for lost time by being more aggressive with your investments. Unfortunately, that may not help you as much as you thought. Retirement planning is all about math, and to help illustrate the math equation, I like to use the metaphor of a garden to explain the lifecycle of retirement savings and distributions. Here are four basic questions that will help you assess your ability to retire. Reflecting on each of these questions will enable you to better understand where you need assistance and also what you are doing well.

Questions One: The Retirement Garden- How Big is Your Plot?

The amount of income you make during your career is your “human capital.” You potential capital is greatest when you are just entering the work force. Whether you work for decades with a low to modest income or you retire early and get a golden parachute worth multiple millions, think of that total income (years worked x income per year) as the land you have available to plant the seeds of your retirement savings. One way to maximize your land is to retire later or invest in your career development. It is also imperative that you protect your “land” with proper insurance such as life and disability.

Questions Two: Planting Seeds for Future Growth- What is Your Savings Rate?

It is how you cultivate your land that counts. In order to have an abundant garden, you need to plant a lot of seeds and seedlings. For example, you may have a high income for many years, but if you are not systematically saving a portion of your income (at least 10%, if not 15%) your land will not bear enough fruit in the future. Your land will be barren. Even investors with modest plots (income) who have diligently sowed the seeds of savings over the years may have more plentiful income in retirement than their profligate neighbors. This is why most financial planners recommend starting early and putting retirement savings on autopilot. To sow more seeds for retirement savings, increase your savings rate into your 401K or other retirement plan and cut back on spending to save additional amounts outside your retirement plan, if you are already at the maximum limit.

Question Three: Weeding, Feeding, and Pruning for Optimal Growth- Do You Have a Sound Investment Plan?

A well thought out investment strategy helps you maximize the growth of your “retirement garden,” but most of the heavy lifting needs to be done by acquiring land (income) as well as planting seeds and seedlings (consistent and/or significant savings). Many people think of their investments like fertilizer, and rationalize that if they increase the aggressiveness of their portfolio, they can make up for lost time. But you can’t rely solely on fertilizer for the output of your garden. Just like fertilizer, too much of a good thing, (say holding a concentrated position of one stock, maintaining too high an exposure to equities, or skewing your portfolio to highly volatile sectors like emerging markets) could undermine your progress, especially if you have limited time left to build up your retirement silo.

Proper asset allocation among low-cost, diversified asset classes such as domestic and international stocks, real estate, commodities, and high quality bonds can provide adequate growth while helping to mitigate potential losses. Just like we plant various crops to hedge our bets, we invest in various asset classes to create an all-weather portfolio. Planting a variety of crops will protect us from a variety of risks and ensure some of our harvest survives no matter what Mother Nature (or the markets) throw at us. Ideally, some investments will perform well when others underperform, and vice versa. The overall performance will be unpredictable and change as often as the weather. Consistently pruning your portfolio through periodic re-balancing of these asset classes, possibly as infrequently as once a year, will help maximize the long run return or yield of your garden.

Questions Four: Providing For Your Future Harvest- Should You Consult an Experienced Gardener?

Retirement planning and investment management need not be (complex or expensive). It is all about how investors behave within the retirement planning cycle. In order to help motivate and guide your master plan for retirement, you may want to consider seeking out the expertise of a fee-only CERTIFIED FINANCIAL PLANNER Professional. He or she will help you determine how much you need to save based on your unique goals and design a low cost investment portfolio to help build and maintain wealth as well as minimize drawdown during your distribution phase. Probably the most important benefit of a professional advisor is that he or she will keep your invested through thick and thin instead of bailing when times get tough. Some investors try to time the market by buying into the market during upswings and selling during declines. This could reduce the overall yield of their crop, just like harvesting a crop before its peak might. Instead, you will need to plant often and consistently (through dollar cost averaging).

I hope that the retirement garden serves as an inspiration for you to focus on maximizing the abundance of your retirement garden. By planting, harvesting, and consuming the fruits of your labor in a prudent manner, you will reap the rewards in the form of a satisfying retirement lifestyle.

Read Full Article

We are now experiencing the fifth most powerful bull market in stocks since 1900. The Federal Reserve, through its quantitative easing program, has lowered interest rates to near zero, thereby forcing investors to search for income in nontraditional places. In response, dividend yielding stocks and high yield “junk” bonds have soared in price. If you review the trajectory of the S&P 500 over the past year, it appears that the market is advancing without any significant corrections.

The market continues to shrug off risks. Despite poor economic data, decelerating growth in China, still unresolved European debt woes, and increasing tensions between Russia and her neighbors, the market continues on its march upward. The only data the market seems to respond to are signals from the Federal Reserve that they may increase interest rates. For now, the stock market assumes that new Federal Reserve Chair Jerome Powell “has its back.” The dovish Powell appears to be an advocate of an accommodative policy through 2018.

Investors can become complacent believing that this pattern will last indefinitely. To wit, the flow of money into stock funds reached an all-time high in 2013-2017 as memories of the crisis of 2008 faded. The belief that market gains can be achieved consistently with no apparent risk of correction is not only naive, but dangerous. Investors in Bernie Madoff’s fund were likewise transfixed by the steady, impressive returns that seemed to move with no correlation to the financial markets. Sometime when things seem to be too good to be true…..
We only need to look back to the more recent examples of complacency and calls of “this time it’s different,” to remind ourselves of the dangers that can result from this mentality.

In the 2000 tech implosion, the market finally came to the reality that stocks with non-existent earnings and lofty prices were not necessarily a good buy. We were told that “earnings did not matter” and that this was “the new paradigm.”

In 2007, when everyone was buying second homes, flipping “spec” homes, and loading up on a McMansions they could not afford, the party line was that, “housing is an investment that never goes down in value.”  The financial crisis was created in part due to this mentality, and we are still feeling the painful repercussions.  In this article , Peter Schiff discusses the implications of the massive debt the US has incurred post 2008.  He states,

America is trying to borrow its way out of recession. We are creating debt now in order to push up prices and create the illusion of prosperity.

He opines further that:

 “The red flags contained in the national and global headlines that have come out thus far in 2014 should have spooked investors and economic forecasters. Instead the markets have barely noticed. It seems that the majority opinion on Wall Street and Washington is that we have entered an era of good fortune made possible by the benevolent hand of the Federal Reserve. Ben Bernanke and now Janet Yellen have apparently removed all the economic rough edges that would normally draw blood. As a result of this monetary “baby-proofing,” a strong economy is no longer considered necessary for rising stock and real estate prices.”

It is important for investors to remind themselves of the following:

Markets are cyclical

Corrections are normal consequence of business cycles:  We can’t predict when they will occur, but we should prepare mentally for their eventuality.

Market timing is extremely difficult.

Who would have predicted that in 2013 the S&P 500 would increase over 30%?  This occurred despite the debt ceiling and budget showdowns, sluggish economic growth, and other geopolitical events.  Few if any analysts, predicted this incredible performance, giving further credence to the notion that the so called “experts” are not particularly prescient.

Chasing performance can lead to pain

Investors have a tendency to pile into segments of the market that have recently performed well , buying more of the recent winners and eschewing the “dogs” that underperformed.  But short term performance is not indicative of longer term returns.  Overexposure to one asset class, say large-cap US stocks, will reduce your portfolios diversification, thereby increasing the overall volatility of your investment mix. Discipline in the form of rebalancing would be a better tactic. In this related article, Craig Israelsen discusses this behavioral tendency and how it can be avoided through proper diversification.

Looking at traditional measures of valuation, the current stock market is overvalued.  According to John Hussman, current valuations suggest that equities are poised to deliver paltry returns of roughly 2.3% before inflation over the next 10 years.  Even the Fed’s own Richard Fisher, president of the Federal Reserve Bank of Dallas, recently said he was concerned about “eye-popping levels” of some stock market metrics warning that the Fed must monitor the signs carefully to ensure bubbles were not forming.

In irrational times like this, it is important to maintain perspective; we don’t know exactly what the stock market will do in the short run.  We can’t control inflation, taxes, political turmoil, the weather, our health or major geopolitical events.  We must instead focus on the things we can control like the following:

Our emotions– It is essential that we have a portfolio of investments that we can stick with through thick and thin.

Review your investment policy statement that was prepared as part of you plan; and specifically; revisit the potential decline for your investments based on your target allocation to the stock market to see if it is still palatable

Rebalancing –After a large market advance, it is important to prune our winners and reinvest proceeds in losing asset classes.

Most recently, that would mean selling stocks and buying bonds. While this is counter to our  behavioral instincts, it is a powerful way to maximize long-range investment returns.

Costs–Given that future stock market returns are likely to be lower, costs becomes especially important.

Employing no-load, passive, low-cost funds and ETF’s will help maximize your gains.  The money you save due to low fees will compound for you over time.  This has an exponential effect on the growth of your portfolio.  Costs are reflected in your funds’  expense ratios.  Low cost investment advice helps to further reduce the overall cost of your investment management.

Diversification–resist the urge to follow performance and load up on yesterday’s star asset classes

Just because US stocks have been stellar performers doesn’t mean that this will continue. We never know in advance which portion of the portfolio will be the star performer. As this periodic table of asset class performance indicates, the stars of one year can easily turn to dogs the next. It is also important to remember that cash, CDs, and high-quality bonds, while they possess frustratingly low yields, are still an essential component of your portfolio, as they act as shock absorbers in periods of market turmoil.

Risk– if you’re planning to retire in the next five years or recent retiree, you may want to adjust your portfolio to position yourself more conservatively.

Recent studies suggest that minimizing your exposure to stocks, five years before and five years after retirement  and then increasing your stocks allocation slowly over time, may be a prudent way to maximize spending in retirement as well as avoid outliving your funds.

In summary, the market over the past few years may convince you that risk will be rewarded with little chance of loss. But remember, what goes up must go down, and invariably, a tipping point emerges that changes the course of the market.  History does repeat itself.  Be realistic and stick to a prudent plan so you are well equipped to weather any market storm.

Read Full Article

As we start a new year, we start to think about our goals over the next 12 months. Will we take a vacation and, if so, where? What sort of activities or hobbies will we engage in or fund for our kids? If we have a big birthday or anniversary, how will we celebrate that event and how much will it cost? These shorter-term goals tend to initiate thoughts and discussions about long-term goals.

If we spend today, how will that affect our ability to fund college or retire? As we reflect on these issues, we may feel inadequate and unable to prioritize and quantify them. More often, those longer-term goals are pushed aside given the immediacy of the day-to-day obligations. The result is that we feel a mounting and nagging pressure that we are ignoring these longer-term goals at our own peril.

That is where financial planning can be a powerful tool. It allows us to balance the short-term needs and wants with important long-term objectives. It gives us perspective and enhances accountability. More importantly, the process provides peace of mind. People with a financial plan that addresses the various aspects of their lives tend to sleep better at night.

For example, say Dr. and Mrs. Jones spend heavily on their children’s activities and vacations each year. They also pay for their kids to attend a private school. However, they have very little set aside for college education, a small emergency cash position that may only cover 2 months expenses, and almost no investments outside of their 401Ks.

They are funding a great lifestyle through current income, but since they are in their 50s, they are concerned that they have not saved enough for retirement. They worry about how to fund medical expenses in retirement and if they will be able to maintain their lifestyle throughout both of their lives.

The financial planning process helps people like this by establishing a spending plan to balance their short-term wants with their ability to retire comfortably. It may mean they need to make tradeoffs by reducing current outlays in private school or family trips in order for them to save additional funds for college and retirement. Or it may mean that they need to work longer than anticipated. Furthermore, the process may address their need to help protect their earning power over the next 15 or so years by ensuring that they have the proper disability and life insurance.

An initial plan sets the course of their financial lifecycle and yearly progress reports, not unlike annual physicals, ensure that they remain financially fit.

Read Full Article

Super funds come in two basic forms.

Defined benefit funds

With defined benefit funds your final pay-out is “defined” by a set formula. For example, you may get four times your salary if you retire at 55, five times at age 60 and so on. You know in advance what you will get.

These were once quite common in public sector super funds and with some larger companies. The advantage of defined benefit superannuation is certainty about the size of your payment upon retirement or leaving the company. The bad news is that it may be less attractive if you don’t stay with the one company until retirement. I know many people who feel trapped by this type of super. The end benefit is so attractive, they just can’t afford to leave. Low motivation is bad for the employee and employer and what a sad situation it is, because no one wins. These people wait for 5 o’clock so they can go home, and long to retire.

With defined benefit funds, how the investments in the fund perform is of no interest to you. Your end benefit is paid anyway (unless your company goes broke and defrauds the super funds). Your employer will be very interested in investment performance though because the better the fund does, the less he has to put in! You may have seen very public arguments about “surpluses” of defined benefit funds. A surplus means simply that your super fund has more money in it than it needs to pay out to its members in entitlements. Often employers will try to reclaim this surplus, and employees fight to hang onto it.

Providing the surplus is accurately measured, I have no doubt who it should belong to – the employer. They guarantee the member will receive a set benefit and dips into the company coffers if the money is not there. So, given the employer must meet any shortfall, I have no doubt any surplus, if it occurs, also belongs to them.

Accumulation funds

Accumulation funds are becoming increasingly common and are also very simple. Whatever you or your employer puts in, plus investment earnings, less expenses, is yours.

While with defined benefit funds you concentrate your attention on the documentation describing your end benefit and don’t worry about investment, with accumulation funds you do worry about investment and you need to ask lots of questions. With accumulation funds what you get is determined by what goes in, but the expenses of the fund and, in particular, the performance of the investments it holds, are critical to what you end up getting.

Thing you should know about your accumulation fund
  1. How much is your employer putting in?
  2. How much do you have today?
  3. Where is the money invested ?
  4. What are the fees and charges?
  5. Do you get any insurance cover, if so how much?
  6. Can you add your own money to your employer’s super fund?
  7. Do you have any choice about how the money is invested?

If you don’t know the answer to these issues – ask! No reputable employer would not want to answer these questions.

Read Full Article