Objective information about financial planning, investments, and retirement plans

Your 401(k) – A To Do List for the Rest of 2014

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In a recent post Eight Financial To Do Items for the Rest of 2014, I outlined several items for your financial to do list for the rest of 2014.  One of those items was to review your 401(k) plan.  Here are a few more steps to take with your 401(k) plan yet this year.

Review your salary deferral amount

The maximum dollar amount that you can defer from your salary is $17,500 or $23,000 if you are 50 or over at any point during 2014.  If you are not on track to max out your contributions now is a good time to see if you can increase your salary deferral percentage even by 1%.  In the long run this will put you that much farther ahead in your question to build a retirement nest egg.

Review and if needed rebalance your account

Both the S&P 500 and the Dow Jones Industrial Average have hit a number of new record highs during 2014 on the heels of a very solid 2013.  In fact the S&P 500 Index is up almost threefold since the market lows of March, 2009.  If you haven’t recently rebalanced the asset allocation of your account back to your target allocation this is an excellent time to do so.  Better still if your plan offers auto rebalancing this is a great time to sign up if you haven’t already.

Be aware of any changes to the plan

Fall is open enrollment time for employee benefits for many companies.  While changes to the level of your salary deferral contributions as well as to the investment choices you make can be done throughout the year, many companies choose this time frame to announce changes to their plan for the upcoming year.  This might include the level of the employer match, the addition of a Roth 401(k) feature, or changes to the menu of investment choices available to you.  You need to be aware of any and all changes to the plan and be ready to make any applicable adjustments based upon your situation.

Be cautious when it comes to company stock 

Perhaps as a sub-set of the rebalancing section mentioned earlier if your account includes an investment in your company’s stock this is a good time to review how much you have allocated there and if needed pare that amount down.  There are no hard and fast rules but many financial advisors suggest keeping your allocation to company stock to 10% or less.  The rational here is that you already depend upon your employer for your livelihood; if the company runs into problems you might find yourself unemployed and holding a lot of devalued company stock in your retirement plan.

Get a handle on any old 401(k) accounts 

It’s not uncommon for folks to have several old 401(k) accounts from former employers.  It’s also not uncommon for these accounts to be neglected and unwatched.  If this describes you make this the year to get your arms around these accounts and make some decisions.  Roll them over to an IRA or if eligible to your current 401(k) plan.  If leaving one or more of them with that former employer is a good decision make sure you monitor the account, rebalance when needed, etc.  The point is even if these accounts are relatively small they can add up and help as you save for retirement.  Take charge and take affirmative action here.

Understand your options should you leave your current employer 

Let’s face it the last part of the year is often when companies do layoffs.  If you suspect that you will be impacted in this way you should at least start thinking about what you will do with your 401(k) account.  The same holds true if you are looking for a new job or considering going out on your own.

As we head into football season, the kid’s activities at school, and the holidays please make some time to tend to these and perhaps other items in connection with your 401(k) plan.  For many of us our 401(k) is our primary retirement savings vehicle, make sure that it is working hard for you.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Time for a Mid-Year Financial Review

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It’s hard to believe that the first half of the year has come and gone already.  We enjoyed having all three of our adult children home over the holiday weekend.

Financial Review

Mid-year is always a good time for a financial review and 2014 is no exception.  So far in 2014:

  • Various stock market indexes are at or near record high levels. The Bull Market in stocks celebrated its fifth anniversary earlier this year and through June 30 the S&P 500 Index is up 190% since the March 2009 lows.
  • Bond funds and ETFs have surprised us by posting some pretty decent returns.  This is contrary to what many expected, especially in the wake of weak performance in 2013.
  • After largely not participating in the in the strong equity markets of 2013 REITS have been a top performing asset class YTD through the second quarter.
  • Emerging markets equity lost money as an asset class in 2013 and has also staged a nice recovery YTD through the first half of 2014.
  • Small cap stocks have underperformed so far in 2014 after a very outstanding 2013. 

In just about any year at the midpoint there will be asset classes that outperformed and some that have underperformed expectations.  That’s completely normal.  As far as your mid-year financial review here are a few things to consider.  These apply whether you do this yourself or if you are working with a financial advisor.

Review your financial plan 

Whether you do this now or at some other point in the year you should review your financial plan at least annually.  Given the robust stock market gains of the past five years this is a particularity opportune time for this review.

  • How are you tracking towards your financial goals?
  • Have your investment gains put you further ahead than anticipated?
  • Is it time to rethink the level of investment risk in your portfolio? 

Adjust your 401(k) deferral

If you aren’t on track to defer the maximum amount of your salary allowed ($17,500 or $23,000 if you are 50 or over at any point in 2014) try to up the percentage of your salary being deferred to the extent that you can.  Every little bit helps when saving for retirement.

Rebalance your portfolio 

This should be a standard in your financial playbook.  Different types of investments will perform differently at different times which can cause your overall portfolio to be out of balance with your target.  Too much money allocated to stocks can, for example, cause you to assume more risk than you had anticipated.

While it is a good idea to review your asset allocation at regular intervals, you don’t want to overdo rebalancing either.  I generally suggest that 401(k) participants whose plan offers auto rebalancing set the frequency to every six months.  More frequent rebalancing might be appropriate if market conditions have caused your portfolio to be severely misallocated.

Note some investment strategies call for a more tactical approach which is fine.  If you are using such a tactical approach (perhaps via an ETF strategist) you will still want to monitor what this manager is doing and that their strategy fits your plan and tolerance for risk.

Review your individual investments 

Certainly you will not want to make decisions about any investment holdings based upon short-term results but here are a few things to take into account during your mid-year financial review:

  • If you hold individual stocks where are they in relation to your target sell price?
  • Have there been key personnel changes in the management of your actively managed mutual funds?
  • Are any of your mutual funds suffering from asset bloat due to solid performance or perhaps just the greed of the mutual fund company?
  • Are the expense ratios of your index mutual funds and ETFs among the lowest available to you?
  • Has your company retirement plan added or removed any investment options?
  • Is the Target Date Fund option in your 401(k) plan really the best place for your retirement contributions? 

Review your company benefits 

I know its July but your annual Open Enrollment for employee benefits at most employers is coming up in the fall.  This is the time where you can adjust your various benefits such as health insurance, dental, etc.  Take a look at your benefits usage and your family situation as part of your financial review to see if you might need to consider adjustments in the fall.

Review your career status 

How are things going in your current job?  Are you on a solid career path?  Is it time for a change either internally or with a new employer?

A key question to ask yourself is whether you feel in danger of losing your job.  Often companies will time their layoffs for the second half of the year.  Ask yourself if approached with a buyout offer to leave would you take it.

For most of us our job is our major source of income and the vehicle that allows us to save and invest to meet financial goals such as retirement and sending our kids to college.

Start a self-employed retirement plan 

If you are self-employed you need to think about starting a retirement plan for yourself.  The SEP-IRA and the Solo 401(k) are two of the most common self-employed retirement plans, but there are other alternatives as well.

You work too hard not to save for your retirement.  If you don’t have plan in place for yourself it is time to take action.

Mid-year is a great time for a financial review.  Take some time and take stock of your situation.  Failing to plan your financial future is a plan to fail financially.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

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Retirement Investors: Poor Timing and Short Memories?

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A recent Wall Street Journal article Retirement Investors Flock Back to Stocks (not behind their paywall as I write this) discussed how retirement savers are putting more money into stocks.  Nothing like waiting for the stock market rally to pass its fifth anniversary, with many of the major market averages in record territory, to get retail investors interested in the stock market.  Two excerpts from this article:

“Stocks accounted for 67% of employees’ new contributions into retirement portfolios in March, according to the most-recent data from Aon Hewitt, which tracks 401(k) data for 1.3 million people at large corporations.” 

What cash I have, I’m going to use to buy more if the market dips,” said Roy Chastain, a 68-year-old retiree in Sacramento, Calif., who put an extra 10% of his retirement account into stocks in September, bringing his total stock allocation to 80%.  Mr. Chastain, who had put all his retirement assets into cash in May 2008, has gradually rebuilt his stockholdings.” 

If I understand Mr. Chastain’s situation, he sold out about half way through the market decline, he likely missed a good part of the ensuing market run-up, and now he’s bulking up on stocks 5+ years into the market rally.  I sincerely hope this all works out for him.

 What’s wrong with this picture? 

Part of the rational cited in this article and elsewhere is that stocks appear to be the only game in town.  At one level it’s hard to argue.  Bonds appear to have run their course and with interest rates at record low levels there is seemingly nowhere for bond prices to go but down.

Alternatives, the new darling of the mutual fund industry have merit, but it is hard for most individual investors (and for many advisors) to separate the wheat from the chafe here.

But a 68 year old retiree with 80% of his retirement investments in stocks is this really a good idea?

I’m not advocating that anyone sell everything and go to cash or even that stocks aren’t a good place for a portion of your money.  What I am saying is that with the markets where they are investors need to be conscious of risk and at the very least invest in a fashion that is appropriate for their situation.

Can you say risk? 

With the stock market flirting with all-time highs and in year six of a torrid Bull Market I’m guessing things are a bit riskier than they were on March 9, 2009 when the S&P 500 bottomed out.

Let’s say an investor had a $500,000 portfolio with 80% in stocks and the rest in cash.  If stocks were to drop 57% as the S&P 500 did from October 9, 2007 through March 9, 2009 this would reduce the size of his portfolio to 272,000.

Not devastating if this investor is 45 years old with 15-20 years until retirement.  However if this investor is 68 and counting on this money to fund his retirement this could be a total game changer.  Let’s further assume this occurred just as this investor was starting retirement.

Using the classic 4% annual rule of thumb for retirement withdrawals (for discussion only retirees should not rely on this or any rule of thumb), this investor could have reasonably withdrawn $20,000 annually from his nest egg prior to this market decline.  After the 57% loss on the equity portion this amount would have declined to $10,880 a drop of 45.6%.

Assuming this retiree had other sources of income such as Social Security and perhaps a pension the damage is somewhat mitigated.  Still this type of loss in a retiree’s portfolio would be a disaster that could have been partially avoided.

Am I saying that the stock market will suffer another 57% decline?  While my crystal ball hasn’t been working well of late I’m guessing (hoping) this isn’t in the cards, but then again after the S&P 500 suffered a 49% drop from May 24, 2000 through October 9, 2002 many folks (myself included) felt like another market decline of this magnitude wasn’t going to happen anytime soon.

Diversification still matters 

I agree with those who say investing in bonds will likely not result in gains over the next few years.  But given their low correlation to stocks and relatively lower volatility than stocks, bonds (or bond mutual funds) can still be a key diversifying tool in building a portfolio.

When I read an article like the Wall Street Journal piece referenced above or hear “experts” advocating the same thing on the cable financial news shows I just have to wonder if investor’s memories are really this short.

Individual investors are historically notorious for their bad market timing.  Is this another case of bad timing fueled by greed and a short memory?  Are you willing to bet your retirement that the markets will keep going up?  Or perhaps you think that you might be able to get out before the big market correction.

Perhaps you should consider doing some financial planning to include an appropriate investment allocation for your stage of life and your real risk tolerance.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

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7 Year-End 2013 Financial Planning Tips

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Thanksgiving is behind us and we are in the home stretch of 2013.  While your thoughts might be on shopping and getting ready for the holidays, there are a number of financial planning tasks that still need your attention.  Here are 7 financial planning tips for the end of the year.

Use appreciated investments for charitable donations

 If you would normally contribute to charity why not donate appreciated stocks, mutual funds, ETFs, closed-end funds, etc.?  The value of doing this is that you receive credit for the market value of the donated securities and avoid paying the capital gains on the appreciation.  A few things to keep in mind:

  • This only works with investments held in a taxable account.
  • This is not a good strategy for investments in which you have an unrealized loss.  Here it is better to sell the investment, realize the loss and donate the cash.

 

English: A bauble on a Christmas tree.

 

Harvest losses from your portfolio

The thought here is to review investments held in taxable accounts and sell all or some of them with unrealized losses.  These may be a bit harder to come by this year given the appreciation in the stock market.  Bond funds and other fixed income investments might be your best bet here.

The benefit of this strategy is that realized losses can be offset against capital gains to mitigate the tax due.  There are a number of nuances to be aware of here, including the Wash Sale Rules, so be sure you’ve done your research and/or consulted with your tax or financial advisor before proceeding.

Establish a Solo 401(k) 

If you are self-employed and haven’t done so already consider opening a Solo 401(k) account.  The Solo 401(k) can be an excellent retirement planning vehicle for the self-employed.  If you want to contribute for 2013 the account must be opened by December 31.  You then have until the date that you file your tax return, including extensions, to make your 2013 contributions. 

Rebalance your portfolio

With the tremendous gains in the stock market so far this year, your portfolio might be overly allocated to equities if you haven’t rebalanced lately.  The problem with letting your equity allocation just run with the market is that you may be taking more risk than you had intended or more than is appropriate for your situation.

Rebalance with a total portfolio view.  Use tax-deferred accounts such as IRAs and 401(k)s to your best advantage.  Donating appreciated investments to charity can help.  You can also use new money to shore up under allocated portions of your portfolio to reduce the need to sell winners.

Review your 401(k) options 

This is the time of the year when many companies update their 401(k) investment menus both by adding new investment options and replacing some funds with new choices.  This often coincides with the open enrollment process for employee benefits and is a good time for you to review any changes and update your investment choices if appropriate.

Be careful when buying into mutual funds 

Many mutual fund companies issue distributions from the funds for dividends and capital gains around the end of the year.  These distributions are based upon owning the fund on the date the distribution is declared.  If you are not careful you could be the recipient of a distribution even though you’ve only owned the fund for a short time.  You would be fully liable for any taxes due on this distribution.  This of course only pertains to mutual fund investments made in taxable accounts.

Required Minimum Distributions 

If you are 70 ½ or older you are required to take a minimum distribution from your IRAs and other retirement accounts.  The amount required is based upon your account balance as of the end of the prior year and is based on IRS tables.  Account custodians are required to calculate your RMD and report this amount to the IRS.

Note beneficiaries of inherited IRAs may also be required to take an RMD if the deceased individual was taking RMDs at the time of his/her death.

If you have multiple accounts with multiple custodians you need to take a total distribution based upon all of these accounts, though you can pick and choose from which accounts you’d like to take the distribution.  Make sure to take your distribution by the end of the year otherwise you will be faced with a stiff penalty of 50% of the amount you did not take on top of the income taxes normally due.

If you turned 70 ½ this year you can delay your first distribution to April 1 of next year, but that means that you will need to take two distributions next year with the corresponding tax liability.  Also if you are still working and are not a 5% or greater owner of your company you do not need to take a distribution from your 401(k) with that employer.  You do, however, need to take the distribution on all remaining retirement accounts.

For those who take required minimum distributions and who are otherwise charitably inclined, you have the option of diverting some or all of your distribution via a provision called the qualified charitable distribution (QCD).  The advantage is that this portion of your RMD is not treated as a taxable income and may have a favorable impact on the amount of Social Security that is subject to income taxes for 2014 and other potential benefits.  Note that you can’t double dip and also take this as a deductible charitable contribution.  Consult with the custodian of your IRA or retirement plan for the logistics of executing this transaction.

With all of the strategies mentioned above I recommend that you consult with a qualified tax or financial advisor to ensure  that the strategy is right for your unique situation and if so that you execute it properly. 

Certainly year-end is about the holidays, family, friends, food, and football.  It is also a great time to take execute some final year-end financial planning moves that can have a big payoff and in the case of RMDs save you from some hefty penalties.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of  your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

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New Stock Market Highs: It’s Different This Time Right?

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Dow Jones (19-Jul-1987 through 19-Jan-1988).

It seems like every time we hit new highs in the stock market, the pundits tell us that somehow it’s different this time.  In 1999 we didn’t need to worry that many of the high-flying tech stocks had no balance sheet or even a viable business plan behind the company.  We all remember how that turned out.

In 2007 Wall Street couldn’t securitize questionable mortgages fast enough.  Mortgages and real estate were very secure investments.  Again we recall how that turned out.

This year the markets are again reaching record highs.  Both the Dow Jones Industrial Average and the S&P 500 stand at record levels as I write this.  No worries say the experts.  Valuations are reasonable and this isn’t a bubble (translation, it’s different this time).  We don’t know how this will turn out, but hopefully those of you with any degree of common sense will recall and apply the lessons of the past 15 years.

Who’s paying the pundits? 

Day after day there are guests on CNBC and similar programs touting stocks.  The chief investment strategist of a major financial services firm recently dismissed any talk of a bubble in stocks at least in the near term.

These folks may be right; perhaps this almost five year old bull market still has a way to go.  But somewhere in the back of my mind I also have to wonder if they aren’t touting stocks because it is in the financial interests of their firms (and perhaps their annual bonuses) for investors to keep investing in stocks.

So what should investors do in this stock market environment? 

What should you do now? 

If you are a regular reader of this blog nothing that I’m going to say below will surprise you nor will it differ from what I’ve been saying for the 4+ years that I’ve been writing this blog or the almost 15 years that I’ve been providing advice to my clients.  For starters:

  • Step back and review your financial plan.  Where do the recent gains in the stock market put you relative to your goals?
  • Does your portfolio need to be rebalanced back to your intended allocations to stocks, bonds, cash, etc.?
  • Review your asset allocation.  Is it still appropriate for your situation?
  • Review the holdings in your portfolio.  In the case of mutual funds and ETFs, how do they compare to their peer groups (for example if you hold a large cap growth fund compare it against other large cap growth funds)?  Would you buy these holdings today for your portfolio?
  • Ignore the market hype from the media and from financial services ads.

If you don’t have a financial plan in place this is a great time to get this done. 

Remember the lessons learned from the market downturns of 2000-2002 and 2008-2009.  While your portfolio will likely sustain losses in a major market downturn or even a more moderate and normal sell-off, diversification helps.  Diversified portfolios fared far better than those that were overweight in equities during the decade 2000-2009.  Portfolios with a diversified equity allocation generally fared better than those heavily weighted to just large cap domestic stocks that use the S&P 500 as a benchmark.

Of note, bonds have been a great diversifier in the past, especially over the past 30 years with the steady decline in interest rates.  With rates at historically low levels at the very least investors may need to rethink how they use bonds and what types of fixed income products to use in their portfolios.

My point is not to imply that a market correction is imminent or that investors should abandon stocks.  Rather the higher the markets go, the greater the risk of a stock market correction.  Make sure your portfolio is properly allocated in line with your financial goals and your tolerance for risk.  Many of the investors who suffered devastating losses in 2008-2009 were over allocated to stocks.  Tragically many couldn’t stomach the losses and sold out near the bottom, booking losses and in many cases missing out on the current market gains.

Revisit your financial plan and rebalance your portfolio as needed.  Most of all use your good common sense.  It’s not different this time regardless of what the experts may say.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

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Five 401(k) Investing Tips for This or Any Market

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Benjamin GrahamThe Dow Jones Industrial Average has hit something like 30 new highs this year alone, the S&P 500 is near record levels as well.  Twitter just went public and Obama Care will go into full swing in 2014.  What does any of this mean to you as a 401(k) investor?  Here are five 401(k) investing tips for this or any market environment.

Rebalance your account 

If you’ve let your holdings run it’s quite likely that your account is over allocated to equities given the strong showing the stock market has made so far in 2013.  This would be a good time to look to rebalance your account back to the original allocations that you had intended.  Paring back on stock funds might seem counterintuitive, but essentially you are taking some of your gains off of the table in order to keep the risk associated with your overall portfolio in line.

Consolidate and coordinate 

If you are just starting out in the workforce, it’s likely that your 401(k) is your lone investment vehicle.  By the time you get to your 30s or 40s and beyond it’s likely that you’ve switched jobs several times and have left a number of old 401(k) accounts or IRAs in your wake.  If you are married and both working multiply this financial clutter by two.

Consider consolidating your old 401(k) accounts either in a rollover IRA or into your current employer’s 401(k).  Looking after a number of scattered accounts is counterproductive and makes viewing all of your investment holdings as a consolidated portfolio that much harder.

While we are on the subject, ALWAYS view your 401(k) account as a part of an overall consolidated portfolio.  I create a spreadsheet for each client to do just that, with all of the technology available today this is not difficult, but it may take just a bit of time to lay things out the first time you do it.

The reason for this approach is so that you view your overall asset allocation and the diversification of your portfolio across all investment and retirement accounts.  Are you taking too much risk or not enough?  Do you own the same fund in three accounts all in different share classes?

Increase your salary deferral

This is the time of year where many companies have their employees go through Open Enrollment for their employee benefits.  While you are thinking in terms of benefits this is a good time to boost your salary deferral to ensure that you are contributing the maximum to the plan.  If you can afford it and are not on track to max out for 2013 ($17,500 and $23,500 if you are 50 or over) arrange to have more withheld for the rest of this year and figure out what percentage to apply to your first check in 2014.  How you invest your 401(k) is important, but studies have shown that the amount you save for retirement is the biggest single factor in determining the size of your nest egg.

Don’t default to the Target Date Fund

One of the Target Date Funds offered by your plan might be the right choice for you.  This may be the fund with the target date closest to your anticipated retirement date or some other fund in the series.  It is important that you understand what is under the hood of the Target Date Funds and decide if this is the right approach for you.  Note these funds change from time-to-time as witnessed by some recently announced changes that Fidelity will be making in its Freedom Funds. 

Get the help you need 

Many plan sponsors are offering advice options ranging from online advice to one-on-one advice to managed accounts.  Check out these options and any fees associated with them.  If you work with a financial advisor make sure that they are providing you advice on how to allocate your 401(k) account along with the advice they provide on your other holdings.  Some 401(k) participants are savvy investors, others are not.  If you are in this latter camp, bite the bullet and hire the advice that you need.  This is important, it’s your retirement, and you only have one shot at it.

For better or worse the 401(k) and similar retirement plans are the main source of retirement savings for most of us.  Make the most of your plan regardless of what is going on in the markets or the economy.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss your 401(k) plan and all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

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Stock Market Highs, Bond Market Woes, and Some Finance Links

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stock market

As I write this the Dow Jones Industrial Average and the S&P 500 stand in record territory.  In fact yesterday the S&P finished above 1,700 for the first time ever.  Bonds on the other hand have started to fizzle with virtually all bond categories suffering a loss during the second quarter.

As an investor what now?  Here are a few thoughts:

Tune out the media 

If you watch CNBC or similar shows the bulk of the guests are encouraging investors to get into stocks even at these high levels.  I’m not saying that new money invested in stocks will turn into losses, but I am saying that record market levels are not a reason to suddenly become euphoric about stocks.

Review your asset allocation

As you review your statements look at your portfolio’s current asset allocation to see if the gains in stocks have gotten you away from your target allocation.  Certainly market highs are a good time to look at rebalancing your portfolio.

Additionally this might also be a good time to review your target allocation in the context of your financial planning goals.  Have the gains in the stock market put you ahead of schedule in terms of reaching financial goals such as retirement and college funding?  Perhaps it’s time to take some risk off of the table and adjust your allocation to stocks a bit lower.  In any event this is a great to review your financial plan if you have one or to get one in place if you don’t.

Review your fixed income strategy 

Bonds and bond funds have operated in a favorable environment for the past 30 years.  This changed in the second quarter, though things have recovered a bit in July.  None the less at some point we will see interest rates rise.  This is a good time to look at your bond and bond fund holdings with and eye towards perhaps shortening up on duration.

It’s been a few weeks since I’ve given recognition to the many excellent investing articles and blog posts out there so here are a few links to some excellent reading:

Mike Piper offers A Look Inside Vanguard’s International Bond Funds at Oblivious Investor.

Ken Faulkenberry explains the difference between Geometric Average vs. Arithmetic Average For Investment Returns? at AAAMP Blog.

Morningstar’s Christine Benz walks us through A Bucket Portfolio Stress Test.

Market Watch’s Brett Arends comments on The return of ‘Dow 36,000’.

Jon  shares Stock Basics: The P/E Ratio at Novel Investor.

Please feel free to contact me at 847-506-9827 for a free 30-minute consultation to discuss your investing and financial planning questions. All services are offered on a fee-only basis, no financial product sales, no commissions. 

Please check out our Mutual Fund Investing page for links to additional posts about mutual fund investing.

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A Bucket Approach to Retirement

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I had the privilege of participating in a panel discussion entitled Practical Solutions for a Challenging Retirement Landscape at the recent Morningstar Investment Conference.  The panel was moderated by Morningstar’s Christine Benz, one of my favorite personal finance journalists.  After our session Christine and I discussed the bucket approach to retirement, a topic about which Christine has written extensively.

Here is a video of this conversation which as I write this appears on the Morningstar site.

 

Here is a link to the interview as well.

My thanks to Christine and to Morningstar for the opportunity to be a part of their excellent conference, this is always an outstanding event.

Please feel free to contact me with your retirement and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.   

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

 

 

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Investing: 7 Steps to Spring Clean Your Portfolio

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Some beautiful flowers in the sun.

Spring time is traditionally the time to clean the garage and to get the yard in shape.  It’s also a great time to clean up your investment portfolio.  Here are 7 steps to a cleaner, more efficient portfolio.

Think of your investments as a portfolio

This is the first key step.  Many investors focus on each holding and fail to look at the sum of the parts.  Nobody is saying that investing in quality mutual fundsETFs, stocks, etc. is not important.  Start with your overall portfolio and determine if you are properly allocated in line with your financial goals and risk tolerance.  Ideally this would all be an extension of your financial plan.  Even younger investors starting out should think in terms of their overall portfolio, even if this is only a few holdings at this point. 

Find your most recent statements and organize your records 

Make sure that you receive and review statements from ALL investment accounts every time one is issued.  This might be monthly or quarterly depending upon your custodian and the type of account.  Keep them all in a file (paper and/or electronic) and more importantly find a way to take a consolidated, overall view of your holdings as a portfolio.  I enter all client accounts and holdings into a spreadsheet. I suggest categorizing your portfolio by account and by asset class (large cap, small cap, etc.).  At a minimum, this will show you how well you are diversified across different asset classes.  You might also be amazed at the number of individual holdings across all of these accounts, I call this financial clutter.  This is common among folks who might have a number of old 401(k) accounts at their former employers.  I had a client with almost 50 distinct holdings across multiple accounts when we started working together.  This is hard for anyone to track and monitor efficiently. 

Consolidate your accounts

To the extent possible, consolidate your accounts.  Unless there is a compelling reason to leave an old 401(k) with a former employer, monitoring your portfolio will be much easier if you roll these accounts into a consolidated IRA or even into your current employer’s 401(k) if allowed and the plan is a good one.  This also holds true if you have several IRA accounts with various custodians as well as for taxable accounts, annuities, etc.  

Review your asset allocation plan (or develop one)

This should happen before reviewing your individual investments so you aren’t influenced by your current allocation. As I’ve advocated here many times you need to have a financial plan in place before you decide upon an asset allocation strategy.  The financial plan should drive your investing activities, your allocation, and your choice of investments.  A well-constructed financial plan will help you focus on your risk-tolerance and your goals for the money you save and invest.

Review your current investment holdings

Have your stocks hit their sell targets? How do your mutual funds compare to their peers? It is important to establish a monitoring process for your individual holdings, and to review your holdings against appropriate benchmarks on a regular basis. If needed, make changes to your holdings if they no longer fit. 

Rebalance your portfolio 

You may need to buy and sell holdings or perhaps you can allocate new investment dollars to do this. Once you have determined that this is needed, you should get your allocation back in line as soon as possible to ensure that your allocation is consistent with the risk and return targets in your financial plan.  Remember your allocation should be reviewed across all of your various accounts.

Establish a regular process to review and monitor your portfolio 

Getting your portfolio in shape once does no good if you don’t establish a process to review your portfolio and your holdings on a regular basis.  This doesn’t mean looking at your investments daily or even weekly.  Depending upon your needs and your interest in doing this quarterly or semi-annually is sufficient for most.  At least annually this should be incorporated with a review of your financial plan to ensure that everything is in synch.

Please feel free to contact me with your financial planning and investing questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

For you do-it-yourselfers, check out Morningstar.com to analyze your investment holdings and your portfolio. Please click on the link to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you. 

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ETFs or Mutual Funds? – Why Not Both?

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Diversification - Investing

Over the past several months I’ve read a number of articles along the lines of “ETFs vs. Mutual Funds.”  In most cases these articles take an either or position which is generally in favor of ETFs.  While I am a fan of ETFs and use them extensively in client portfolios, my question is why do we need to choose between ETFs and mutual funds?  Why not use both?

Looking over the portfolios of my individual clients I could not find one that did not include both ETFs and mutual funds.  In addition some include closed-end mutual funds as well as individual stocks.

Advantages of ETFs  

Originally ETFs were introduced as a way to trade various stock market indexes.  The S&P 500 SPDR (ticker SPY) just turned 20 and is generally at or near the top of the list in terms of ETF trading volume.  The availability of low cost ETFs across a variety of equity and fixed income indexes has mushroomed over the years.  As a financial advisor I use them extensively for their style consistency, low cost, and in many cases their consistently above average performance within their style peer groups.

Especially after the 2008-09 financial crisis the number of ETFs offered has mushroomed and so has the variety of offerings.  Actively managed ETFs are growing and the success of PIMco’s ETF version (ticker BOND) of its popular PIMco Total Return (ticker PTTRX) mutual fund will undoubtedly spur further growth here.

Why bother with Mutual Funds?

In looking at mutual funds you have to divide them into actively managed funds and passive (index) funds.

If you are indexing all or part of your portfolio you want to look at various factors in making your decision as to whether to go with a mutual fund or an ETF.  These include:

  • The size of your account/portfolio.  Even in the world of index mutual funds there are some lower cost versions available to investors who can meet higher minimum investment thresholds.  Vanguard is a good example here.
  • Cost to own.  The expense ratio should be the main factor, but transaction costs can come into play.  While the availability of no-transaction fee ETFs is growing, the ETF you want to buy may not be on this menu at a given custodian.  Likewise some mutual fund families might incur a transaction fee at certain custodians.
  • How will you invest?  If you are dollar cost averaging into a fund/ETF at say $250 per month you’ll want to look for options with no transaction costs.

While actively managed mutual funds get a bad rap in the press, there are still a number of well-managed reasonably priced funds across equity and fixed income styles.  A Schwab study a number of years ago touted a “core and explore” approach to investing.  This meant that the core of the portfolio would be index funds, with the use of actively managed funds in certain asset classes where good index products were not available.

Given the expansion of indexing to a wide range of assets classes in both the ETF and mutual fund format this approach in its original form may be passé.  However I still use a number of actively managed funds across both individual and institutional portfolios.

In choosing an active fund I’m looking for some or all of the following:

  • Long-term outperformance.
  • Superior risk-adjusted performance.
  • Consistency of management.
  • Something that I can’t find in an index product that adds to the overall quality of the portfolio.

Certainly there are a lot of mutual funds that don’t belong in your portfolio.  Loaded funds, proprietary funds from various brokerage houses and other high fee alternatives put a lot of money into your broker/registered rep’s pockets.  Go with no load funds and always shop for the most competitive share class available to you in terms of expense ratio.

Why exclude either ETFs or Mutual Funds?

My point here is not to argue the merits of either mutual funds or ETFs, or for that matter active management vs. passive.  Certainly I’ve seen some excellent examples of portfolios that are all ETF and/or all index products.

However why limit yourself and feel that you need to avoid funds or ETFs?  There are so many choices out there, I feel that I owe to my clients to look at the whole universe of ETFS, mutual funds, and other products that might enhance their portfolio and help them to achieve their investment goals.  In building a portfolio I suggest that you take the approach of picking the best investing vehicles for the various allocation “buckets” in your portfolio whether they be ETFs, mutual funds, actively managed, or passive index products.

Please feel free to contact me with your financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page for more information about our services.   

For you do-it-yourselfers, check out Morningstar.com to analyze your mutual funds, ETFs, and all of your investments and to get a free trial for their premium services.

Photo credit:  Flickr

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