Objective information about financial planning, investments, and retirement plans

Friday Finance Links May 3, 2013 – Dow 15,000 Edition

English: A view from the Member's Gallery insi...

Today the Dow Jones Industrial Average crossed the 15,000 mark for the first time.  Who knows where it will end the day.  What does this mean to you?  It shouldn’t mean anything if you invest according to a coherent plan, other than perhaps that you may need to review and if needed rebalance your portfolio.

Here are a few links to some great weekend financial reading. 

Personal Finance Blogs

Emily compares the Pros and Cons of the 15 vs 30 Year Mortgage at PT Money.

Ken discusses Mutual Fund Expense Ratio: How Much Does It Hurt Investment Performance? at AAAMP Blog.

Kyle asks If Everybody Indexed, Would It Stop Working? at Amateur Asset Allocator.

Posts from Fellow NAPFA Members 

Fern Alix LaRocca warns us to avoid Refi Hell – I Almost Got Taken! at Figuide.com.

Lon Jeffries asks When Did You Last Review Your Insurance Coverage? at Figuide.com.   

Other financial articles from around the web

Andrea Coombes discusses The risks and costs of exotic investments at marketwatch.com.

Dan Solin says CNBC’s Ratings Decline is Bullish News for Investors at usnews.com.

In case you missed it here is my latest contribution to the US News Smarter Investor Blog Improving Your Odds in the ‘Retirement Gamble’.

Here’s wishing everyone a great weekend.  

Photo credit:  Wikipedia

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Stock Market Highs and Your 401(k)


As you are probably aware, the Dow Jones Industrial Average closed at a record high of 14,296; the second day in row for a record close.  Intra-day the index topped the 14,300 mark for the first time ever.  By this benchmark we’ve now gotten past the financial crisis as the prior high was reached pre-crisis in 2007. The S&P 500 Index is also near record territory.  During the financial crisis there was much handwringing about how the 401(k) had failed retirement savers.  It was popular to refer to accounts with reduced balances from losses as a “201(k).”

As of the end of 2012, Fidelity reported that the average 401(k) account balance had risen some 12% during 2012 to $77,300 from $69,100 at the end of 2011.  This is also up from early 2009 when the average was $46,100.  Fidelity estimated that about 2/3 of the 2012 gains were from investment gains and the other 1/3 from a combination of employee salary deferrals and employer matches.

What do I do now with my 401(k) now? 

If you are looking for profound, radical advice here, I suggest that you stop reading this article now.  This will save you from wasting the next 30 seconds of your life.

Assuming that you are still here, the suggestions that I have for the current situation are the same as I would have offered a year ago, five years ago, or ten years ago.  I would have made the same suggestions at the depths of the 2008-2009 financial crises as well.

Review and Rebalance 

A market high is always a good time to review your 401(k) account to ensure that things are not too far out of balance.  Ideally you have a target allocation for investments you chose.  Generally if a client’s allocation varies by more than +/- 5% of the target we consider rebalancing.  Given how quickly the market has risen this year your account might need some attention here.

Review your 401(k) account as part of your overall portfolio 

If you have investments outside of your 401(k) plan such as taxable accounts (stocks, mutual funds, etc.); IRAs; a spouse’s retirement plan and the like this is a good point to review not only your 401(k) account but your overall portfolio.  If you have a financial plan in place a market high is a good point to take stock of how you are tracking toward financial goals such as retirement.  Are you ahead of schedule?  If so perhaps this is a good point in time to not only rebalancing but to consider reducing the risk profile of your portfolio.

Take the long view 

If you watch enough of CNBC or other cable financial news shows, or read enough articles on the web about investing you can probably find someone who will support any position ranging from an impending stock market Armageddon to someone saying this Bull Market will run for another five years or more.  The route to go in my opinion is to largely ignore all of this hype, get a financial plan in place, and invest your 401(k) and any other investment holdings as a total portfolio in line with the goals and risk tolerance that flow out of the financial planning process.

Please feel free to contact me with your financial planning and investing questions. 

For you do-it-yourselfers, check out Morningstar.com to analyze your 401(k) holdings and all of your investments and 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. 

Photo credit:  takeasmartstep.com


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Dow 14,000 – Big Deal or Just a Number?


On Friday February 1, 2013 the Dow Jones Industrial Average closed 14,010.  This is the first close above 14,000 for the index since October of 2007.  The news media is, of course, making a huge deal about this.  It’s newsworthy and captivates the public’s interest.

In reality 14,000 or any number on the Dow is pretty meaningless.  For example the Dow sustained a triple digit loss today.  I discussed this in my recent US News Smarter Investor contribution (as picked up by Business Insider) I Couldn’t Care Less How Well The Stock Market Is Doing Right Now And Neither Should You.  As I said in the article “I have no idea what the stock market will do over the next year let alone the next week. Frankly I really don’t care. My opinion is that your financial plan, your tolerance for risk, and your financial goals should drive your investment allocation. Any buying or selling of stocks or any other type of investment should be driven by keeping your asset allocation in line with your financial plan.

In fact the Dow is a pretty narrowly focused index of 30 stocks of very large companies.  While this index is influential and widely followed it is not really a good indicator of much of anything.

A look at the S&P 500 

Let’s take a look at “the market” as depicted by another widely followed index, the S&P 500, an index of the 500 largest U.S. stocks.  Not only is the S&P 500 a broader large cap index than the Dow, it also tends to be a benchmark for many investment managers.  The following chart from JP Morgan shows the behavior of the index from 1997 through December 31,2012:

As I write this the S&P 500 is straddling the 1,500 mark, about 4% below its all time high of 1565 set in October of 2007.  As you can see from the chart the current market rally off of the March 2009 lows is some 46 months along now.  According to data from S&P the average length of nine Bull Markets off of market low points since 1946 is 68 months, with a range in length from 26 months to 148 months.

What does this all mean? 

In this writer’s opinion all of this hype and hoopla surrounding the Dow hitting 14,000 and the S&P hitting 1,500 is pretty meaningless.  Investors need to diversify among various asset classes and types of holdings such as stocks and bonds (funds or individual holdings) both domestic and international.  The chart below from JP Morgan below does a nice job of showing the benefits of a diversified portfolio over time.  Various benchmarks and asset classes are depicted across equities, fixed income, real estate, and alternatives.  This chart also does a nice job of showing the ups and downs of the returns of the various asset classes both on a relative and an absolute basis from year to year.  Note the Asset Allocation portfolio depicted by the graph points in the middle of the chart.  While this is a sample portfolio compiled by JP Morgan, it does demonstrate the benefits of diversification.

What to do now 

This is a great time to ignore the market hype and stick to your financial plan if you have one in place, or to get one done if you don’t.  Investing isn’t different in 2013 no matter what the talking suits on CNBC and elsewhere might tell you.  If anything the investing landscape becomes more treacherous as the market increases.  Don’t panic, but don’t let yourself get caught up in the hype either. 

Please feel free to contact me with your financial planning and investing questions at any time.  

Check out our Resources page for links to some services and tools that you might find beneficial.

The charts are courtesy of JP Morgan Asset Management.

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