Objective information about retirement, financial planning and investments


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


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.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Photo credit:  Wikipedia

Enhanced by Zemanta

7 Reasons to Consider Selling a Mutual Fund


Investing in mutual funds takes work, even index funds. Whether you own actively managed funds or index funds you still need to monitor your holdings. Here are 7 reasons you might consider selling a mutual fund holding.


A significant outflow of dollars

In my view, mutual fund managers should try to stay fully invested within their investment mandate. If I am investing in mutual fund in the large growth style, I want those dollars invested in large cap growth stocks.  I don’t want an equity fund manager deciding to be in cash, if I want to be in cash I’ll put that portion of the portfolio in a money market fund.   When a mutual fund experiences a high level of redemptions the managers may need to keep more cash on hand to meet these redemptions. This cash is not being invested in the stocks, bonds or other vehicles that the fund should be focused on.  In an up market like this one excess cash can be a drag on returns.

A significant inflow of dollars

Money follows success. Last year’s hot fund will attract more investors hoping to latch on to the fund’s success. Too much new cash in a short time frame can pose a real problem for a fund manager in terms of finding good investment ideas within the fund’s investment style.

This is not as significant for an index fund or a fund that invests in larger cap stocks.  However, for a fund investing in small- or mid-cap stocks this can be a death knell in terms of future success. I really admire mutual fund companies who close popular funds when they become too large.  Two that come to mind are Sequoia Fund (SEQUX) which was closed for over 20 years at one point and recently closed again after reopening for a couple of years (purchases can only be made directly from the fund company last time I checked).  Another is Artisan Funds and their Artisan Mid Cap Value Fund (ARTQX).  The mention of these funds should not be construed as investment advice in any way, shape or form. 

The flip-side is funds that simply allow new money to come in droves.  All too often these once stellar performers become tomorrow’s laggards.  I don’t know if this behavior is born out of stupidity, greed, hubris, or all three.  At the very least a fund taking in a vast amounts of new money should be raise a red flag as you monitor your portfolio. 

 A change in personnel

For an actively managed fund, a manager change is a significant event. Who will be in charge going forward? Will the fund’s investment style stay the same? This can also be an issue for an index product in terms of a change in its indexing methodology.

Personnel issues in the management of the fund company can also be an issue. As an example once high-flying Janus Funds has experienced heavy turnover in the executive suite over the past decade.  There has also been a fair amount of management turnover in many of the company’s mutual funds.  I find it hard to believe that this doesn’t have an impact on day to day operations and the management of the funds.

A change in the fund’s investment style  

I alluded to shifting investment styles above, but it’s worth repeating.  For example I recently suggested to the Committee of 401(k) plan for whom I serve as investment advisor that we remove a mutual fund whose investment style had shifted along with their investment methodology and some of the fund’s personnel.  While there’s nothing wrong with a go-anywhere fund that is style agnostic, if your intent is to invest in a mutual fund that invests in small cap growth stocks you should consider replacing that fund if its investment style changes to say small cap blend or value.

Fund mergers

Mutual fund companies sometimes merge laggard funds into other mutual funds within their families.  There are rules about restating past results for the surviving fund, but nonetheless if this happens to a fund you own, or recently took place in one you are thinking of buying, be sure to dig into the details, holdings and performance of the surviving fund to be sure it still makes sense for you as a part of your portfolio.

The reasons listed above often warrant selling out of mutual fund entirely.  Here are two additional reasons to consider a total or partial sale that have nothing to do with negative developments with the fund. 

Donating appreciated fund shares 

As year-end approaches many of us look to make contributions to our favorite charities.  If you own shares of a mutual fund that has appreciated in value donating some or all of the shares to the charity is an excellent and tax-efficient way to make this contribution.  By donating appreciated shares owned in a taxable account (as opposed to a tax-deferred account like an IRA) you avoid paying capital gains taxes that would be due if the shares were simply sold.  You also receive a charitable deduction for the full market value of the shares donated.  Many charities have the capacity to receive donations in this fashion. 

Rebalancing your portfolio 

I generally suggest that most people look to rebalance their portfolio back to its intended asset allocation at least once or twice annually.  For example with the solid gains in most equity asset classes this year and the relatively flat to down performance of many fixed income asset classes, it is likely that your portfolio is over allocated to equities.  This potentially exposes you to more risk than your financial plan and your asset allocation calls for.  It is very appropriate in this case to sell off some of your mutual fund (or other investments) holdings where you are over allocated and adding to fund positions in areas of the portfolio that have become under allocated. 

I am not an advocate of the frequent buying and selling of mutual funds or any other investment vehicle for that matter.   However, mutual fund investing is not about sending in your money and forgetting about it. Successful mutual fund investors monitor their holdings and make changes when and if needed based upon a number of factors.  

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

Photo credit:  Flickr

Enhanced by Zemanta

1% a Small Number with Big Implications


Percent Symbols - Best Percentage Growth or In...

The inspiration for this post comes from fellow finance blogger and financial advisor Jim Blankenship and his November is “Add 1% to Your Savings Month” movement.

It’s amazing how a small number like 1% can have such a big impact on your investments and the amount you’ll be able to accumulate for goals like retirement.  Here is a look at the impact of saving 1% on your investment expenses.

Mutual fund expenses matter

Using two share classes of the American Funds EuroPacific Growth fund as an example, the chart below illustrates the impact of 1% in expenses on the growth of your investment.  I was able to find two share classes of this fund whose expense ratios were exactly 1% different.  The B shares (ticker AEGBX) carry an expense ratio of 1.59% and the F-2 shares (ticker AEPFX) which carry and expense ratio of 0.59%.  Using Morningstar’s Advisor Workstation I compared the growth of a hypothetical $10,000 investment in each fund held over three time periods.

5 years ending 10/31/13 

Value of $10,000 investment
B Shares $17,710
F-2 Shares $18,606


As you can see varying nothing more than the expense ratio in these otherwise identical mutual funds, investing in the fund with a 1% lower expense ratio resulted in the accumulation of an additional $896 a 5.1% increase over an investment in the B share class.

10 years ending 10/31/13

Value of $10,000 investment
B Shares $22,677
F-2 Shares $24,734


Again varying nothing more than the expense ratio in these otherwise identical mutual funds, investing in the fund with a 1% lower expense ratio resulted in the accumulation of an additional $2,057 a 9.1% increase over an investment in the B share class.

From 4/30/84 through 10/31/13 

Value of $10,000 investment
B Shares $205,652
F-2 Shares $260,042


Once again varying nothing more than the expense ratio in these otherwise identical mutual funds, investing in the fund with a 1% lower expense ratio resulted in the accumulation of an additional $54,390 a 26.4% increase over an investment in the B share class.

A couple of things about the above comparison:  The assumption is that an investor put $10,000 into each of the funds and held them for the full time period, including the reinvestment of all fund distributions.  Any potential taxes or the expenses of engaging an investment advisor were not considered.  Further B shares are no longer available to new investors and even when they were they would generally convert to the less expensive A shares after a period of time.  None the less this comparison illustrates the impact saving 1% on your investment expenses can have on your returns and the amount you can potentially accumulate over time. 

How to reduce investing expenses 

While you may not always be able to save a full 1%, reducing your investment expenses by even a fraction of 1% can have a significant positive impact.  Here are some ideas that may help:

  • Utilize low cost index mutual funds and ETFs where possible and where they fit your investment strategy.  In many asset classes index funds outperform the majority of actively managed products.  Combine this with low expenses and index funds have a major leg up on most of their competitors.
  • In all cases make sure that you invest in the lowest cost share class of a given mutual fund that is available to you.
  • Avoid sales loads whenever possible.
  • Understand the expenses associated with the investment choices in your company’s 401(k) plan and the plan’s overall expenses.  If they are excessive consider asking your company’s plan administrator to look at some lower cost alternatives.  You might also  consider limiting your contributions to the amount needed to receive the maximum company match (if one is offered) and invest the remainder of your retirement savings elsewhere.
  • If you work with a financial advisor you must fully understand all of the ways in which your advisor makes money from your relationship.  This might include fees (hourly, flat-fee, or a percentage of assets).  In some cases the advisor makes money from the investment and insurance products they sell to you.  This can include up-front sales commissions (loads), deferred loads (B shares which are mostly obsolete), and level loads (C shares).  Additionally the advisor may make money from trialing commissions (12b-1 fees) or surrender charges incurred if your sell out of some mutual funds or annuity products too early.  If you are a regular reader of this blog you know that I am horribly biased in favor of using fee-only advisors (of which and I am one), avoiding the inherent conflict of interest that can arise when an advisor earns money from the sale of financial products. 

Saving 1% might seem like a trivial endeavor, but as you can see it can have big ramifications for investors.

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

Photo credit:  Flickr

Enhanced by Zemanta

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

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.

Photo credit:  Flickr


Enhanced by Zemanta

5 Investing Lessons Learned So Far in 2013

English: Markowitz-Portfolio Theory, Investmen...

The first half of 2013 is in the books.  It’s been a good year in terms of the domestic stock market; other areas of the markets have been mixed.  The second quarter saw declines in most fixed income categories, real estate, and in many international stock categories including emerging markets.  Commodities and precious metals have also suffered setbacks of late.  As an investor this is a good time to take stock of your investments and more importantly any implications for your financial planning goals.

When reviewing your portfolio keep these 5 investing lessons learned (and relearned) in the first half of 2013 in mind.

Components of a diversified portfolio can lose money 

Diversification and balance are generally good characteristics for an investment portfolio.  However it is not uncommon for some components of a well-balanced portfolio to lose money over a quarter or longer.  Case in point during the second quarter of 2013 virtually all fixed income categories lost money.  Of the major bond investment styles high yield led the way with a loss of 1.4% for the quarter while TIPs suffered the worst loss at 7.0%.  The fact that some components of a diversified portfolio might suffer a loss at various times should not come as a surprise as one of the goals of diversification is to include some asset classes with a low correlation to other portfolio holdings.

Gold doesn’t always glitter 

Gold, touted by many as the ultimate safe haven investment really took it on the chin during the second quarter.  The main Gold ETF (ticker GLD) lost 22.89% in the second quarter and is down 26.48% for the first six months of 2013.  This brings the five year trailing return of the ETF down to 5.44% compared to 6.92% for the S&P 500 ETF (ticker SPY).  Gold may ultimately stage a major comeback but these results fly in the face of the doom and gloom folks who tout Gold and other hard assets as the ultimate investment solution.  A college economics professor once told the class that investors in Gold had not progressed past Freud’s anal stage of development.  That may or may not be true but like anything else a portfolio that is top-heavy in Gold and precious metals may not be the answer.

The stock market can go up even if Apple doesn’t 

Apple, the largest component of the S&P 500 index, lost 24.42% over the first six months of 2013.  However the index still gained 13.82% over the same period of time.  Apple is also a large holding for many large cap mutual funds and ETFs.

The rally in bonds may be over, or maybe it isn’t 

As I mentioned above, the second quarter was dismal for bonds of all types.  Bonds and bond mutual funds have enjoyed 30 years of mostly continuous gains, in large part due to a favorable interest rate environment.  Some say the favorable period for bonds may be over, but others say investors who have yanked $ billions from bond funds may be overreacting.  Time will tell.  One thing is certain to me is that this is a good time to evaluate your fixed income investments and to look at the duration risk that you are taking.

Investors are enthusiastic when things “feel good” in the markets 

As typified by an infuriating commercial for John Hancock showing several couples saying they need to get back into the markets now, more investors have been finally feeling good about getting back into the markets after the market drop of 2008-09.  It’s easy to invest when things feel good; it’s profitable to invest when they don’t.  If you are an investor just getting back into stocks now you need both a good financial plan and a financial advisor who knows what he or she is doing.

Six months into any year is a good point to review your investments and your progress against your financial plan.  Given the wide variations in performance among various asset classes this is an especially good point to review your situation.

Please feel free to contact me with your investing and financial planning 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 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: Wikipedia

Enhanced by Zemanta

Trading vs. Investing – Which Do You Do?

Better in the Dark

This is a guest post from Robert Farrington at The College Investor.  He seeks to help young adults and college students get started investing, and has a great Investing 101 resource.  Though Robert’s audience is a bit younger than many of the readers of this blog his insights are useful to investors of all ages and experience levels in my opinion. 

When you describe yourself and your financial future, do you see yourself as a trader or an investor?  Did you know there was a difference? It’s true, they are often used interchangeably, but they are quite different.   And knowing yourself and the difference between the two can help you understand where you’ll be successful in the future.

Trading is Different From Investing 

Trading and investing have a major difference, and that difference has to do with time. If you are trying to multiply your money over the course of 30 or 40 years, then you are most likely investing. If, however, you are interested in buying a stock today and selling it tomorrow if it jumps a point or two, then you are almost certainly a trader, and not an investor. Trading is often a very short term action, while investing is performed over the long term.

While the terms are quite different, one can perform a trade while still being an investor. For instance, if you have a 401(k) account that isn’t performing as well as you’d like, you might decide to change your overall investment strategy and you would do this by making some trades. You would sell off the shares that no longer matched your investment plan and then you would purchase some new ones that do. With this, you would be trading in order to fulfill the long-range goals of your overall investment plan.

Give Into Temptation 

I think there’s a little piece in all of us that is intrigued by risk and excitement. This is why some people like to skydive and others like to swim with sharks. Still others love the thrill of a short-term trade built mostly on speculation.

We all have our investments, but you know what? Nobody talks about them. Why is that? Because they’re boring. What would we say? Something like, “My portfolio increased by 5.6% last year…” And that would most likely be the end of the conversation. But, what if you decided to make some trades and possibly make some short term cash? You story would turn into, “I evaluated the economy and I realized that this particular stock was undervalued, so I bought 100 shares and they just skyrocketed! I made $1,000 in just a couple of days.”

Because there’s a little need for risk and adventure in all of us, I say give into your temptation….in moderation. You definitely should not risk your entire investment portfolio, but feel free to use a small portion (something like 5%) and trade it as you wish. This will ensure that 95% of your portfolio stays safe within your planned strategy, but yet you can still have some fun with the 5% by making trades and taking a few risks here and there.

Making Trades

If you do decide to take a little risk and make some trades, there are a few basics you should know. First of all, most every trade carries a fee. So, if you sell a stock to make $5, but the trading fees were $10, then you actually just lost money.

Secondly, decide which trading method is right for you. Are you a fundamentalist or a technical trader? Meaning, do you trade based on the movement of the share price or are you making trades because of a certain ratio (like the debt-to-equity ratio, etc.)? Find out what makes sense for you and have a good time.

If you plan on trading at all, you need a strategy, and you need to stick to it.  Just like investing!  Invest in what you know, but also trade in what you know as well.  If you are interested in trading in a certain area of the market, say currencies, but aren’t knowledgeable step back, take an investing course, read up, and maybe use a practice account before you go for it with real money.

Final Thoughts

For some people, trading can be fun, but it’s just too much uncertainty and risk.  Just know that it’s not for everyone. If you aren’t comfortable with it, then don’t do it. But, if you feel like it won’t take over your life then maybe you want to give it a shot. Happy investing!

This was a guest post from Robert Farrington, from The College Investor.  He seeks to help young adults and college students get started investing, and has a great Investing 101 resource.  

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

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

 Photo credit:  Wikipedia

Enhanced by Zemanta

Investing: 7 Steps to Spring Clean Your Portfolio

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. 

Photo credit:  Wikipedia

Enhanced by Zemanta

5 Steps to a Lousy Retirement



Lousy Retirement

 I’ve written a number of posts on this site about saving for retirement.  This time let’s turn it around and discuss 5 steps to a lousy retirement.

Invest in stocks at the top of the market 

This tip is timely as major stock market indexes are at all-time highs.  In fact one company, John Hancock recently ran a TV ad encouraging investors who had been on the sidelines during the current market rally to get in now.  The commercial depicted upscale couples sitting in their financial advisor’s office with a sense of optimism about the markets and feeling like this is the right time to invest.  Don’t get me wrong, I have no idea where the stock market is going from here, but four years into a major Bull Market is not the time to be thinking about just getting back into stocks.  A better approach is to have a financial plan that includes an appropriate investment allocation for your situation through the market’s ups and downs.

Invest in high cost broker sold mutual funds 

Whether proprietary mutual funds offered by your broker or registered rep’s employer or mutual funds with expensive loads, these funds are generally bad choices for most investors.  While no financial advisor works for free, unless there is some overriding reason to the contrary it is generally a good idea to avoid these mutual funds.  Rather look for a fee-only financial advisor who sells their advice and expertise and isn’t dependent upon commissions and trailers from the sale of financial products.  This type of structure lends itself to utilizing low cost index funds and actively managed funds across the whole universe of fund families.

Make financial decisions based upon your emotions 

It is said that fear and greed are the two most potent forces that drive the stock market.  Many financial products, especially many annuities (including Equity Index Annuities) are sold by fear mongering sales types with retirees and Baby Boomers as their prime targets.  An annuity might be the right answer for you, but don’t write a check until you review all the details of this or any financial product.  Don’t buy into the doom and gloom scenarios pitched by many financial sales types, especially right after a market decline such as the one we experienced in 2008-09.  Make financial decisions with a clear head, not out of fear, greed, or any other emotion.

Don’t take full advantage of your workplace retirement plan 

Why contribute to a 401(k) plan, 403(b), 457, or similar retirement plan offered by your employer?  It’s much more fun to spend the money on things you want now such as clothes, a new car, that vacation you deserve, etc.  Besides, didn’t 401(k) plans let investors down in 2008-09?  The reality is that your employer sponsored retirement plan is one of the best retirement savings vehicles going.  Even a lousy 401(k) plan is generally worth funding at least enough to receive your employer’s full match if one is offered.  Over the course of my years as a financial planner I can tell you that I have many clients who have accumulated (or are in the process of accumulating) significant sums in their retirement plan accounts that will play a key role in their retirement.

Don’t plan for retirement, just wing it 

Why spend money on a financial plan?  Retirement will just happen and I’ll be ready.  Things have always worked out for me.  The reality is that retirement is a financial journey, both accumulating enough for a comfortable retirement and managing your money during retirement.  While you might win the lottery or inherit a princely sum from some long lost relative, the reality is that a successful retirement takes planning.

As the legendary golfer Gary Player once said, “… the more I practice, the luckier I get…”  The same applies to preparing financially for retirement.  Planning, preparation, saving early and regularly, and your good common sense are all key elements in engineering a successful and comfortable retirement.

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Wikipedia


Mutual Funds – The First Shall be Last and So On


Well another year is in the books and there is no shortage of articles about what worked well and what didn’t in terms of investing.  For those of us who use and follow mutual funds it’s always instructive and interesting to take a look back as we move forward.  Here are some observations and examples from 2012 and some lessons that we can take into the future.

Artisan Mid Cap Value ARTQX 

The managers of this fund were named as Morningstar’s Domestic Manager of the Year for 2011.  So how’d they do in 2012?  The fund gained a respectable 11.39% for the year, but that only ranked the fund in the 86th percentile (bottom 14%) of its category.  Did the award go to their heads?  I doubt it.  I’ve written about this closed fund here before and it is one of my favorite mutual funds.  This fund is included in the menu of several 401(k) plans for whom I provide advice as well as in the portfolios of many of my individual clients.  The fund’s track record since its inception has been exemplary and in fact the fund ranks in the top 1% of all funds in its category for the ten years ending 12/31/12.  Artisan is a solid fund company who regularly closes funds that have become too large, including this fund.  While we can’t predict the future, the fund’s relatively poor 2012 performance is a non-issue in my mind at this point.

American Funds Growth AGTHX

My October post on this multi-share class fund asked if it was a fallen star.  Using data from the A shares, the fund had a banner 2012 returning 20.54% and placing in the 7th percentile of its category.  This comes after finishing in the 64th percentile or below in three of the five prior calendar years.   This still leaves the fund in the 53rd percentile of its category for the five years ended 12/31/12; though the fund is in the 22nd percentile for the trailing ten years.  As I discussed in the post, the fund was a top performer year in and year out until 2007.  As one industry publication pointed out, the fund has become somewhat of a “closet indexer” with its increasing correlation to the S&P 500 Index.  In fact the Vanguard Large Growth Index Fund is a far less expensive alternative that has outperformed Growth Fund by almost 300 basis points annually for the past three years and has gained almost three times as much annually for the past five years ending 12/31/12.  While I have tremendous respect for the American Funds as a group, this fund’s 2012 performance does nothing to change my view of the fund as an investment vehicle for my clients.

On a more macro level, 2012 saw the rebound of both developed and emerging markets international funds as a group after a dismal year in 2011.

What does all of this tell us, frankly not much as far as how to invest into the future

 An investment process is critical

Here are some of the factors that we usually look at when evaluating mutual funds and ETFs (from Fi360 and our Investment Policy Statements):

  • Does the fund have at least a three year track record?
  • Does the fund manager have at least a two year track record with the fund?
  • Does the fund have at least $75 million in assets?
  • Do the fund’s composition (its holdings) and its Morningstar style look like other funds in its investment category?
  • The fund’s expense ratio should be in the category’s 75th percentile.  (In reality we like to see this number much lower than that).
  • The fund’s risk-adjusted returns (Sharpe and Alpha) in the top 50% of its peer group of funds.
  • Trailing 1, 3, and 5 year returns at least in the top half of its peer group of funds.
  • Has the fund experienced a significant gain or loss in assets?
  • Has ownership of the fund changed?
  • Has there been turnover in the fund’s management?

While some investors may disagree, we believe in asset allocation and portfolio rebalancing.  We use both active and passive mutual funds and ETFs to fill the allocation slots in the portfolio, and we monitor those holdings on a regular basis.

As discussed above, there will always be fluctuations in the performance of various investments whether they are individual stocks or bonds or managed products such as mutual funds and ETFs.  Certain asset classes will underperform at various times (such as Foreign Stocks in 2011).  The point is to have an investment process in place that uses a disciplined methodology to make investment decisions.  In my experience, this is a key element in long-term investment success.

Feel free to contact me with questions about your investments.

For you do-it-yourselfers, check out Morningstar.com to analyze 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:  Wikipedia

Enhanced by Zemanta