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Should I invest now?

By Posted on In Investment Behavior, Investment Strategies, Rule of Thumb, Saving, Uncategorized

I’ve been getting this question a lot this summer: “Should I invest in the market now, or is this the top of the market?”

Here’s my response:

If you watch the news, there’s always a reason not to invest. Think back to the election and the fiscal cliff.  Who would be crazy enough to invest at the end of 2012 when the fiscal cliff was right in front of us?  Then again, The market has gone up and up this whole year with only a few speed bumps.

If you run the numbers, the research suggests that you’re better off moving the money into the markets despite what you hear from the media. Don’t try to time when to buy or sell. But that may be too hard to stomach for many investors.

And then there is the middle ground – invest in the markets on a regular basis over a certain period of time – called dollar cost averaging.  Instead of investing 100% of your portfolio right away, you could invest 25% of it for four months.  That may reduce the risk of buying a security only to see it drop shortly after you purchase it. This allows you to ease back into the markets, instead of jumping in.  Keep in mind, this method does not ensure a profit and does not protect against loss in a declining market, so investors should consider their willingness to continue purchases during a declining or fluctuating market.

Top takeaways from 10 articles on asset allocation.

By Posted on In Investment Strategies, Rule of Thumb, Uncategorized

I’ve been doing a lot of reading on Asset Allocation this morning and here are a few key takeaways that I think might be helpful to investors:

  • Static allocations assume the relationships between the various asset classes stay the same.  Dynamic allocations assume that the relationships are constantly changing.  Look back over the past five years and you can see how the relationships are in constant state of fluctuation.
  • Dynamic asset allocation can be accomplished with frequent reviews, opportunistic components, and flexible strategies.  It’s more active than static, and requires more effort and time.
  • Leveraging a portfolio (borrowing money to buy more of a certain asset class) to create risk parity across each asset class can reduce the overall risk of the portfolio while providing acceptable returns. This can be complicated to do on your own and comes with its own set of risks and higher costs (cost to borrow money).
  • Marcus Schlumerich, author of The Efficient Frontier in Modern Portfolio Theory, got it right when he stated that “a portfolio is efficient if no other portfolio has the same expected return with lower volatility.”
  • A growing trend in asset allocation goes beyond the standard 60/40 split between stocks and bonds.  New research suggests a broader and deeper use of asset classes can help to reduce risk.
  • Due diligence is becoming increasingly important as new asset classes in the alternative space emerge.
  • Asset classes are cyclical and respond based on economic environments. Changing economic environments cannot be predicted. Portfolios need to be designed with that in mind.

It’s nice to see new research supporting strategies that  have already been implemented in our client portfolios. If you’re interested in putting the Asset Allocation approach to work in your own investment portfolio, please feel free to contact us.

Talk about the magic of compounding interest!

By Posted on In Investment Strategies, Rule of Thumb, Saving, Uncategorized

I just stumbled upon this interesting nugget.  All things being equal, a 19 year old who contributes $2,000 per year for JUST 7 years will have more money at age 65 than a 26 year old who made $2,000 contributions each year until age 65.

Talk about the magic of compounding interest.  Too bad, most 20-somethings won’t realize this until it’s too late.

For details, read: Investment Advice for Gen Y

Four Strategies to Determine Your Asset Allocation.

By Posted on In Investment Behavior, Investment Strategies, Retirement, Rule of Thumb, Uncategorized

Asset allocation is an important component to any portfolio.  It deals with the ratio between various asset classes such as stocks and bonds.  Many investors don’t know where to start or how to determine if their asset allocation is appropriate based on their objectives or risk tolerance. Below are four strategies to determine an appropriate asset allocation.  Each one with pros and cons.

  • Rule-of-thumb Formulas are useful for quick planning purposes.  For an investor, this should be a starting point to see if their current allocation is in the ballpark.
  • Risk Tolerance. Investors can complete questionnaires which can identify how comfortable they feel about volatility in their portfolio.  The questions identify how the investor would feel if they were to see their account value decline by X% over various time frames.  Based on their answers, a portfolio is designed around their risk profile.  This is an objective data-driven solution, which many find appealing. But an investor’s risk profile is not static. It changes day to day, depending on their experiences, the news, and a variety of other factors.  When the economy has a negative outlook, an investor’s appetite for risk is usually much lower than when the economy is bullish.
  • Stage of Life.  Age based asset allocations that adjust over time have grown in popularity.  The premise is simple: as an investor gets closer to retirement, his allocation shifts to more conservative asset classes.  This can help reduce the risk of extreme market volatility right before they enter retirement.  The downside, this approach does not factor in personal considerations such as risk tolerance, longevity or financial goals.
  • Goal based. At times, we have built portfolios around a client’s financial goal, such as having $500,000 in assets by the time they retire.  We can show the client the risk factors he/she would take on to try to reach that goal.  This often sparks a conversation with the client about other factors that should be explored, such as increasing the savings rate or adjusting the goal.

If you’re looking to get started, begin with this popular rule of thumb: subtract your age from 110 to determine your stock percentage, put 10% in cash, and the remainder in bonds. From there, you can edge the portfolio to be more aggressive by increasing your stock holdings or more conservative by increasing cash or bonds.

This is starting point, although you should seek professional guidance in determining an asset allocation that will meet your objectives.

Three Retirement Strategies I Forgot to Tell My Client.

By Posted on In Investment Strategies, Retirement, Saving, Uncategorized

I recently met with prospective clients who needed a lot of guidance. They were entering retirement with substantial assets and sources of income, but there were important health issues to consider. It was complicated.

They had not been well served in the past. They had outlived all their previous advisors as two of them in succession had retired from the business. They had been left with several accounts of investments, IRAs and annuities, and they have to deal with multiple organizations to get the answers to their questions.

No one is helping them coordinate their planning. Nobody else knows all the pieces of the puzzle.

We spoke for a while about their situation and how I could help them. After the meeting, I thought about three other strategies that I wish I had shared with them.

1) Check to make sure the entire portfolio is working well together. Consolidation of accounts can help keep paperwork organized and simplifying tax preparation, but doesn’t help the performance of the investments. All too often, we see client’s combined portfolios inadvertently skewed too aggressive or too conservative because they never stepped back and looked at the whole portfolio. There are even cases, were a client owns several mutual funds only to realize that about 10% of their underlying investments are invested in just three stocks. While they thought they were diversified, they never took the time to review the overlap that existed between the funds.

2) As a rule of thumb, we recommend that clients spend down their accounts in the following order to minimize tax consequences: Cash, Individual and joint accounts, 401(k)s and IRAs, ROTH IRAs. There are, of course, exceptions and we don’t recommend spending an account down to zero before moving on. As a client transitions into retirement, this rule of thumb may help in planning the order of tapping each account.

3) A client should go into retirement having a good idea of what their expenses have been for the last few years so we can develop an income stream to meet their expenses without taking on unnecessary risk. If a client has yearly expenses of $50k pre-tax and $30k coming in from a pension and Social Security, we know that we need a portfolio that can generate $20k plus extra for inflation. If a client has a portfolio of $600k, then a $20k withdrawal represents about 3.5% – That’s acceptable. Now, if the client had a portfolio of $200k, then a withdrawal of $20k would be 10% and would warrant some further discussion about how to bring that down to a more reasonable rate of withdrawal.

If this situation sounds familiar or if you think you can benefit from any of these strategies, we’d be happy to offer you a complimentary consultation. Please email me to get started.