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Tweaking a Buy and Hold Strategy

One of the most common investment strategies is called “Buy and Hold”, which usually consists of mutual funds or other securities held for the long term and rebalanced occasionally.  These funds are held during the best and worst performing years.  The theory is that you can never predict the future performance of the market or time your trades to sell at the top or buy at the bottom. Instead you ride the waves, knowing that there will be ups and downs.

After the recession of 2008 and 2009, the “Buy and Hold” strategy started to lose favor.  Investors could not tolerate such significant declines in their portfolio. It caused many investors to give up on their strategy, sell out of their portfolios at the wrong time (the bottom) and move to cash to wait for better days, more optimism and more clarity.

And so they sat. and sat. and sat.

Here we are, four years later and the S&P 500 has now returned a total of 130% (3/9-12/12). There is a pattern here. American Funds released a newsletter that has a chart on page 2. It highlights the returns for the subsequent 10 years following the major declines of 1939 and 1974. The returns for those two ten year periods were in the 15% range, well above the 11% average for the S&P 500.

It turns out, this sort of return is not unique when compared to historical performance.

For those investors that stayed invested, they are watching their portfolios return to previous levels and grow even more. But, unfortunately many investors are still sitting on the sidelines wondering how to get it.

Maybe “Buy and Hold” is not dead after all!  Although, it may not be right for everyone.

If you are one of the millions of investors who sold out close to the bottom and still reluctant to get back in, consider these strategies:

1 – Limit the amount of news you watch. So much of it is noise and simply a distraction.  Take it with a grain of salt.

2 – Periodically review your statements and make calculated decisions.  It’s easy to react quickly if you see a bad news report and then review your statement.

3 – Keep the course.  Despite all the voices in your head that tell you to sell, hold on to your strategy. It may be hard, but that’s why you have a strategy in the first place.

4 – Stay diversified.  Invest in different asset classes to spread your risk out.  If you are holding too much in one specific stock or mutual fund, consider moving some of it elsewhere.

5 – Consider dollar cost averaging.  If you’re trying to time when to get back in the market or when to make contributions, dollar cost averaging may help.  With most fund companies and broker/dealers, you can establish rules to invest a specific amount each week/month. That may reduce the risk of buying a security only to see it drop shortly after you purchase it. It 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.

6 – Get help. It is becoming more and more complicated to invest with more options and increasingly complex products that may not be right for you unless you talk to a professional.

But if you read this, and you feel that even with those changes, you can’t stomach another decline like before then you may need a new strategy all together.  We had several client that express their concern and have developed a model portfolio to meet their needs. It looks to capture profits when trends within a variety of asset classes are positive and sit in cash when the trends are negative.  You can read more about it here.

Our Take on the “4% Rule” for Retirement Withdrawal

Many advisors tell their clients, as a rule of thumb, a client can withdraw about 4% of their portfolio each year, without it affecting the principal. We have been telling our clients this for years. In fact, this rule of thumb dates back a few decades and was determined after a lot of research.

And then a few weeks ago, an article written in the WSJ called into question the validity of the rule of thumb. Its premise is quite simple: if you retire and then your portfolio drops like it did in 2008, then a withdrawal rate of 4% of the original balance would most likely not be able to sustain you through retirement. You would then need to reduce your withdrawal rate. In the investment and financial community, this was quite a statement to make and has caused many individuals to question their current withdrawal rate.

It’s important to consider a few points that the article touches upon, but are overlooked:

1) The “4% Rule” is a rule of thumb, a guide, a rough figure to help investors determine how much they can withdraw from their portfolio in retirement.

2) A client should only take what they need from their portfolios. They should keep as much invested as possible, so their assets can continue to appreciate. An extra $1,000 sitting in a checking account earning next to nothing, should probably stay in invested where it can generate a decent return.

3) The “4% Rule” does account for some of the long tail risks. When this rule of thumb was calculated in the 90’s, it did use data points going back to the depression. Of course, there are scenarios where the “4% Rule” will not work, but these are the outlier scenarios. They are economic situations that happen every 75 years or so. Fortunately, we are recovering from one of them right now.

The most important point to take away from this post and the article is to remember that the “4% Rule” should be renamed “4% Rule of Thumb”. Maybe then investors will understand that withdrawals will have to fluctuate depending on market conditions and their needs.

If you’re interested in some additional information on this topic, Vanguard has a few interesting pieces on the topic.


Why Is It So Hard to Make a Tax Deductible Contribution to a Traditional IRA?

During tax season, we had dozens of conversation with clients that begin with the client asking, “can I make a tax deductible contribution to my IRA, so I can lower my tax bill?”

Unfortunately, the answer isn’t a straightforward “yes” or “no”. Rather, we have to drill into each client’s specific situation to make sure we follow the in’s and out’s associated with IRA contributions on a case by case basis. The below infographic does a pretty good job at capturing the complexity of answering the question. Bottom line, before making a contribution to your IRA, consult with a financial advisor or tax professional because it’s complicated.

IRA Contribution Flow Chart

Growing complexity of retirement

This piece was written about a year ago, but the two statistics from Sloan should be read again. During the past year, we have plenty of anecdotal evidence to support their findings:

There are a lot of options and factors to consider when preparing for retirement. It’s no longer just about the size of your nest egg. It’s about adequate insurance coverage, strategies to maximize your social security benefits (interesting story here), strategies to minimize taxes, and weighing your needs for Long Term Care insurance. And that’s just to name a few.

Of course, another option to consider is when to retire. Given the state of the economy and the fact that people are healthier and living longer than ever before, more and more people are pushing retirement back. Here are a few interesting statistics coming from the Sloan Center on Aging & Work at Boston College:

“Fewer Older Workers Expect to Retire at 62 or 65. According to a 2012 analysis of data from the Health and Retirement Survey, ‘a declining percentage of Americans are expecting to retire at 62 and 65. In 2006, 7.4 percent of people [over the age of 50] said they plan to stop working at 62, but by 2010 it had dropped to 4.9 percent. In 2006, 16.1 percent people expected to retire at 65, but in 2010, 14.6 percent planned to do so. Conversely, expected retirement at 66 has increased from 2.9 percent in 2006 to 4 percent in 2010.'”

And coming from the same outfit:

“One-fifth of U.S. Workers Say They Don’t Plan to Stop Working According to the 2011 Sun-Life Unretirement Index, when asked at what age they plan to stop working, 20% of American workers stated ‘Never. I think I’ll always work in some capacity.'”

Five strategies to fix the biggest problem with your portfolio

The single greatest factor to affect your financial goals for retirement has nothing to do with investment options, asset allocations, bonds or stocks. Rather, it’s the amount you save for retirement year over year. And yet, many struggle to save for retirement despite the facts. Business Insider recently published an excellent article that detailed some of the reasons why individuals are not saving enough for retirement.

So now you know why you aren’t saving enough, here are a few top strategies you can use to improve how you save for retirement:

1) Aim to save about 10% of your gross pay for retirement. It’s a rule of thumb – if you’re starting to save later in life, that rate will have to be higher.

2) Double check that you are taking advantage of matching programs with your employer’s 401k.

3) Save in addition to your 401k contributions. Just because you’ve maxed out your matching contribution, doesn’t mean that you should stop there. Consider opening a Roth IRA to save more.

4) Track expenses. To reiterate one of the tips in the article, by reducing how much you spend on non-essential expenses you can end up with a nice contribution to your retirement accounts. You can track expenses yourself or use a site like

5) Set up systematic contributions. It’s very easy to link your checking account to your retirement account and have contributions made to your investment account automatically. You can even explore the option of a payroll deduction.

Regardless of the strategy you adopt, remember that it will require self control. It’s very easy to shift dollars you earmarked for retirement to pay for that unexpected expense. Develop a plan, stick to it and review it periodically.