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Move Over Florida, There is a New Retirement Hot Spot

By Posted on In Retirement

Florida may not be the ideal location for retirement according to some new research from Bankrate. Based on tax rates, crime states, weather and health care, Bankrate has ranked all fifty states to find the best ones for retirees. Florida ranks 17th! Connecticut comes in 32nd

New England has two states that make the top of the list. New Hampshire claims the top spot and Maine claims the third spot. Surprised? I am too. I guess Bankrate didn’t factor in cold weather as Minnesota and Colorado also made the top 5.

See the full list

The Problem With Target Date Funds

By Posted on In Investment Strategies

In the last 10 years, the rise of target funds have become common options found in 401(k) plans.  While many love the simplicity of the fund options, investors are giving up a lot of control.  And in some cases, they do not even know what they own.  That is setting many investors up for a potentially big surprise later in life.

The premise is simple: investors select from several different target date options based on the approximate date they expect to retire. For example, anyone who plans to retire in 25 years may select the 2040 target date fund or the 2045 target date fund as those are the closest options to his retirement date.  As the years role by, the fund slowly migrates from an aggressive stock dominated plan to a mostly conservative bond portfolio by the time he retires.  Some target date funds will continue to move to more conservative investments even after the target date has been reached.

This can be a good default option for investors but investors shouldn’t rely on default options all the time.  These funds don’t reflect an investors individual risk tolerance nor are they designed to fit into an investors overall financial plan.  Let’s expand on our example from before: let’s say that 40 year old investor is averse to risk.  He may want a really conservative portfolio, but if he selects the 2040 target date fund, he will take on more risk than he may want if the portfolio was built just for him.  Conversely, we see some clients that come to us the other way around.  They have several other investment accounts in addition to the target date fund.  When they eventually retire, the funds from their target date fund may not be used until much later in their retirement years.  In that case, the fund will become too conservative too early which means the client might be missing out on market appreciation.

Not all target date funds are created equal.  We routinely see target date funds with some flaws in how they’re constructed.  Their asset allocations, risk profile and glide path differ dramatically and as such the results and investor experience differ as well.  I’ve seen allocation to equites in  2025 target date funds range from 50% all the way up to 77%! That’s a huge difference.  In some rare cases, we advise clients not to use the target date funds because the asset allocation is so bad or because the underlying investments are inappropriate.

Target date funds are a default option – a starting point.  That should not be confused with tailored investment strategy, custom planning or optimizing one’s financial situation.

Alternative Retirement Examples (Millennials, this one is for you)

By Posted on In Retirement

Ask a 20 or 30 something about their vision of retirement and they often shrug.  They can barely make ends meet now – how can they try to envision themselves in 40 years?  Conventional wisdom suggests that they should save as much as they can.  If they save enough, they might be able to retire early!  Soon, that conventional wisdom will be labeled as outdated.  It does not reflect the changing situation of current retirees and especially the mindset of Millennials who value work life balance much more so than other recent generations.

This post will explore some of the more creative ways someone can retire.

  • Semi-retirement.  Currently, the most popular alternative.  This approach suggests that someone could retire in their mid 50s and work part time doing a fun job until they are ready for full retirement.  This is a very common option for many of our clients who have started consulting businesses or have turned a hobby into a side job. In many cases, these semi-retired individuals are working well into their 70s doing something they love.
  • Our traditional view of working one career for 45 years may be changing.  A very small but rising trend is to take a 4-5 year sabbatical every 15 years of working a full time job.  In this case, the individual is enjoying “retirement years” much earlier in life. Working years are broken into three 15 year full time chunks of time and are sometimes delineated by different careers each time.  Perhaps, someone takes a few years off to get an advanced degree and reenters the workforce as a consultant or as a teacher.
  • Short Sabbaticals.  An alternative to the above is to take a year every ten years and work on a reduced schedule.  This gives the individual flexibility to travel or do something they love without having to give up their career.
  • Extreme Retirement.  This is the traditional retirement approach taken to an extreme.  In this case, the individual (or couple) in their late 20’s or 30s is saving 70% of their income every year with the hopes of retiring in their 40s.  They are taking frugality to the highest level and this concept is starting to turn into a movement.

In all of these cases, planning becomes crucial.  The status que and conventional wisdom is tossed out the window and is replaced with a truly customized plan for the individual.  If any of these options resonate with you (or someone you know) make sure a financial planner is engaged early in the process to ensure the right plan is in place.

A little bit of forethought early in one’s life mixed with the correct planning can have a tremendous impact on one’s life.

What Should You Do When Markets Are At All Time Highs

By Posted on In Finding Confidence

When markets reach heights like this, it’s a great time to evaluate your portfolio to see if you are invested correctly.  Too often, investors wait for the market to decline before doing that analysis.  That’s the worst time to reevaluate how you’re invested.

Instead, follow the old adage: Buy Low, Sell High. Perhaps, you aren’t as willing to accept a 10%-15% decline as you were 5-10 years ago.  If that’s the case we should think about taking profits of the table and moving into a more conservative lineup.

If you’re curious about how your portfolio stacks up to your risk tolerance, please complete this questionnaire.  This is an extremely valuable exercise that can compare your personal risk tolerance to your actual investments to quantify how much risk you’re willing to take and how much risk is in your portfolio.  Basically, you’re asked a series questions that will result in a risk score.  I then analyze your holdings that you maintain with us and investments held elsewhere to arrive at a portfolio risk score.  Hopefully, they match but if not we can take steps to tweak your holdings.

Political Impacts on your Investments

By Posted on In Politics & the Economy

Since Donald Trump was elected in early November, the US stock market has surged to new heights.  We have fielded dozens of phone calls from clients asking how we are viewing this situation.  Below is a summary of our thoughts:

  • We believe this a tortoise vs hare race in terms of investing.  Lots of investors are piling into the market right now as they don’t want to miss this surge.  Or they are seeing unbelievable opportunities.  Caution is being replaced by exuberance for some investors.  This is the first time since the recession of 2008 and 2009, that we are hearing investors feel confident and optimistic in the markets.  This kind of knee-jerk reaction reminds me of the story about the tortoise and the hare, where the hare is overly confident in his abilities while the tortoise remains steady and purposefully in his pursuit. In this case, we will gladly be the tortoise. We will continue our steadfast approach to investing and will not deviate from our process.
  • What’s changed since trump’s election: Trump has continued to tweet his positions and that has been well received by the market.  No policies have been actually implemented, yet the market is pricing itself as though the policies have been implemented.  We all know intuitively that a president can’t just snap his fingers to make things happen.  As Trump hits resistance in implementing his plans, we expect the stock market to overreact to the bad news.  We expect more volatility this year as the market tries to correctly price itself based on the actions and words (and tweets) from an unconventional, and unpredictable leader.
  • Foreign Opportunities: As measured by valuations, the US stock market is expensive to invest in right now.  But when we look oversees, we see stocks on sale.  When the 2008 and 2009 recession occurred, the US stock market came back and has reached new highs, but many of the foreign markets have continued to muddle along over the last few years.  One related item is how the dollar will do relative to other currencies – if the dollar continues to strengthen, it could mute any returns we see abroad.
  • Small Cap Opportunities:  As the US and other countries embrace a more nationalistic attitude, foreign trade will likely be affected.  This means, that large US companies that see a significant profit coming from overseas trading will likely be hurt thanks to tariffs.  On the flip side, smaller US companies that serve mostly customers in the US will likely do better since they will not have to compete as much with foreign companies (bc there goods would be slapped with tariffs coming into the US).

Bottom line:  While we do see some opportunities, we plan to maintain a defensive approach to investing.  We see the current run up in stock prices to be unwarranted and that there will be a reversion to the mean at some point.  The opposite is true when looking abroad – the foreign markets have limped along for too long and we expect a reversion to the mean to occur at some point.

Why the Dow Jones Reaching 20,000 Is Not As Important As You May Think

By Posted on In Investment Behavior

The big headline the other day was news of the Dow Jones Industrial Average (DJIA) reaching 20,000 for the first time. It’s gathered headlines all over the world. I counted 13 articles in The Wall Street Journal about the Dow 20,000. Most of the mainstream media has been quick to jump on what this means for investors, the market, and the future. And some of that thinking is flawed. This post will focus on putting this milestone in perspective for you and, more importantly, what it means for your investments.

The Dow Jones Industrial Average is probably the most iconic index. When someone says the market is up 150 points, they are referring to the DJIA. It has a long track record – about 130 years! So on the surface this milestone is impressive. It took the Dow over 100 years to reach 10,000. It took 18 years for it to reach 20,000. But it took only 42 days to go from 19,000 to 20,000. That’s the second fastest thousand point gain in history. So what does that mean for you? To answer that, we need to pull pack the curtain to understand what is the Dow Jones Industrial Average:

  • It is an index consisting of 30 companies. That’s a very small representation of the overall market and can completely misrepresent how the whole market is doing in reality.
  • The Dow Jones is 100% US stocks which represent a single asset class. On top of that, it skews heavily toward large-cap industrial companies. This may have been valuable 130 years ago when the index was first created, but the economy has changed drastically since this index was first created. No longer are industrial companies an accurate representation of the overall market like they once were.
  • A company is included in the DJIA because it was selected by a committee of the Wall Street Journal. They actively decide which companies should be included and which should be removed.
  • The common methodology to determine the weighting of each company is very unusual. Most modern indexes are weighted based on the market capitalization – the bigger the company, the larger representation it holds in the index. The DJIA weights the company based on the share price of each stock. The larger the price per share, the larger the weight in the index. That puts Goldman Sachs as the largest holding at about 8% and GE at the second lowest (about 1%). This reason for this methodology dates back to a time before computers when a simple methodology was needed.
  • Here is a technical issue – the DJIA was prone to inaccurate calculations before computers were used to track the index. In going back to the very beginning and correcting all the mistakes, the DJIA passed 30,000 last month.
  • While you can’t invest directly in indexes, you can invest in indexes the mimic and replicate the performance of the underlying index. When you total the dollar amount that tracks the DJIA, it adds up to about $36 billion. To put that in perspective – over $2 trillion track some version of the S&P 500!

As you can see, this is a deeply flawed and outdated index. It serves very little use for most investors because of these flaws. It is not a good gauge of the overall health of the market or the economy. It barely does a good job of capturing the health of industrial segment of our economy in the US. It should never compared to a broad, diversified investment portfolio. So the Dow reaching 20,000 is a big story about an out-of-date index.

Fake News and Your Investments

By Posted on In Finding Confidence

For readers of this blog, you know how I feel about financial journalism these days. The talking heads and the supposed experts we see on TV and read about in the news are doing a great job making people nervous and afraid to invest. It’s clearly having a negative impact on decisions most investors make. Investors tend to be nervous when the markets become volatile but when the media reconfirms their fears or exaggerate their concerns, the investor is more likely to follow the heard.

Lately, the whole concept of Fake News has come into focus as people call out poor reporting. While most of the backlash is focused on political journalism, I believe that financial journalism is even more prone to reporting of half-truths and spreading of misinformation. Journalists know how to stoke fear and anxiety for an investor with clever headlines and drawing comparisons or conclusions in ways that are factually and logically incorrect.

I hope the pressure continues and that the media can reform itself and realize they can help people stay the course in reaching their financial goals. Right now, the majority of the content from CNBC (and most media) is good for entertainment purposes but rarely would I consider it reliable or educational in nature.

What Happens When Your Retirement Plan Goes Awry

By Posted on In Retirement

US News recently made several good points in the following article: When You Do Everything Right But Your Retirement Plans Go Wrong

I would add that a financial plan should be reviewed on a regular basis regardless of what’s occurring in the market.  The analogy we use is that a financial plan is similar to sailing a ship across the ocean.  Throughout the journey, there are many course corrections along the way.  It’s to be expected and the plan must be dynamic enough to adjust.  In some cases, investors believe that a financial plan is static and that it never changes.  It’s important to remember that a plan is good for only as long as the underlying assumptions remain valid.  If inflation increases too much or if the markets are negative for an extended period of time or some other assumption changes, it may warrant a change in the plan.

Critiquing a Financial Plan

By Posted on In Finding Confidence, Investment Behavior, Personal Development, Retirement, Rule of Thumb, Saving

The following article examines five young people and their financial plan (more like their lack of planning).  They are then offered some preliminary advice about how to improve their situation.  Unfortunately, in every case I found the advice to be overly simplified.  Here’s the article

And here are some overarching strategies that apply to all the case studies:

1)      Emergency fund.  Start here first and make it a priority to build an emergency fund that can cover non-discretionary expenses for 3-6 months.

2)      Save more.  If you can’t save more now, earmark any future raise toward saving.  When asked about a rule of thumb for how much to save, I’ll often respond with “Save as much as you can”.  Young people and millennials are unlikely to have pensions and with the questionable future of Social Security, the burden to save is placed on their shoulders much more than previous generations.

3)      Automate.  Make sure any savings are set to occur automatically.  The mental anguish of writing a check every month or year to a retirement account can be surprisingly difficult.  Many times it is our own biases that create obstacles to reaching our own goal and simple processes like automating our savings can have a huge impact.

4)      Disability.  Life insurance is commonly discussed when a couple has children.  But disability insurance is rarely brought up.  What’s odd is that people are more likely to file a claim for disability insurance than life insurance.  And it doesn’t apply just to physical injuries, either.  We’ve had several clients and prospects tell us about their long term disability that affects their ability to do a desk job as a result of a bad car crash.

 

The Best Stocks To Invest In Right Now

By Posted on In Investment Behavior, Investment Strategies, Uncategorized

How many times have you seen that headline? How many times did it spur you to read an article and even take action? Well respected publications are famous for putting together these kinds of lists. The odd part is that every month, week, or even day that list changes. This morning I saw headlines like these “ The Best Value Plays of 2017”, “These Stocks are Poised to Grow”, “These Stocks Will Surge With Trump”.

This is part of the Fake News problem we’re dealing with. Editors and journalists know that those headlines are going to generate the clicks and your attention. They want your attention long enough for you to see the ads and don’t care at all if those investment ideas are good.

Publications and the media are in the business of selling ad space. Any recommendations should be taken with a grain salt.

The Team

H.L. Rives III, CPA
Cliff Jarvis
Michael Lecours, CFP®
Ronald G. Lecours, CFP®

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