Category: Investment strategy

This Simple Tip Could Make a Big Difference in Your Retirement Account

You can make a 2016 contribution to your IRA or Roth IRA as early as January 1, 2016 and as late as April 15, 2017.  It would seem obvious that the sooner you contribute to your retirement account and invest the money, the more money you’ll have by the time you retire.
However, according to research from Vanguard, people are more than twice as likely to fund their IRAs at the last minute as opposed to the first opportunity!  When Vanguard looked back at the IRA contributions of its clients from 2007 to 2012, only 10% of the contributions were made at the optimum point in January, and over 20% were made at the very last month possible.
IRA Contribution Month
To demonstrate the type of real, monetary impact this can have on someone’s retirement savings, take the following hypothetical example.  On January 1 each year, “Early Bird” contributes $5,500, while “Last Minute” makes their $5,500 contribution on April 1 of the following year.  Assume that each investor does this for 30 years and earns 4% annually, after inflation.  Early Bird ends up with $15,500 more than Last Minute.  Put another way, Last Minute has incurred a $15,500 “procrastination penalty” by waiting to make his contribution until the last possible month.
Procrastination Penalty
At the beginning of every year, make fully funding your IRA contributions a habit. (And if you’re the type of person who works better when things are automated, look into setting up an automatic savings & investment plan from your paycheck or bank account to your IRA to save on a monthly or per-paycheck basis.)

"Will a Stock Market Drop Affect My Dividend Payments?"

We got this question from a client of ours earlier this week in response to the stock market’s wild market ride.  It is a great question!
The quick and easy answer is “No, it shouldn’t.”  And we could pretty much stop right there.  But if you know us, you know we love to get into the explanation!  So here it goes…
Let’s go back to the very start, with “What is a dividend?”  A dividend is a payment of a portion of a company’s earnings distributed to the company’s shareholders.  Dividends typically are paid in cash, and the company’s board of directors decides the amount distributed.
Now the next question would be, “What causes a company to raise or lower their dividend?”  The answer is cash flow.  It all comes down to earnings and profitability and how much money the company has remaining after paying for all the things that keep it running, such as salaries, research and development, marketing, etc.  After those expenses and the dividend payment, the remaining profits go back into the company.
When a company pays a dividend, their board is essentially deciding that reinvesting all of the company’s profits to achieve further growth will not offer the shareholders as high a return as a dividend distribution.  That said, companies offer a dividend as extra enticement for investors to buy their stock.  Moreover, a steadily increasing dividend payout is an indication of a successful company.
Therefore, it stands to reason that a company’s steady or increasing profitability will typically lead to steady or increasing dividend rates, and a decline in profitability will lead to that company reducing or eliminating their dividends.  Most U.S. companies are loathe to reduce their dividend rates because it signals to investors that their profits are lagging, which results in their stock price getting pummeled.  And that is not a good thing for their company’s board or management.
The final long-winded answer: You will often see companies cut their dividends when there is a severe economic crash, but not in reaction to a market correction.  Since dividends are not a function of stock price, market fluctuations and stock price fluctuations on their own do not affect a company’s dividend payments.
If you have a question, feel free to send it our way!
(Here is an interesting tidbit: the term “dividend” comes from the Latin word dividendum, which means “thing to be divided.”  With a dividend, companies are dividing their profits up among shareholders.)

How to live well in retirement

No one plans to live in poverty in retirement. But one of the biggest problems for the majority of current workers is that they don’t plan … period. So what can we do to live better in retirement?

  •  Save, save, save and start early. The biggest tool that anyone has is time. Time is the magic that makes compound interest a miracle.  There is no substitute for starting early, and that means as soon as you leave school and begin work. Those who begin saving in their 20s saving $50 a month will end up with more money that those who started in their 40s.
  • Don’t retire early. People are living longer than ever before. Unless you are already rich, retiring early has at least three pernicious effects. First, your income stops and you begin drawing down your savings. Second, your pension and social security payments are much lower than if you wait. Third, you will spend more time as a retiree, forcing you to reduce spending to stretch your savings dollars.
  • After you retire from your main job and if you are physically able, find a paying job that will supplement your other income sources.
  • Find a way to cut costs. One of the best ways to reduce the cost of living during retirement is to be out of debt and that includes mortgage debt. It also pays, once you are empty nesters, to downsize the home. This has the effect of reducing taxes, utility and maintenance costs.

And once you are retired, get a copy of my book, Before I Go, so that you will be ready for the next stage on your journey.

What's a "Bubble?"

The word “bubble” has been thrown around a great deal with the Dow Jones Industrial Average (DJIA) at 16,000, the S&P 500 at 1800, and the Nasdaq Comp above 4000.  The term “bubble” is a scare word that makes people think of a repeat of the Tech Crash of 2000 or the real estate bubble that led to the financial crisis of 2008.

Cluifford Asness, whose firm manages $80 billion has a pet peeve and one of them is the loose use of the term “bubble.”

“The word “bubble,” even if you are not an efficient market fan (if you are, it should never be uttered outside the tub), is very overused. I stake out a middle ground between pure efficient markets, where the word is verboten, and the common overuse of the word that is my peeve. Whether a particular instance is a bubble will never be objective; we will always have disagreement ex ante and even ex post. But to have content, the term bubble should indicate a price that no reasonable future outcome can justify. I believe that tech stocks in early 2000 fit this description. I don’t think there were assumptions — short of them owning the GDP of the Earth — that justified their valuations. However, in the wake of 1999-2000 and 2007-20008, and with the prevalence of the use of the word “bubble” to describe these two instances, we have dumbed the word down and now use it too much. An asset or a security is often declared to be in a bubble when it is more accurate to describe it as “expensive” or possessing a “lower than normal expected return.” The descriptions “lower than normal expected return” and “bubble” are not the same thing.

Bloomberg columnist Barry Ritholtz comments:

“It would only take a small marginal improvement in the economy, or a small uptick in hiring, or heaven help us, even a modest increase in wages to increase revenues and drive profits significantly higher,”he current market valuations do not, in my opinion, have the characteristics of a “bubble.” “

Whether stocks, bonds or commodities are fairly valued, undervalued or overvalued will become apparent over time.   In the meantime, unless you are being paid to opine, it’s best to realize that fortune-telling is not the way to manage your portfolio.  Creating an all-weather portfolio with the asset allocation that will allow you to face any reasonable future is the best strategy.

 

Income Investing: Investors No Longer Taking a 'Fixed' Approach

While interest rates on bonds have risen slightly from the absolute bottoms, investors looking for income are still not satisfied with the rates that they can get today.  Adding to their concerns is the expectation that when the federal reserve slows “quantitive easing” interest rates will rise to significantly higher levels.  And that means that the bond they buy today will probably go down in value.

As a result, income investors are actually looking at dividend paying stocks to provide the cash flow that they need.  One other advantage of this strategy is that many companies have been raising their dividends regularly, something that bonds don’t do.

Sudden Wealth Syndrome

The person who suddenly comes into wealth needs much more than financial planning.  Lottery winners, those who inherit wealth, people who sell a family business often fall prey to the “sudden wealth syndrome” and frequently lose what they have gained.  Sudden wealth recipients’ immediate concerns may have little to do with financial planning or investment strategies. Even people who know they’ll be getting money at some point—such as an inheritance—may significantly underestimate the amount. Failing to address the psychological ramifications of sudden wealth can lead to financial ruin.  The assistance that these people need is often more psychological than financial, at least at the beginning .

Newfound wealth is usually a very emotional thing and people usually make terrible financial decisions when they are emotional.  People who win the lottery or inherit wealth need to give a lot of thought and decide what they want their lives to look like.  Some of the dangers that these people face include:

  • Thinking they have more money than they do.   No matter how much it seems at the beginning it’s always a finite amount and can run out if not properly handled.
  • Windfalls are viewed very differently than money they that’s been worked for and therefore is often spent irrationally.  No one really “needs” a yacht.
  • Many immediately quit their jobs.  The problem then becomes: what are they going to do with their time.  This can lead to a “honeymoon period” where they go on spending sprees and find their lives empty of meaning.
  • They become suspicious, including suspecting their advisors of being more interested in their money than them.
  • They are barraged with business propositions, requests for loans and the like.   This is where a trusted advisor can help.  I recently had a portfolio review with one of my clients who is a doctor.  Physicians and surgeons are constantly barraged with business and investment proposals because they are viewed as wealthy.  I offered to review these proposals for him and tell him which ones were legitimate, reasonable and appropriate for him.  An advisor should be willing and able to do the same thing for those who have acquired sudden wealth.

Advice to those who achieve sudden wealth.  Don’t do anything sudden.

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