Tag: Investment strategy

Are Your Financial Goals Achievable? Financial Mapping.

Financial Planning is a term that put a lot of people off. To some it means obsessing about money, to others it implies budgeting, to yet others it may mean paying someone to prepare a 75 page book that takes every contingency into account between now and forever.

But there’s another way of thinking about financial planning.  I call it “Financial Mapping.”

Let’s say you have a goal of retiring at age 65 with $5 million in assets.  You’re 35 and have a good job.  You have put $150,000 away and are putting 10{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} of your salary into savings.  Can you reach your goal?  Are you saving enough? And how hard will your money have to work to help you get to your financial objective?

This kind of analysis does not require budgeting or telephone sized books to figure out.

It’s like planning a cross country trip for your vacation.  You get out your maps and try to figure out how many miles you need to cover each day to finish your trip within the time you have for vacation.  And every day you mark your progress.  There may be side trips so each day you may not go as far as you planned.  You may have to adjust your speed, the hours you drive and the sights you see.  You may even decide that you can’t reach your goal and settle for something a little closer before you head home.

A simple financial plan can be thought of as that road map.  You know where you start, you set a specific goal, prepare an estimate of your savings and your expected rate of return and see if that will allow you to reach your goal.  And every year your update your net worth, just like marking where you are on a road map.  If your financial map tells you that you are on track, you’re good for another year.  If you’re above or below the track that gets you to your goal, you can increase or decrease your savings rate or change your investment strategy.  Or you can adjust your goal.  And it’s all on a single sheet of paper.

If you’re interested in creating your own financial map, get in touch with us.  We’ll be happy to help.

Considering 529 Plans?

Saving for college usually involves putting money aside and a popular vehicle for this is the so-called “529” plan.  Here are five things to consider when deciding on this kind of plan.

  1. Don’t overlook prepaid tuition plans.  If you are fairly certain that you know where the student will be attending college, these may reduce the uncertainty of the amount that will be available for college.  The down side is if the student elects to attend a college that does not participate in the plan, then the credits may only cover a very small portion of the tuition cost — or participants just get their money back.
  2. Beware of the strict rules for changing beneficiaries, which could cause a client to incur taxes or penalties. The new beneficiary must be a member of the family as defined by the IRS, within the same generation (or an earlier one) as the original plan beneficiary, in accordance with gift tax laws.
  3. Even if the student does receive a scholarship for any reason, the dollars in a 529 plan are not wasted. Clients have the option to withdraw from the plan the dollar amount of the scholarship. Taxes will have to be paid on the earnings, but the 10{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} penalty on non-qualified distributions is waived.
  4. The IRS allows 529 plans to be rebalanced only once per year, turning any further trades into taxable events that may incur penalties too.
  5. Consider target date funds as an alternative to choosing your own asset allocation program.


Five lessons to be learned from the Madoff scandal

Five years ago we learned about the Ponzi scheme engineered by Bernie Madoff.  How can you avoid being scammed like the people who lost billions to Madoff?  Here are five things to look for when working with an investment firm:

1. Demand Assets Be Held at Large Custodian

Be sure your assets are held by a large reputable custodian like Charles Schwab.  The custodian will be the one sending you your statements and trade confirmations.  In the Madoff scandal, all of the clients’ funds were accounted for only by Madoff’s firm, and investments were held by Madoff’s wealth management operation, which was at the heart of the scam. If client funds were held at a legitimate, large custodian like Charles Schwab, the scam would have been virtually impossible to carry out since the account statements would flow from the custodian, and the discrepancies would have been exposed immediately.

2. Fraud Diversification

Diversification is one of the primary keys to risk control.  No one should have all of his assets in a  single fund or a single stock.

3. Ask Questions and Demand Answers

When clients asked Madoff questions about his returns and management style, he refused to answer them. This is a massive red flag. Clients are entitled to answers regarding holdings, investment strategies and costs. Failure to provide this sort of information is a major warning sign.

4. If Investments or Strategy Can’t Be Readily Explained, Don’t Invest

Often investment scams are hidden in the obscure, opaque and complicated. Madoff claimed to use a “split-strike” strategy for generating steady returns for investors by investing in the largest stocks in the S&P 100 index while simultaneously buying and selling options against either these particular stocks or the S&P 100 index. If it sounds too confusing or can’t be explained simply, avoid it altogether.

5. If it Sounds Too Good to Be True watch out.

Investors often fall victim to big lies more easily than small lies. Madoff used decade-long consistency to lure investors in. Don’t believe anyone who tells you that you can earn higher returns while assuming a lower risk. If you’re realizing high returns, then you’re also accepting increased risk.

Pricking the Stock Market Bubble Debate

We recently posted a note about the definition of a “bubble.”  We thought it would be worth our while to share the thoughts of billionaire Ken Fisher’s firm on this issue.  We share this, not as a firm prediction, but an analysis by an individual who’s more often right than wrong.

Are stocks about to froth over? With many indexes routinely clocking new highs, bubble chatter is easy to come by. One former presidential budget advisor says stocks are in a bubble! Our soon-to-be Fed head and one of her predecessors say no such bubble exists! A popular newspaper weighed in, too, corralling a few “experts” to opine on the issue. All the hoopla suggests there is a bubble … in bubble talk! In stocks, however, evidence suggests otherwise—this bull has plenty of fundamental support and rational reasons to keep on running.

What tends to move stocks most is the gap between economic and business fundamentals and the degree to which these fundamentals are appreciated. A stock market bubble forms when expectations about publicly traded companies’ future earnings exceed reality—when expectations become inflated. In the late 1990s, for example, Tech stocks with little revenue, unproven track record of success and poor business models shot sky high. Euphoric sentiment was defying fundamentals—glee, driven largely by past returns, was the only thing holding them up. Fundamentals eventually won the day, and sentiment followed after investors gradually saw their irrational bets go south. The bubble burst.

But today’s market looks nothing like that. Expectations are pretty low—few fathom that profits can keep growing and the global economy stay firm or even reaccelerate. Signs of optimism are guarded at best, and are often loaded with “yeah buts.” And keep in mind, bubbles don’t form overnight and are very difficult to detect. So difficult, in fact, that if everyone’s talking about them, they probably aren’t there. Constant bubble talk is self-deflating—it fosters fear and skepticism.

So why do some argue that we are in a bubble? Perhaps it’s because of the recent spate of social media IPOs, which may scare folks into thinking that markets are partying like it’s 1999—just before the Tech bubble burst. However, there are many differences between now and then. Sure, there may be some euphoria in social media, but social media is a small subset of IPOs. Consider: In 1999, there were 368 IPOs in tech alone. In 2013, Twitter made 33. Even if you think Social Media firms are frothy, they’re a tiny portion of the overall market and don’t necessarily reflect broader sentiment. Among tech companies, recent IPOs are trading at 5.6 times sales, compared with 26.5 times sales in 1999—investors aren’t placing exuberant valuations on yet-to-be-seen sales. And most of today’s IPOs aren’t Tech—they span most sectors, and many are higher-quality companies with real business plans compared to the flash-in-the-pan tech companies from the ‘90s. Hilton, an IPO scheduled to launch soon, has a rather time-tested business model, if nothing else.

Others believe stocks are propped up by something artificial (ahem, quantitative easing) and once it’s removed, the market will crash. The case: The Fed’s QE program has pushed investors from Treasurys to equities, in search for better return, and this is why the stock market has done well. Once interest rates rise, investors will drift back to fixed income, and stocks will fall. Yet data don’t support the notion of some massive rotation from bonds to stocks since QE began. Nor would that even be necessary for stocks to rise—there is a seller for every buyer. Stocks are an auction market—buyers’ willingness to pay higher prices is what matters, not the sheer number of buyers.

Philosophically, too, the notion fixed-income investors would chase higher yields in stocks is flawed. Perhaps some might, but many investors own bonds to reduce expected short-term volatility, particularly if they have higher cash flows. If they were dissatisfied with Treasury yields, they probably wouldn’t rush headlong into stocks, a more volatile asset class. They’d likely move to another form of fixed income (e.g., corporate bonds).

Finally, some suggest hot stock markets are detached from slow economic growth. True, this expansion is one of the slowest in modern history, but stocks aren’t the economy. Stocks are shares of publicly traded companies and reflect the private sector. While headline GDP growth hasn’t been stellar, much of the detraction has come from state, local and Federal government spending reductions. Business investment is closing in on all-time highs, profits are at all-time highs and rising, and S&P 500 earnings and revenues continue growing. Heck, earnings hit their first all-time high two years ago! Stocks hit theirs earlier this year. Stripping this influence out shows a stronger private sector—and the gap between how folks perceive the economy (pervasive claims of a sluggish, flat, fake or only “technical” recovery) is a great illustration of the dearth of euphoric sentiment. With this in mind, it seems tough to argue stocks are wildly higher than reality warrants. It seems more like the reverse.


5 Bad Ways to Pick a Mutual Fund

The Sunday Wall Street Journal has an article with the title “Bad Ways to Pick a Mutual Fund.”  We think it’s worth while examining this list and making a few comments.

1. Focusing on past returns

This may well be the biggest problem for people who pick their own mutual funds.  There is a good reason that funds mention that “past performance is no indicator of future results.”  There are all sorts of reasons that past performance may not predict how well a fund will do in the future.  Among them are management changes, style drift, and sector rotation.

2. Not looking under the hood

I am always amazed by the number of people who buy a fund without knowing what they do or how their money is being invested.   Going by an advertisement or an article in a financial magazine is no substitute for research.

3. False diversification

Buying multiple funds that all do the same thing is not diversification, its duplication.

4. Chasing headlines

I recall that dot.com stock funds were incredibly hot in 1999 and people losing their shirts when the tech bubble burst the next year.   The retail investor is never going to be ahead of the information curve.

5. Buying on ratings alone

Focusing on stars alone is as bad as buying based on what some magazine has deemed, say, the top five funds. In both cases, past performance plays too big a role.

The focus for serious investors is to look for a well diversified portfolio of funds that focuses on generating superior risk-adjusted returns.  To do that, serious investors get professional guidance.

Investment Advice from Mike Tyson

“Everyone has a plan until they get punched in the face.”   Mike Tyson, former heavyweight     champion of the world

No one associates Mike Tyson with financial wisdom, but this little gem is something to remember inside and outside of the ring.  If you have ever seen a prize-fight the one thing you see immediately is that the boxers have their hands up, protecting their heads and faces.  They know that they’re going to get hit, they just don’t want to be on the other end of that knock-out punch.

Which is something that investors should also do.  Unfortunately, they often forget Tyson’s sage advice and get greedy during “bull” markets, letting their guards down, worried that others may be doing better.  That’s when Mr. Market delivers the uppercut and knock them out, perhaps permanently or at least struggling for years to regain their balance.

The first rule for investors is to avoid big losses.  In finance and in boxing,  keep your guard up and stay nimble.

Two Views of GE

General Electric is one of the most widely owned stocks in the world.  And as a GE alumnus we are often asked about it.  At present there are two main schools of thought about GE and it’s outlook over the next year.

The bullish case argues that General Electric still has many growth opportunities, especially considering its $223B order backlog. Six out of seven of General Electric’s business segments posted earnings growth in Q2 compared to last year, with three seeing double-digit growth.  In addition, GE is one of the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), with a dividend yield of over 3{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.

The neutral case is made Goldman Sachs:

“Our view is based on limited upside to 2013/2014 EPS coupled with a balanced risk/reward at this time. Specifically, we believe the 2013 margin targets are aggressive and a lower asset base at Capital will weigh on 2014 growth. Over the long term, we like GE’s position in attractive markets, simplification efforts and actions since the global financial crisis to make Capital stronger/safer. However, while GE appears well on its way to achieving its ENI reduction targets, we believe more can be done to improve its returns/ growth profile, making it a more attractive investment longer-term,”

With a P/E ratio of over 17, our view is that GE has limited upside potential.  We see the likelihood of an announcement of a dividend increase in the 4th quarter.  GE still has a lot of restructuring in its future as it sheds more of its GE Capital businesses.  This stock is not for the impatient.

The Biggest Retirement Mistakes Investors Make

According to Forbes, the single biggest mistake that people make is “winging it.”

Operating without a financial plan and — maybe worse — having no idea how much they need to retire on ranks first because it can put investors years behind schedule.

The others are:

  • Starting too late.  Market gyrations, fund fees and other costs cost you, but nothing compares to the cost of getting a late start on saving and investing for retirement
  • Heading into retirement with expensive mortgages,
  • Overlooking the free money from employer matching funds for 401(k) plans,
  • Failing to consolidate their accounts — increasing the likelihood that they’ll lose retirement money through forgetfulness, poor record keeping or clumsy tax planning.
  • The tendency among investors to put their children’s financial needs before their own. In other words, they’ll sacrifice their well-being in retirement for their kids’ education, living and sometimes even lifestyle expectations. In truth, not becoming a financial burden in old age is the most generous thing parents can do for their kids.

How to Get Your 401(k) Ready for Retirement

In a recent Wall Street Journal article the writer gives those who are getting within 10 years of retirement six very useful ideas about getting their 401(k) plans prepared for the day they will actually leave work.

  1.  If you haven’t done it lately, review your 401(k) investment mix.: Typically after people enroll in employer-sponsored plans and make initial investment choices, they forget about how their money is allocated in the plan—sometimes for years.  Don’t let this happen to you.  It may mean that just as you should be getting more conservative you are actually increasing your risk.
  2. Beware of the rate sensitivity of fixed-income funds you own in your 401(k).:  Bonds traditionally were the safe-haven choice for near-retirees, but the bond market has changed and rising rates could result in losses just as retirement approaches.  Not all bond funds are created equal and caution is the watchword in today’s bond market.
  3. Look for greater variety within your 401(k).: When advisers construct portfolios for clients, they often include a mix of U.S. and international stocks, multiple types of bond exposure and, increasingly, “alternative” investments such as commodities and a variety of hedge-fund-like strategies.  So should you.
  4.  Use IRAs and other accounts to complement your 401(k).:  Too often people who change jobs leave their 401(k) behind at their previous employer.  When you leave, roll your 401(k) money into an IRA and don’t leave “orphan” accounts behind and unattended.
  5. Check whether your 401(k) plan includes a brokerage window, or self-directed account.: if your plan allows you to make your own investment decisions, you can often get greater variety and better asset allocation options than are offered in most 401(k) plans.
  6. Consider getting professional advice. : As you would expect we are 100{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} behind this recommendation.  In fact, if you want guidance with your 401(k), call us and see what we can do for you.

More People Seek Help About Making Retirement Money Last

From Financial Advisor magazine:

More people than last year are seeking advice on how to save for retirement and how to make their retirement money last, according to a TIAA-CREF survey released Tuesday.
In 2013, 63 percent of Americans who received financial advice sought information on saving for retirement, as opposed to 52 percent in 2012, the survey says. At the same time, 54 percent of Americans who received advice say they were looking for how to make their retirement savings last, a 9 percentage-point increase over 2012.
The TIAA-CREF second annual Financial Advice Survey included 1,000 Americans 18 years of age or older. …

What are the obstacles facing people seeking advice?  Nearly half say that finding an advisor they can trust.  The other reason that more don’t get advice is that they do not like talking to anyone about their finances.

Money and time are also drawbacks to seeking advice. Forty percent say financial advice costs more than they can afford and one third say they lack the time to seek advice.
Different demographic groups have different attitudes toward financial advice and planning, the survey found. Members of Gen X, those 35 to 44 years old, were the most likely to seek retirement advice. Eighty percent of Gen Xs seeking financial advice are looking for more guidance about how to prepare for retirement. Gen X also is the largest segment of the American population to rely on financial service provider Web sites or online tools for financial advice, the survey says.

The problem with using the Internet to get financial advice is that while it pretends to provide customized advice, it really does not know you  personally and is unable to ask the questions that a personal financial professional is able to.   In the end, using the computer to get guidance reminds us of the old saying about computer analysis: “garbage in, garbage out.”

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