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A LONG-TERM PERSPECTIVE . . . . . . .

A Long-Term Perspective on the
Stock Market Downturn

Prior to Feb. 2, the stock market had been through a remarkably tranquil period. Since that date, the U.S. stock market has experienced multiple days with drops of 2 percent or more in a short period of time. Here, though, we will focus on the long-term investing concepts you should keep in mind, as well as historical context for market moves of this magnitude.

Short-Term Forecasting

Markets are notoriously difficult to forecast over any horizon, and this difficulty is only amplified over shorter periods of time. Nevertheless, this won’t stop some market “professionals” from trying. You would be wise to ignore these forecasts in your own decision-making. Yes, markets are currently extremely volatile, but that volatility might not continue and no one can reliably know whether stocks will move up or down from here. In fact, no one can even clearly know what caused the drop over the last week. Some commentary we have seen points to inflationary concerns while other pundits blame anxiety around the U.S. budgetary process. Still others believe the market is concerned the Federal Reserve may raise interest rates too quickly. Who’s to say which, if any, of those explanations are correct, much less what that implies going forward. What we do know, though, is that over the long term, you can expect to be rewarded for investing in a low-cost, diversified portfolio of stock funds.

The recent past shows us just how wrong consensus, short-term forecasts can be. Two recent examples are the post-financial-crisis prediction of higher interest rates and the expectation that the stock market would decline following the 2016 presidential election. Both predictions were clearly wrong, and investors who acted on them instead of focusing on the long-run evidence that markets tend to reward risk-taking were harmed.

Your Plan Incorporates Risk

One of the advantages investors have today compared to investors in the early part of the 20th century is that we now have decades-worth of data to help us understand long-run returns and risks. Our partner, BAM Advisor Services, maintains an extensive database of the risk profiles associated with the portfolios that we recommend to clients. This data allows us to incorporate risk into the way we build your financial plan, meaning that outcomes like the market falling by 2, 3 or 4 percent over a handful of days already are reflected in our recommendation. The BAM Advisor Services Investment Policy Committee is well aware that these events — however unpredictable — will eventually happen, and we therefore imbed this knowledge in the comprehensive planning process that results in your portfolio allocation.

Putting Market Risk in Historical Context

The following graph plots the historical annual return of the U.S. stock market in each year (in blue) from 1926 through 2017 and the largest intra-year decline (in light blue outline) that occurred in each of those years.

Annual Stock Market Returns and Intra-Year Declines
There are two primary takeaways from this graph. First, as we all know, the stock market goes up far more often than it goes down. Second, but possibly less well known, virtually every year includes a period of time where markets fell precipitously. It’s clear, though, that these intra-year declines don’t necessarily signal whether the market will be up or down over that particular year. But it does show that stock markets have and always will be risky, particularly over shorter periods of time.

Are There Any Actions to Take?

Given what we know, we obviously don’t recommend making drastic changes to your portfolio allocation as a result of short-term market moves already accounted for in the planning process. Your portfolio is well-thought-through and built to be highly diversified. But are there any other actions worth considering? If you haven’t recently, now could be a good time to reassess your investment plan from a long-term point of view. We’re always here to help with that endeavor.

Interest rates

5 ways the tax bill will affect your retirement

Re-posted from marketwatch.com

The $1.2 trillion tax overhaul that was signed into law by President Trump on Friday will affect your retirement in a number of ways.

The tax plan no longer includes lowering contribution limits on retirement accounts or nixing traditional individual retirement accounts in lieu of Roth individual retirement accounts (which would have shifted when retirement savers pay taxes on their savings), but it does address individual retirement accounts and increases the standard deduction (by almost double), which could affect the way people itemize their charitable donations. These changes would be for next year’s taxes, to be filed in 2019 — 2017 tax returns are due on April 17.

 When it comes to retirement, 60s are the new 50s

Here are five ways retirees will be affected:

Retirees will have to be more strategic about their IRA conversions

The new tax bill would stop what’s called “recharacterizations” of IRAs. Recharacterizations allow a person to undo their decision to rollover or convert accounts to Roth IRAs. Therefore, retirement savers who have already made these conversions this year should consider before the new year if they want to reverse them.

And contribute to charity twice every two years

Retirees likely won’t be itemizing since they don’t have many deductions, except for charitable contributions, property taxes and perhaps state income taxes, said Andrew Houte, director of retirement planning at Next Level Planning and Wealth Management in Brookfield, Wis. Some retirees may want to take advantage of Qualified Charitable Distributions, which allow them to donate directly to charity from their individual retirement accounts without having to itemize those donations (after 70 ½ years old). Because of the increase in the standard deduction, retirees may benefit from making more charitable donations, but less frequently — for example, donate twice as much, but every other year — which would help taxpayers by having more to write off than the standard deduction limit, said Scott Bishop, executive vice president of financial planning at advisory firm STA Wealth in Houston, Texas. More people may also invest in donor-advised funds instead of donating cash, he said.

Personal income tax rates are changing, but still important

Personal income taxes would be lowered for most households — to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Retirees will have to watch their income to avoid ending up in a higher tax bracket, Bishop said. Income includes withdrawals from retirement accounts, required minimum distributions and ordinary income. For example, people with large balances might want to begin distributions before turning 70 ½ years old, when they’ll be required to take distributions in some accounts — that way, when they get there, they won’t be forced into a higher tax bracket. It takes a little calculating, and predicting what income will look like in the future versus now, but it could save retirees money down the road.

Also see: The four worst things about the tax bill

Small businesses may not offer retirement accounts

Most 401(k) plans and similar defined contribution benefits are offered by large employers because they’re too expensive for small businesses to administer. Under tax reform, it may become even less advantageous for small businesses to host these accounts, said Trevor Gerszt, chief executive officer of CoinIRA, a company that allows savers to convert assets into digital currency, such as bitcoin. The bill reduces the income tax rate for small businesses but does not address offering or contributing to retirement plans, which are incentives to establish these accounts, according to the American Retirement Association.

Some retirees may want to move

Deductions for mortgage interest rates were left untouched, and $10,000 in local property taxes will be deductible on a federal level. That means income tax-free states will be best for retirees, according to Brett Anderson, a financial adviser and president of St. Croix Advisors in Hudson, Wis. Retirees are more easily able to move from state to state because they have no job tying them down, he said, which also means they can be more sensitive to the various income tax rates in various states. There are a few states that soar above the rest for tax-friendly states best for retirees, such as Nevada, New Mexico and Wyoming.

The new bill also reduces the maximum amount of mortgage debt a person can acquire for their first or second residence, to $750,000 for married couples filing joint tax returns (or $375,000) for those married filing separately, down from $1 million. This won’t affect home purchases before Dec. 16, 2017 so long as the home closed before April 1, 2018.

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To Save More, Focus on Your Needs, Not Your Wants

Re-posted from Investopedia

We all know that being able to save is very important when trying to grow assets. To eventually find financial freedom and have our assets give us the income that we need to live, we need to be able to live on a smaller amount of money than what we are bringing home. However, there are a lot of forces working against us trying to make us spend more. Marketers are getting smarter and more effective in getting us to overspend.

It is true that getting what you need for a smaller price is a good thing, however more people are falling into the trap marketers plant to make us buy more. To become financially successful, you need to understand the difference between buying on sale and being frugal.

Be Aware of Marketers Techniques Use to Make You Buy More

Marketers study human behavior. They know about the mood they need to put you in so that you buy more. They use color, scents, sounds and textures to convince you that you need their products.

Pricing is also an important tool they use. For example, recent research found that coupons actually have neurological effects on customers. They impact happiness and lower stress. Marketers understand that people want a good deal and offering coupons might be a way to get customers to feel good about purchasing their products.

As a financially savvy consumer, you need to be aware of the techniques marketers use so that you can be ready to resist to the temptation. (For related reading, see: Sneaky Strategies That Fuel Overspending.)

Focus on What You Want Versus What You Need

To be smarter with your money, you need to determine the difference between what you want and what you need. Needs are everything you have to have to be able to go on with your day. Besides food, water, shelter and clothing, there isn’t much more we substantially need. Depending on your career choice or goals you are aiming for, there might be other things you need to accomplish them.

The rest of the stuff we buy are wants! To become financially successful, you need to control yourself when dealing with your wants. You need a priority list to help you stay within your budget. This will ensure you have some money to invest for later.

What Is Frugality?

Frugality is not about depriving yourself. It’s not about living a substandard life. It is actually about avoiding waste. To stop you from spending money on stuff you don’t really need, you have to find out what is important to you. There are too many things we buy every day that we end up throwing away. The few dollars you could save can make a huge difference over the long term. Would it be worth it to be frugal with your money if it meant you afford something really important to you later?

Take a hard look at all of the money that you waste on small things and make a plan to control your “want” expenses. If you still decide to purchase a certain want and are able to to buy it on sale, more power to you. It’s time for you to take control over your money. Don’t let marketers dictate how to spend it.

(For more from this author, see: How to Build Your Financial Foundation.)

 

IMPORTANT DISCLOSURES: MoneyCoach LLC and/or Patrick Traverse offer investment advisory and financial planning services through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe), an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe Asset Management offers, or that or its personnel possess a particular level of skill, expertise or training. Insurance products are offered through Belpointe Insurance, LLC and Belpointe Specialty Insurance, LLC. MoneyCoach LLC is not affiliated with Belpointe Asset Management, LLC. 

 

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One thing you can do to … your retirement savings

Re-posted from MSN Money

Being able to contribute consistently enough to your retirement savings accounts is the most important aspect of any retirement plan, but it’s also by far the most challenging. So finding a way to make regular, adequate contributions easier is really the key to a successful retirement. And the best way to accomplish this is by having a written financial plan.

Why does a written plan help?

Self-help gurus uniformly urge their clients to write down their goals, plans, and dreams for a reason. Writing something down has a significant psychological impact on the writer: It makes that written declaration more “real” to us and gives us accountability. Once it’s in writing, we feel more compelled to follow through on it. For a task like saving for retirement, that feeling of accountability can make all the difference in sticking to a contribution plan versus having a plan but only contributing “when it’s convenient.” A written plan also motivates us by reminding us what we stand to gain tomorrow by sacrificing today.

The power of written financial plans

A recent study by Charles Schwab highlighted the impact that written financial plans have on retirement savings. The study compared various financial attributes of Americans with a written financial plan to those who did not have one. For many important financial tasks, the difference between the two groups was startlingly high.

For example, 27% of savers with written financial plans maxed out their contributions to their retirement savings accounts, compared to 11% of savers without plans. Thirty-four percent of savers with written financial plans had investments in addition to their retirement investments, versus only 16% of those without written plans. And 49% of savers with written financial plans felt very confident in their ability to reach their financial goals, as opposed to just 13% of those without written plans.

Starting your financial plan

Financial plans come in many forms — debt payment plans, down payment savings plans, investing plans, and so on. And while the idea of creating a financial plan may sound daunting, in reality such a plan can be extremely simple, as you’ll see shortly. We’ll focus on a retirement savings plan, but the principles are similar for creating any type of financial plan.

First, your plan needs a goal. For a retirement savings plan, the goal will typically be to save enough during your working years so that when you reach your planned retirement date, you will have enough money to live comfortably for the rest of your life. Because different savers have very different ideas of what “living comfortably” entails during retirement, the exact number you end up with as a savings goal will depend largely on your own preferences and situation.

In order to know how much money you’ll need to save for retirement, you first need to figure out how much you’ll be spending during that time. Ideally, you’ll write up a list of the expenses that you expect to carry during retirement and add them up. If that sounds like too much work, you can get a pretty fair estimate based on your current income.

If you anticipate a fairly sedate retirement without a lot of fancy, expensive activities, you can assume for planning purposes that 80% to 90% of your current income will suffice as annual income during retirement. Aim for the low end of this range if you’re sure you’ll be debt free by the time you retire (that includes owning a home that’s completely paid off). Otherwise, aim for at least 90% of your current income. On the other hand, if you dream of an adventurous retirement touring the capitals of the world, aim for at least 100% of your current income (or possibly even more, if you have really expensive plans).

Making it official

Once you have a goal for your retirement income, you can plug that number into a retirement calculator to find out how much you need to save in order to hit your target by your planned retirement date. Let’s say that your goal is to save $1 million by age 65 and the retirement calculator tells you that in order to reach your goal, you need to save $1,000 per month. Write this down in a form that will inspire you to follow through. For example, you might write “Millionaire by age 65: $1,000 every month into the 401(k).” Then post a copy of this document somewhere you’ll see it on a regular basis, such as next to your bathroom mirror, on the front of the refrigerator, or attached to the side of your computermonitor.

Just having the plan in writing, staring you in the face on a regular basis, can work wonders to improve your follow-through.

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6 Money Saving Tips You Can’t Afford To Miss

Re-posted from AICPA.ORG

6 Money-Saving Tips You Can’t Afford to Miss

Those fun, light-hearted GEICO commercials that ask if you are tired of paying too much for car insurance hone in on the idea of wasting your money –– paying too much for something or not getting enough.

As a CPA who is passionate about making my hard-earned money work for me, it’s important to take time to critically analyze what my cash is doing. Busy lives often lend themselves to costly complacency in one’s personal finances. Basically, we want bill paying done and our retirement planning intact with as minimal effort as possible.

At least once per year, I do a serious deep-cleaning scrub on my family’s finances. I look at what we’re paying and why, and I see where we need to do better. This “scrub” saves us thousands of dollars and I suggest each of you take a few hours each year to review your finances critically. Don’t let your money run itself; it needs you to keep it on track.

Here are six tips to make your money work for you (consider sharing these with your clients):

  1. Carefully review your credit/debit card auto-drafts.

Did you join Consumer Reports to get insight on what car to buy and forget to cancel it after your purchase? Or sign up for other subscription services that you haven’t used in months? Review your statements for these $10-20 no-value bills. Though small, they add up quickly.

On the flip side, auto-draft anything you can to your credit card. You’ll consolidate bill paying, and get paid to pay your bills. Often, electricity, water, cable, etc., can be auto-drafted. One can easily earn hundreds of dollars each year (in points and rewards) by effectively using a credit card. But, don’t forget to pay off the balance each month! Interest on credit cards is extremely costly. I suggest setting up another auto-draft to pay your credit card bill directly from your bank account.

  1. Bundle your insurance (home, automobiles, etc.), and scrutinize rate increases.

These bills can significantly fluctuate each year as your insurance carrier offers new incentives or changes its rates (sometimes arbitrarily). This year, I noticed our home and auto insurance went up by about $1,500. After calling my agent, I learned that there was an explanation for some of it (insurance regulation hiked up the price), but there was no excuse for the bulk of it. After asking my agent to price shop, I decreased my bill and increased my coverage. My agent wasn’t going to do this price shopping without my nagging, but a five-minute phone call saved me over a thousand dollars.

  1. Review your investments.

Make sure you are deferring appropriately to your 401(k), taking advantage of company matches and profit sharing plans. Also, ensure you’re planning for retirement with other investment vehicles (IRAs, etc.). Review your portfolio, making sure it’s well-balanced. Consider contacting your 401(k) or brokerage adviser to confirm your investments (as a whole) keep your plans on track. Consider making serious adjustments the older you get; the closer you are to retirement, the less risk you may want to take.

  1. Know the market rates for cell phone plans, cable, internet, etc., and don’t be afraid to negotiate.

Cell phone rates have actually gone down recently as more competition enters the market. If you bundle plans with family members, you may be able to save even more. Plus, many employers offer their employees discounts for certain carriers.

Cable/internet, for example, is a bill that I need to renegotiate each year. Otherwise, they go up significantly. Call your cable/internet company and ask about promotions, and let them know you’re not happy that your bill went up. Talk to someone in their customer retention group. They usually have more flexibility to keep your rates lower (or offer you freebies like premium channels) to keep you from switching to a competitor. If it doesn’t go well the first call (and you have time and patience), call back. A different representative may give you a better deal.

  1. Review your debt financing and interest rates.

Prioritize what to pay off quickest based on which item has the highest interest rate. Explore where you may be able to decrease interest rates by re-financing or consolidating debt. Make an extra payment that goes directly to principal. You can save significant money by paying off your debt sooner.

  1. Know what you’re worth (net equity).

Annually, prepare a financial statement. Add up your assets (cash, investments, property, etc.) and subtract your liabilities (loans, etc.) to yield your net worth. Are you too heavily in debt, or saving enough for retirement? These are important questions to know your true financial health.

I use Mint.com (a free application) to track our family’s progress, but a simple spreadsheet or other system works. The point is: don’t let your finances be a surprise to you.

The AICPA is committed to helping us achieve financial security. Visit feedthepig.org for additional tips and resources to help you budget, invest and reduce debt.

Susan C. Allen, CPA, CITP, CGMA, Senior Manager, Tax Practice and Ethics-Public Accounting, Association of Certified Professional Accountants

Senior woman with a piggy bank isolated on white background.

Want to Be Rich?

Reposted from www.msn.com

Money Talks News

Stacy Johnson 9 hrs ago

I’ve been offering financial advice professionally for nearly 40 years. I’m also a millionaire several times over.

During my decades in the trenches, I’ve heard every conceivable piece of financial advice, acted on many and offered some of my own. Here are the best of the best, a few simple sentences you can follow that will absolutely, positively make you richer.

  1. Never spend more than you make, ever.

When I was 10, I started cutting grass to earn money beyond my meager allowance. Minutes after earning my first buck, mom was stuffing me in the car for a trip to the bank to open my first passbook savings account.

Fifty years later, priority one is still to put something aside from every paycheck and send out less than I bring in. Of course, life being what it is, it hasn’t always worked out that way. But in general, getting richer every month is as simple as spending less than you make and getting poorer is as simple as spending more than you make.

  1. Avoid debt like the plague.

Most people treat debt as if it’s a normal part of life. They divide it into categories like “good debt” and “bad debt.” They discuss it endlessly, as if it’s some mathematical mystery.

Debt’s not complicated. Paying money to temporarily use other people’s makes you poorer. Charging money to temporarily let other people use yours makes you richer.

Since paying interest makes you poorer, you only do it two situations: first, when you have to in order to survive;  second, when you’ll earn more on what you’re financing than what you’ll pay to finance it.

Unless borrowing is ultimately going to make you richer, don’t do it.

  1. Buy when everyone is freaking out and sell when everyone thinks they can’t lose.

Rich people ring the register when the economy is booming, but that’s not when they created their wealth. You get richer by investing when nobody else will: when unemployment is high, the market is tanking, everybody’s freaking out, and there’s nothing but fear and misery on the horizon.

The cyclical nature of our economy all but ensures bad times will periodically occur, and human nature all but ensures that when bad times happen, most people will freeze like a deer in the headlights. But it’s downturns that are the time you’ve been saving for.

If you think the world is truly ending, buy canned food and a shotgun. If not, step up. As billionaire investor Warren Buffett famously advised, “Be fearful when others are greedy and greedy when others are fearful.”

  1. You can either look rich or be rich, but you probably won’t live long enough to accomplish both.

When I worked as a Wall Street investment adviser, I quickly learned that people who have tons of money most often don’t look like it. They don’t have to. So who are the big shots wearing the fancy suits and driving the Porsches? Often it’s the people who make a living selling stuff to the rich people.

I can’t remember the last time I wore a fancy suit. I’ve never owned a new car, and I live in a house that’s worth about a third of what I could afford.

Diverting your investable cash into things like cars, clothing, vacations and houses you can’t afford will make you look rich now, but prevent you from actually becoming rich later.

  1. Live like you’ll die tomorrow, but invest like you’ll live forever.

You should always strive to get as much out of life as you can each and every day. After all, you could die tomorrow.

But here’s the thing: You probably won’t. Put something aside so you can continue soaking up what life has to offer for as long as possible.

  1. There are only six ways to get rich.

The only ways to get rich:

  1. Marry money
  2. Inherit money
  3. Exploit a unique talent
  4. Get exceedingly lucky
  5. Either own or lead a successful business
  6. Spend less than you make and invest your savings wisely over long periods of time.

Even as you’re aiming for any of the first five, practice the last one and you’re guaranteed to be rich eventually.

  1. The riskiest thing you can do is take no risk.

Whether it’s money, love or just life in general, if you want rewards, you have to take risks.

When it comes to money, taking risks means investing in things that can go down in value, like stocks, real estate or your own business. Can you get through life without taking risks? Sure, but as my dad was fond of saying, you’ll never get a hit from the dugout.

Invest $200 a month at 2 percent for 30 years, and you’ll end up with a little less than $100,000. Earn 12 percent on the same investment, and you’ll end up with nearly $900,000. Taking a measured amount of risk is the difference between getting rich and getting by.

That being said, making risky bets is simply gambling. Take measured risks. Minimize risk by knowing as much as possible before investing, not putting all your eggs in one basket and learning from your mistakes. Or better yet, learn from someone else’s.

  1. Never make your well-being someone else’s responsibility.

If you need surgery you have little choice but to trust your fate to a professional. But when it comes to your money, don’t ever turn over complete control to anyone.

Seeking advice is always a good idea. But no matter who that adviser is or how smart they are, your money is more important to you than it is to them. So if you’re not doing everything yourself, at least understand exactly what’s going on.

Virtually anyone can learn to navigate their finances. If you can’t be bothered to take responsibility for your own money, just keep in the bank. At least that way you won’t end up ripped off, broke and blaming someone else for your problems.

  1. When it comes to information, less can be more.

About 15 years ago, I put about $2,000 into Apple stock. As I write this, it’s worth about $300,000. Had I been watching financial news all day and reacting to all the pundits and market news, I’d have sold it long ago and been kicking myself today.

If you want to be rich, buy into high quality stocks and hold on to them for long periods of time. If you want to kick yourself, buy into high quality stocks, then sell them at the drop of a hat based on something or someone you saw on air or online.

  1. Time isn’t money; money is time.

Whoever said “Time is money” had it backwards.

Time is the one nonrenewable resource you have. Once your time is up, it’s up. So the trick is to spend as much of your limited time as possible doing stuff you want to do rather than working for other people doing stuff you have to do. Money is the resource that allows you to do this.

If you go to the mall and spend $200 on clothes, that’s $200 you could have invested. If you’d earned 12 percent on that $200, in 30 years you’d have accumulated a little more than $10,000. Ignoring inflation and assuming you could live on $5,000 a month, forgoing those clothes today means retiring two months earlier.

Of course, you must have clothes. But maybe you don’t need $200 worth, or maybe you could have gotten them for less at a consignment shop. It’s your choice: expensive stuff today or free time tomorrow. Those who choose the former often stay poor. Those who choose the latter often get rich.

Which will you choose?

 

Women stressed over finances

When Should You Rebalance Your Portfolio?

Reposted from MSN Money

Even if a family member’s poor money skills won’t affect your pocketbook, sometimes a money conversation is necessary.

Rebalancing is an important (and often overlooked) step in creating and maintaining a diversified investment portfolio that is also consistent with your risk tolerance.

After you set up your initial asset allocation, the different investments in your portfolio will gain or lose value as the market goes up and down. Since your underlying holdings are not the same, they will all behave differently as the market moves, some growing much faster than others.

In order to realign your current portfolio to your target asset allocation, you must rebalance.

Rebalance to align with your target asset allocation. When you first set up your asset allocation, you (ideally) did so with your risk tolerance, investment goals, and other considerations like time horizon in mind. In evaluating these factors together, you may be able to determine how conservatively you can be invested and still reach your goals.

[See: 8 Times When You Should Sell a Stock.]

Your individual risk tolerance is a key component here. Taking on more risk than you’re comfortable with to achieve a goal more quickly can have disastrous consequences on a portfolio. Truly risk-averse investors often panic and sell when the market sustains continued losses, only to re-enter when prices are high.

Whether you are working within the confines of your retirement plan or have a vast universe of investment options available in a rollover individual retirement account or brokerage account, creating an asset allocation that is appropriate for your varied goals can be complicated. Whatever you’re investing for, if you aren’t confident in your ability to develop and maintain a risk-adjusted diversified portfolio, consider working with a fee-only financial advisor and fiduciary.

When should you rebalance your portfolio? Rebalancing is the process of realigning your current portfolio holdings to your target asset allocation. What this truly entails is counterintuitive to many investors. When you rebalance, you sell positions that outperformed and use the proceeds to buy more of a position that did not grow as quickly.

Although this may be a bit painful for some, recall two important principles of investing: past performance does not indicate future results; and that holding a diversified portfolio can help mitigate losses during the market’s inevitable ups and downs.

Here’s an example. Suppose your target asset allocation contains the following: 50 percent large-cap U.S. equity, 20 percent small-cap U.S. equity, 15 percent foreign developed markets equity, and 15 percent U.S. fixed income.

Now suppose the following year your holdings are 55 percent large-cap U.S. equity, 30 percent small-cap U.S. equity, 7 percent foreign developed markets equity, and 8 percent U.S. fixed income.

As a result of the market, your portfolio is now weighted 8 percent more heavily toward equity than originally modeled. Further, the allocation to small-cap equity had increased 50 percent from the initial asset allocation.

Asset classes with more reward potential also carry greater risk. As these holdings benefit from a favorable market cycle, rebalancing involves liquidating out a portion of your holdings and redistributing the proceeds to other assets in your portfolio. This process can not only help protect your investments by limiting your exposure during a market downturn, but it can also help ensure you maintain adequate exposure to potential gains in other asset classes.

It is possible to rebalance your portfolio at any time, although it is typically only recommended once or twice per year. As you review your holdings, try to set bands in which you’re comfortable with an asset class straying from its target allocation. In another words, your holdings will continue to shift with the market, so it may not be worth rebalancing to correct a small 2 percent variation.

Tax consequences of rebalancing a brokerage account. When you rebalance a tax-deferred retirement account like a traditional IRA, 401(k), or 403(b), there are no immediate tax consequences. However, when you rebalance a taxable brokerage account, you will owe capital gains tax on your gains, even if you reinvest the proceeds. Selling other positions at a loss can help by offsetting your gains, but there may still be tax implications to the extent your overall gains exceed your losses. As such, if you’re planning on overhauling your investment strategy, you may want to do so over two years.

There can be other costs to rebalancing as well, such as trade fees and commissions. Working with a fee-only advisor can help offset the expense of rebalancing, as they do not receive commissions or sell products like insurance or securities.

An advisor can also help you develop your investment strategy and create a financial model to integrate all of your goals together in one cohesive plan. Self-managing investors often turn to financial products, like annuities or permanent life insurance, to help put cash to work when they’re unsure of how to create an asset allocation. Unfortunately, these types of products often carry very high fees for the investor and sizable commissions for the individual selling the product.

[See: 7 Stocks That Could Save Your Portfolio.]

Whether you’re focused on growing and preserving your retirement fund, a major purchase, or are just saving for the future, give your hard-earned investments the best opportunity for success.

Glasses on newspaper

Warren Buffett’s best investment tip for everyone: Index funds

Reposted from USA TODAY

When one of the world’s richest men provides free money tips, it’s worthwhile to pay attention.

Warren Buffett does so in the chairman’s letter contained in Berkshire Hathaway’s latest annual report, offering a strong vote of confidence for a blue-collar investment vehicle.

As with past Buffett essays, his most recent narrative, penned Feb. 25, provides valuable insights mixed with a prosaic discussion of Berkshire Hathaway’s operations. That’s part of Buffett’s literary style — spin yarns, go off on tangents, keep it simple.

Buried deep in the 27-page letter, Buffett recounted how he initiated a long-term wager nearly a decade ago and now has nine years of performance data that will determine who wins the bet.

Back then, he staked $500,000 to support his view that a mutual fund holding stocks in the Standard & Poor’s 500 index would beat a representative sampling of hedge funds. Only one hedge fund proponent, an investment manager named Ted Seides, took him up on it on the wager, choosing five portfolios that each invested in 20-plus hedge funds.

All performance results, the two agreed, would be measured net of fees, as is standard practice.

This was a blue-collar vs. white-collar proposition, a contest pitting a mainstream investment against portfolios reserved for the wealthy. Index mutual funds, open to anyone with a couple thousand dollars or less, are designed for the masses. Hedge funds, by contrast, are reserved for “accredited” investors — basically, people with incomes of $200,000 and up or net worths exceeding $1 million — and run by some of Wall Street’s sharpest minds. With one year to go, barring a market meltdown, Buffett’s bet looks like a winner.

Over the prior nine years, from 2008 through 2016, the blue-collar S&P 500 index fund appreciated 85.4% including reinvested dividends, beating all five funds that Seides selected (each was a portfolio investing in 20 or more individual hedge funds, as noted). The best hedge fund-of-fund rival was up 62.8% over the nine years, according to Buffett’s accounting, giving the latter a commanding lead.

Hedge fund managers have a lot more tools at their disposal than mainstream mutual funds. They typically can buy stocks long or sell them short, invest in currencies, commodities or other assets, trade options or — in short — seek out opportunities wherever they spot them. Index funds do just one thing — buy and hold the same stocks represented in the market index or basket that they track.

So why have the hedge funds lagged so badly? In part, it’s because their managers do try to outperform the market and often mess up, Buffett noted. In addition, the funds typically charge lofty expenses that include a fairly standard 2% annual bite plus 20% of any profits realized. A typical index fund, in comparison, charges around 0.2%, possibly a bit less, and the fund’s management team doesn’t take a slice of the shareholders’ capital gains.

As part of the bet, Buffett agreed not to disclose the names of the funds or the hedge funds they held, so we have to take his word that the performance numbers are accurate (he indicated he gets to view the audited results). Of significance, Buffett structured the bet by pitting his S&P index fund against the average results from multiple hedge funds. That was an important condition because it minimized the possibility that one hot hedge fund, by itself, could hit paydirt and win the wager. Rather, this was a bet comparing multiple hedge funds against the overall stock market, as represented by the 500 or so largest corporations.

The comparative results say a lot about the eroding effects that expenses can exert and the futility of active portfolio management. “When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients,” he observed.

Buffett’s hedge fund competition has deeper significance, as it says a lot about human behavior and psychology. In many respects, as Buffett acknowledged, the wealthy do receive the best products and services. But this isn’t necessarily the case when it comes to investing. In fact, this expectation of superiority can work against the rich.

“The financial elites — wealthy individuals, pension funds, college endowments and the like — have great trouble meekly signing up for a financial product or service that is available as well to people investing only a few thousand dollars,” he wrote. “The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket — you name it.”

But it isn’t necessarily so in the investment world, Buffett argued, pointing to the hedge fund contest as evidence. If anything, he cautioned upscale individual and institutional investors to beware the many advisers and consultants who play to these presumptions.

Buffett recounted that many people have asked him for investment advice over the years, to which he has regularly recommended low-cost index funds such as those holding stocks in the S&P 500.

“To their credit, my friends who possess only modest means have usually followed my suggestion,” he said. “I believe, however, that none of the megarich individuals, institutions or pension funds has followed that same advice when I’ve given it to them.”

2017

2017 ~ Take the Opportunity to Live Well

January 2017

Of the new year, celebrated Victorian poet Alfred Lord Tennyson said, “Ring out the false, ring in the true.” So in that spirit, we pose two questions:

  1. Do you feel wealthy?
  2. Do you feel “well-thy”?

In response to the first question, if you are like most people, your mind likely went to the size of your bank account. Change one small letter, and your perspective may have shifted dramatically. You may have found yourself thinking of your health, your family, your friends, your role in your community, your connection to a higher power, your career, your hobbies and more.

This begs the question, what really is “a rich life”? In his new book, “The Feel Rich Project,” Michael F. Kay says it’s about improving “our ability to live closer to our values … to build upon a foundation of appropriately aligned beliefs, behaviors, and habits.” He goes on to point out how, for so many of us, a nagging sense of dissatisfaction, of feeling that we are lacking, comes from a life in which our daily habits do not support our deepest values.

Another way to think about this is the common notion that we must first do the right things so we can have certain possessions or experiences in order to be truly happy. This way of thinking can be summarized as “DO, HAVE, BE.” Alternatively, focusing on who you want to be — from the standpoint of your character, your interactions with others, the legacy you wish to leave, what brings you joy — will lead you to do what is necessary to support those values, and you will end up with what you are meant to have. This way of thinking can be summarized as “BE, DO, HAVE.” The second philosophy not only takes the emphasis off external elements (which are much harder for us to control) but refocuses us on why we want to do or have something.

Manisha Thakor, director of wealth strategies for women for the BAM ALLIANCE, was recently interviewed for The New York Times article “How Much Is Enough?” The piece and subsequent reader comments about “enough” and its counterpoint “too much” underscore what a loaded question this is in modern life. It pertains to so many aspects of our experience — money, time, love and connection, to name a few. When our answers to “enough” or “too much” come from outside ourselves, they are difficult to control and can leave us feeling hollow.

So instead of making a list of New Year’s resolutions, why not consider a different project: Identify your core values and take whatever steps necessary to shift your daily actions in the direction of those beliefs. Looking at how you spend your time and your money will give you powerful clues about areas of your life that may be ripe for some tweaks. If family is a core value, what rituals can you put in place to ensure you are devoting the time you want to your loved ones? If financial independence is a core value, have you taken steps to fully finalize your estate, risk management and tax minimization plans? Is your spending aligned with your values?

As you begin 2017, we hope you see it as an opportunity to ensure you’re living a “well-thy” life. From all of us, we wish you a very Happy New Year!

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