Archives

Change Jar

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.

SPONSORED: The $16,122 Social Security bonus most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known Social Security secrets could help ensure a boost in your retirement income. For example, one easy trick could pay you as much as $16,122 more each year. Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies. 

Change Jar

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!

vidsplash1

Trap

Opinion: Beware the Dow 20,000 trap

Reposted from MSN.COM

Editor’s note: The opinions in this article are the author’s, as published by our content partner, and do not necessarily represent the views of MSN or Microsoft.It’s tempting at moments like this to ask why you bother having any money in international stocks at all.Wall Street is hitting new highs. The U.S. economy is growing faster than its international competitors. The U.S. dollar (DXY)  is booming. Apparently we’re about to erect Fortress America around our markets and hit our foreign rivals even harder. U.S. stocks have soundly beaten those of the United Kingdom, Japan, and the European Union over the past one-, three-, and five years. U.S. stocks have surpassed emerging markets handily over the past five years as well.

No wonder the latest mutual fund data shows investors pulling money out of global funds and tossing it at U.S. stock . What’s not to like about the Dow Jones Industrial Average (DJIA)  the S&P 500 (SPX) , or the Nasdaq (COMP)?

But if you’re a mainstream investor — rather than a trader — and you’re tempted to sell your international stock funds, you might want to think again.

The latest massive outperformance of U.S. stocks is not the first in recent history and will not be the last. But hard-numbers analysis show that it has generally been a bad move to concentrate too much of your investments on one market, especially that of your own country. Despite the temptation, it raises your risks and lowers your returns.

Data going back almost 50 years show that the investors who made the biggest returns with the lowest volatility resisted the siren song of the latest boom and spread their money evenly across multiple markets, including both the U.S. and overseas.

Stock-market data supplied by MSCI, the financial information company, shows that one of the best strategies you could have pursued over the past half-century was just to invest equally in the U.S., Europe, the United Kingdom, and Japan. All you had to do was rebalance your portfolio every so often, trimming whichever had just done best and buying more of what had just done the worst, being mindful to keep the allocation at 25% each.

That strategy has outperformed a U.S.-only strategy by about 12% overall since 1970 — meaning someone who followed it would be about 12% richer. At that’s even after counting the huge U.S. run of recent years.

Richard Branson: ‘Thousands’ will go to space soon Two years after a fatal accident, Virgin Galactic launched its first successful test flight in September. Richard Branson, Elon Musk and Jeff Bezos are racing to send tourists to space. Branson talks to MarketWatch about the future of space travel.

After looking at the data I wondered how much was due to a one-off “Japan” effect — Japan in the 1970s was essentially an emerging market that succeeded in spectacular fashion, and it produced big stock market gains at a time when the U.S. and Europe both struggled.

But even after excluding Japan from the numbers, the international strategy held: A portfolio equally spread across Europe, the United Kingdom and the U.S. has outperformed that of just the U.S. since 1970, by about eight percent.

Interestingly, these portfolios also beat a simple investment in the MSCI World index. Logically, “rebalancing” between four or three equal parts reduces your exposure to the world’s latest overheated market, and increases your exposure to the world’s unloved bargains.

We’ve been here before. The last time people were saying “Why own anything but the S&P 500?” was in the late 1990s. Then, too, Wall Street had just spent five years massively outperforming the rest of the world. It was human nature to assume it would continue. It didn’t. From 1999 through 2007, and especially from 2002 onwards, the picture was almost exactly reversed. International stocks crushed the returns in the US.

One of the big, underappreciated issues with “index investing” is to pick the right indexes. It was a big mistake to focus only on the S&P 500 in the late 1990s, as many did. It would be a mistake again now.

It makes no sense at all to assume that the U.S. presidential election results somehow reduce the equity risks of the U.S. (or other markets). The strong dollar is a headwind for U.S. exporters, and a wonderful boon for overseas competitors, whose goods will now be cheaper here. The plunge of the Mexican peso since the election — it is down about 10% against the dollar — is great news for Mexico’s exporters.

If you have a strategy of U.S., international, and emerging-market stocks, history and math both say you should stick with it and ignore this year’s hot fashion.

Larry Swedro at Computer Monitors

Swedroe: Checking In With The ‘Gurudex’

Larry Swedroe

One of my favorite sayings about the market forecasts of so-called experts is from Jason Zweig, financial columnist for The Wall Street Journal: “Whenever some analyst seems to know what he’s talking about, remember that pigs will fly before he’ll ever release a full list of his past forecasts, including the bloopers.”

You will almost never read or hear a review of how the latest forecast from some market “guru” actually worked out. The reason is that accountability would ruin the game—you would cease to “tune in.” But I believe forecasters should be held accountable. Thus, a favorite pastime of mine is keeping a collection of economic and market forecasts made by media-anointed gurus and then checking back periodically to see if they came to pass. This practice has taught me that there are no expert economic and market forecasters.

Thanks to research compiled by the team at InterTrader, we can examine the 2015 stock market recommendations from 16 leading investment banking firms. They produced what they called the Gurudex.

How The Gurudex Works
InterTrader’s prediction data was sourced from The Motley Fool website for the period from Jan. 1, 2015 through Dec. 31, 2015. They collected the date of the prediction, the starting and ending prices, and the prediction itself (buy or sell). Because almost all the predictions did not specify a “time frame” for the investment, they provided results for 30-, 90- and 180-day investment periods, though all positions were closed out at the end of the year.

A guru’s prediction was deemed accurate if the sell price was higher than the buy price for the selected investment period—a very low bar. When reviewing the results, keep in mind that they do not account for transaction costs. The following is a summary of their findings:

  • For the 30-day investment period, 55 percent of the recommendations produced a gain. The total return of all the forecasts was just 0.8 percent, less even than the return one could have earned using an FDIC-insured deposit account from an online bank. It’s also less than the 1.3 percent return of Vanguard’s 500 Index Fund (VFINX), which does include all costs. Nine of the 16 investment banking firms posted accuracy percentages above the 50 percent mark, and six came in below. The highest accuracy rate was 74 percent for Barclays. However, the total gain of the firm’s predictions, before trading costs, was just 2.5 percent. The lowest accuracy rate was 33 percent for Mizuho. And that firm’s total return was an ugly -11.2 percent.
  • For the 90-day investment period, 49 percent of the recommendations produced a gain, with the aggregate average loss being 1.5 percent. Now, just seven of the 16 firms had an accuracy rate above 50 percent, and seven had an accuracy rate below 50 percent. Nomura posted the highest accuracy rate with 70 percent. However, the total return of the firm’s predictions, even before expenses, was -2.3 percent. Citicorp now had the worst accuracy rate at 14 percent. Its total return was -14.1 percent.
  • For the 180-day investment period, just 42 percent of the recommendations produced a gain, with the aggregate average loss being 3.7 percent. Only three of the 16 firms had an accuracy rate greater than 50 percent, while 10 of them had an accuracy rate below 50 percent. BMO Capital Markets had the highest accuracy rate at 58 percent, but its predictions produced a total gain, before expenses, of just 0.8 percent. Amazingly, Canaccord Genuity put up a 0 percent accuracy rate. I don’t think you could get a score of zero if you actually tried to do that. Its predictions produced a total return of -12.9 percent.
  • Using the end of the year, 43 percent of the recommendations produced a gain, with the aggregate average loss being 4.8 percent, pre expenses. Just four firms had accuracy rates above 50 percent, while 10 had rates below that figure. Nomura’s 60 percent accuracy rate was the highest, although its total gain, before expenses, was just 2.8 percent. Citicorp’s 14 percent accuracy rate was the lowest, and its recommendations earned a total return of -3.1 percent.

Conclusion

The preceding data serves as a reminder of the wisdom in Warren Buffett’s words of advice on the subject of the value of stock market forecasters: “We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

 

Risk

Don’t Let Wall Street Fool You Into Taking Too Much Risk by Tim Maurer

Tim Maurer

Personal finance is more personal than it is finance.

Opinions expressed by Forbes Contributors are their own.

Competition for your dollars creates an inertia that always seems to lead Wall Street down the path of unhelpfully increasing the risk in your portfolio. The recent Wall Street Journal headline, “Bond Funds Turn Up Risk,” illustrates an especially alarming trend. Specifically, of increasing the risk in the part of your portfolio that should be reducing overall risk—bonds.

Bonds are supposed to be boring. The primary role they serve in our portfolios is not necessarily to make money, but to dampen the volatility that is an inevitable byproduct of the real moneymakers—stocks.

Yes, interest rates are low. Yes, it’s frustrating. Yes, it’s tempting to reach for higher yields in fixed income investments. But there is a price to be paid for that decision, as we saw last December when there was a run on high-yield “junk” bond funds.

Wall Street has capitalized on low-yield frustration by articulating the “problem” while claiming to have manufactured the “solution.” It’s Sales 101. But the potential gain in higher returns (from corporate bonds, junk bonds, international bonds and dividend-oriented stocks) isn’t worth the excess risk taken.

Here are four ways to ensure you’re not getting fooled, and to help you eke out a bit more interest without additional risk:

1) Take the Gut Check Test to better understand how much risk you’re really willing to take. Then take that level of risk where you’re better rewarded for it—in equities, not fixed income that comes with a shinier wrapper.

Gut Check Test Table

(The preceding test should not be considered a replacement for a deeper risk-tolerance analysis with a knowledgeable financial adviser. But you will get a better reading from it if you translate the listed percentages to the actual dollar amounts represented in your portfolio.)

2) Ensure you only have the highest-quality, lowest-credit-risk fixed income securities. Remember, bonds should be boring. Look for U.S. Treasurys and/or FDIC-insured CDs.

3) Lower expenses to the greatest degree possible. This is good advice whether you’re investing in stocks or bonds, but it’s especially important in the latter case because interest rates are currently so low. A best-case scenario is to create a ladder of individual fixed-income securities, completely eliminating mutual fund expenses. But, if you lack the knowledge or access to do so, look instead for index-oriented mutual funds, not actively managed funds (which can also increase the risk in your portfolio without your even knowing).

4) Increase interest rates by looking at CDs over Treasurys. My colleague, Larry Swedroe, noted in a recent article that “the yield on five-year Treasurys was just 1.23%. CDs of the same maturity were available with a yield of 1.85%. That’s an improvement of 0.62 percentage points. For 10-year CDs, the gap was even greater, with 10-year Treasurys yielding 1.7% and 10-year CDs available with a yield of 2.4%, or 0.7 percentage points higher.”

What is the ultimate goal of investing? Most answer, “To make money.” But I dispute that conclusion. In my view, the goal of investing is to have a better life, and that means understanding the stress that comes from unnecessary risk-taking. The goal of investing in stocks is to make money. But the goal of investing in bonds is to help us weather the inevitable periods of volatility inherent in equity investing. Don’t get fooled into believing otherwise.

I’m a speaker, author of “Simple Money” and director of personal finance for Buckingham and the BAM Alliance. Connect with me on Twitter, Google+, and click HERE to receive my weekly email.

 

Carl Richards Is it Worth it

Is It Worth It?

In life, there are certain non-negotiables we simply must have. Think food, water and shelter for starters. Nobody will ask, “Is it worth it to eat?” It’s just something you do to stay alive.

But deciding what to eat? That’s a different question. Will you eat the bologna or prosciutto? Drink tap water or bottled? And anything discretionary — anything that has even the slightest element of choice in it — invariably deals with a question we find ourselves asking all the time: “Is it worth it?”

Alas, there is no objective answer to that question, so we often want someone else to answer it for us. But in the end, we have to answer it for ourselves. There is no right or wrong answer — just one that does or doesn’t work for you. But it doesn’t mean there aren’t clever ways to think about the question. These three functional relationships can help you identify whether something is worth it: utility, enjoyment and cost.

Carl Richards Is it Worth it

Utility: While spending more for an item that can be purchased for less may seem crazy at first, consider whether the more expensive item will last longer or is a better fit — especially if it’s something you’ll be using regularly. If so, it could be worth buying because of how much use you’ll get out of it.

Enjoyment: If you don’t enjoy something, it’s not going to be worth it. For instance, imagine the choice is between a cheap can of sardines or some wild-caught Alaskan salmon. Regardless of the price, if you don’t eat it, neither one was worth it. However, if you happen to be partial to lox, you would most likely find the salmon to be completely worth it. The sardines, on the other hand, may find their way to the back of some cupboard and never be used. They may have been less expensive, but if you don’t enjoy them, they won’t be worth it.

Cost: It’s not always the most expensive stuff that’s worth it (because of how, or how much, you use or enjoy it). It might be something that’s an incredible value, like the inexpensive ice cream scooper that works every time.

Of course, things that cost almost nothing but give you a tremendous amount of utility or enjoyment are the secret little gems of the “worth it” world. But many decisions are not so obvious, particularly those in which the cost is high. And that’s when these three functional relationships can really help.

In the end, however, your answer is the only one that will count. The next time you are about to ask someone if something is worth it, don’t. Instead, ask yourself.

  • Contact us

  • This field is for validation purposes and should be left unchanged.
Contact Us