I’m sure you have seen those mutual funds ads where they brag about their performance. Well I have a new fund that blows most of them away! It’s called Bet on Red — 100% return last year — really! Watch the video for the whole story . . .
Archive for the ‘Investing’ Category
Bet On Red!
Thursday, February 25th, 2010Tax cut expiration makes Roth conversion more advantageous in 2010
Friday, February 5th, 2010With the Bush tax cuts expiring at the end of this year and unlikely to be renewed, taxpayers in the highest income brackets that are considering a Roth IRA conversion should think about doing it this year.
The highest federal tax bracket next year will go from 35% to 39.6% meaning the taxes on a $1,000,000 conversion will increase by $40,600 in 2011. If you will turn 59 and ½ next year you may want to consider waiting because the penalty for early withdrawal will expire for you next year lowering the tax on your conversion form 45% in 2010 (35% + 10% early withdrawal penalty) vs. 39.6% next year.
Young tax payers in any tax bracket with small IRA balances may also want to convert this year. That is because by converting now they will be able to shelter any future gains on their current IRA from taxes, and for a young person those gains could be substantial. For example the future gain on $10,000 for a 30year old could be $310,000 by the time the person reaches 70. In addition if your current IRA contributions were not tax deductible because your income was too high, most or all of your Roth conversion could be tax free.
One last benefit for converting in 2010 is that you are able to spread any taxes you do owe over a 3-year period vs. paying them all this year.
Investing – Some Lessons From 2009
Monday, January 18th, 20102009 was not a year for investors with weak stomachs. After a plunge of 46% from August,2008 through March, 2009, the U.S. markets started rising, recovering almost all of the losses since last August. The same was true for international stock markets. Unfortunately, many investors I spoke with locked in their losses by selling in late February, and then never got back in and missed the 50% rise from March on.
Lesson 1:
When the markets fall by 40% or more in a year it almost always signals we are near the bottom of the market. The major post-WW2 declines have been about 40% (1974, – 37% in 9 months; 2001-2, -35% in 14 months; 2008-9, -46% in 6 months). So once the market has declined sharply in a short period selling will almost guarantee a big loss.
Lesson 2:
Although the market declines are steep and fast, so are the rebounds (1974-5, +45% in 14 months; 2002-3, +47% in 14 months; 2009,+63% in 6 months). Most people who sell at the bottom are also slow to get back in since they are afraid of future declines and miss out on most of the rapid gain.
Lesson 3:
Younger investors should not be soured on investing. Poor market performance in their younger years could benefit them in the long-term. If you are in your 20s or 30s the markets have not seemed to be a great place to put your money. That is not long-term thinking. Your time horizon is at least another 30 years. The lower prices are now, the more shares you can buy and the more room your have for appreciation.
When Index Funds Perform the Best
Monday, November 2nd, 2009I read an interesting article in today’s Wall Street Journal about when index funds do the best vs. actively managed funds. Index funds do the best in the asset classes that are seeing the strongest returns. The study was based on a 10-year period from 1997-2007. The reason for this is active managers tend to deviate from their primary asset class (e.g. Large-Cap manager buying Mid and Small Cap stocks) when the primary asset class has performed poorly and then miss the quick run up when the primary asset class recovers.
Does this mean that you should use active managers for poorly performing asset classes? No. The problem with this conclusion is not that actively managers are picking better stocks in their primary asset class but they are moving outside their designated asset class to try and improve performance. When they do this they change your overall asset allocation and risk/return profile without telling you. If you wanted to you could do the same thing with index funds but at least you would be aware of the changes you were making.
The article also did not address if they active managers’ performance was after all fees and expenses. Actively managed funds have management fees that average 6x higher a low cost index funds. In addition if you buy an actively managed fund through a broker you load fees in addition. There is also the issue of taxes. An actively managed fund turns its stock portofilio over about 3x/year which could generate signficiant short-term capital gains on which the mutual funds shareholders are taxed on lowering their overall retrun. An index fund may only turn over 20% or less of its portfolio generating much lower taxable gains.
My advice: Stick with low-cost index funds, for superior long-term performance.
Index Funds Make Even More Sense in a Downturn
Monday, August 3rd, 2009According to the Wall Street Journal many large institutional investors are turning too index funds after finding that actively managed mutual funds have not performed well during the downturn.
They would rather have the guaranteed lower cost of an index fund vs. the unfulfilled promise of better performance through an actively managed fund.
This is the strategy that I use with my clients. Although some actively managed funds will out perform an index fund the percentage that do is actually less than chance would predict. It is also difficult to predict which managers will outperform and index fund year after year. This is especially true for bond funds. According to Morningstar the Vanguard Total Bond Market Index Fund has outperformed 83% of its peers over the last 10-years.
Index funds charge substantially less than their actively managed peers. A low cost index fund costs about 1% per year less than its actively managed peer. That means that the actively managed fund would have to outperform the index fund by 1% per year just to be equal. That is very difficult to do for almost all managers.
Asset Allocation is Like Democracy
Wednesday, July 15th, 2009
The Wall Street Journal says that asset allocation has “failed miserably” as an investment strategy. That is like saying democracy is a failed political system because it allowed the severe recession to happen. The problem with the WSJ analysis is that neither asset allocation nor democracy is a perfect system. Far from it; but the real measure of success of either is evaluated over the long-term not on a single year. In addition, no one has come up with an alternative strategy that has stood the test of time.
What I have seen from many new clients whose portfolios were managed by large brokers was no asset allocation strategy but just a random collection of stuff that the brokerage houses were trying to push on their clients. For clients who did have a semblance of an asset allocation strategy their broker had not explicitly explained the downside risk of their investment portfolio.
Here are two questions that you should always ask your advisor:
* What is my potential percentage loss on this portfolio (1%) chance?
* What is my potential dollar loss on this portfolio (1%) chance?
If she can’t answer those questions then you should find another advisor.
Retirement Withdrawal Strategies — Research Review
Monday, June 8th, 2009I just returned from the NAFPA National Conference which was held near Washington, DC. I’m still sorting through all of my session notes and handouts but I wanted to share a great session by Jonathan Guyton, CFP® who reviewed all of the recent research on retirement withdrawal strategies.
· If you want to withdraw a steady amount each year from your portfolio (adjusted for inflation) you can have an initial withdrawal rate of 4-4.5% per year.
· If you are willing to freeze your withdrawal in the year after your portfolio value declines then you can have an initial withdrawal rate of 5-5.5% per year.
· If you are willing to reduce your withdrawal by 10% the year after your portfolio declines then you can have an initial withdrawal rate of 5.5-6.5%.
The most interesting part of the presentation was a “stress test” of a client who retired in 1973 (our current worst case historical scenario). We had a big market decline in 1974 along with high inflation (which according to Guyton’s research is more dangerous to a retirement portfolio than market declines).
In all three cases the client had enough money to last until at least 2009 but in the first couple of cases the ride was very scary and most clients and advisors would likely abandon the policy. The third scenario (which allows for reductions in withdrawals) would be a lot easier to adhere to without the client or advisor having sleepless nights.
Although in the first scenario the withdrawal rate starts out low, the combination of a big market decline in the second year and high inflation mean that the withdrawal rate quickly reaches double digits if the client increases their withdrawals to keep pace with inflation. Although the withdrawal rate rises in the third scenario it is much less dramatic due to the ability to adjust the withdrawals based on the portfolio performance.
How do you who your Financial Advisor is really working for?
Saturday, March 28th, 2009Jason Zweig of the Wall Street Journal wrote a nice piece in today’s paper about the arcane world regulating Financial Advisors.
Most advisors are not required to work in your best interests. That includes any advisor at a bank (e.g. Chase, Bank of America, Citibank) or brokerage company (Merrill Lynch, Smith Barney).
Despite the nice ads stating how they really help you out, their approach is similar to a car salesperson that explains the feature of a car and sells you one that is “suitable” for you needs but not necessarily what he things would be best with you. Most people understand that about a car salesperson but not their financial advisor.
The National Association of Personal Financial Advisors NAPFA) has a great series of videos that you can watch at www.focusonfiduciary.com .
Higher Income makes it hard to Invest Enough for Retirement
Tuesday, March 24th, 2009It seems counterintuitive but having a higher income could make it harder for you to save enough to retire. Let’s look at two couples.
Couple 1:
Age: 45
Retirement Age: 65
Income: $400,000/year
Savings To Date: $500,000
Retirement Income Goal: $300,000/year (today’s dollars)
Less: Estimated Social Security $50,000/year*
Amount Needed from Investments: $250,000/year (today’s dollars)
Investment Income Needed 1st Year of Retirement: $547,866**
Annual Investment Needed***: $177,000
% of income to invest to meet Retirement Goal: 44%
Couple 2:
Age: 45
Retirement Age: 65
Income: $80,000/year
Savings To Date: $100,000
Retirement Income Goal: $64,000/year (today’s dollars)
Less: Estimated Social Security $40,000/year*
Amount Needed from Investments: $24,000/year (today’s dollars)
Investment Income Needed 1st Year of Retirement: $52,587**
Annual Investment Needed***: $13,000
% of income to invest to meet Retirement Goal: 16%
*Social Security could be reduced for higher income taxpayers in the future
** Assumes Inflation of 4%/year and Investment Return of 8% per year
***Increased by inflation rate each year.
The high income Couple needs to save 44% of their income vs. 16% for the moderate-income couple. Why? For the moderate-income couple Social Security will pay a much greater percentage of their retirement income. The Social Security tax is almost like forced retirement savings. The higher income couple is on their own to invest for retirement.
The message: If you have an income in this range or higher, it is even more important to invest a substantial portion of your income for retirement and not to let the fact that you can “afford” things now lead you to establish a lifestyle that will be unsustainable in retirement.
Index Funds Still Winners
Wednesday, February 25th, 2009I read an interesting analysis in the New York Times that compared a hypothetical stock index fund, with an actively managed stock fund, and a hedge fund. Because of higher fees and taxes the actively managed stock fund would have to outperform the index fund before taxes by an average of 4.3 percentage points per year to be a better long-term investment. The hedge fund would have to do 10 percentage points better over a 20 year period.
How many actively managed funds have pull off that feat – 13! You would have to be very lucky to figure out which 13 funds (out of several thousand) would be the ones to outperform over the next 20 years.
Read the whole article at http://www.nytimes.com/2009/02/22/your-money/stocks-and-bonds/22stra.html?scp=1&sq=index%20funds&st=cse