January 18th, 2010
2009 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.
Posted in Investing, Money Values, Retirement Plans | No Comments »
December 11th, 2009
Even affluent families can easily overspend at this
time of year. Although one year of overspending will
probably not affect your long-term goals
significantly, a pattern of over spending certainly will.
Plus, if you have children think about the messages
and values you will demonstrate to them with your
spending patterns.
Here are some quick ideas to help you stay on
budget.
1. Make an overall budget and then assign
certain amounts to each category (e.g. Presents, Decorations,
Travel, etc.).
2. Have a plan for how you will pay for your holiday expenses before
you spend the first dime. (Hint: borrowing money is not an answer).
3. Assign each person responsibility for a category, (tip – assign the
most frugal to the budget items most likely to be exceeded.).
4. Suggest a holiday grab bag for adults so you are not buying gifts for
siblings, parents, etc. who may not need nor want a gift; or consider
a card exchange only.
5. Put all receipts in an envelope and review them on occasion to see
who has been naughty or nice with keeping to the budget.
6. Resist the urge to splurge, even with all of the sales and media
attention to them. What the media isn’t focusing on is the damage
to your long-term goals that overspending creates, even when you
buy on sale.
Posted in Budgeting, Money Values | No Comments »
November 2nd, 2009
I 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.
Posted in 401k and 403b Plans, Investing, News, Retirement Plans | No Comments »
October 22nd, 2009
According to the Wall Street Journal mortgage rates could be headed up now that the Federal Reserve is wrapping up its mortgage purchase program. The Fed bought large amounts for mortgage debt to stabilize the mortgage market and keep rates low during the recession. Without that support some are speculating that rates for a 30-year fixed mortgage could rise to 6% by next spring
Posted in Home Financing, News | No Comments »
August 25th, 2009
I know many people (including me) that have refinanced recently and lowered their monthly payments. However, not the entire reduced payment amount is real savings. Some of the lowered payment comes from stretching out the term on the loan. Below are the details of my recent refinance this spring:
Chris’ Mortgage Refinance:
Old Mortgage
Interest Rate: 5.875%
Amount Owed: $267,000
Monthly Payment: $1845
Terms: 30yr Fixed
Payoff Date: 2035
New Mortgage
Interest Rate: 4.875%
Amount Borrowed: $267,000
Monthly Payment: $1413
Terms: 30yr Fixed
Payoff Date: 2039
Lowered Monthly Payment: $432
Savings: ???
By refinancing it appears that I “saved” $432 per month, but how much did I really save?
New Mortgage (Shortened Term)
Interest Rate: 4.875%
Amount Borrowed: $267,000
Monthly Payment: $1412 $1671 (Includes $258 of principle payments to keep the same loan payoff date)
Terms: 30yr Fixed
Payoff Date: 2039 2035
Monthly Savings: $432 $174 ($432-$258)
In reality I was already making extra principle payments on the original loan to pay it off by 2026, which is 30 years from the date I bought my house. I recommend that you follow the same strategy when you refinance so that you do not inadvertently spend extra money by extending the period of your loan.
So be careful when you refinance. Although you will save, don’t use the opportunity to borrow more by extending your loan term. Make extra principle payments or save/invest that amount for retirement.
Posted in Budgeting, Home Financing | No Comments »
August 12th, 2009
The September 2009 issue of Consumer Reports Magazine has a report rating homeowners’ insurance. The three top rated companies were Amica, USAA, and Chubb. USAA is limited to people who have a connection to the military. All three carriers were rated highly for paying claims in a timely matter and the amount of the settlement.
Popular carrier State Farm was rated mid-pack and Allstate was near the bottom of the rankings.
The article has some great advice about raising your deductibles to save money, avoiding small claims which could raise your rates or get your dropped, and checking rates every few years.
You can read the article at www.consumerreports.org/ (online subscription required)
Posted in General, Insurance, Insurance, News | No Comments »
August 3rd, 2009
According 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.
Posted in 401k and 403b Plans, Fee-Only, Investing, Money Values, News, Retirement Plans | No Comments »
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.
Posted in Investing, News, Retirement Plans | No Comments »
June 8th, 2009
I 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.
Posted in Investing, Retirement Plans | No Comments »
April 7th, 2009
Recently two Long & Associates clients were featured in an ongoing series in the Wall Street Journal called “Savings Strategies”. In December, 2008 Mike Casner and John Stryker were featured, and on April 7, Jody Feczko and Rob Lukens were featured.
I’d like to publicly thank these clients and the many others who have been willing to open up their financial lives so that others can learn from their experiences.
To Read about John and Mike:
To Read about Jody and Rob:
Posted in Budgeting, Families, General, Money Values, News | 1 Comment »