Asset Allocation is Like Democracy

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 »

Retirement Withdrawal Strategies — Research Review

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 »

Long & Associates Clients Featured in the WSJ

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 »

How do you who your Financial Advisor is really working for?

March 28th, 2009

Jason 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 .

Posted in Fee-Only, Investing | No Comments »

Higher Income makes it hard to Invest Enough for Retirement

March 24th, 2009

It 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.

Posted in Budgeting, Families, Investing | No Comments »

How to check out your Variable Annuity

March 16th, 2009

I don’t really like variable annuities. They are very complicated and have a lot of hidden fees that most people don’t understand. Nonetheless, many of my new clients arrive at our first meeting with statements from variable annuities they have been sold.

Many of the annuities have a guaranteed value, or a guaranteed withdrawal amount. Most of my boomer clients with variable annuities are way over invested in stock funds within the annuity for people their ages so the cash out value would be substantially less than the initial investment or the guaranteed value with the market declines of 2008.

So were stuck with them for now. Now I’m wondering will the insurance companies be able to make good on all those guarantees my clients have been paying for. The Wall Street Journal just ran a great story on variable annuities.

Here is a quick quote from the article about the financial strength of some of the major annuity companies:

“Moody’s has “negative outlooks” on units of top-10 U.S. annuity sellers Lincoln, Hartford Financial Services Group Inc., Prudential Financial Inc., and Canadian giant Manulife Financial Corp., while ratings of units of American International Group Inc. are under review for possible downgrade. Last week, Moody’s downgraded units of Europe-based ING Groep NV to A1 from Aa3, giving them stable outlooks.”

Read the whole article

The states that regulate insurance companies do provide some protection for annuity owners. You can find out about your state’s insurance at www.nolhga.com

Here are some links to ratings agencies that rate insurance company financial strength

A.M. Best

Fitch, IBCA, Duff & Phelps

Moody’s

Standard & Poor’s

Weiss Ratings

Posted in General | No Comments »

Index Funds Still Winners

February 25th, 2009

I 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

Posted in Investing | No Comments »

Obama’s Housing Plan may Help you Refinance

February 19th, 2009

One element of Obama’s housing plan that caught my eye is the provision that allows homeowners with less than 20% equity in their homes to refinance.

Many of my clients have wanted to refinance but been stopped because they bought their homes recently and didn’t have enough equity. This would open that option to them.

Posted in Home Financing | No Comments »

What will you pledge to do?

January 27th, 2009

In his inauguration speech President Obama told our nation that it’s time to make the difficult decisions we have put off in the past, and the sacrifice is needed to achieve a better future.

In the spirit of Obama’s call to action what would you be willing to pledge to do to improve you own future and the future of the country?  The pledge can be in time, money, effort or a combination of those.

Please send me your ideas at mypledge@longfinancialplanning.com.

Look for your ideas on a future post.

Posted in General | No Comments »

Obama Plans to Keep the Estate Tax

January 12th, 2009

According to the Wall Street Journal President Elect Obama plans to keep the estate tax vs. letting it expire in 2010 as the current legislation calls for.  He plans to keep the exemption at $3.5MM.

What does this mean for you?  If you die and your net worth is less than $3.5MM you will not have any estate taxes.  If you have over $3.5MM then your will pay a tax of about 45% of the amount over $3.5MM.  There are many exemptions and credits available so that even if your estate is over $3.5MM you may not have to pay tax on some or all of the amount above $3.5MM.

It is likely that this $3.5MM limit will be raised with inflation over time.  Should you already have an estate over the $3.5MM limit or it will be shortly, you should make sure your estate plan is up to date.

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Posted in Estate Planning | No Comments »

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