Investing

How the Sequence of Investment Returns Can Negatively Impact Retirees

silver and gold coins

Photo by Pixabay on Pexels.com

A look at how variable rates of return do (and do not) impact investors over time.

What exactly is the “sequence of returns”?

The phrase simply describes the yearly variation in an investment portfolio’s rate of return. Across 20 or 30 years of saving and investing for the future, what kind of impact do these deviations from the average return have on a portfolio’s final value?

The answer: no impact at all.

Once an investor retires, however, these ups and downs can have a major effect on portfolio value – and retirement income.

During the accumulation phase, the sequence of returns is ultimately inconsequential.

Yearly returns may vary greatly or minimally; in the end, the variance from the mean hardly matters. (Think of “the end” as the moment the investor retires: the time when the emphasis on accumulating assets gives way to the need to withdraw assets.)

An analysis from BlackRock bears this out.

The asset manager compares three model investing scenarios: three investors start portfolios with lump sums of $1 million, and each of the three portfolios averages a 7% annual return across 25 years. In two of these scenarios, annual returns vary from -7% to +22%. In the third scenario, the return is simply 7% every year. In all three scenarios, each investor accumulates $5,434,372 after 25 years – because the average annual return is 7% in each case. (1)

Here is another way to look at it.

The average annual return of your portfolio is dynamic; it changes, year-to-year. You have no idea what the average annual return of your portfolio will be when “it is all said and done,” just like a baseball player has no idea what his lifetime batting average will be four seasons into a 13-year playing career. As you save and invest, the sequence of annual portfolio returns influences your average yearly return, but the deviations from the mean will not impact the portfolio’s final value. It will be what it will be. (1)

When you shift from asset accumulation to asset distribution, the story changes.

You must try to protect your invested assets against sequence of returns risk.

This is the risk of your retirement coinciding with a bear market (or something close). Even if your portfolio performs well across the duration of your retirement, a bad year or two at the beginning could heighten concerns about outliving your money.

For a classic illustration of the damage done by sequence of returns risk, consider the awful 2007-2009 bear market. Picture a couple at the start of 2008 with a $1 million portfolio, held 60% in equities and 40% in fixed-income investments. They arrange to retire at the end of the year. This will prove a costly decision. The bond market (in shorthand, the S&P U.S. Aggregate Bond Index) gains 5.7% in 2008, but the stock market (in shorthand, the S&P 500) dives -37.0%. As a result, their $1 million portfolio declines to $800,800 in just one year. (2)

Here is a good chart from investmentmoats.com which helps visually explain what how early negative returns in retirement could potentially impact final portfolio value:

jlFIqYt

If you are about to retire, do not dismiss this risk.

If you are far from retirement, keep saving and investing knowing that the sequence of returns will have its greatest implications as you make your retirement transition.

Sources

  1. blackrock.com/pt/literature/investor-education/sequence-of-returns-one-pager-va-us.pdf
  2. kiplinger.com/article/retirement/T047-C032-S014-is-your-retirement-income-in-peril-of-this-risk.html
  3. http://investmentmoats.com/budgeting/retirement-planning/explaining-sequence-of-return-risk-and-possible-solutions/
  4. https://retireone.com/sequence-of-returns/

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

How to Balance Portfolio Risk and Reward as You Get Closer to Retirement

jeremy-thomas-75753-unsplash.jpg

As you approach retirement, it may be time to pay more attention to investment risk.

If you are an experienced investor, you have probably fine-tuned your portfolio through the years in response to market cycles or in pursuit of a better return. As you approach or enter retirement, is another adjustment necessary?

Some investors may think they can approach retirement without looking at their portfolios. Their investment allocations may be little changed from what they were 10 or 15 years ago. Because of that inattention (and this long bull market), their invested assets may be exposed to more risk than they would like.

Rebalancing your portfolio with your time horizon in mind is only practical.

Consider the nature of equity investments: they lose or gain value according to the market climate, which at times may be fear driven. The larger your equities position, the larger your losses could be in a bear market or market disruption. If this kind of calamity happens when you are newly retired or two or three years away from retiring, your portfolio could be hit hard if you are holding too much stock. What if it takes you several years to recoup your losses? Would those losses force you to compromise your retirement dreams?

As certain asset classes outperform others over time, a portfolio can veer off course.

The asset classes achieving the better returns come to represent a greater percentage of the portfolio assets. The intended asset allocations are thrown out of alignment.1

Just how much of your portfolio is held in equities today? Could the amount be 70%, 75%, 80%? It might be, given the way stocks have performed in this decade. As a StreetAuthority comparison notes, a hypothetical portfolio weighted 50/50 in equities and fixed-income investments at the end of February 2009 would have been weighted 74/26 in favor of stocks by the end of February 2018. (1)

Ideally, you reduce your risk exposure with time.

With that objective in mind, you regularly rebalance your portfolio to maintain or revise its allocations. You also may want to apportion your portfolio, so that you have some cash for distributions once you are retired.

Rebalancing could be a good idea for other reasons.

Perhaps you want to try and stay away from market sectors that seem overvalued. Or, perhaps you want to find opportunities. Maybe an asset class or sector is doing well and is underrepresented in your investment mix. Alternately, you may want to revise your portfolio in view of income or capital gains taxes.

Rebalancing is not about chasing the return, but reducing volatility.

The goal is to manage risk exposure, and with less risk, there may be less potential for a great return. When you reach a certain age, though, “playing defense” with your invested assets becomes a priority.

Sources

  1. nasdaq.com/article/how-to-prepare-your-income-portfolio-for-volatility-cm939499

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

 

What is the Yield Curve, and Why is the Financial Media Concerned About it?

Wall Street sign in New York City

Why are investors and economists getting nervous about Treasury yields? Here is a brief explanation, starting with a clarification.

A yield curve is really an X-Y graph projecting expected rates of return for equivalent-quality bonds with different maturity dates.

But it is not just any yield curve that matters. When investors, commentators, and economists talk about “the yield curve,” they are talking about the graph plotting the interest rates of Treasuries: 3-month, 2-year, 5-year, 10-year, and 30-year notes. The “curve” is the line connecting their projected future yields. This Treasury yields snapshot is authoritatively referred to as: “the yield curve.” (1,2)

The yield curve normally slopes upward.

(Think “rise over run.”) In other words, the projected yields on the short-term Treasuries (at the left of the X-Y graph) are small compared to the projected returns on the 10-year and 30-year Treasuries. (2)

NORMAL YIELD CURVE

normalyieldcurve_r

When the economy is booming, the slope of the yield curve is often steep.

A thriving economy typically has significant inflation, and when investors see rising inflation, they assume the Federal Reserve will start raising interest rates. That belief leaves them cold on longer-term bonds, so the prices of those bonds begin to fall, and their yields correspondingly rise. (2)

The yield curve usually flattens when the Fed tightens.

It has been flattening lately, and some economists wonder if it will invert. When the yield curve inverts, interest rates on short-term Treasuries exceed interest rates on longer-term Treasuries. (2,3)

Inverted yield curves are strongly correlated with recessions.

In fact, every recession America has experienced in the last 50 years has been preceded by an inverted yield curve. Three times in the 1950s, however, an inverted yield curve failed to presage a downturn. (2,3)

INVERTED YIELD CURVE

Invertedyieldcurve_r-1

Right now, the 10s-2s gap is being closely watched.

This is the difference between 10-year and 2-year Treasury yields. It has been steadily declining since December 2015 (when the Fed began tightening), and it narrowed to less than 0.5% this spring. (2)

Looking back over the last half-century, the 10s-2s gap has slimmed to less than 0.5% five other times, with an inversion of the yield curve – and a recession – following each time.

Those recessions took time to arrive, though. On average, they began nearly two years after the yield curve inverted. (2)

Wall Street analysts have noticed a relationship between bear markets and recessions – the former tends to herald the latter.

As some study the flattening yield curve, they not only see a recession risk, but an accompanying risk of a stock market downturn, as well. (2)

Could their fears be overblown?

As MarketWatch noted, the flattening yield curve has been promoted by pension funds buying up greater quantities of zero-coupon Treasuries. The Fed, too, may have affected things due to its quantitative easing and ongoing forward guidance. (4)

Is a flatter yield curve a new normal, as former Fed chair Janet Yellen argued in 2017?

She felt the latest gradual flattening was actually a product of a changing relationship between the yield curve and the business cycle. If that is correct, investors could worry a little less about the Fed’s determination to maintain its pace of rate hikes. (Its latest dot-plot projects four interest rate increases in 2018.) The New York Fed recently put the chance of a 2019 recession based on the slope of the yield curve at 11%; in comparison, the chance was 40% on the eve of the Great Recession. (3,5)

Sources

  1. investopedia.com/terms/y/yieldcurve.asp
  2. schwab.com/resource-center/insights/content/eye-on-indicators-what-does-yield-curve-tell-us
  3. brookings.edu/blog/up-front/2018/04/16/the-hutchins-center-explains-the-yield-curve-what-it-is-and-why-it-matters/
  4. marketwatch.com/story/how-pension-funds-could-be-muddying-the-predictive-power-of-this-recession-indicator-2018-06-13
  5. bloomberg.com/news/articles/2018-06-13/fed-raises-rates-officials-boost-outlook-to-four-hikes-in-2018

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What an Investment Policy Statement is and Why You Should Have One

adult book business cactus

An “Investment Policy Statement” is a document that forms the foundation for an investor’s portfolio.

A good IPS outlines your entire investment plan

An IPS includes the asset allocation, the asset management approach, and your objectives, time horizon, risk tolerance, expected return, liquidity requirements, income needs, and tax concerns.

If you are a value investor, a growth investor, or a conservative investor, your IPS defines a strategy to invest your assets among diverse asset classes in a way that suits your preferred investment style.

Think of your IPS as long-term GPS for your portfolio.

The goal is to set the asset allocation in a way that can potentially give you the highest possible rate of return corresponding to an acceptable level of risk.

Your IPS keeps you from getting “off track” when it comes to investing.

You and your advisor should keep an eye on your portfolio to see that your invested assets stay within the allocation boundaries set by your IPS. This is why regular reviews are so essential.

Periodically, your portfolio may need to be rebalanced.

Here’s why. As months go by, the ups and downs of the investment markets will throw your asset allocation slightly or dramatically out of whack. As an extremely simple example, let’s say you start out with 25% of your assets in U.S. large caps, 15% in U.S. mid caps, 15% in U.S. small caps, 20% in foreign shares and 25% in bonds. Suddenly, small cap stocks have a great quarter, and thanks to the great returns, you wind up with 21% of your assets invested in small caps and only 19% in bonds. Great, right?

No. What’s actually happened is that your risk has increased along with your return. A greater percentage of your assets are now held in the comparatively risky stock market, removed from the bond market. So while the short-term gains have been great, it’s time to rebalance according to the parameters set by your IPS so that you can help reduce your risk exposure.

Rebalancing in Tax-Deferred Accounts

For tax-deferred investment accounts, this is easily done: you simply transfer assets among accounts to restore the target allocations. Future contributions occur according the IPS parameters.

Rebalancing in Taxable Accounts

When it comes to taxable investment accounts, it is usually best to ramp up future contributions to the underweighted funds rather than sell portions of a fund and trigger taxes.

Maintaining Balance

As a balanced investor your IPS should be designed to help you invest in a consistent, appropriate way, a way that matches your preferred investment style. Without an IPS, you invite impulse, emotion and a short-term focus into the picture.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

What a Target-Date Retirement Mutual Fund Is and How to Use It Properly

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Photo by Pixabay on Pexels.com

Are these low-maintenance investments vital to retirement planning, or overrated?

Do target-date funds represent smart choices, or just convenient ones?

These funds have become ubiquitous in employer-sponsored retirement plans and their popularity has soared in the past decade. According to Morningstar, net inflows into target-date funds tripled during 2007-13. Asset management analysts Cerulli Associates project that 63% of all 401(k) contributions will be directed into TDFs by 2018. (1,2)

Fans of target-date funds praise how they have simplified investing for retirement. Still, they have a central problem: their leading attribute may also be their biggest drawback.

How do TDFs work?

The idea behind a target-date fund is to make investing and saving for retirement as low-maintenance as possible. TDFs feature gradual, automatic adjustment of asset allocations in light of an expected retirement date, along with diversification across a wide range of asset classes. An investor can simply “set it and forget it” and make ongoing contributions to the fund with the confidence that its balance of equity and fixed-income investments will become more risk-averse as retirement nears.

In a sense, a TDF starts out as one style of fund for an investor and mutates into another. When he or she is young, it is an aggressive growth fund, with as much as 90% of the inflows assigned to equities. By the time the envisioned retirement date rolls around, the allocation to equities and fixed-income investments may be split closer to 50/50. (2)

With such long time horizons, TDFs are truly buy-and-hold investments.

That has definite appeal for people who lack the time or inclination to take a hands-on approach to retirement planning. TDFs also usually have low turnover, with some distributions taxed as long-term capital gains. (1)

Are pre-retirees relying too heavily on TDFs?

Putting retirement investing on “autopilot” can have a downside – and that may be worth an alarm or two, given Vanguard’s forecast that 58% of its retirement plan participants (and 80% of its new plan participants) will have all of their retirement plan assets in TDFs by 2018. So in noting the merits of TDFs, we must also look at their demerits. (2)

The asset allocation of a target-date fund is not exactly dynamic.

As it is geared to a time horizon rather than current market conditions, TDF investors may wince when a severe bear market arrives – it could be a case of “set it & regret it.” They will need the patience to ride such downturns out. If they sell, they defeat the purpose of owning their TDF in the first place.

Additionally, some investors are conservative well before they reach retirement age.

A fortysomething risk-averse investor might not like having a clear majority of his or her TDF assets held in equities.

An investor will not be able to perform any tax loss harvesting with assets invested in a TDF (that is, selling “losers” in a portfolio to offset gains made by “winners”) and if all of his or her retirement savings happen to be in the TDF, you have to pull money out of the TDF to put it in other types of investments that might generate tax savings. (1)

Fees can be high

Because most TDFs are funds of funds – that is, multiple mutual funds brought together into one giant one – it may mean two layers of fees. (2)

The glide path is very important.

All TDFs have a glide path, the glide path being the rate or pace at which the asset allocation changes from aggressive toward conservative. With some TDFs, the glide path ends at retirement and the asset allocation approaches 100% cash. With others, the fund keeps gliding past a retirement date with the result that the retiree maintains a foot in the equities market – potentially very useful in the face of longevity risk, or as it is popularly known, the risk of outliving your money. The glide path of the TDF should be agreeable to the investor. The problem is that an investor may agree with it more at age 40 than at age 60. (1)

Here is a sample equity glide path for Vanguard’s target date funds:

Screen Shot 2018-06-05 at 8.59.23 PM

One feature can make TDFs even more appealing.

In 2014, the IRS and the Treasury Department permitted TDFs held in 401(k) plans to add a lifetime income option. That let a TDF investor receive a pension-like income beginning at the fund’s target date. Companies sponsoring 401(k)s can even elect to make such TDFs the default plan investment; that is, employees who wanted to direct their money into other investment vehicles would have to inform their employers that they were opting out.

Younger retirement savers should take a look at TDFs.

If you are not enrolled in one already, you may want to weigh their pros and cons. While not exactly “the cure” for America’s retirement savings problem, they are deservedly popular.

Source

  1. money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/04/07/3-questions-to-ask-before-choosing-target-date-funds
  2. time.com/money/3616433/retirement-income-401k-new-solution/
  3. nextavenue.org/article/2015-02/target-date-funds-pros-and-cons
  4. https://www.vanguard.com/pdf/s167.pdf

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Will You Be Prepared When the Market Cools Off?

Markets have cycles, and at some point, the major indices will descend.

We have seen a tremendous rally on Wall Street, nearly nine months long, with the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average repeatedly settling at all-time peaks. Investors are delighted by what they have witnessed. Have they become irrationally exuberant?

The Major Indices Do Not Always Rise.

That obvious fact risks becoming “back of mind” these days. On June 15, the Nasdaq Composite was up 27.16% year-over-year and 12.67% in the past six months. The S&P 500 was up 17.23% in a year and 7.31% in six months. Performance like that can breed overconfidence in equities. (1,2)

The S&P last corrected at the beginning of 2016, and a market drop may seem like a remote possibility now. Then again, corrections usually arrive without much warning. You may want to ask yourself: “Am I prepared for one?”(3)

TIP #1:

Are You Mentally Prepared?

Corrections have been rare in recent years. There have only been four in this 8-year bull market. So, it is easy to forget how frequently they have occurred across Wall Street’s long history (they have normally happened about once a year).(3,4)

The next correction may shock investors who have been lulled into a false sense of security. You need not be among them. It will not be the end of the world or the markets. A correction, in a sense, is a reality check. It presents some good buying opportunities, and helps tame irrational exuberance. You could argue that corrections make the market healthier. In big-picture terms, the typical correction is brief. On average, the markets take 3-4 months to recover from a fall of at least 10%.(4)

TIP #2:

Are You Financially Prepared?

Some people have portfolios that are not very diverse, with large asset allocations in equities and much smaller asset allocations in more conservative investment vehicles and cash. These are the investors likely to take a hard hit when the big indices correct.

You can stand apart from their ranks by appropriately checking up on, and diversifying, your portfolio as needed. Thanks to the recent rally, many investors have seen their equity positions grow larger, perhaps too large. If you are one of them (and you may be), you may want to try to dial down your risk exposure.

TIP #3:

Do You Have an Adequate Emergency Fund?

A correction is not quite an emergency, but it is nice to have a strong cash position when the market turns sour.

TIP #4:

Are Your Retirement and Estate Plans Current?

A prolonged slump on Wall Street could impact both. Many older baby boomers had to rethink their retirement strategies in the wake of the 2007-09 bear market.

TIP #5:

Consistently Fund Your Retirement Accounts

Finally, a deep dip in the equity market should not stop you from consistently funding your retirement accounts. In a downturn, your account contributions, in essence, buy greater amounts of shares belonging to quality companies than they would otherwise.

A correction will happen – maybe not tomorrow, maybe not for the rest of 2017, but at some point, a retreat will take place. React to it with patience, or else you may end up selling low and buying high.

Sources.

  1. money.cnn.com/data/markets/nasdaq/ [6/15/17]
  2. money.cnn.com/data/markets/sandp/ [6/15/17]
  3. fortune.com/2017/03/09/stock-market-bull-market-longest/ [3/9/17]
  4. investopedia.com/terms/c/correction.asp [6/15/17]
  5. This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Should You Borrow From Your 401(k) if You Need Cash?

Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice. Here are 6 reasons 401(k) loans are a bad idea.

REASON #1
Damages Retirement Prospects

A 401(k), 403(b), or 457 should never be viewed like a savings or checking account.

When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan.

So in borrowing from a 401(k), 403(b), or 457, you siphon down your invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you will likely repurchase investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense.1

Most plans charge a $75 origination fee for a loan, and of course they charge interest – often around 5%. The interest paid will eventually return to your account, but that interest still represents money that could have remained in the account and remained invested.

REASON #2
Contributions Could Be Halted

May not be able to make additional contributions due to outstanding loans

Some workplace retirement plans suspend regular employee salary deferrals when a loan is taken. They can resume when you settle the loan.

REASON #3
Potential for Docked Pay

Your Take-Home Pay Could Be Docked

Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored.

REASON #4
A. May Have to Pay Back Immediately

30-60 Days: If You Quit, Get Laid Off Or Are Fired

This applies if you quit, get laid off or are fired. You will have 30-60 days (per the terms of the plan) to repay the loan in full, with interest.

If you are younger than age 59½ and fail to pay the full amount of the loan back, the IRS will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty.1,2

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.1

B. 5 Years To Repay

If Terms Are Not Met Unpaid Balance is Taxable

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.1

REASON #5
You Get Taxed Twice!

Repay with after-tax dollars AND Taxed on withdrawals

When you borrow from an employee retirement plan, you invite that prospect. One, you will be repaying your loan with after-tax dollars. Two, those dollars will be taxed again when you withdraw them for retirement (unless your plan offers you a Roth option).

REASON #6
Why Go Into Debt to Pay Off Debt?

It’s Better to Go to a Reputable Lender for a Personal Loan

If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks.

SMART TIP:

Your 401(k) Plan is NOT a Bank Account

Always remember, you should never confuse your retirement plan with a bank account.


Sources:

  1. cnbc.com/id/101848407 [9/14/14]
  2. mainstreet.com/article/why-you-cant-borrow-your-401k-and-only-way-you-should [7/24/14]
  3. This material was prepared in part by MarketingPro, Inc.

Market and Economic Update for the Second Quarter of 2017

It has been an awfully good year in most of the capital markets so far. Just like a great summer day with blue skies and bright sunshine, most stock markets have happily been rising and the economy has been chugging along. Bonds of many types have been profitable. We open our account statements and we’re pleased with the progress.

2Q.2017.Chart

The Economy Has Been Looking Good

From an economic standpoint there has been much to be cheerful about. Corporate earnings in the first quarter came in above expectations and sharply higher than preceding quarters. Unemployment is very low and while we haven’t seen a dramatic uptick in wages we are seeing what looks close to full employment. GDP growth continues to show positive numbers even if the pace of growth is somewhat slower than we would like it to be. Good things haven’t been confined to our shores either; Europe’s economy, in spite of Brexit and some tough election cycles, has continued to firm, China continues to grow, even with concerns about banking and debt, India and other parts of Asia show steady progress, and South American economies continue to improve despite the political turmoil in Brazil and elsewhere.

No Signs of Recession Yet

There doesn’t seem to be any sign of recession on the horizon as yet; the Fed continues to be both transparent about and circumspect towards the execution of rate changes. Our government is promising lower taxes and less regulation, items that can cheer even the most gloomy business owner.

So What Could Possibly Go Wrong?

It’s important to remember (or perhaps re-remember) that markets don’t move in a straight line, not very often at any rate. We’ve had 16 periods of downward market movement since the bull began running back in early 2009! It is entirely possible that we are ready for another, and we think it a useful endeavor to remind ourselves of this every so often. Bear markets begin when markets or economies get pretty far out of alignment and while we don’t think we’re seeing any of that right now, the garden variety market correction can strike at any time.

Planning & Diversification

As always, our defense is two-fold, good planning and diversification. In regards to the former, we sure don’t want to get too excited about stock market gyrations that concern money we won’t be touching for a long time; we know we can’t really time the market and we also know that over the long-term stocks tend to give superior returns in spite of that very same volatility. We also know we don’t want to have to eat our “seed corn” and so shorter term money should be invested in other areas.

What Will The Second Half of 2017 Bring?

We of course don’t know if the second half of 2017 will be as productive as the first has been. As mentioned earlier, we don’t think we’re on the verge of a recessionary time and that bodes well for the economy over the short and intermediate term. US stocks appear a bit richer than average, but that has been the case for some time and that modest overvaluation has moderated a bit in light of the robust first quarter earnings.

We’re also cognizant of the fact that reasonable investment time horizons are often greater than many folks’ attention spans and this can create volatility once someone in the proverbial theater yells “fire”! Watching that sort of “running for the exits” is always disconcerting. It is the age old story: we tolerate shorter term volatility for longer term performance; it isn’t always fun but over time it works exceedingly well.


Source:

  1. Prepared by LSA Portfolio Analytics

Why Portfolio Diversification Is Important During Volatile Markets

We all seem to know a day trader or two: someone constantly hunting for the next hot stock. That’s not what I’d consider smart investing. Here’s why it’s wise to diversify your portfolio:

Diversification Helps You Manage Risk

We all want a terrific ROI, but risk management matters just as much in investing, perhaps more. That is why diversification is so important. There are two great reasons to invest across a range of asset classes, even when some are clearly outperforming others.

REASON #1:

Potentially Capture Gains in Different Market Climates

If you allocate your invested assets across the breadth of asset classes, you will at least have some percentage of your portfolio assigned to the market’s best-performing sectors on any given trading day. If your portfolio is too heavily weighted in one asset class, or in one stock, its return is riding too heavily on its performance.

Your portfolio is like a garden. A good gardener will plant a variety of flowers to ensure something is always blooming. The gardener knows that some flowers eventually die off or may not grow well but if there is enough diversity the overall picture will still look good.

REASON #2:

Potentially Less Financial Pain if Stocks Tank

If you have a lot of money in growth stocks and aggressive growth funds (and some people do), what happens to your portfolio in a correction or a bear market? You’ve got a bunch of losers on your hands. Tax loss harvesting can ease the pain only so much.

Diversification gives your portfolio a kind of “buffer” against market volatility and drawdowns. Without it, your exposure to risk is magnified.

ADVICE:

Don’t put all your eggs in one basket!

Believe the cliché: don’t put all your eggs in one basket. Wall Street is hardly uneventful and the behavior of the market sometimes leaves even seasoned analysts scratching their heads. We can’t predict how the market will perform; we can diversify to address the challenges presented by its ups and downs.


Sources

  1. usatoday30.usatoday.com/money/perfi/retirement/story/2011-12-08/investment-diversification/51749298/1
  2. This material was prepared, in part, by MarketingPro, Inc.

Market and Economic Update for The First Quarter of 2017

The year started with a bang as both US and international stock markets roared ahead in the first quarter. Bonds were much more muted as investors grappled with the potential upward nudging of rates by the Fed.

1Q.2017.graphic

The Markets & The Economy: A Look Back

As we pass the eighth anniversary of the turning of the markets and economy it is useful to look back and think about just how far we’ve come over that time. Things were looking pretty grim back in the spring of 2009 and almost all of us had been scarred in one way or another by the significant downturn in the economy that some call the Great Recession. On the business front some pretty big names had simply disappeared, tipped over into liquidation by that tumultuous series of events and families across the country were struggling to hold onto their jobs and their homes.

The Economy Today

Fast forward to today and things look a lot different. We have reached “full employment” and rather than a surplus of folks looking for work we now have many positions being unfilled. Businesses are healthy, the economy is chugging along and the stock market is breaking new records as corporate earnings move upwards and as investors increasingly feel comfortable with paying more for a dollar of earnings that they did a year or so ago.

Politics & The Market

It is an interesting time for certain. The change in the political landscape has been significant and markets and businesses have responded, seeing the potential for growth in the economy seemingly enhanced by the promise of lower taxes and less regulation. We’ve seen this most directly in the action of the stock market whose advance since the election has been robust but anecdotally we hear of businesses beginning to put capital to work and laying the plans for future expansion.

Future Assumptions

It’s important to remember that capital markets (stock, bond and other) look ahead and incorporate assumptions about what the world might look like 6 months or a year hence into the price movements of today. That market rise last quarter isn’t about what is so much as what will (or could) be. Should that vision of the future not turn out quite the way it might be expected to, then adjustments will be made in outlooks and be incorporated into the market levels of tomorrow.

Market Valuations

Over the long term, of course, stock prices are based on economic growth, the level of interest rates (as they set the bar for investment alternatives to stocks) and current market valuations, i.e. what investors are willing to pay for a dollar of current or future earnings. That last factor is a key one, and one that we employ regularly when looking at the relative attractiveness of the various components of our portfolios. Absolute valuations for the market as a whole (for instance “the market is too high”) are quite hard to make meaningful judgments about in the near and intermediate term as markets that are getting a bit pricey may continue to do so for some time and vice versa! We can however use relative valuations to see which segments of the market are starting to overheat or look very attractively priced and we review these data points on a continual basis as we think about constructive changes in our portfolios.

Looking Forward

Looking forward, markets will continue to be influenced by a number of economic factors. Corporate earnings are key of course and the direction of the economy is perhaps the major contributing factor to successful growing companies and to jobs and opportunities in communities throughout the country. So far so good on that score, we’re seeing continued economic growth coupled with low unemployment and the Conference Board’s leading economic indicators continue to point in the right direction.

Interest Rates

Interest rate increases, which folks expect more of this year, can have a moderating influence on markets in a number of ways but a measured pace of increases is not terribly worrisome as they reinforce the notion of strength in the broader economy. A significant difference over time in rates will also wiggle itself into the valuation equation however, which brings us back to, you guessed it, valuations!

What’s Next?

As we talked about earlier, trying to judge the valuation of the market as a whole is very difficult save perhaps in those times when valuations are near extremes of their range (think May of 2000 on the upper end and March of 2009 on the other end). Valuations have been creeping up over the last 8 years and we’re higher now than average certainly but perhaps not in the nosebleed territory as yet. These higher metrics could certainly provide, coupled with some other sort of economic uncertainty, an excuse though for the next market correction but that is just as it should be as market corrections do happen fairly frequently and their effects are naturally mitigated to some degree by our overall portfolio diversification.

In the meantime it’s spring, the days are longer and, thankfully, our televisions and computers have an “off” switch we can use to moderate the barrage of political and financial news that can be so unsettling at times. It’s the economy that will be the prime driver of the markets and the political parties have a lot less to do with that than one might be led to believe.


Source:

  1. Prepared by LSA Portfolio Analytics