Written by Dani, January 27th, 2012
As we open the new year with the second Monday Market Update of 2012, welcome and thank you for listening. You can listen to Doug Fabian’s full podcast here, or keep reading for a summary of what we’ve discussed on the air.
We provide these blogs, podcasts and telecasts as part of our effort to inform and engage our friends and clients in healthy investing and rewarding financial growth. Feel free to skim through this blog for some highlights and listen to the full broadcast when you have time later – the information provided is not intended to give you be specific financial advice, but it will help you to make smart decisions with your investments.
Last week we talked a lot about Europe’s looming debt crisis, and this week we saw Europe still trying to fix their situation. Greece is in especially bad shape, and is about to go bankrupt, with austerity programs missing many of the fiscal targets they were aiming for. There is much concern that a meltdown in Greece will lead to the insolvency of European banks, and we still believe that “caution is the greater part of valor” in this instance.
One good note last week was the jobs report, which reported 200,000 jobs added on Friday – although we need 275,000 new jobs just to break even, so even that news is met with some caution.
Obviously, we continue to be a very uncertain economy, and uncertain world. Right now the trend of the market is very tenuous. We still believe that even with relatively positive news out of US, markets will go even higher, I think there’s 5% upside and 20% downside on a short term (next six months) standpoint in the stock market.
Remember last week we talked about patience in these areas, recognizing that the global economy is probably in a more serious recession than we currently feel. Be careful, as there is still plenty of risk for your hard-earned investment capital.
We want to talk today about your 401k, 403b, 457 plan, variable annuities, variable universal life – all of these are retirement products with some common traits. One of the questions we want to ask is: how do you allocate your retirement money?
The vast majority of Americans readjust their retirement allocations in January and don’t look at them for the rest of the year, so take the time to see what’s working for you and what’s not.
Look at what your personal allocations are – what are the individual accounts and how much is devoted to various allocations (stocks, bonds, etc.) What are your choices? Our first choice is cash. As Mohamed A. El-Erian said in his Wall Street Journal opinion piece this week, our investment strategy should be: “defensive, but agile enough to be offensive when opportunities emerge.”
To illustrate, you’ll notice that many large companies are dealing in what’s known as self-insurance, or sitting on large amounts of cash to insure themselves against a tenuous economy. We suggest that you take a similar approach right now – don’t be fully invested. Now is a time to be exercising some prudence, and hold cash so that if opportunity arises, as El-Erian wrote, you’re ready.
We suggest putting some of your portfolio in short-term bonds. They pay less in yield, but some interest is better than no interest. Also, if you have a Pimco total return fund option, that’s a good option, and if you’re going to have an allocation to stocks, make it very small.
Our clients have no allocations to stocks, in this uncertain economy. If these allocation decisions are difficult for you to make, or if you would like more in-depth analysis of what your options are, please call our offices so that we can take a look at your portfolio and help you with personalized options.
Now we’ll move on to the series we started last week: personal finance exercises.
We believe that the most successful people are on top of the issues of the day. Being well-informed and staying well-organized will help you to succeed, so for the next few weeks we will be outlining six exercises for you to stay informed and ready to make good decisions. Those six exercises are:
- Making a calculation of your net worth
- Taking inventory of financial assets
- Understanding your cash flow projections
- Examining your expenses
- Making sure you have an updated estate plan and living trust
- Taking stock of all insurance policies – health, life, long term care, annuities, etc.
Last week, we took less than an hour to calculate your net worth – in order to grow your net worth you have to know where you’re starting from.
This week, we’ve moved on to the second item: take inventory of your assets. Everyone knows how great it feels to clean out unnecessary clutter, and you need to do the same thing with your assets. Look at individual positions and see where you are. List each position, look at how it performed, look at your asset allocation, look at whether it’s a good idea to sell and be defensive with our cash, or hold and then decide what to reallocate.
Don’t be afraid to make changes – remember we are being defensive with our investments, and it can be a good idea to take a small loss if something is underperforming. Look at how your mutual funds perform versus their peer group and get rid of anything that isn’t up to par.
All of these exercises are relatively easy, and you need to start the new year off right by looking at this. Again, if you need guidance on what needs to be held or bought, how this inventory works and our advice for your assets, don’t hesitate to get in touch with us.
Once you know what you have to can set clear, reachable goals. Tune in next week for more on Doug Fabian’s Monday Market Update, and the next exercise to preparing yourself for a successful investment future. (Also, if you read this blog and enjoyed it, listen to Doug’s podcast this week for even more details on these topics, and please share this information with others who might benefit from our perspective.)
Written by David, June 07th, 2011
You knew it was going to happen eventually. Today, I read an article on Yahoo Finance that confirmed my suspicion that ETFs soon will make their way into 401(k) plans.
According to the article, provided to Yahoo Finance by The Wall Street Journal, Jim McCool, Charles Schwab’s executive vice president of institutional business, “made waves at an asset-management conference in March when he announced that the brokerage firm soon would offer 401(k) retirement plans stuffed solely with exchange-traded mutual funds — and let investors trade them without charge.”
The article went on to say that Schwab has plans to stick to “plain-vanilla index ETFs, including domestic and international stocks and bonds” for their 401(k) offerings. Schwab reportedly will begin meeting with 401(k) plan sponsors this fall to work out the details of such offerings.
If this happens, and I certainly expect it to, then it could open the proverbial floodgates for more 401(k) plans to add ETFs to their investment offerings. That would be a very good thing indeed, and something that I suspect will help investors save money, enjoy greater transparency of holdings — and ultimately gain more control over their retirement portfolios.
Kudos to Schwab for taking this step in the right direction.
Written by David, September 23rd, 2009
Although exchange-traded-funds (ETFs) are finding their way into the portfolios of many investors, they have yet to make much headway in 401(k) retirement plans. But that situation could start to change. If current drawbacks to using ETFs in 401(k) plans are resolved, the ETF industry would gain increased working capital, heightened revenues and earnings, and enlarged market share at the expense of mutual funds.
It also would open up the world of ETFs to a much bigger pool of investors. Mutual fund companies recognize the competitive threat and counter that they provide many low-cost, index-tracking funds that essentially perform the same service as ETFs.
It would not surprise me at all if many 401(k) providers were eyeing ETFs to supplement their array of mutual fund offerings. The sheer breadth of ETFs gives asset managers a spectrum of investment possibilities. The vast selection will allow retirement portfolios to be cobbled together that are best suited for the individual circumstances of people across a wide range of ages and income brackets.
Ideally, a retirement portfolio should have access to funds that mirror all types of market indexes, ranging from the S&P 500 to overseas stock exchanges. If there is anything that the bear market of 2008 taught us, it has been to diversify. Just ask any wealthy investor or hedge fund manager who used Bernard Madoff to manage money. In the wake of industry scandals and poor performance by money managers, ETFs that track indexes and stock markets are becoming increasingly attractive.
ETFs still have hurdles to overcome before their use in 401(k) plans becomes common place. A correctable weakness for ETFs is that their use in 401(k) accounts involves the payment of fees by plan administrators that—when used inside a “collective trust”—can be higher than the fees for mutual funds. However, that current disadvantage is limited to the use of ETFs in 401(k) accounts and can be remedied.
A 401(k) record keeping company, Invest n’ Retire, of Portland, Ore, has developed a technology to trade ETFs cost-effectively in 401(k) plans. The firm’s software allows ETFs to be traded in real-time at institutional pricing. Coupled with lower management fees, ETFs are becoming attractive investments in 401(k) plans.
ETFs still retain decisive advantages, compared to mutual funds. For example, ETFs offer intra-day trading to allow their purchase and sale throughout a trading day as share prices change. If an investor decides to trade an ETF, the transaction can be processed within seconds to eliminate market risk. In contrast, mutual funds keep the same price throughout a trading day and only revise it the next day after the market closes. That limitation for mutual funds leaves their investors vulnerable to market volatility during the course of a day. Right now, a growing number of mutual fund investors are pulling out their money — driving down fund values for the remaining shareholders.
Written by David, February 16th, 2009
Mutual funds control the majority of Americans’ retirement assets through 401(k)s, IRAs and annuities. Sadly, a gullible public has bought into the idea that steady investments in mutual funds, regardless of market conditions, is the way to make their financial dreams come true.
This is one of the biggest fallacies of investing, and why mutual funds are hazardous to your wealth.
Click here to view my recently published MarketWatch article on the five fundamental flaws of mutual funds.
Written by David, February 04th, 2009
It’s no secret that most 401(k)-type retirement plans are in shambles as a result of the recent market meltdown. And while there is no simple, quick-fix solution for an ailing 401(k), 403(b) or 457 plan, if you have the ability to self-direct your retirement assets there is a way to put yourself on the road to recovery.
Here are the dos and don’ts of turning around that big drop in your retirement nest egg.
First of all, you have to fight “city hall.” All 401(k) providers want you to buy your investment and hold them in perpetuity. I don’t care where your 401(k) is, the mutual fund companies want you to choose a mix of funds and then just leave that mix alone. They have placed rules and restriction on you, and in many cases they make it hard for you to do what you want with your own money. Your first assignment is to know the rules of your 401(k) plan’s fund exchange policies. Hey, it’s your money, so don’t let anyone talk you out of doing what you want with it.
Second, you need to know your retirement plan fund choices. Usually, these choices fall into three categories; stocks, fixed income or cash. Look closely at your safe choices in the cash category; this could be labeled “stable value” or “money market.” As I have been saying for the last year, you need to use this account as your safe harbor in these uncertain times. I’d say you need at least a 50% safe harbor allocation right now.
In the fixed income category, there are some choices that I like. One popular fund is the PIMCO Total Return Fund, a balanced bond fund that posted a total return of 4.2% in 2008. I think you should stay away from those fixed income funds that went down in 2008.
Third, you need to get out of stock mutual funds. I realize that some of you may want to hold on to some of your exposure to stocks, but for me and subscribers to my newsletter services, we have zero exposure to equity mutual funds right now. Ideally, if the S&P 500 can recapture 900, we could make a run to 950. If this happens, then it will represent the best opportunity for those still in equity mutual funds to sell into strength.
Fourth, are you able to get some money out of your 401(k) plan? Here’s what I mean by that. Traditionally, 401(k)’s are very restrictive. Their very design means you have limited choices and more trading restrictions than you would otherwise have in a self-directed IRA. If you are able to, you should transfer assets out of you 401(k). You can do this if you are over age 59 ½, as you may be able to do what’s called an in-service rollover. This is when you transfer all or part of your 401(k) to an IRA rollover account. And while this is perfectly legal, your plan must allow for it.
Also, if you have a 401(k) at a previous employer you should roll that account into an IRA. This will give you the ability to buy and sell exchange-traded funds (ETFs), which come at lower cost than mutual funds—along with virtually no trading restrictions and with the utmost transparency, so you know always know what you own.
Finally, I know what I am outlining here runs counter to establishment thinking, but ask yourself this: are you happy with the results you had in your 401(k) last year? I dare say that that the answer for most people is no, and that means it could be time for some radical change.
Remember that success in anything doesn’t come without a little effort, and real success almost never comes about by following the conventional wisdom. In order to rescue your 401(k), you simply have to get involved and start thinking for yourself.
