Mutual Funds
Written by David, January 11th, 2012
In last week’s Alert, we began a special series on personal finance exercises for 2012. The first installment was all about taking an inventory of all of your assets. Here we took a page from corporate CFOs, as they regularly are tasked with determining the precise value of their company’s assets. The result of that inventory should be that you now know how much money you actually have, and in what type of asset class that money resides (equities, bonds, real estate, gold or silver coins, checking account, CDs, etc.).
This week, we are going into Part II of the series, and that is to do an asset allocation review. This is the time to dig down deep into precisely where your assets are, and by that I mean knowing specifically which stocks, bonds, exchange-traded funds (ETFs), mutual funds, variable annuities, etc., you currently own. You also need to know how much you own of each security. Your goal this week is to take an inventory of all of your securities holdings so that you can see if there are any glaring weaknesses and/or omissions in your asset allocation.
Once you know, in percentage terms, how much of your total investment portfolio is committed to stocks, how much to bonds, commodities, cash, etc., you can make the necessary adjustments to get the desired mix of assets where you want them.
I am of the opinion that stocks are going to struggle to make headway at least in the first half of 2012. And while there certainly could be a lot of flux in stocks going forward, I think portfolios with a distinctly risk-averse orientation will perform much better than those with a lot of equity exposure. That means you’ll want to have more cash and bonds in your mix than equities.
If you find that you have a relatively high equity allocation, then you should think about reducing your level of exposure. If, on the other hand, you have a lot of cash in your portfolio, then I think your cautious approach will be rewarded in the months to come.
Next week, we’ll do an inventory of all of the income streams your money is generating. If your primary goal is to capture high yield and dividend income from your existing assets, next week’s lesson is aimed directly at you.
If you’d like to hear more about these personal finance exercises, and my take on all of the latest market action, then I invite you to sign up here for my weekly audio podcast.
Written by David, October 12th, 2011
Last Friday marked the end of the third quarter, and what a dismal quarter it was for the equity markets. Stocks in the Dow sank 12.09%, while the broader S&P 500 Index dropped 14.33%. The NASDAQ Composite finished the dreary Q3 with a 12.91% surrender of value.
The poor performance of the broad market in one quarter is bad enough, but just think about how badly you’d feel if a mutual fund you owned continually delivered poor performance relative to its benchmark? I suspect you wouldn’t be very happy, and that’s why I created the Fabian Lemon List.
The Lemon List is our inventory of mutual funds that have underperformed their one-, three-, and five-year benchmarks. This quarter, 1,786 mutual funds qualified as lemons, and those funds accounted for more than $1 trillion in assets.
If you want to rid yourself of the bitter taste of lemons in your portfolio, you must first find out if your fund(s) are on the list. If they are, it may be time to turn those mutual fund lemons into ETF lemonade. Get your complete copy of the Fabian Lemon List today.
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.
Written by David, November 19th, 2008
Consider taking cover if you hold any mutual funds in taxable accounts. Many mutual funds that absorbed big losses still will incur significant capital gains for the 2008 tax year. Those capital gains are caused by mutual funds buying and selling stocks during the year – even if a fund racked up huge losses.
Investors looking to limit their tax liabilities from capital gains may want to move money out of mutual funds during the very near future. The record date for when mutual funds assign capital gains to their account holders usually comes as soon as early December. This doesn’t leave you much time to take action. If you delay, expect to owe Uncle Sam more in taxes that you otherwise may have anticipated.
The lesson of incurring capital gains from a money-losing mutual fund may come as a bit of a shock if you are a young investor who largely has only known bull markets. This year’s market turmoil likely caused the stock mutual funds that you own to sell heavily as other investors bailed out and caused the fund companies to redeem their shares.
Keep in mind that you still will incur a one-time tax liability if you sell any mutual fund shares for a profit that were held in a taxable account. If you invest in mutual funds through a 401(k) or a similar retirement account, you escape the tax liability this year. The benefit of selling mutual funds before the record date is that you will avoid incurring capital gains not only this year but each year in the future that you otherwise would stay invested in the funds.
I checked with a couple of the leading mutual fund companies, Vanguard and T. Rowe Price, and learned that the capital gains of some of their mutual funds will be significant. The Vanguard Health Care Fund is estimated to incur capital gains of $8.03 a share, with a record date of Dec. 15. T. Rowe Price posted an announcement on its Web site to inform investors that “unprecedented market fluctuations” in the second half of 2008 are causing potentially “substantial” revisions to its previous capital gains estimates. The record date begins Dec. 10 for T. Rowe Price’s stock mutual funds and Dec. 4 for its bond and money market funds.
My favorite investment vehicle, exchange traded funds, typically minimize capital gains to shareholders because of their index structure. Consider rotating out of your under performing mutual funds into ETFs for a more tax-efficient and low-cost investment alternative.
