A basic investment strategy for investors is to diversify. Typically, investors put some of their money into stocks, and most of the rest into bonds. Small portions may go into gold or other commodities, or be held as cash. Stocks and bonds historically have tended to offset each other. When stocks rose, bonds would fall, and vice versa. A diversified portfolio would be hedged, ameliorating the ups and downs of the market and making investing less stressful.
Today, though, central bank accommodation--in the form of ultra low interest rates, negative interest rates and quantitative easing--has distorted this historical relationship. As the Fed and other central banks print more and more money, both stocks and bonds rise in value. They no longer offset, and diversified portfolios are becoming unhedged. If and when the era of easy money ends, both stocks and bonds could fall, and perhaps precipitously.
By unhedging diversified portfolios, the central banks are heightening investor risks. Many wealthy and institutional investors, apparently sensing the danger, have been increasing their levels of cash. But ordinary mom and pop 401(k) investors may not be able to shift gears so easily. They may face increasing exposure, and perhaps not know it. If they sustain losses when they expected to be hedged, they could lose confidence in the markets. The result could be rapid and ugly. That's what happened on Black Monday, October 19, 1987, when the stock market crashed and fell 22.61% in a single day because many institutional investors thought they'd be hedged by a financial product called portfolio insurance and found out unexpectedly that portfolio insurance didn't work.
The central banks could reduce accommodative policies in order to raise rates and normalize the financial markets. But that process could cause investor losses and trigger selling that leads to a market meltdown. If, on the other hand, central banks keep printing money, they may worsen the problem. You could shift more assets to cash (or at least refrain from committing fresh cash to the markets). Otherwise, understand that diversification, like everything else in the financial markets, is starting to look a little hinky.
Showing posts with label diversification. Show all posts
Showing posts with label diversification. Show all posts
Monday, August 22, 2016
Thursday, June 12, 2014
How To Reduce Volatility in Your Retirement Income
The S&P 500 has dropped three days in a row, and after all the market calm of recent months, many investors must be thinking that the apocalypse looms. There are understandable explanations for the recent downdrafts. Islamic radicals of the Sunni variety have rapidly seized several towns and cities in Iraq, along with American weapons and vehicles provided to the Iraqi government (and the administration worries about giving small arms to moderate Syrian rebels?). Iranian paramilitary troops, who are Shiites, supposedly are fighting alongside Iraqi government troops to retake territory seized by the Sunni radicals. Is Iran now a more important ally of the Iraqi government than the U.S.?
Russian tanks have reportedly rolled into Ukraine, where the fighting is escalating. Bashir Assad is winning in Syria, and the moderate rebels that the U.S. supports seem to be almost inconsequential. Most of East Asia is squabbling over this island or that, with contending nations issuing many a proclamation declaiming a neighbor as a ratfink, a double ratfink or even a triple ratfink.
Domestic politics also create uncertainty for the markets. Eric Cantor, House Majority Leader, was just defenestrated in a primary election by a guy from far right field whose name, even if we mentioned it now, you probably wouldn't recognize. (But we're going to, because it's Dave Brat, a marvelously fitting name for a guy who ousted the Majority Leader.) Cantor, who outspent his opponent's six-figure campaign by $5 million, convincingly proved that money isn't everything. Not even in politics. The Koch brothers must be scratching their heads about what checks to write next.
The markets will always be plagued by volatility. And it tends to pop up when you least expect it. That might be inherent in the definition of volatility, but you know what we mean. Yogurt happens, but you don't want your retirement finances smeared with yogurt. While there are no complete protections against the ups and downs of life, here are a few ideas for calming the financial waves.
Build Up Social Security Benefits. Disregard the hyperbole. Social Security will be there when you retire. Maybe not exactly as it is now, but nevertheless in a meaningful form. Any politician who votes to eliminate or sharply reduce Social Security retirement benefits will end up doing an Eric Cantor faster than Eric Cantor as voters reject the idea that they should have to eat dog food in their old age. Work as long as you can to build up your benefits.
Get a Pension. If you're lucky enough to get a pension, stick out it long enough in that job to qualify. Although classic defined benefits pensions are usually found these days only alongside the remains of diplodocus, lasso one if you can. Other pension arrangements, like cash balance plans, are a lot better than no pension.
Save More. Saving more is a salve for portfolio instability and financial insecurity. Those that have the saving jones won't have to get loans.
Use Retirement Accounts. Retirement accounts like 401(k)s, IRAs and so on offer tax advantages that let you leverage your retirement savings, while limiting your ability to prematurely spend your savings. A particular advantage to a 401(k) account comes if your employer provides a matching contribution, which is the freest money most people can get. Use these accounts as much as you can.
Diversity Your Investments. The values of all assets wax and wane. But they usually don't wax and wane in unison. More commonly, some assets get yeasty while others do the fallen souffle thing. And vice versa. So a diversified portfolio is usually kind to your antacid budget. There are moments, like the 2008-09 financial crisis, when it seems like almost all assets belly flop. But these cognitively dissonant interludes are the exception and not the rule.
Consider an Annuity. A fixed annuity (one that pays a specified dollar amount per month) or a fixed annuity adjusted for inflation can be a reasonable way to provide a steady income. Annuities aren't cheap, and you should buy only from an insurance company with a strong credit rating. Don't put more than about one-third to one-half of your portfolio into an annuity because cash needs in old age can be unpredictable and it helps to have a nice pool of cash or cash equivalents. Be very cautious about variable annuities--they often have high expenses, and the point here is to reduce volatility, not subject yourself to it in another form.
Health Insurance and Long Term Care Insurance. Financial volatility can sometimes come from sudden increases in expenses, and not just decreases in portfolio values. Health care and long term care needs are the biggest landmines in the journey through retirement. Most retirees are covered by Medicare, but if you're not, then buy something else. The Affordable Care Act, despite all the teeth-gnashing on the right, is likely to be a good option if you don't have anything else. If you have a significant net worth, consider buying long term care insurance, especially if you have a spouse who may depend on that net worth after you've gone to the great Dance Party in the sky. It's expensive, but so is long term care. If you want more than the quality of care given to Medicaid patients, long term care insurance may be a good choice.
Part-time Work. Okay, you want to hear about retirement, not employment. But part-time employment reduces the extent you need to draw down your savings, so you can keep more powder dry for later. It also lessens your risk of dying from the boredom of day time TV. It may boost your Social Security benefits (depending on your work history). And the dignity of work is better than the indignity of looking for sales on dog food.
Russian tanks have reportedly rolled into Ukraine, where the fighting is escalating. Bashir Assad is winning in Syria, and the moderate rebels that the U.S. supports seem to be almost inconsequential. Most of East Asia is squabbling over this island or that, with contending nations issuing many a proclamation declaiming a neighbor as a ratfink, a double ratfink or even a triple ratfink.
Domestic politics also create uncertainty for the markets. Eric Cantor, House Majority Leader, was just defenestrated in a primary election by a guy from far right field whose name, even if we mentioned it now, you probably wouldn't recognize. (But we're going to, because it's Dave Brat, a marvelously fitting name for a guy who ousted the Majority Leader.) Cantor, who outspent his opponent's six-figure campaign by $5 million, convincingly proved that money isn't everything. Not even in politics. The Koch brothers must be scratching their heads about what checks to write next.
The markets will always be plagued by volatility. And it tends to pop up when you least expect it. That might be inherent in the definition of volatility, but you know what we mean. Yogurt happens, but you don't want your retirement finances smeared with yogurt. While there are no complete protections against the ups and downs of life, here are a few ideas for calming the financial waves.
Build Up Social Security Benefits. Disregard the hyperbole. Social Security will be there when you retire. Maybe not exactly as it is now, but nevertheless in a meaningful form. Any politician who votes to eliminate or sharply reduce Social Security retirement benefits will end up doing an Eric Cantor faster than Eric Cantor as voters reject the idea that they should have to eat dog food in their old age. Work as long as you can to build up your benefits.
Get a Pension. If you're lucky enough to get a pension, stick out it long enough in that job to qualify. Although classic defined benefits pensions are usually found these days only alongside the remains of diplodocus, lasso one if you can. Other pension arrangements, like cash balance plans, are a lot better than no pension.
Save More. Saving more is a salve for portfolio instability and financial insecurity. Those that have the saving jones won't have to get loans.
Use Retirement Accounts. Retirement accounts like 401(k)s, IRAs and so on offer tax advantages that let you leverage your retirement savings, while limiting your ability to prematurely spend your savings. A particular advantage to a 401(k) account comes if your employer provides a matching contribution, which is the freest money most people can get. Use these accounts as much as you can.
Diversity Your Investments. The values of all assets wax and wane. But they usually don't wax and wane in unison. More commonly, some assets get yeasty while others do the fallen souffle thing. And vice versa. So a diversified portfolio is usually kind to your antacid budget. There are moments, like the 2008-09 financial crisis, when it seems like almost all assets belly flop. But these cognitively dissonant interludes are the exception and not the rule.
Consider an Annuity. A fixed annuity (one that pays a specified dollar amount per month) or a fixed annuity adjusted for inflation can be a reasonable way to provide a steady income. Annuities aren't cheap, and you should buy only from an insurance company with a strong credit rating. Don't put more than about one-third to one-half of your portfolio into an annuity because cash needs in old age can be unpredictable and it helps to have a nice pool of cash or cash equivalents. Be very cautious about variable annuities--they often have high expenses, and the point here is to reduce volatility, not subject yourself to it in another form.
Health Insurance and Long Term Care Insurance. Financial volatility can sometimes come from sudden increases in expenses, and not just decreases in portfolio values. Health care and long term care needs are the biggest landmines in the journey through retirement. Most retirees are covered by Medicare, but if you're not, then buy something else. The Affordable Care Act, despite all the teeth-gnashing on the right, is likely to be a good option if you don't have anything else. If you have a significant net worth, consider buying long term care insurance, especially if you have a spouse who may depend on that net worth after you've gone to the great Dance Party in the sky. It's expensive, but so is long term care. If you want more than the quality of care given to Medicaid patients, long term care insurance may be a good choice.
Part-time Work. Okay, you want to hear about retirement, not employment. But part-time employment reduces the extent you need to draw down your savings, so you can keep more powder dry for later. It also lessens your risk of dying from the boredom of day time TV. It may boost your Social Security benefits (depending on your work history). And the dignity of work is better than the indignity of looking for sales on dog food.
Friday, May 16, 2014
Why You Should Invest Like the Smart Money
One characteristic of the investing strategies of the wealthy is to diversify. Stocks, bonds, money markets, real estate, alternative investments, collectibles, precious metals, jewelry, and so on are frequently found in the portfolios of the high net worth crowd. Diversifying is a way to win no matter what's going on with asset values, and the wealthy want to stay wealthy.
The 99% should do no different, and recent market activity illustrates why. Bond values have improbably risen in recent weeks, while stocks are stuck in a trading range right about where they started the year. Gold and silver went up earlier this year, but have slid back. Real estate ended 2013 with a roaring comeback, but now seems to have stalled out in many markets. International markets have delinked, with Asian markets generally falling over the past six months, while European markets have moved up slightly (Ukraine crisis notwithstanding). It would not have been easy to predict this mix of events. Indeed, it's rare to find financial analysts who predict much of anything right. Few predicted the 2007-08 financial crisis. Few predicted the 30% jump in stocks in 2013. Few predicted that bonds would rise this year.
The investing patterns of the smart money reveal that the smart move is to diversify. Don't look for a quick buck. You'll probably get a quick loss. Don't look to hit a home run with a single investment. The financial press may glamorize the few who manage to do that, but generally pays little attention to the many who fail. Don't try to predict the unpredictable. There are rare situations, like 2008-09, when all asset classes seem to be falling in value. That's what can happen when vast amounts of debt and other leverage enter the financial system in one-sided bets dependent on rising asset values. When that debt begins to lose value, the assets it was used to buy are at serious risk. But more typical is what we have today--a lot of uncertainty, but some of the uncertainty is about the upside and some about the downside. Most of the time, diversification is the best way to play your cards.
And if you're still unhappy about your net worth, save more. Whether the markets are doing well or badly, adding to your pool of capital will pay off in the long run.
The 99% should do no different, and recent market activity illustrates why. Bond values have improbably risen in recent weeks, while stocks are stuck in a trading range right about where they started the year. Gold and silver went up earlier this year, but have slid back. Real estate ended 2013 with a roaring comeback, but now seems to have stalled out in many markets. International markets have delinked, with Asian markets generally falling over the past six months, while European markets have moved up slightly (Ukraine crisis notwithstanding). It would not have been easy to predict this mix of events. Indeed, it's rare to find financial analysts who predict much of anything right. Few predicted the 2007-08 financial crisis. Few predicted the 30% jump in stocks in 2013. Few predicted that bonds would rise this year.
The investing patterns of the smart money reveal that the smart move is to diversify. Don't look for a quick buck. You'll probably get a quick loss. Don't look to hit a home run with a single investment. The financial press may glamorize the few who manage to do that, but generally pays little attention to the many who fail. Don't try to predict the unpredictable. There are rare situations, like 2008-09, when all asset classes seem to be falling in value. That's what can happen when vast amounts of debt and other leverage enter the financial system in one-sided bets dependent on rising asset values. When that debt begins to lose value, the assets it was used to buy are at serious risk. But more typical is what we have today--a lot of uncertainty, but some of the uncertainty is about the upside and some about the downside. Most of the time, diversification is the best way to play your cards.
And if you're still unhappy about your net worth, save more. Whether the markets are doing well or badly, adding to your pool of capital will pay off in the long run.
Monday, November 11, 2013
How Do You Invest in a Market That's Fearful and Greedy?
To paraphrase Warren Buffett's aphorism about investing, be greedy when others are fearful and fearful when others are greedy. In other words, buy low and sell high.
But what do you do when the market is beset by fear and greed? Market indexes rise to new heights almost every day. But many investors are increasingly stepping back and hoarding cash. Indeed, the greedier some get, the more fearful others get.
There's no established strategy for a pishmi-pullyu market like this. The fearful, greedy market's bipolar movements defy logic and rationality.
Much of the market's wackiness comes down to the fact that asset values today are determined as much by government policy as anything else. We live in the era of the Great Central Bank Accommodation, spiced up with bailouts of one sort or another as ad hoc government policies are slapped together in response to the crisis du jour. Even though the central banks mutter disquietingly about withdrawing accommodation, they don't really get around to it, because they remain the only show in town when it comes to economic stimulus. Investors know that government intervention is likely to continue indefinitely, so some invest. They are also fearful because they know that government support cannot continue forever. So some hoard cash.
You can't rationally invest on the political process or government policy. You can diversify. That's simply another way of admitting you don't know what's happening or what's going to happen. Then again, no one does.
But what do you do when the market is beset by fear and greed? Market indexes rise to new heights almost every day. But many investors are increasingly stepping back and hoarding cash. Indeed, the greedier some get, the more fearful others get.
There's no established strategy for a pishmi-pullyu market like this. The fearful, greedy market's bipolar movements defy logic and rationality.
Much of the market's wackiness comes down to the fact that asset values today are determined as much by government policy as anything else. We live in the era of the Great Central Bank Accommodation, spiced up with bailouts of one sort or another as ad hoc government policies are slapped together in response to the crisis du jour. Even though the central banks mutter disquietingly about withdrawing accommodation, they don't really get around to it, because they remain the only show in town when it comes to economic stimulus. Investors know that government intervention is likely to continue indefinitely, so some invest. They are also fearful because they know that government support cannot continue forever. So some hoard cash.
You can't rationally invest on the political process or government policy. You can diversify. That's simply another way of admitting you don't know what's happening or what's going to happen. Then again, no one does.
Sunday, December 19, 2010
Year End Financial Checkup
Before you become too friendly with the nearest bowl of eggnog, give your finances a quick year end checkup. That way, you can roll into the new year hungover, perhaps, but with some idea of where you are financially and where you want to go. Admittedly, money issues bring less cheer than the bubbly stuff that makes the cork pop. Ignoring one's finances, though, won't lead to wealth.
A lot of year end financial advice focuses on tax planning or prognostications for next year. Like many things, though, a solid foundation in financial basics is more important than doing some transactions that invite an IRS audit or believing in the latest self-appointed soothsayer. Get the basics right and other things become easier.
Calculate your net worth. This is the where sound financial planning begins. If you don't know where you stand, you can't tell if you're making progress (or losing ground). If things are going well, you can give yourself a pat on the back. If not, save more and perhaps change what you're doing. Calculate your net worth every three months. For more, see http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Ensure adequate cash reserves. Make sure you have at least six months worth of living expenses set aside in an emergency cash fund that you never tap except during a crisis. Better yet, considering today's continuing albeit not-officially-recognized recession, have nine or twelve months of living expenses set aside. Unemployment remains a serious problem. Even though high ranking government officials are quick to tout even a tiny smidgen of improvement in employment levels, lots of people are still being laid off. Thrifty squirrels are the ones that survive winter.
Review portfolio diversification. Your portfolio's asset allocation may have changed as a result of market shifts. Most recently, bonds have been falling (contrary to every effort of the Federal Reserve to push them higher), while stocks have been rising. Consider whether you should adjust your allocations.
You may have different asset allocations for different pools of assets. The way you diversify a college fund for your kid(s) could be different from the ideal asset allocation for retirement savings. Keep these differences in mind.
Go over your benefits. Make sure you understand where you stand with Social Security and, if you have a pension, with your pension benefits. Maybe you don't believe either will be around by the time you retire. Well, people thought the same thing 30 and 40 years ago, and they're now retiring with Social Security and, sometimes, pension benefits. Figure out how to maximize your benefits. Then, maximize them as much as possible.
Review privacy. The Internet, by all indications, is becoming less private by the day. In an implicit but sharp rebuke to the private sector for its failure to display even a modicum of propriety, U.S. government regulators are now talking about setting federal standards for online privacy. Think about limiting your use of the Internet for financial matters (this includes banking, stock trading, online shopping and other online use of credit cards, debit cards, bank account numbers, and other financial transactions). The less often you do financial transactions on the Internet, the fewer opportunities you give bad guys to steal your money and/or identity. The Internet is unquestionably a convenience, but being robbed by cybercrooks can be highly inconvenient. If you must do transactions online, use the best security measures available.
A report in this weekend's Wall Street Journal (P. C1) indicates that smart phones (like the iPhone and Android) may be significantly less secure than computers. Apparently, some apps may sneak off with your name and other highly personal information without telling you or getting your permission. Avoid doing financial transactions on a smart phone, at least until security is greatly improved. If you must do financial transactions on your smart phone, check account balances and activity often. This means at least weekly and perhaps even daily for your bank accounts, credit card accounts and whatever accounts you use through your smart phone.
A cyberthief can make off with savings you took years to accumulate. Protect yourself.
Think about saving more. One of the best protections you have against an uncertain future is a nice, warm, fuzzy and large pool of savings. The more you save, the sooner you'll be able to retire and the nicer your retirement lifestyle will be. See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.
A lot of year end financial advice focuses on tax planning or prognostications for next year. Like many things, though, a solid foundation in financial basics is more important than doing some transactions that invite an IRS audit or believing in the latest self-appointed soothsayer. Get the basics right and other things become easier.
Calculate your net worth. This is the where sound financial planning begins. If you don't know where you stand, you can't tell if you're making progress (or losing ground). If things are going well, you can give yourself a pat on the back. If not, save more and perhaps change what you're doing. Calculate your net worth every three months. For more, see http://blogger.uncleleosden.com/2007/04/secret-to-building-wealth.html.
Ensure adequate cash reserves. Make sure you have at least six months worth of living expenses set aside in an emergency cash fund that you never tap except during a crisis. Better yet, considering today's continuing albeit not-officially-recognized recession, have nine or twelve months of living expenses set aside. Unemployment remains a serious problem. Even though high ranking government officials are quick to tout even a tiny smidgen of improvement in employment levels, lots of people are still being laid off. Thrifty squirrels are the ones that survive winter.
Review portfolio diversification. Your portfolio's asset allocation may have changed as a result of market shifts. Most recently, bonds have been falling (contrary to every effort of the Federal Reserve to push them higher), while stocks have been rising. Consider whether you should adjust your allocations.
You may have different asset allocations for different pools of assets. The way you diversify a college fund for your kid(s) could be different from the ideal asset allocation for retirement savings. Keep these differences in mind.
Go over your benefits. Make sure you understand where you stand with Social Security and, if you have a pension, with your pension benefits. Maybe you don't believe either will be around by the time you retire. Well, people thought the same thing 30 and 40 years ago, and they're now retiring with Social Security and, sometimes, pension benefits. Figure out how to maximize your benefits. Then, maximize them as much as possible.
Review privacy. The Internet, by all indications, is becoming less private by the day. In an implicit but sharp rebuke to the private sector for its failure to display even a modicum of propriety, U.S. government regulators are now talking about setting federal standards for online privacy. Think about limiting your use of the Internet for financial matters (this includes banking, stock trading, online shopping and other online use of credit cards, debit cards, bank account numbers, and other financial transactions). The less often you do financial transactions on the Internet, the fewer opportunities you give bad guys to steal your money and/or identity. The Internet is unquestionably a convenience, but being robbed by cybercrooks can be highly inconvenient. If you must do transactions online, use the best security measures available.
A report in this weekend's Wall Street Journal (P. C1) indicates that smart phones (like the iPhone and Android) may be significantly less secure than computers. Apparently, some apps may sneak off with your name and other highly personal information without telling you or getting your permission. Avoid doing financial transactions on a smart phone, at least until security is greatly improved. If you must do financial transactions on your smart phone, check account balances and activity often. This means at least weekly and perhaps even daily for your bank accounts, credit card accounts and whatever accounts you use through your smart phone.
A cyberthief can make off with savings you took years to accumulate. Protect yourself.
Think about saving more. One of the best protections you have against an uncertain future is a nice, warm, fuzzy and large pool of savings. The more you save, the sooner you'll be able to retire and the nicer your retirement lifestyle will be. See http://blogger.uncleleosden.com/2009/07/simplest-financial-plan-of-all.html and http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.
Wednesday, September 12, 2007
Investing in Volatile Times
With the markets turning bipolar, and a bank or two being bailed out every week, investors are understandably nervous. Different asset classes take turns losing value. Investments thought to be safe, like money market funds, turn out to hold asset-backed commercial paper, a security some now deem toxic. Information about the extent of the subprime mortgage and related messes is inadequate. In these times of confusion and incomplete information, many market participants may be buying and selling for the wrong reasons. That only increases the seeming irrationality of the markets.
What’s an investor to do? Here are a few ideas.
1. Diversify. If you can’t reasonably predict which assets will rise and which will fall, diversification allows you to use gains from rising assets to offset losses from falling assets. Your portfolio’s volatility will be muted, and your antacid budget reduced. Diversification is also the sensible way to invest for the long term, so you’re doing your retirement planning a good turn.
2. Dollar-cost averaging. A standard investment technique is to invest a fixed amount of money at regular intervals. The bi-weekly or monthly contribution you make to your 401(k) or equivalent retirement account is a good example of this approach. By investing a fixed amount at regular intervals, you average out the costs of your investments and avoid the risks of trying to time the market. Most investors (and many professional money managers) are not very good at timing the market. Given the long term historical rise of the stock markets, it makes sense to stay in the game. Dollar-cost averaging ensures that you do so without having to guess which fork in the road the market will take tomorrow.
3. Ease back from 80 mph. Another way to reduce the volatility of your portfolio is to make it more conservative. Stick to well-established investments built around benchmarks you understand—index funds, short or medium term bond funds, and money markets. Or go with a lifecycle or target date retirement fund. These funds are long term investment vehicles where the fund managers do the diversification for you. Because they are retirement-oriented, they generally aren’t loaded with risk. Instead, they tend to stick to meat-and-potatoes funds for their equity exposure. See our discussion of lifecycle funds at http://blogger.uncleleosden.com/2007/05/investing-made-simple.html. Conservative investments may, in fact, do well in the next few years. Risk is being re-priced, and low risk investments may be relatively valuable for a while.
4. Save whichever way you can. If you really can’t stomach the ups and downs and uncertainties of the financial markets, put your money into safe, short term investments like money market funds, credit union and bank CDs, and high interest rate online bank accounts. See our earlier blog for suggestions about short term investments. http://blogger.uncleleosden.com/2007/05/investing-for-short-term.html. If you’re concerned about interest rates dropping, buy a CD with a term of several years, or U.S. Treasury notes with similar maturities. That way, you’ll lock in current rates. This strategy could turn against you if interest rates rise (which isn’t forecast by most seers, but the one thing that’s certain is you never know for sure). With the uncertainties of the times, ensuring that you save, however conservatively, remains a smart move. If the only way you can bring yourself to save is to put your money into today’s equivalent of the mattress, then go for it. Maybe, when things calm down a bit, you can diversify. But the worst thing to do is to stop saving.
Entertainment News: read about the air guitar champ. http://www.wtop.com/?nid=456&sid=1242515.
What’s an investor to do? Here are a few ideas.
1. Diversify. If you can’t reasonably predict which assets will rise and which will fall, diversification allows you to use gains from rising assets to offset losses from falling assets. Your portfolio’s volatility will be muted, and your antacid budget reduced. Diversification is also the sensible way to invest for the long term, so you’re doing your retirement planning a good turn.
2. Dollar-cost averaging. A standard investment technique is to invest a fixed amount of money at regular intervals. The bi-weekly or monthly contribution you make to your 401(k) or equivalent retirement account is a good example of this approach. By investing a fixed amount at regular intervals, you average out the costs of your investments and avoid the risks of trying to time the market. Most investors (and many professional money managers) are not very good at timing the market. Given the long term historical rise of the stock markets, it makes sense to stay in the game. Dollar-cost averaging ensures that you do so without having to guess which fork in the road the market will take tomorrow.
3. Ease back from 80 mph. Another way to reduce the volatility of your portfolio is to make it more conservative. Stick to well-established investments built around benchmarks you understand—index funds, short or medium term bond funds, and money markets. Or go with a lifecycle or target date retirement fund. These funds are long term investment vehicles where the fund managers do the diversification for you. Because they are retirement-oriented, they generally aren’t loaded with risk. Instead, they tend to stick to meat-and-potatoes funds for their equity exposure. See our discussion of lifecycle funds at http://blogger.uncleleosden.com/2007/05/investing-made-simple.html. Conservative investments may, in fact, do well in the next few years. Risk is being re-priced, and low risk investments may be relatively valuable for a while.
4. Save whichever way you can. If you really can’t stomach the ups and downs and uncertainties of the financial markets, put your money into safe, short term investments like money market funds, credit union and bank CDs, and high interest rate online bank accounts. See our earlier blog for suggestions about short term investments. http://blogger.uncleleosden.com/2007/05/investing-for-short-term.html. If you’re concerned about interest rates dropping, buy a CD with a term of several years, or U.S. Treasury notes with similar maturities. That way, you’ll lock in current rates. This strategy could turn against you if interest rates rise (which isn’t forecast by most seers, but the one thing that’s certain is you never know for sure). With the uncertainties of the times, ensuring that you save, however conservatively, remains a smart move. If the only way you can bring yourself to save is to put your money into today’s equivalent of the mattress, then go for it. Maybe, when things calm down a bit, you can diversify. But the worst thing to do is to stop saving.
Entertainment News: read about the air guitar champ. http://www.wtop.com/?nid=456&sid=1242515.
Wednesday, May 16, 2007
Investing Made Simple
There's a simple way to invest that gives you the diversified portfolio designed for long term growth that financial experts recommend. And the best part of it is that you don't have to a lot of research into stocks, mutual funds or other investments. We're talking about lifecycle funds, which are also called target date funds.
Lifecycle and target date funds solve two basic problems investors face. First, you should diversify your investments, so that you don't have all your eggs in one basket. Typically, a variety of stocks and bonds is recommended.
Second, you should change the focus of your diversification as you grow older. In your 20's and 30's, your portfolio should be heavily weighted toward stocks, since they have greater potential for long term growth. Of course, stocks can nosedive in value if the market stumbles--and you can be sure it will stumble every now and then. But when you're young, you still have plenty of time to ride through market turbulence and profit from the next upswing. As you grow older, you have less time to recover from investment losses. Therefore, you should shift more of your portfolio into bonds and even money market funds in order to lock in the gains you've achieved and stabilize your financial foundation.
Given the vast array of investments available, how could an ordinary investor figure out how to diversify, and then how to change the diversification appropriately over time? If you have time every week to devote to investment research and strategizing, you could probably do reasonably well. But what if you have a job to keep, kids to raise, housekeeping to do, and fun to have?
The solution is to invest in lifecycle and target date funds. These mutual funds provide a diversified portfolio for you. All you do is pay in your money and they automatically invest it in a diversified way. They have "target dates," which are years (usually in increments of 5, like 2010, 2015, 2020, 2025, 2030, etc.). You pick a year that's close to the time when you plan to retire. For example, if you were born in 1975 and expect to retire around age 65, you'd invest in a fund with a target date of 2040. Right now, this fund would probably be mostly invested in stocks (probably somewhere around 80% in stocks, with the remaining 20% in bonds). As you grow older, the management firm operating the lifecycle or target date fund will gradually reduce the stock portion of the fund's assets and increase the bond portion. By the time you reach 65, the fund might have something like 30% to 40% of its assets in stocks, and the rest in bonds and money market funds. This conservative allocation is meant to lock in much of your investment gains so that you'll have some certainty for your retirement finances.
As with any mutual fund, you should look closely at the fees and expenses of lifecycle and target date funds. Some are noticeably more expensive than others, and in the long run, high fees and expenses can be costly. Vanguard and Fidelity offer lifecycle or target date funds that have pretty low costs. Other mutual fund management companies may also offer low cost funds.
If you are a bit of a stock market buff, you may want to think about the diversification philosophies of the lifecycle or target date funds you consider. They tend to have slightly different approaches--some are more heavily weighted toward stocks, while others have a greater preference for bonds. Make sure you are comfortable with the fund's diversification philosophy.
With a lifecycle or target date fund, all the investment strategizing and diversification happens automatically. You just pay in your money and the fund's managers do the rest of the work.
More and more 401(k) plans are offering lifecycle or target date funds as an investment option. If your employer doesn't offer them, lobby for them. They'll make the process of retirement saving much simpler for you. You can invest in these funds through an IRA--just open the IRA with the mutual fund management company offering the funds in which you are interested. If you've maxed out your retirement accounts and want to save more, you can always open a taxable account with a mutual fund management company and invest in a lifecycle or target date fund that way.
Doing things the simple and easy way means you're more likely to do them. We all recognize the importance of saving for retirement. Keep lifecycle and target date funds in mind as one of the easiest ways to build wealth.
Entertainment News: Celebrity phobias. You've heard of some of this stuff--claustrophobia, fear of flying, fear of heights, and fear of snakes. But pigs? Eggs? Ferns? Gerbils? Houseplants? Antiques? Silver cutlery? Bright colors? And chewing gum? We're not making this up. See www.nbc4.com/slideshow/entertainment/13331800/detail.html.
Lifecycle and target date funds solve two basic problems investors face. First, you should diversify your investments, so that you don't have all your eggs in one basket. Typically, a variety of stocks and bonds is recommended.
Second, you should change the focus of your diversification as you grow older. In your 20's and 30's, your portfolio should be heavily weighted toward stocks, since they have greater potential for long term growth. Of course, stocks can nosedive in value if the market stumbles--and you can be sure it will stumble every now and then. But when you're young, you still have plenty of time to ride through market turbulence and profit from the next upswing. As you grow older, you have less time to recover from investment losses. Therefore, you should shift more of your portfolio into bonds and even money market funds in order to lock in the gains you've achieved and stabilize your financial foundation.
Given the vast array of investments available, how could an ordinary investor figure out how to diversify, and then how to change the diversification appropriately over time? If you have time every week to devote to investment research and strategizing, you could probably do reasonably well. But what if you have a job to keep, kids to raise, housekeeping to do, and fun to have?
The solution is to invest in lifecycle and target date funds. These mutual funds provide a diversified portfolio for you. All you do is pay in your money and they automatically invest it in a diversified way. They have "target dates," which are years (usually in increments of 5, like 2010, 2015, 2020, 2025, 2030, etc.). You pick a year that's close to the time when you plan to retire. For example, if you were born in 1975 and expect to retire around age 65, you'd invest in a fund with a target date of 2040. Right now, this fund would probably be mostly invested in stocks (probably somewhere around 80% in stocks, with the remaining 20% in bonds). As you grow older, the management firm operating the lifecycle or target date fund will gradually reduce the stock portion of the fund's assets and increase the bond portion. By the time you reach 65, the fund might have something like 30% to 40% of its assets in stocks, and the rest in bonds and money market funds. This conservative allocation is meant to lock in much of your investment gains so that you'll have some certainty for your retirement finances.
As with any mutual fund, you should look closely at the fees and expenses of lifecycle and target date funds. Some are noticeably more expensive than others, and in the long run, high fees and expenses can be costly. Vanguard and Fidelity offer lifecycle or target date funds that have pretty low costs. Other mutual fund management companies may also offer low cost funds.
If you are a bit of a stock market buff, you may want to think about the diversification philosophies of the lifecycle or target date funds you consider. They tend to have slightly different approaches--some are more heavily weighted toward stocks, while others have a greater preference for bonds. Make sure you are comfortable with the fund's diversification philosophy.
With a lifecycle or target date fund, all the investment strategizing and diversification happens automatically. You just pay in your money and the fund's managers do the rest of the work.
More and more 401(k) plans are offering lifecycle or target date funds as an investment option. If your employer doesn't offer them, lobby for them. They'll make the process of retirement saving much simpler for you. You can invest in these funds through an IRA--just open the IRA with the mutual fund management company offering the funds in which you are interested. If you've maxed out your retirement accounts and want to save more, you can always open a taxable account with a mutual fund management company and invest in a lifecycle or target date fund that way.
Doing things the simple and easy way means you're more likely to do them. We all recognize the importance of saving for retirement. Keep lifecycle and target date funds in mind as one of the easiest ways to build wealth.
Entertainment News: Celebrity phobias. You've heard of some of this stuff--claustrophobia, fear of flying, fear of heights, and fear of snakes. But pigs? Eggs? Ferns? Gerbils? Houseplants? Antiques? Silver cutlery? Bright colors? And chewing gum? We're not making this up. See www.nbc4.com/slideshow/entertainment/13331800/detail.html.
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