psewealth No Comments

Long-Term Investment Truths

Key lessons for retirement savers.

You learn lessons as you invest in pursuit of long-run goals. Some of these lessons are conveyed and reinforced when you begin saving for retirement, and others you glean along the way.

First & foremost, you learn to shut out much of the “noise.” News outlets take the temperature of global markets five days a week (and even on the weekends), and fundamental indicators serve as barometers of the economy each month. The longer you invest, the more you learn to ride through the turbulence caused by all the breaking news alerts and short-term statistical variations. While the day trader sells or buys in reaction to immediate economic or market news, the buy-and-hold investor waits for selloffs, corrections and bear markets to pass.

You learn how much volatility you can stomach. Volatility (also known as market risk) is measured in shorthand as the standard deviation for the S&P 500. Across 1926-2014, the yearly total return for the S&P averaged 10.2%. If you want to be very casual about it, you could simply say that stocks go up about 10% a year – but that discounts some pronounced volatility. The S&P had a standard deviation of 20.2 from its mean total return in this time frame, which means that if you add or subtract 20.2 from 10.2, you get the range of the index’s yearly total return that could be expected 67% of the time. So in any given year from 1926-2014, there was a 67% chance that the yearly total return of the S&P might vary from +30.4% to -10.0%. Some investors dislike putting up with that kind of volatility, others more or less embrace it.1

You learn why liquidity matters. The older you get, the more you appreciate being able to quickly access your money. A family emergency might require you to tap into your investment accounts. An early retirement might prompt you to withdraw from retirement funds sooner than you anticipate. If you have a fair amount of your savings in illiquid investments, you have a problem – those dollars are “locked up” and you cannot access those assets without paying penalties. In a similar vein, there are some investments that are harder to sell than others.

Should you misgauge your need for liquidity, you can end up selling at the wrong time as a consequence. It hurts to let go of an investment when the expected gain is high and the P/E ratio is low.

You learn the merits of rebalancing your portfolio. To the neophyte investor, rebalancing when the market is hot may seem illogical. If your portfolio is disproportionately weighted in equities, is that a problem? It could be.

Across a sustained bull market, it is common to see your level of risk rise parallel to your return. When equities return more than other asset classes, they end up representing an increasingly large percentage of your portfolio’s total assets. Correspondingly, your cash allocation shrinks as well.

The closer you get to retirement, the less risk you will likely want to assume. Even if you are strongly committed to growth investing, approaching retirement while taking on more risk than you feel comfortable with is problematic, as is approaching retirement with an inadequate cash position. Rebalancing a portfolio restores the original asset allocation, realigning it with your long-term risk tolerance and investment strategy. It may seem counterproductive to sell “winners” and buy “losers” as an effect of rebalancing, but as you do so, remember that you are also saying goodbye to some assets that may have peaked while saying hello to others that you may be buying at the right time.

You learn not to get too attached to certain types of investments. Sometimes an investor will succumb to familiarity bias, which is the rejection of diversification for familiar investments. Why does he or she have 13% of the portfolio invested in just two Dow components? The investor just likes what those firms stand for, or has worked for them. The inherent problem is that the performance of those companies exerts a measurable influence on the overall portfolio performance.

Sometimes you see people invest heavily in sectors that include their own industry or career field. An investor works for an oil company, so he or she gets heavily into the energy sector. When energy companies go through a rough patch, that investor’s portfolio may be in for a rough ride. Correspondingly, that investor has less capacity to tolerate stock market risk than a faculty surgeon at a university hospital, a federal prosecutor, or someone else whose career field or industry will be less buffeted by the winds of economic change.

You learn to be patient. Even if you prefer a tactical asset allocation strategy over the standard buy-and-hold approach, time teaches you how quickly the markets rebound from downturns and why you should stay invested even through systemic shocks. The pursuit of your long-term financial objectives should not falter – your future and your quality of life may depend on realizing them.

Warmest Regards,

 april-signature

Citations.

1 – fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088 [6/4/15]

psewealth No Comments

Investing in Agreement With Your Beliefs

The case for aligning your portfolio with your outlook & worldview.

Do your investment choices reflect your outlook? Are they in agreement with your values? These questions may seem rather deep when it comes to deciding what to buy or sell, but some great investors have built fortunes by investing according to the ethical, moral and spiritual tenets that guide their lives.

Sir John Templeton stands out as an example. Born and raised in a small Tennessee town, he became one of the world’s richest men and most respected philanthropists. Templeton maintained a lifelong curiosity about science, religion, economics and world cultures – and it led him to notice opportunities in emerging industries and emerging markets (like Japan) that other investors missed. Believing that “every successful entrepreneur is a servant,” he invested in companies that did no harm and which reflected his conviction that “success is a process of continually seeking answers to new questions.”1

Among Templeton’s more famous maxims was the comment, “Invest, don’t trade or speculate.” Having endured the Great Depression as a youth, he had a knack for spotting irrational exuberance.2,4

As the 1990s drew to a close, he correctly forecast that 90% of Internet companies would go belly-up within five years. In 2003, he warned investors of a housing bubble that would soon burst; in 2005, he predicted “financial chaos” and a huge stock market downturn. To Templeton, a rally or an investment opportunity had to have sound fundamentals; if it lacked them, it was dangerous.3,4

Warren Buffett leaps to mind as another example. The “Oracle of Omaha” is worth $70 billion, and Berkshire Hathaway’s market value has risen 1,826,163% under his guidance – yet he still lives in the same house he bought for $31,500 in 1958, and prefers cheeseburgers and Cherry Coke to champagne or caviar. He was born to an influential family (his father served in Congress), but he has maintained humility through the decades.5

Money manager Guy Spier dined with Buffett in 2008 at one of the billionaire’s annual charity lunches, and in his book The Education of a Value Investor (co-written with TIME correspondent William Green), he shares a key piece of advice Buffett gave him that day: “It’s very important always to live your life by an inner scorecard, not an outer scorecard.” In other words, act and invest in such a way that you can hold your head high, so that you are staying true to your values and not engaging in behavior that conflicts with your morals and beliefs.5

Buffett has also cited the need to be truthful with yourself about your strengths, weaknesses and capabilities – as you invest, you should not be swayed from your core beliefs to embrace something that you find mysterious. “You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t understand. It’s not terribly important how big the circle is. But it’s terribly important that you know where the perimeter is.”5

Speaking to a college class some years ago in Georgia, he cited the real reward for a life well lived: “When you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster.”5

Values and beliefs helped guide Templeton and Buffett to success in the markets, in business and in life. For all the opportunities they seized, their legacy will be that of humble and value-centered individuals who knew what mattered most.

Today, socially responsible investing looks better than ever. Investors who want to their portfolios to better reflect their beliefs and values often turn to “socially responsible” investments – or alternately, “impact” investments that respond to environmental issues, women’s rights issues and other pressing societal concerns. When they emerged in the late 1980s, people were skeptical about how well such investments would perform; that skepticism is still around, but it appears to be unwarranted. Since 1990, the average annual total return for the S&P 500 has been 9.93%; the Domini 400, considered the prime index tracking socially responsible companies, has an annual total return of 10.46% by comparison. So aligning your portfolio with your outlook and worldview looks like even more like a win-win these days.6

Warmest regards,

april-signature

Citations.

1 – forbes.com/sites/alejandrochafuen/2013/05/07/how-to-invest-think-and-live-like-sir-john-templeton/ [5/7/13]

2 – record-eagle.com/news/local_news/jason-tank-finding-the-right-mindset-is-good-start/article_42c81b99-c7c9-5fa1-83b3-4fa2f9c1c641.html [5/5/15]

3 – csmonitor.com/Commentary/Opinion/2008/0711/p09s01-coop.html [7/11/08]

4 – crossingwallstreet.com/archives/2014/02/sir-john-templeton-the-last-yankee.html [2/10/14]

5 – observer.com/2015/05/ive-followed-warren-buffett-for-decades-and-keep-coming-back-to-these-10-quotes/ [5/4/15]

6 – marketwatch.com/story/socially-responsible-investing-has-beaten-the-sp-500-for-decades-2015-05-21 [5/21/15]

psewealth No Comments

Estate Planning for Your Digital Assets

Have you addressed this issue?

Social media and email accounts. Creative works, photos and keepsakes kept on home computers, the cloud or external storage drives. E-commerce accounts. Domain names. Bitcoin. These are all examples of digital assets. You will manage them closely as long as you live – but what will happen to them once you die?

Have you talked about it with those you love? In a recent survey of baby boomers, antivirus software provider AVG Technologies found that only 16% of respondents had thought about what would happen to their digital assets after their deaths. A mere 3% had alerted or prepared their loved ones in regard to this issue.1

If you have a will or a revocable trust, you must plan for the transfer and/or administration of digital assets just as you have for tangible assets. Your digital assets may or may not be of great financial value, but they need protection against exploitation as well as abandonment.

Distributing digital assets is part of fiduciary duty. That is what makes articulating your wishes so important. A financial professional or financial firm acting in a fiduciary role on your behalf has an obligation to distribute your digital assets – but many social media and e-commerce websites will not readily allow this without the permission given by the user or his or her heirs.2

How about social media & email accounts? Facebook has a legacy contact feature for its users. You can appoint a custodian for your page after you are gone: your legacy contact will be able to respond to friend requests, change your cover photo and profile picture, and write a notice of your memorial service or funeral; he or she will not be permitted to log in with your password or username, read messages sent to you or modify your account settings. Alternately, you can simply tell Facebook that you would like to have your account immediately deleted at your death. Google has an Inactive Account Manager option that will let you leave instructions for what should be done with your Google Drive docs or Gmail account once you are deceased.3

As for LinkedIn, a loved one fills out an online form on behalf of the deceased, which is reviewed by LinkedIn pursuant to getting in touch with that person. The notifying party will need to supply your name, profile URL, email address and date of death plus information on the company you last worked for and a link to your obituary. Twitter handles accounts of the deceased in similar fashion, and it can also remove images in a person’s account per request; the Twitter account is frozen at death, with access barred even to immediate family.4,5

Computer files. Your executor or trustee should be provided with the location of your computers, tablets or e-readers after your death and the passwords to them if you have set password protection. Locating backups may also become crucial. Remember that annual fees for antivirus programs and website hosting may no longer need to be paid; the executor or trustee will need to be informed about those user agreements.

E-commerce accounts. Most of us have eBay, iTunes or PayPal accounts, all with monetary value (with a PayPal account, the value may reach into the five-figure range). Moreover, these accounts can serve as pathways toward our banking and credit card information.

What if your idle e-commerce account is hacked after your death? What if the account balance is drained or the cybercriminal uses the account to go on a shopping spree? What if your username and password could be stolen and used at other websites you have accessed? These what-ifs need to be considered – and addressed during your lifetime and in your estate plan.

Domain names. How can you keep a website going after you die? One way is to pay for a decade (or more) of hosting or domain name ownership with such URL longevity in mind, and letting your trustee or executor know just how to renew the agreement. Only that trustee or executor should have access to that knowledge – unless you want business partners or a future owner to know how the arrangements work.

Bitcoin. You can create a copy of your Bitcoin wallet file for a trusted beneficiary, or arrange Bitcoin transfer to your beneficiary dependent on multiple signatures or the signature of an oracle server, or at a specific date. Or, a wallet file may be divided into component pieces for different heirs, with the heirs having to unite the components to form the Bitcoin wallet.6

Does your will or trust need amending? Language regarding your digital assets is essential. At the very least, you want to tell your executor or trustee where digital assets are stored. Even better, the amendment should give your executor or trustee the authority to administer, archive, alter or destroy digital assets in addition to the power to direct them to heirs or other named beneficiaries. That means turning over your online passwords to your executor or trustee at your death, or having them access password management software used to create them.

Warmest Regards,

april-signature

Citations.

1 – globalnews.ca/news/1940177/digital-wills-should-we-start-including-a-digital-legacy-clause-in-our-wills/ [4/15/15]

2 – tinyurl.com/kbno2wu [5/11/15]

3 – cnet.com/news/facebook-to-allow-legacy-contacts-for-when-you-die/ [2/12/15]

4 – help.linkedin.com/app/answers/detail/a_id/2842/~/deceased-linkedin-member—removing-profile [11/3/14]

5 – support.twitter.com/articles/87894-contacting-twitter-about-a-deceased-user-or-media-concerning-a-deceased-family-member [5/18/15]

psewealth No Comments

The Psychology of Saving

How many households have the right outlook to build wealth?

Why do some households save more than others? Building household savings may depend not only on cash flow, but also on psychology. With the right outlook, saving becomes a commitment. With a less positive outlook, it becomes a task – and tasks and chores are often postponed.

Financially speaking, saving is winning. Sometimes that lesson is lost, however. To some people, saving feels like losing – “losing” money that could be spent. So assert Ellen Rogin and Lisa Kueng, authors of a recently published book entitled Picture Your Prosperity: Smart Money Moves to Turn Your Vision into Reality. They cite a perceptual difference. If people are asked if they can save 20% of their income, the answer may be a resounding “no” – but if they are asked if they can live on 80% of their income, that may seem reasonable.1

There may be a gap between perception & behavior. Since 2001, Gallup has asked Americans a poll question: “Thinking about money for a moment, are you the type of person who more enjoys spending money or more enjoys saving money?”2

While more respondents have chosen “saving money” over “spending money” in every year the poll has been conducted, the difference in the responses never exceeded 5% from 2001-06. It hit 9% in 2009, and has been 18% or greater ever since. In 2014, 62% of respondents indicated they preferred to save instead of spend, with only 34% of respondents preferring spending.2

So are we a nation of good savers? Not to the degree that these poll results might suggest. The most recently available Commerce Department data (January 2015) shows the average personal savings rate at 5.5% – a percentage point higher than two years ago, but subpar historically. During the 1970s, the personal savings rate averaged 11.8%; in the 1990s, it averaged 6.7%.2,3

What reminders or actions might help people save more? Automated retirement plan contributions can assist the growth of savings, and are a means of paying oneself first. There is the envelope system, wherein a household divides its paycheck into figurative (or literal) envelopes, assigning X dollars per month to different packets representing different budget categories. When the envelopes are empty, you can spend no more. The psychology is never to empty the envelopes, of course – leaving a little aside each month that can be saved. Households take an incremental approach: they start by saving one or two cents of every dollar they make, then gradually increase that percentage, household expenses permitting.

Frugality may help as well. A decision to live on 70% or 80% of household income frees up some dollars for saving. Another route to building a nest egg is to invest (or at least save) the accumulated consumer savings you realize at the mall, the supermarket, the recycling center – even pocket change amassed over time.

How many households budget like businesses? Perhaps more should. A business owner, manager, or executive may realize savings through this approach. Take it line item by line item: spending $20 less each week at the supermarket translates to $1,040 saved annually.

Working with financial professionals may encourage greater savings. A 2014 study on workplace retirement plan participation from Natixis Global Asset Management had a couple of details affirming this. While employees who chose to go without input from a financial professional contributed an average of 7.8% of their incomes to their retirement plan accounts, employees who sought such input contributed an average of 9.5%. The study also learned that 74% of the employees who had turned to financial professionals understood how much money their accounts needed to amass for retirement, compared to 54% of employees not seeking such help.4

Saving money should make anyone feel great. It means effectively “paying yourself” or at least building up cash on hand. A household with a save-first financial approach may find itself making progress toward near-term and long-term money goals.

Warmest Regards,

 april-signature

 

  

Citations.

1 – businessinsider.com/mental-trick-save-money-2015-1 [1/27/15]

2 – gallup.com/poll/168587/americans-continue-enjoy-saving-spending.aspx [4/21/14]

3 – bea.gov/newsreleases/national/pi/pinewsrelease.htm [3/2/15]

4 – bostonglobe.com/business/2014/09/06/advice-seekers-save-more-study-finds/dJmUUXz78twO9OxLcRTqdN/story.html [9/6/14]

psewealth No Comments

Yes, Young Growing Families Can Save & Invest

It may seem like a tall order, but it can be accomplished.

Plan to put yourself steps ahead of your peers. If you have a young, growing family, no doubt your to-do list is pretty long on any given day. Beyond today, you are probably working on another kind of to-do list for the long term. Where does “saving and investing” rank on that list?

For some families, it never quite ranks high enough – and it never becomes the priority it should become. Assorted financial pressures, sudden shifts in household needs, bad luck – they can all move “saving and investing” down the list. Even so, young families have planned to build wealth in the face of such stresses. You can follow their example. It is less an option than a necessity.

First step: put it into numbers. Most people have invested a little by the time they reach 30 or 35, and some have invested avidly. A plan is not always in place, however. The mission is simply to “make money” or “build wealth” for “the future.”

This is good, but also vague. How much money will you need to save by 65 to promote enough retirement income and to live comfortably? Are you on pace to build a retirement nest egg that large? How much risk do you feel comfortable tolerating as you invest? What kind of impact are investment fees and taxes having on your efforts?

A financial professional can help you arrive at answers to these questions, and others. He or she can help you define long-range retirement savings goals and project the amount of savings and income you may need to sustain your lifestyle as retirees. At that point, “the future” will seem more tangible and your wealth-building effort even more purposeful.

Second step: start today & never stop. If you have already started, congratulations! In getting an early start, you have taken advantage of a young investor’s greatest financial asset: time.

If you haven’t started saving and investing, you can do so now. It doesn’t take a huge lump sum to begin. Even if you defer $100 worth of salary into a retirement plan a month, you are putting a foot forward. See if you can allocate much more.

If you begin when you are young and keep at it, you will witness the awesome power of compounding as you build your retirement savings and net worth through the years.

Just how awesome is it? An example: let’s say you save $100 per month in an investment account for 20 years and the account returns a (hypothetical) 5% for you over those two decades. In 20 years under such conditions, your $100-a-month nest egg will not amount to $24,000 – it will work out to $41,011, which is 71% more! If you put in $200 a month, you wind up with a projected $82,022 off of the $24,000 in contributions! We aren’t factoring in account fees or market fluctuations, of course – but you get the picture. Stretched out to 30 years, a consistent $100-per-month contribution and a consistent 5% return project to $82,302; raise the monthly contribution to $200 and you get $164,604. These numbers factor in annual compounding; use daily compounding as the variable, and they grow a bit larger. So even if you set aside and invest a few twenties each month, you may still end up with appreciable retirement savings – and these are numbers for one retirement saver, there are two of you.1

What’s that? You say you can’t retire on $164,000 or less? You’re absolutely right. You have to devote more than that to your effort. You may need a million or two – and if you plan ahead, you may very well generate it. Ownership of equity investments, real property, business or professional success – this can all help to position you and your family for a comfortable future, provided you keep good financial habits along the way and pay attention to taxes.

How do you find the balance? This is worth addressing – how do you balance saving and investing with attending to your family’s immediate financial needs?

Bottom line, you have to find money to save and invest for your family’s near-term and long-term goals. If it isn’t on hand, you may find it by reducing certain household costs. Are you spending a lot of money on goods and services you want rather than need? Cut back on that kind of spending. Is credit card debt siphoning away dollars you should assign to saving and investing? Fix that financial leak and avoid paying with plastic whenever you can. Other young families are doing it, and yours can as well.

Vow to keep “paying yourself first” – maintain the consistency of your saving and investing effort. What is more important, saving for your child’s college education or buying those season tickets? Who comes first in your life, your family or your gardener? You know the answer.

It has been done; it should be done. Stories abound of families that have built wealth out of comparative poverty. There are people who came to this country with little more than the clothes on their backs who have found prosperity; there are families (including single-parent households) who have been dealt a bad hand yet overcame long financial odds to gain affluence.

It all starts with belief – the belief that you can do it. Complement that belief with a plan and regular saving and investing, and you may find yourself much better off much sooner than you think.

Warmest Regards,

april-signature

Citations.

1 – bankrate.com/calculators/savings/compound-savings-calculator-tool.aspx [12/26/14]

psewealth No Comments

Why Does Family Wealth Fade Away?

A lack of vision is often the answer to that question.

Many are the stories of family wealth lost. In the late 19th century, industrial tycoon Cornelius Vanderbilt amassed the equivalent of $100 billion in today’s dollars – but when 120 of his descendants met at a family gathering in 1973, there were no millionaires among them.1

Barbara Woolworth Hutton – daughter of the founder of E.F. Hutton & Company, heiress to the Woolworth’s five-and-dime empire – inherited $900 million in inflation-adjusted dollars but passed away nearly penniless (her reputed net worth at death was $3,500).1,2

Why do stories like these happen? Why, as the Wall Street Journal notes, does an average of  70% of family wealth erode in the hands of the next generation, and an average of 90% of it in the hands of the generation thereafter? And why, as the Family Business Institute notes, do only 3% of family businesses survive past the third generation?1,3

Lost family wealth can be linked to economic, medical and psychological factors, even changes in an industry or simple fate. Yet inherited wealth may slip away due to a far less dramatic reason. 

What’s more valuable, money or knowledge? Having money is one thing; knowing how to make and keep it is another. Business owners naturally value control, but at times they make the mistake of valuing it too much – being in control becomes more of a priority than sharing practical knowledge, ideas or a financial stake with the next generation. Or, maybe there simply isn’t enough time in a business owner’s 60-hour workweek to convey the know-how or determine an outcome that makes sense for two generations.  A good succession planner can help a family business deal with these concerns.

As a long-term direction is set for the family business, one should also be set for family money. Much has been written about baby boomers being on the receiving end of the greatest generational wealth transfer in history – a total of roughly $7.6 trillion, according to the Wall Street Journal – but so far, young boomers are only saving about $0.50 of each $1 they inherit. If adult children grow up with a lot of money, they may also easily slip into a habit if spending beyond their means, or acting on entrepreneurial whims without the knowledge or boots-on-the-ground business acumen of mom and dad. According to online legal service Rocket Lawyer, 41% of baby boomers (Americans now aged 50-68) have no will. Wills are a necessity, and trusts are useful as well, especially when wealth stands a chance of going to minors.1,4   

Vision matters. When family members agree about the value and purpose of family wealth – what wealth means to them, what it should accomplish, how it should be maintained and grown for the future – that shared vision can be expressed in a coherent legacy plan, which can serve as a kind of compass.

After all, estate planning encompasses much more than strategies for wealth transfer, tax deferral and legal tax avoidance. It is also about conveying knowledge – and values. In the long run, nothing may help family wealth more.

Warmest Regards,

 april-signature

 

Citations.

1 – tinyurl.com/qblyk6v [3/8/13]

2 – investorplace.com/2013/08/woolworths-heiress-outspent-a-near-billion-dollar-fortune-died-penniless/#.Us8-D7SLXs8 [8/2/13]

3 – fa-mag.com/news/why-wealth-disappears-8227.html [9/7/11]

4 – forbes.com/sites/lawrencelight/2013/11/22/how-to-inherit-wealth-without-screwing-up/ [11/22/13]

  

psewealth No Comments

It Isn’t Too Late to Save for Retirement

If you’re 40 or 50 and haven’t begun, you must make the effort.

 Some people start saving for retirement at 20, 25, or 30. Others start later, and while their accumulated assets will have fewer years of compounding to benefit from, that shouldn’t discourage them to the point of doing nothing.   

If you need to play catch-up, here are some retirement savings principles to keep in mind. First of all, keep a positive outlook. Believe in the validity of your effort. Know that you are doing something good for yourself and your future, and keep at it.

Starting later means saving more – much more. That’s reality; that’s math. When you have 15 or 20 years until your envisioned retirement instead of 30 or 40, you’ve got to sock away money for retirement in comparatively greater proportions. The good news is that you won’t be retiring strictly on those contributions; in large part, you will be retiring on the earnings generated by that pool of invested assets.      

How much more do you need to save? A ballpark example: Marisa, a pre-retiree, has zero retirement savings at age 45 and dedicates herself to doing something about it. She decides to save $500 each month for retirement. After 20 years of doing that month after month, and with her retirement account yielding 6% a year, Marisa winds up with about $225,000 at age 65.1

After 65, Marisa would probably realize about $10,000 a year in inflation-adjusted retirement income from that $225,000 in invested retirement savings. Would that and Social Security be enough? Probably not. Admittedly, this is better than nothing. Moreover, her retirement account(s) might average better than a 6% return across 20 years.1

The math doesn’t lie, and the message is clear: Marisa needs to save more than $6,000 a year for retirement. Practically speaking, that means she should also exploit vehicles which allow her to do that. In 2014, you can put up to $5,500 in an IRA, $6,500 if you are 50 or older – but you can sock away up to $17,500 next year in a 401(k), 403(b), Thrift Savings Plan and most 457 plans, which all have a maximum contribution limit of $23,000 for those 50 and older.2

If Marisa is self-employed (and a sole proprietor), she can establish a solo 401(k) or a SEP-IRA. The yearly contribution limits are much higher for these plans. If Marisa’s 2013 net earnings from self-employment (after earnings are reduced by one-half of self-employment tax) work out to $50,000, she can put an employer contribution of up to $10,000 in a SEP-IRA. (She must also make similar percentage contributions for all “covered” employees, excepting her spouse, under the SEP IRA plan.) As a sole proprietor, Marisa may also make a combined employer-employee contribution of up to $33,000 to a solo 401(k) this year, and if she combines a defined benefit plan with a solo 401(k), the limit rises to $47,400. If her 2013 net earnings from self-employment come out to $150,000, she can make an employer contribution of as much as $30,000 to a SEP-IRA, a combined employee salary deferral contribution and employer profit sharing contribution of up to $53,000 to a solo 401(k), and contribute up to $96,300 toward her retirement through via the combination of the solo 401(k) and defined benefit plan.3 

How do you save more? As you are likely nearing your peak earnings years, it may be easier than you initially assume. One helpful step is to reduce some of the lifestyle costs you incur: cable TV, lease payments, and so forth. Reducing debt helps: every reduced credit card balance or paid-off loan frees up more cash. Selling things helps – a car, a boat, a house, collectibles. Whatever money they generate for you can be assigned to your retirement savings effort.

Consistency is more important than yield. When you get a late start on retirement saving, you naturally want solid returns on your investments every year – yet you shouldn’t become fixated on the return alone. A dogged pursuit of double-digit returns may expose you to considerable market risk (and the potential for big losses in a downturn). Diversification is always important, increasingly so when you can’t afford to lose a big portion of what you have saved. So is tax efficiency. You will also want to watch account fees.

If you start saving for retirement at 50, your retirement savings will likely double (at least) by age 65 thanks to consistent inflows of new money, decent yields and compounding.4

What if you amass a big nest egg & still face a shortfall? Maybe you can reduce expenses in retirement by moving to another city or state (or even another country). Maybe you can broaden your skill set and make yourself employable in another way (which also might help you before you reach traditional retirement age if you find yourself in a declining industry).

If you haven’t begun to save for retirement by your mid-40s, you have probably heard a few warnings and wake-up calls. Unless you are independently wealthy or anticipate being so someday, the truth of the matter is…

If you haven’t started saving for retirement, you need to do something to save your retirement.

That may sound harsh or scary, but without a nest egg, your vision of a comfortable future is in jeopardy. You can’t retire on hope and you don’t want to rely on Social Security, relatives or social services agencies for your well-being when you are elderly.

Warmest Regards,

april-signature

 

 

 

Citations.

1 – money.cnn.com/2012/08/15/pf/expert/late-start-retirement.moneymag/ [8/15/13]

2 – irs.gov/uac/IRS-Announces-2014-Pension-Plan-Limitations;-Taxpayers-May-Contribute-up-to-$17,500-to-their-401%28k%29-plans-in-2014 [11/4/13]

3 – forbes.com/sites/ashleaebeling/2013/11/01/retirement-savings-for-the-self-employed/ [11/1/13]

4 – forbes.com/sites/mitchelltuchman/2013/11/21/financial-planning-for-late-starters-in-five-steps/ [11/21/13]

psewealth No Comments

Dividend Reinvestment & Compound Interest

Their combined power must be recognized & appreciated.

Why reroute dividends back into your investments? Isn’t taking the income the preferred outcome when a dividend is produced?

Retirees and pre-retirees are eager for dividend income in this era of historically low interest rates. Even so, the choice to buy more shares has merit for the long run.

Reinvestment & compounding may have profoundly positive effects. As a hypothetical example, let’s say you own 100 shares of a stock with a $10 share price. For the sake of mathematical convenience, let’s say that this stock maintains that share price while providing you with a 3% annual dividend. That 3% payment breaks down to a 0.75% quarterly dividend ($7.50 per quarter going to you). You choose to reinvest these payouts, buying more shares each quarter. So after one quarter, you own 100.75 shares of that stock (valued at $1,007.50), and a year later, you own 103.034 shares (valued at $1,030.34). Your annual yield effectively improved from 3% to 3.34%.1

That’s after one year. The big picture, even with such a simple example, is easily grasped here. While past performance is no indicator of future results, some recent stock market history illuminates the power of dividend reinvestment and compounding further.

Bears reference the “lost decade” of the 2000s, but dividend trends from that era certainly put stock market investing in a more positive light. Even with the 2000-02 bear market and 2008 downturn, S&P 500 firms increased their dividends by an average of 5.46% in a 10-year stretch that witnessed both those market setbacks. In the same ten-year period, DJIA companies boosted their dividends by an average of 7.07% per year, while NASDAQ firms bumped up theirs by an annual average of 45.38%! If an investor put $100,000 into a hypothetical investment that performed similarly to the DJIA on January 1, 2000, simple price appreciation would have taken its value north to more than $105,000 by January 1, 2012. Yet across the same 12 market years, that hypothetical $100,000 invested with dividends would have grown to approximately $141,000 by the start of 2012.2

Over 80% of S&P 500 firms pay dividends. In September 2013, 83% of stocks in the index were issuing dividend payments – the most in 15 years – with dividends from 99 firms at 3% or better. Some firms paid them out even as they lost money.3,4

Think about DRIPs. About 1,000 publicly traded firms offer dividend reinvestment plans (DRIPs), and you can get into them for the price of a single share. DRIPs let you buy partial shares using your reinvested dividends – often without a fee. (You can also open a DRIP using a broker, but commissions and transfer charges may apply.) This is really another form of dollar cost averaging – slow and steady investment with the potential for a considerable long-term benefit. Multiple DRIPs mean multiple 1099s and some shareholders lose track of DRIPs over time, but they offer you a nice way to broaden your portfolio.5

Do you work for a big company that offers a DRIP? While you expose your portfolio to too much risk by assigning too much of it to one company’s stock, the reinvestment and compounding potential of a no-fee DRIP certainly warrants your attention.

Here is another hypothetical example. Say you go to work for the Rewarding Corporation and you invest an initial $1,000 in its employee DRIP, buying 100 shares at that price. You make $100 monthly contributions to the drip for the next 20 years while the shares appreciate 5% annually over that period and the dividend yield averages 2.3%. (We’ll factor in unchanging capital gains tax rates of 15% as well.) Twenty years later, your investment grows to $52,790.80. If your consistent monthly contribution to the DRIP is $250 rather than $100, you end up with $126,221.11 under the same conditions.6

Keep investing consistently, with compounding & reinvestment in mind. It may make a huge financial difference for you over time – a difference that might even let you retire earlier instead of later.

Warmest Regards,

april-signature 

 

Citations.

1 – beta.fool.com/cacody/2012/09/02/compound-interest-the-8th-wonder-of-the-world/10945/ [9/2/13]

2 – tinyurl.com/pftknyj [3/26/13]

3 – factset.com/dividend [9/16/13]

4 – 247wallst.com/special-report/2013/10/02/the-highest-yielding-dividends-that-are-safe-to-hold/ [10/2/13]

5 – consumerreports.org/cro/money/personal-investing/drip-your-way-to-growth/overview/index.htm [10/11]

6 – hughchou.org/calc/drip.php [10/17/13]

psewealth No Comments

Money Matters

For many of us, money seems like a grown-up topic that we can put off until our kids are, well, grown-ups. When they see parents arguing about money, parents tell them it isn’t a big deal. When they ask for something, parents try to get it for them—without mentioning how much it will cost.  It’s easy to send messages that confuse our kids, but it doesn’t have to be this way.

 

Read the stories of five families struggling with the all-too-common kids’ money lessons … and how they can turn their mistakes around.

Click Here to read: 5 Money Mistakes Parents Make … and How to Fix Them

Warmest Regards,

april-signature

 

psewealth No Comments

7 PRINCIPLES OF LONG-TERM INVESTING

Increasing your wealth over time is about more than making the right stock picks or always buying low and selling high. Too often, we see intelligent investors shoot themselves in the feet by making fundamental errors in their investing strategy.

Through years of experience, we have observed the effects of fear, greed, lack of discipline, groupthink, and many other pitfalls that investors experience. Accordingly, we have compiled this list of seven principles of long-term investing. These are by no means exhaustive, nor will they guarantee investment success, but we hope that you will find them useful in helping you make investment decisions.

1. FOCUS ON THE TOTAL REAL RETURN OF YOUR INVESTMENTS

To maximize investment growth over time, it’s critical to factor in the effects of fees, taxes and inflation on your returns. Many posted investment returns explicitly exclude the effects of fees, which come right off the top of each year’s gains, so it’s important to dig a little deeper and find out how much that performance is costing you each year.

Taxes can also take a serious bite out of your investment gains each year and it’s important to structure your investments to account for taxes on capital gains, dividends, and income. While we don’t believe that taxes should be the primary driver of an investment strategy, incorporating tax efficiency into your overall plan will help you keep more of what you earn. If taxes are a problem for you, structuring your investments so that taxable investments can grow in a tax-deferred account may be an option.

Inflation, the erosion of your purchasing power over time from increases in the cost of goods, is another insidious force that can eat away at investment growth each year. For example, a candy bar that cost 25 cents in 1975 would cost over a dollar today, due to the effects of rising prices. That same candy bar would cost approximately $1.30 in 2020 if we assume an annual inflation of 4 percent per year. Consumer prices have risen each year in the United States. In the century since the U.S. Department of Labor was founded and began tracking consumer prices, the average annual inflation has been 3.22 percent each year, which means that what cost one dollar in 1913 costs $23.51 today.

To put these numbers in the context of investments, an assumed inflation rate of 4 percent will reduce the value of a $100,000 portfolio invested today to approximately $67,500 in just ten years; this means that your investments would have to grow to $148,000 during that time period – a 48 percent gain – simply to keep pace with inflation. And this number doesn’t include the effects of taxes and fees on investment performance.

In an effort to reduce risk, many people over-invest in fixed-income securities, which are highly exposed to inflation risk since they do not have the same potential for capital appreciation as equities. We recommend that our clients’ portfolios contain enough exposure to equities for their ability to fight inflation through growth. Historically, common stocks have offered the best performance over time. For the period 1928 to 2011, the S&P 500 returned an average annual performance of 9.2 percent, while 10-Year Treasury bonds returned just 5.1 percent, investment-grade corporate bonds returned 6.0 percent, and inflation during the same period was 3.2 percent.  It can be psychologically difficult to weather the volatility of equity markets, but investors who fail to adequately plan for the effects of inflation risk running out of money later in life.

An investment strategy that fails to account for the effects of fees, taxes and inflation on overall return will severely handicap your ability to increase your wealth over time. After some research, you may find that in some cases, an investment with a lower return may actually have a higher total return once you account for taxes, fees, and inflation.

2. DON’T CHASE THE CROWD

No one knows with any certainty which direction markets will go in the future. However, a good axiom to remember is that it is usually wise to avoid following the herd. By the time your friends, family, neighbors and newspaper columnists are all investing in a particular sector or security, it’s often too late to benefit because hype has already inflated the price. Whenever investment dollars charge in, prices soar and savvy investors usually move on. By the time the mass of average investors have caught on to a new fad, prices are often too high and investments are overvalued, making them a poor choice for investors who are seeking value.

We don’t necessarily advise becoming contrarian investors, i.e. those who believe that crowds are always wrong and look for opportunities to invest against the prevailing trend. Instead, we strongly encourage an investment strategy that is based on objective research using the best information available, calculated choices, a realistic assessment of risk, and a determination to avoid emotional decision-making.

The herd mentality is a well-documented pitfall among investors and it can have striking consequences for investment performance. Investment clubs, which were popular during the 1990s, were studied as part of a study in 2000 about the dangers of groupthink. These clubs, made up of amateur investors, often favored certain sectors and investment types such as small-cap domestic stocks to the exclusion of all other types. Researchers at the University of California found that portfolio returns of investment clubs lagged the S&P 500 index   by 3.7 percent per year, meaning that members did worse as part of the group than the market overall during the same period.

3. REMAIN FLEXIBLE AND DIVERSIFIED*

In today’s volatile markets a successful long-term investment strategy can often benefit from flexibility and proper diversification. Diversification is one of the pillars of modern investment theory and can be a powerful tool to reduce certain types of risk in your portfolio. Be sure that your overall portfolio contains a variety of quality investment types, including stocks, bonds, international securities, and a few alternative investments if your risk profile and investment goals support them.

No matter how careful or prudent you are, you cannot predict or control future market movements. Much of the market volatility of the last few years has been driven by economic events that are outside any investor’s control. Global economic events, natural disasters, and government activities can all cause large-scale market movements. While we can’t diversify away all forms of risk, a flexible strategy can help you find investment opportunities in many market conditions.

On the level of individual companies, any number of unforeseen factors can affect a stock’s price: Natural disasters, supply line disruptions, unexpected technological advances by a competitor, or the loss of a major partner can all cost a company millions of dollars in losses and affect its value to your portfolio. Since it’s impossible to predict these events, it’s important to implement an investment strategy that diversifies by industry, by risk level, by country, by investment type, and other factors. While diversification can’t always protect your assets in times of widespread market declines, by spreading investment risk among a wide variety of securities, we hope that what affects one part of a portfolio doesn’t bring down the value of the whole.

It’s important to remember that there is no single kind of investment that is always best. There is a time to purchase corporate bonds, Treasuries, blue chip stocks, small-cap stocks, internationals and so on. And there are times when it’s best to keep enough cash on hand to take advantage of investment opportunities that present themselves.

4. BUY VALUE, NOT MARKET TRENDS OR THE ECONOMIC OUTLOOK

Wise investors focus on value when evaluating investment options. Too many investors focus on buying market trends and economic outlook, not realizing that trends can be deceiving and markets often perform very differently from the economy. Individual stocks can easily surprise you – rising in a down market, and falling during a rally – making it important for long-term investors to focus on buying quality investments with good fundamentals.

While economic trends can exert a powerful effect on market movements, the stock market and the economy do not move with perfect correlation and there are many occasions in which markets rally in spite of poor economic fundamentals or declining corporate earnings. This is not to say that economic outlook is unimportant. Over the long term, market movements often foreshadow economic trends as investors attempt to “price in” how they expect the economy to affect stock prices. A smart investor keeps an eye on the economy and factors economic outlook into investment decisions, but ultimately seeks out high-quality individual investments.

5. TAKE THE RIGHT AMOUNT OF RISK

Experience and research has taught us that investors do best when they take on the right amount of risk for their individual goals and tolerance. Too many investors focus strictly on generating returns while ignoring the importance of managing risk properly. Although there are many different types of risk, when discussing portfolios, we generally are referring to systematic risk: risk that affects markets as a whole, such as recessions and wars; or unsystematic risk: risk that is specific to individual stocks and securities that can be addressed through diversification.

Too much risk can leave your nest egg vulnerable to market swings with too little time to recover before you must start withdrawing money and locking in the losses. Too little risk in your portfolio will reduce your potential for capital appreciation and allow inflation to eat away at the long-term value of your investments.

The challenge is in ascertaining how much risk is right for you and your portfolio. Determining risk tolerance and the appropriate amount of risk for your investment goals is one of the most important things we help our clients with.

Obviously, no one wants to see their portfolio lose money at any point, but it’s important to understand that, generally, one must take on more risk in order to achieve higher long-term returns. It’s vital to be honest about your ability to withstand short-term swings in value and take investment losses in the pursuit of returns.

Another essential question that you must answer is how much risk you need to take on in order to meet your investment goals. Modern portfolio theory hypothesizes that there is an asset allocation strategy that will generate the highest return for every risk level. The right risk allocation for a portfolio will depend on a number of factors, including your expectations for return, investment objectives, time horizon, and appetite for risk.

Many popular asset allocation tools focus on age – or time until retirement – as the primary driver of an allocation strategy. While this can be useful, we believe that age is only one factor in determining a proper asset allocation strategy; other factors include liquidity needs, net worth, and investing priorities. On the face of it, the logic of decreasing allocation to equities and increasing fixed income holdings as one gets older seems reasonable. As investors approach retirement, their ability to wait out portfolio swings or earn their way out of losses diminishes. However, many age-based allocations fail to adequately account for longer lifespans and the effects of inflation, putting investors at risk of running out of money later in life.

Ultimately, holding the wrong amount of risk means that you may not realize the investment gains that you expect or that you may experience wider swings in portfolio value than you can stomach. If you are unsure about the current level of risk in your portfolio or have questions about risk management, it may be worth talking to us. We can help you understand your options.

6. LEARN FROM YOUR MISTAKES

The words “this time is different” are among the most costly words in the history of investing. One of the key differences between successful long-term investors and those who are not, is that successful people learn from their own mistakes and commit to never making the same mistakes twice. Even when a mistake results in a large loss, take a step back to review the actions that led to the loss. Don’t compound the errors by taking bigger risks in an effort to recover your money. Determine where you went astray and take steps to ensure that you avoid the same mistake in the future.

Many common investing mistakes can be attributed to emotional decision-making. Whenever you make financial or investment decisions, you will confront the challenges of overcoming fear and greed. Fear can cause you to run for the exits when markets decline or your portfolio takes losses. Greed can encourage you to chase fads and take on too much risk in the pursuit of a big score. However, by recognizing your emotional triggers and engaging your rational mind, you can overcome your impulses and cultivate discipline.

Working with a financial professional can help avoid emotional decision-making and many other pitfalls commonly encountered by amateur investors. It’s our job to remain focused on the long-term strategy and act as a voice of reason when emotions run high. In today’s world of high-tech investing, major financial decisions are only a click away and investors pay a high price for short-term thinking. Professional financial representatives can be invaluable for their ability to answer questions, provide reassurance, and keep financial strategies on track despite volatile conditions.

7. AGGRESSIVELY MONITOR YOUR INVESTMENTS, OR PAY SOMEONE SKILLED TO DO IT

When markets are rising and amateur investors are doing very well, it’s easy to forget that protecting your assets during declining markets requires skill, discipline and constant attention. Investors need to expect and be prepared to react to fast-moving markets. No market rally is permanent and no decline lasts forever, meaning that there are no investments that you can buy and forget about. The pace of change of today’s markets is too great for investors to be complacent. For example, the 30 companies that make up the Dow Jones Industrials, which are some of the largest publicly traded companies in the U.S., have changed numerous times since the Dow’s inception in 1896. These companies were removed as they declined, were acquired, went private, or simply went bankrupt.

Investing with long-term assets is not child’s play since most investors can ill-afford to lose their nest egg. Today’s markets are no place for dabblers without the time, patience, discipline, and diligence needed to do a proper job. If you aren’t completely sure that you have what it takes to manage your investments well, it may be time to find a professional financial representative with the skills and experience to do it for you.

CONCLUSIONS

Achieving long-term investing success is challenging and requires discipline, time, and skill. While it’s not possible to predict future returns or market movements, it is possible to develop strategies that mitigate risk and place us in the best position to achieve reasonable returns. No strategy is perfect, but our experience has shown that when used with prudence, these guiding principles can help investors achieve financial success over the long term. We hope you’ve found these rules useful and that they will help you in your financial journey.

Footnotes, disclosures and sources:

* Diversification does not guarantee profit nor is it guaranteed to protect investments from losses.

Neither the named representative nor the named Broker dealer gives tax or legal advice.

Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice.

This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Investing in small- and mid-size companies may involve greater risk in price volatility and potential reward than investing in larger, more established companies.

 International investing presents certain risks not associated with investing solely in the United States. These include currency fluctuations, political risks, accounting procedure differences and the lesser degree of public information required to be provided by non-U.S. companies.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

Opinions expressed are not intended as investment advice or to predict future performance.

Past performance does not guarantee future results.

Consult your financial professional before making any investment decision.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.

These are the views of Platinum Advisor Marketing Strategies, LLC, and not necessarily those of the named representative or named Broker dealer, and should not be construed as investment advice.

[1] Bureau of Labor Statistics. Inflation Calculator. Source: http://www.bls.gov/data/inflation_calculator.htm  

[1] Annual Returns on Stock, T.Bonds and T.Bills: 1928 – Current. Aswath Damodaran. Source: http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/histretSP.html#_msoanchor_1 , Long Term Returns. Historical Long Term Investment Grade Corporate Bond Returns. Source: http://www.longtermreturns.com/2012/01/historical-long-term-investment-grade.html , Multipl.com. US Inflation Rate by Year. Source: http://www.multpl.com/inflation/table

[1] The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. You cannot invest directly in an index.

[1] Barber B. and Odean T. “Too Many Cooks Spoil the Profits: Investment Club Performance.” 2000. AIMR. Source: http://faculty.haas.berkeley.edu/odean/papers%20current%20versions/faj%20jf00%20barber%20and%20odean.pdf