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Posts Tagged ‘Mutual Funds’

There are many valid reasons to consider a 401k rollover.

Costs

While it may not seem like it, you are paying for your funds to stay with your old employer’s sponsored plan.  You just don’t see it.  Fees for employer plans are not very transparent.  While you may not see an actual bill, your employer is probably paying for the administration of the plan through hidden fees assessed on the balances held in it.

I have seen sponsored plans that had these back-end hidden fees and charged the participant a piece for each contribution.  A little here, a little there all adds up.  And the more it is, the less there is to compound for your retirement.

While there are few things that you can control in life and investing, fees are one of them.

In a rollover IRA, you’ll have more choices of platforms which may offer low loads and costs so you can keep more in your pocket.  So control what you can when you can for successful investing.

Choice and Access

While some employer plans may offer a variety of funds which may be top of the line, you’re still limited to the menu selected by your employer.  More often than not this is influenced by the broker associated with the plan.  And this can be influenced by the restrictions placed on the choices by the broker’s company or administrator because there may be an incentive to fill the menu with one fund family.

I’ve seen plans offered through national payroll companies that required more than 50% of the fund choices to be of one particular fund family.  Not every choice in a management company’s fund line up may be stellar so you’re limiting yourself by staying with the old plan.

When you rollover you’ll have a much larger universe to choose from.  (My company has access to more than 14,000 non-proprietary mutual funds with no loads or loads waived).  You’ll typically even have access to individual stocks, bonds, Unit Investment Trusts, Exchange Traded Funds and bank CDs.

Have you ever considered investing in something besides stocks, bonds or mutual funds? Maybe you might want to invest in real estate or buy judgments or invest in a business by being its lender or providing a friend with start-up capital.

Well, you can’t do that with a typical 401k plan.  But you can with a self-directed IRA.  And such an IRA can’t be done through the Big Box financial firms.  There are specialized bank and non-bank custodians who handle such transactions and work through independent financial planners to help their clients learn more about such options.

Risk Controls & Broader Choice of Investment Strategies

While you may have online access to your company-sponsored plan so you can make trades or switches of your funds periodically, there really are no risk controls that you can use given the limitations of the platform the 401k is using.

Let’s put it this way:  Investors make money when they don’t lose it.  At least that’s my working philosophy.  Having options and systems in place means that you stand a better chance of protecting your retirement nest egg.

It’s always easier to not lose money in the first place than it is to try to make up for lost ground.  Your money has to work harder to get back to breakeven much less get ahead for your retirement goals.

Consider this:  If you think that Treasurys or munis are in their own bond bubbles, what can you do to protect yourself through your 401k?  Probably, not much.  But in your own IRA you’ll be able to build a more all-weather portfolio that includes inflation hedges like convertible bonds, foreign dividend-paying stocks, master limited partnerships or even managed futures.  All come in mutual funds or ETFs which offer the advantages of diversification without the tax and cost structures of direct investment options.

Or maybe you want to minimize the impact of another downdraft in the market.  Using ETFs and trailing stop-loss orders you may help protect your gains.  Not an option in your old 401k.

So when you roll your account over, you’ll also have access to professional help, tools and direct management options tailored to your specific needs that you just can’t get within your old 401k.

Things to Consider:

iMonitor Portfolio Program

Money Tools DIY Program

For more information, please call Steve Stanganelli, CFP® at the Rollover Helpline at 978-388-0020 or 617-398-7494.

Check out the website and newsletter archive for more on this and similar topics:  www.ClearViewWealthAdvisors.com.

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Da-Dum … Da-Dum … Da-Dum Da Dum Da Dum … Da Da Da Da Da Da Da Da … Da Da Daaaa …..

Sound familiar?  While you could mistaken it for my toddler son Spencer calling me, it’s really the eerily memorable theme song from the classic water thriller Jaws. (Or at least that’s what it sounds like when I’m singing it).

Like many, after seeing this movie I was more than a bit afraid to go swimming even in my own backyard pool.  Let’s not even talk about trips to the beach!

Just as investors thought it was safe to get back into investing waters as the market continues to sport positive numbers on several indexes like the Dow and S&P, news of another potential scandal comes out that may cause investors to pause once again.

After a decade that has included three stock market busts, a real estate bubble burst, a mutual fund industry timing scandal, the greatest Ponzi scheme ever and a whole lot of smaller ones coupled with a long and wearying Recession and near financial meltdown, we now have another cloud on the horizon.

Since a November 20 article in the Wall Street Journal, there has been an increasing amount of media scrutiny about a widening investigation by the FBI, Securities and Exchange Commission and the New York Attorney General’s Office into possible insider trading by several well-known mutual funds, hedge funds and investment managers.

How this plays out is anyone’s guess.  But the last time there was a wide-spread scandal in mutual funds, the bedrock investment that allows many retail investors to get in on the action of Wall Street, it resulted in not only bad PR but in more than $3 billion paid out to investors to make up for the inequity of favorable market timing by a select few.

In fact more than six years after the scandal, I continue to receive checks in the amounts ranging from $2 to $30 from mutual fund companies that used to hold my investments.

Will this result in the same sort of long-tail remedy?  Who knows but the more immediate concern will be if individuals decide that this is one more piece of evidence that the Wall Street game is rigged against them.

I hope that is not the case.  Throwing the baby out with the bath water will ultimately do no good for an investor saving for long-term goals.  Sure, you can take all your marbles and go home.  In fact, more than $90 billion has been withdrawn from mutual funds since the beginning of 2009.

The general gist of this investigation is centered on so-called expert networks that offer research of various stocks to investment managers.  Since investing is all about determining what is a fair value to pay for the stock of a company, it’s important to understand the company’s cash flows and things that can affect the top and bottom line.  So certain research companies go about like investigative reporters developing contacts with companies, asking questions about new products or sales and then reporting this to stock analysts that work at other firms.

There is nothing inherently wrong or illegal about asset managers using third-party research.  Since there’s no easy to see bright line about what is or isn’t insider information in some of these cases, nothing wrong may have been done.

The problem for many investors right now is one of perception.  There is the cockroach theory in accounting and finance.  When you turn on a light in a room and you see something scampering off, it’s almost safe to say that there were probably more bugs running about when the lights were off.  So to avoid future surprises, you might want to relocate from the apartment and in investing you might be inclined to also get out of Dodge.

I think it’s too early to simply paint the whole industry with a broad brush and say that they’re all corrupt.  Yes, there were some bad apples.  But you should think about this sentiment best expressed by Frank Black in Investment News (11/29/2010, page 2):  If they are getting inside information … why did the average fund decline almost 50% in 2008-2009?

Trying to get a leg up on the other guy is pretty normal in a competitive marketplace.  Information is king after all.

But there are more honest fools in this business than corrupt ones.

Even a lump of coal is something useful even if it is dirty and messy right now.

So stay calm and avoid shooting first before asking questions of your financial adviser.  This is just another type of risk to be aware of and there are ways to lessen the adverse impact on your long-term portfolio and goals.

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“The safest way to double your money is to fold it over once and put it in your pocket.” Kin Hubbard

Investing takes time.  As humans our brains are more wired toward the flight-or-flight survival responses that got us to the top of the food chain.  So we are more prone to panic moves in one direction or another and this is not always in our best long-term interests.

So to retire richer requires a little work on understanding who we are and what we can do to improve our sustainable retirement odds.

There are lots of things in life that we cannot control.  And humans in general are easily driven to distraction. We are busy texting, emailing, surfing the web, and all other manner of techno-gadget interruptions from phone, computer and office equipment around us.

It’s no wonder that folks find it difficult to focus on long-term planning.  We hear a snippet of news on the radio or watch a talking head wildly flailing his arms about one stock or another and think that this is the ticket to investing success.

For those who remember physics class and one of Newton’s great discoveries, you can just as easily apply the rules of the physical world to human financial behavior:  A body at rest will tend to stay at rest; a body in motion will tend to stay in motion.

For most investors, inertia is the dominant theme that controls financial action or inaction.  Confronted with conflicting or incomplete information, most people will tend to procrastinate about making a commitment to one plan or another, one action or another.  Even once a course of action is adopted, we’re more likely than not to leave things on auto-pilot because of a lack of time or fear of making a wrong move.

To get us to move on anything, there has to be a lot of effort.  But once a tipping point is reached, people move but not always in the direction that may be in their best interests. Is it any wonder that most people end up being tossed between the two greatest motivators of action – and investing:  Greed and Fear.

So while someone cannot control the weather (unless you remember the old story line from the daytime soap General Hospital in the 1980s), the direction of a stock index or the value of a specific stock, we can all control our emotions.

Easier said than done?  You bet.  That’s why you need to approach investing for retirement or any financial goal with a process that helps take the emotional element out of it.  And you need to develop good habits about saving, debt and investment decisions.

What Does Rich Mean To You?

So you say you want to retire rich?  Sure, we all want to.  But what does “rich” look like to you.  There are surveys of folks who have $500,000 or $1million in investable assets describing themselves as middle class.  There are those I know who live quite comfortably on under $30,000 a year and would never describe themselves as poor.

Be Specific

First you should get a good picture of where you expect to be and what kind of life you envision.  Be clear about it.  Visualize it and then go find a picture you can hang up in a prominent place to remind you of your goal every day.  (That’s why I have pictures of my family on this blog reminding me of why I do everything I do).

Appeal to Your Competitive Streak

We are better motivated when we have tangible targets for either goals or competitors.  Ever ride a bike or run on the road and use the guy jogging in front of you as a target?  Same thing here.

So assuming you know what your retirement will look like, you’ll be able to put a number to it.  Now find out how you’re doing with a personal benchmark.  One way is to go to www.INGcompareme.com, a public website run by the financial giant ING which allows you to compare your financial status with others of similar age, income and assets.  Or try the calculators found at the bottom of the home page for www.ClearViewWealthAdvisors.com. This might help give you the motivation you need to save more if needed.

Use Checklists

They can save your life.  And even the lives of your passengers.  Just ask Captain Sully who credits his crew with good training and following a process that minimized the distractions from a highly emotional scene above the Hudson River.

The daily grind can be distracting.  Often we may be unable to see the big forest because of the trees standing in our path to retirement.

So try these tips:

Mid-thirties to early 40s:

  • Target a savings goal of 1.5 times your annual salary
    • Enroll in a company savings plan
    • Take full advantage of any 401k match that’s offered
    • Automatically increase your contributions by 5% to 10% each year (example: You set aside 4% this year; then next year set aside at least 4.5%)
    • If you max out what you can put aside in the company plan, consider adding a Roth IRA
    • Get your emergency reserves in place in readily available, FDIC-insured bank accounts, CDs or money markets
    • Invest for growth: Consider an allocation to equities equal to 128 minus your current age
    • Let your money travel: More growth is occurring in other parts of the world so don’t be stingy with your foreign stock or bond allocations.  Americans are woefully under-represented in overseas investing so try to look at a target of at least 20% up to 40% depending on your risk profile

Mid-Career (mid-forties to mid fifties)

  • Target a savings goal of 3 times your annual salary
    • Rebalance your portfolio periodically (consider at the very least doing so when you change your clocks)
    • Make any “catch-up” contributions by stashing away the maximum allowed for those over age 50
    • Consolidate your accounts from old IRAs, 401ks and savings to cut down on your investment costs and improve the coordination of your plan and allocation target

Nearing and In Retirement (Age 56 and beyond)

  • Target savings of six times your annual salary
    • Prune your stock holdings (about 40% of 401k investors had more than 80% in stocks according to Fidelity Investments)
    • Shift investments for income:  foreign and domestic hi-yield dividend paying stocks, some hi-yield bonds, some convertible bonds
    • Map out your retirement income plan – to sustain retirement cash flow you need to have a retirement income plan in place
    • Regularly review and rework the retirement income plan that incorporates any pensions, Social Security benefits and no more than 4% – 4.5% withdrawals from the investment portfolio stash accumulated
    • Have a Plan B ready:  Know your other options to supplement income from part-time work or consulting or tapping home equity through a reverse mortgage or receiving pensions available to qualifying Veterans.

Don’t be afraid to get a second opinion or help in crafting your plans form a qualified retirement professional.  You can find a CFP(R) professional by checking out the consumer portion of the Financial Planning Association website or by calling 617-398-7494 to arrange for a complimentary review with your personal money coach, Steve Stanganelli, CFP(R).

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Whatever your retirement dreams, they can still be made a reality.  It just depends on how you plan and manage your resources. On any journey it helps to have an idea where you’re going, how you plan to travel and what you want to do when you get there.

If this sounds like a vacation, well, it should. Most people invest more time planning a vacation than something like retirement.  And if you think of retirement as the Next Act in your life and approach it properly, you won’t be so easily bored or run out of money to continue the journey or get lost and make poor money decisions along the way.

It’s How You Manage It That Counts

How much you need really depends on the lifestyle you expect to have.  And it’s not necessarily true that your expenses drop in retirement. Assuming you have an idea of what your annual expenses might be in today’s dollars, you now have a target to shoot for in your planning and investing.

Add up the income from the sources you expect in retirement.  This can include Social Security benefits (the system is solvent for at least 25 years), any pensions (if you’re lucky to have such an employer-sponsored plan) and any income from jobs or that new career.

Endowment Spending: Pretend You’re Like Harvard or Yale

Consider adopting the same approach that keeps large organizations and endowments running.  They plan on being around a long time so they target a spending rate that allows the organization to sustain itself.

1. Figure Out Your Gap:  Take your budget, subtract the expected income sources and use the result as your target for your withdrawals. Keep this number at no more than 4%-5% of your total investment portfolio.

2. Use a Blended Approach: Each year look at increasing or decreasing your withdrawals based on 90% of the prior year rate and 10% on the investment portfolio’s performance.  If it goes up, you get a raise.  If investment values go down, you have to tighten your belt.  This works well in times of inflation to help you maintain your lifestyle.

3. Stay Invested:  You may feel tempted to bail from the stock market.  But despite the roller coaster we’ve had, it is still prudent to have a portion allocated to equities.  Considering that people are living longer, you may want to use this rule of thumb for your allocation to stocks: 128 minus your age.

If you think that the stock market is scary because it is prone to periods of wild swings, consider the risk that inflation will have on your buying power.  Bonds and CDs alone historically do not keep pace with inflation and only investments in equities have demonstrated this capability.

But invest smart. While asset allocation makes sense, you don’t have to be wedded to “buy-and-hold” and accept being bounced around like a yo-yo.  Your core allocation can be supplemented with more tactical or defensive investments.  And you can change up the mix of equities to dampen the roller coaster effects.  Consider including equities from large companies that pay dividends.  And add asset classes that are not tied to the ups and downs of the major market indexes.  These alternatives will change over time but the defensive ring around your core should be reevaluated from time to time to add things like commodities (oil, agriculture products), commodity producers (mining companies), distribution companies (pipelines), convertible bonds and managed futures.

4. Invest for Income: Don’t rely simply on bonds which have their own set of risks compared to stocks. (Think credit default risk or the impact of higher interest rates on your bond’s fixed income coupon).

Mix up your bond holdings to take advantage of the different characteristics that different types of bonds have. To protect against the negative impact of higher interest rates, consider corporate floating rate notes or a mutual fund that includes them.  By adding Hi-Yield bonds to the mix you’ll also provide some protection against eventual higher interest rates. While called junk bonds for a reason, they may not be as risky as one might think at first glance. Add Treasury Inflation Protected Securities (TIPS) that are backed by the full faith and credit of the US government.  Add in the bonds from emerging countries.  While there is currency risk, many of these countries do not have the same structural deficit or economic issues that the US and developed countries have.  Many learned their lessons from the debt crises of the late 1990s and did not invest in the exotic bonds created by financial engineers on Wall Street.

Include dividend-paying stocks or stock mutual funds in your mix.  Large foreign firms are great sources of dividends. Unlike the US, there are more companies in Europe that tend to pay out dividends. And they pay out monthly instead of quarterly like here in the US.  Balance this out with hybrid investments like convertible bonds that pay interest and offer upside appreciation.

5. Build a Safety Net: To sleep well at night use a bucket approach dipping into the investment bucket to refill the reserve that should have 2 years of expenses in near cash investments: savings, laddered CDs and fixed annuities.

Yes, I did say annuities.  This safety net is supported by three legs so you’re not putting all your eggs into annuities much less all into an annuity of a certain term. For many this may be a dirty word.  But the best way to sleep well at night is to know that your “must have” expenses are covered.  You can get relatively low cost fixed annuities without all the bells, whistles and complexity of other types of annuities.  (While tempting, I would tend to pass on “bonus” annuities because of the long schedule of surrender charges). You can stagger their terms (1-year, 2-year, 3-year and 5-year) just like CDs.  To minimize exposure to any one insurer, you should also consider spreading them around to more than one well-rated insurance carrier.

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Investing Mistake #1: Treating Investments Like a Part-Time Job and Not a Business.

“When a man tells you that he got rich through hard work, ask him: Whose?” Don Marquis

While you may be investing for a child’s education, a vacation home or retirement, the common ingredient for success really is the process, approach and mindset you bring to making investing a success.  Take it seriously and you get serious results.  If you are fearful, your results will reflect it.  If you are a daredevil, your results may reflect that, too.

All your personal goals are important, aren’t they? You’ve worked hard for your money, didn’t you?  So why not find a better way to make your money work smart for you?

Why Mindset Can Really Harm You

Too often, investors simply think that what and how they save won’t really matter.  They don’t have enough money to make it worth it and they don’t have the time to really focus on the whole investing game. I know, life gets in the way when you’re doing other things and making other plans.

Thinking of this made me remember visiting an underground cave with my friends John and Lisa on a trip through the Blue Mountains. We entered the caves on a tour and saw all these fantastic, awe-inspiring formations created by the centuries of slow drips of water and mineral from the cave ceilings.  The stalactites and stalagmites formed bridges and statues of animals and even formations reminiscent of the craftsmanship used to build the cathedrals of Medieval Europe.  Small, incremental and consistent efforts produced such grand results.  If it can happen in nature, why not for something like a college savings account?

Too often, investors simply throw up their hands and take the easy road.  They do nothing, make no changes and for fear of making a mistake or because they don’t know who to trust, they avoid working with a professional.

They may hear the media report that a monkey throwing darts at a list of mutual funds or stocks may have beaten a professional money manager. Another favorite topic in the financial press is how most money managers do not bear their index.  But on the other hand, other stories will focus on the fantastic results of quick trigger investment schemes of the day-trader variety.

Let’s face it:  How well your investments perform from day to day will not likely make a big difference in your lifestyle now.  But how well you plan and invest may determine if, how and when you can retire, build a legacy to pass on and do all the things that are on your personal “bucket list.”

Two Categories of Investors

So investors will fall into two categories:  Those who focus exclusively on performance and those who focus on process.

Most investors, despite repeated warnings in small print at the end of the ads,  will focus on past performance as reported by the popular press and websites.  So despite the daily constraints on time because of family and work, these same folks will pick up an occasional financial newspaper or magazine or troll some financial websites and pick up a few ideas. They’ll see a Top 10 list of investments from last quarter or last year and then buy them because they performed well over some arbitrary time frame.

The Part-Time Investor in Action

Those who are more well-to-do or successful or affluent are either too busy making money to focus their time on investing or they believe that they have the skills to handle things on their own because they are successful in their careers.

I’m reminded of a woman I met on several occasions to discuss a way to bring some order to her investments.  She was a single mom raising a teen and worked in a fast-paced, deadline sensitive business.  Whenever we spoke, we were regularly interrupted by ringing phones and a buzzing pager.  Although she barely had time for lunch, much less research basic investment concepts, she ultimately decided that she would go it alone and master an online trading strategy to buy and sell stocks and options.

If you’re a successful surgeon or restaurateur or engineer or banker, do you really think that the same skill set that got you to the top of your profession, will also mean you can invest the time needed to properly manage and protect your wealth – not just your investments, but the whole set of tax, asset protection, retirement strategy planning, credit and cash management concepts?

Highly successful people may have achieved enviable incomes but can tend to be haphazard or casual about investing and integrating a financial plan.  Often, they may think that their incomes are secure, their career path certain, and they have skill and time to handle things on their own.

In reality, most may not really know what it takes to get to their goal.  For a 49-year old executive with a good $400,000 annual income and a $1 million investment portfolio trying to target for a retirement lifestyle at age 65 without much down scaling, he has to grow his nest egg to $6 million within a mere decade and a half.

And there is the equally disturbing statistic that the Great Recession has been hard on white collar professionals.  Those with college and advanced degrees make up more than 20% of the unemployed and long-term unemployed.

Be the CEO of Your Own Investment Company

Investing at any level and especially at this level requires a business mindset. The same sort of principles that apply to business success apply to your own investing. And just like any other CEO, you need to make sure that your assets are managed in a systematic, disciplined and prudent manner.

  • Business Plan: You need a business plan for your investments that covers the short and long term.  This means having a clear road map for your goals with appropriate benchmarks tied to achieving them. Instead of using the arbitrary indexes quoted by the media, you need to have a personal benchmark so you’re more likely to stay on target.
  • SMART GOALS: You need clear goals: Specific, Measurable, Achievable, Realistic and Time-Specific
  • Commit to a Realistic Strategy: You need a clear strategy for meeting those goals – a 20% annual return might sound nice but is it realistic given historical norms and your own experience and peace of mind
  • Don’t take it personally: As in business, don’t take the ups and downs in the market personally and don’t be afraid to review
  • Surround yourself with a professional team: If you’re serious about investing for success, then take the time to assemble a proper team of professionals who can help and who you can trust.  No business succeeds long term without a good team.

Don’t be too focused on your career to ignore this.  You can’t afford to treat your family’s future security as a part-time job or hobby.

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The market’s are jumpy to say the least right now.  As I post this the market has ended four days down in a row after finishing August up 3.5% and up 45% since March. 

Despite signs of ‘green shoots’ and glimmers of positive economic activity, the US stock markets have ended the summer rally with a selloff of over 2% (on the DJIA Index).  Fears of a stock market correction or a “W”-shaped recovery loom large after several months of impressive gains.

Manufacturing activity in the US and Europe are mostly up.  Large money-center banks have been paying back the US Treasury for the money borrowed as part of their bailout.  US auto manufacturers are rehiring.

Yet fears that the mighty economic engine of China may slow coupled with worries about the commercial real estate sector in the US have lead investors to take cover.

What’s an investor to do?  Buy and Hold. Or is buy and hold dead as some commentators say?  What about diversification which really seemed to not protect anyone from the steep dive in all markets and all asset classes?

I personally believe that it’s important to follow the time-tested wisdom of grandma:  Don’t put all your eggs in one basket.

But diversifying doesn’t mean “set it and forget it” either which is typical among investors.

To all things there is a season.  And farmers planting crops and fisherman at sea all know that there are cycles in nature.  (El Nino, anyone?)

So why wouldn’t you expect there to be cycles in markets as well?

Considering that stock and bond markets reflect the collective expectations and emotions of millions of investors, it’s an easy leap to expect markets to be governed by cycles in the cumulative raw emotions as well as considered opinions of its many participants.

Example: Right now small-cap stocks have paid off big time this year.  According to the WSJ, stocks in the S&P Small Cap 600 index have leaped over 66% and midcap stocks are up nearly 62%, far outpacing the S&P 500 large cap index which gained “only” 51%.

What a typical investor will do upon hearing such performance will be to move money into this hot sector of the market. And of course that has been exactly what investors have done as more than $7.5 Billion of all fund flows have been to small-cap mutual funds versus outflows of $18.5 Billion from large-cap funds. What’s that saying about “when fool’s rush in?” 

This being said, there are ways to combine investment approaches.

Instead of “buy and hold” it’s time to consider “sit on it and rotate.” 

Ideally, we all want to a perfect investment that always goes up and never goes down.  But a look at one of those “periodic table” of investment returns shows, rarely does the same sector that was a top performer one year do a repeat the following year.

There is a way to get off the wild roller coaster ride between “gloom and doom” and “irrational exuberance.”

This is what I refer to as a “skill-weighted” portfolio.  Essentially, this approach combines various investments in different assets with different investment approaches to help reduce the roller coaster ride.

Even a nesting hen that is sitting on its eggs will rotate positions every once in a while.  And through this approach, too, an investor will maintain a watchful eye on his portfolio being positioned for opportunities by rotating between and among investments, sectors and trends.

Think of a house: a foundation, a frame and then all the visually appealing touches.

In this approach, an investor will have a core foundation comprised of index type investments (mutual funds or Exchange Traded Funds) with a frame consisting of actively managed mutual funds and topped off with a trend-following program for stocks and/or other Exchange Traded Funds to accent the portfolio.  The combination of all these elements will provide balance which helps reduce overall volatility while still positioning for opportunities.

Consider this:  If an investor owns and holds onto an index, he’ll get 100% of the upside … and 100% of the downside.  If an investor owns all actively managed mutual funds, more than 80% do not beat their benchmark.  And those who “market time” need to be right two times:  when they sell and then when they buy.

Not all approaches work all the time but by combining them (rotating between them) an investor may have a better opportunity to preserve, protect and ultimately profit.

What should matter most to any investor is not beating an individual benchmark but getting where they want to go with as few bumps as possible.

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If you’ve never met with a financial planner before or if it’s been years since you’ve visited one, you need to find a planner and then prepare for your visit.

 

Generally, you should research individual financial advisers or firms, and you should look to trusted friends and family for advice.  But don’t stop there.  Your due diligence should include checking the background of the advisor, understanding the services offered and how they are compensated. You can use industry trade groups like the CFP Board of Standards (www.cfp.com) or investor education websites like those offered by the industry regulator FINRA (www.finra.org/Investors/) or independent advisor rating services like the Paladin Registry (www.paladinregistry.com/external/general/). You should interview two or three advisers by phone before you sit down and commit to a planning engagement. 

 

It’s also important to discuss your overall goals with the planner you’re interviewing so you can gauge their ability to help you meet those targets. It’s imperative that you and your financial advisor have clear and open communication.  And it’s equally important to understand each other’s roles and expectations from the relationship to avoid any future misunderstandings. 

 

Here are some questions you should ask a prospective financial planner:

 

What training do you have?  Find out how long the planner has been in practice and what kind of certifications they hold. A CERTIFIED FINANCIAL PLANNER™ professional is someone with a minimum experience of three years who has completed a comprehensive course of study through a degree or certificate program offering a financial planning curriculum approved by The CFP Board of Standards, Inc. CFP® practitioners must pass a comprehensive two-day, 10-hour Certification Examination that tests their ability to apply financial planning knowledge in an integrated format. Based on regular research of what planners do, the exam covers the financial planning process, tax planning, employee benefits, retirement planning, estate planning, investment management and insurance.  In addition, CFP ® practitioners must complete a minimum of 30 hours every two years of continuing education in these topics to keep abreast of changes that may impact clients. 

 

What services do you offer? What a financial planner offers is based on credentials, licenses and areas of expertise. Generally, financial planners cannot sell insurance or securities products such as mutual funds or stocks without the proper licenses, or give investment advice unless they are registered with state or Federal authorities. Some planners offer financial planning advice on a range of topics but do not sell financial products. Others may provide advice only in specific areas such as estate planning or taxes.

 

How do you charge for your services? Professional planners will provide you with a financial planning agreement that spells out the services they provide and how they’ll be compensated. Payment can happen in one of several ways:

  • Salaried planners are actually employees of a firm, and you help pay their salaries through fees or commissions you agree to pay.
  • Direct fees to the planner through an hourly rate, a flat rate, or on a percentage of your assets and/or income.
  • Commissions paid by a third party from the products sold to you based on the planner’s recommendations. Commissions are typically a percentage of the amount you invest based on those recommendations.
  • A hybrid of fees and commissions based on services. A planner may charge a fee for designing a comprehensive financial plan and occasional visits and calls to review it, while commissions might come from products they sell that you invest in.

 

Do you have any potential conflicts of interest? It may seem like a rude question, but the best planners expect this one and are prepared to make disclosure. Obviously, if a planner profits from the sale of investment products to you, she must spell that out. Some may receive indirect fees from the mutual funds selected (called 12-b-1 fees).  Others may receive a commission for placing certain business with a provider of a financial product as in the case of insurance or alternate investments like limited partnerships.  The method of compensation may be an inherent conflict of interest since a financial salesperson may be motivated to steer you toward a product purchase that pays the highest compensation for the sale.  Fee-only financial professionals do not receive any compensation from investment product sales which may result in more objective advice not tied to a particular product.

 

How do you feel about teaching and training? One of the primary benefits of having a financial planner is education about the moves you are making or may potentially make. Don’t view a planning relationship as tossing someone your finances so you won’t have to deal with them anymore. You will still need to be involved in this relationship and a good planner will help educate you.  While you’re not expected to be an expert in all financial matters, you will at least be able to make informed decisions with a base of knowledge. As long as you’re paying for their services, make sure you get a long-term education out of it.

 

(For a more detailed list, there is a useful brochure located at the investor education portion of the CFP Board’s website with ten questions you should consider asking any prospective planner).

 

When you select a planner, they’ll give you a list of documents and information to bring in for your first meeting, and generally, it will be detailed on a checklist that may include:

 

An income and expenditure checklist: This is a summary of current and projected income.  You’ll need to bring or detail:

 

Income

  • A current pay slip
  • Profit and loss statements for business income
  • Pension income statements
  • Statements of non-investment income
  • Family trust distribution documents
  • Tax returns
  • Annuity, maintenance agreement statements

         

Expenses

  • Home: Mortgage, rent statements, utilities, household repairs, insurance, appliance purchases, landscaping or house cleaning
  • Transportation: Gasoline, car loan, public transit expenses and parking
  • Food: Grocery and restaurants
  • Medical: Doctor, dentist and prescription bills
  • Education: Tuition, school fees
  • Child care: In-home our outside-the-home care
  • Personal grooming: Clothing, shoes and accessories, hair, makeup
  • Pet care: veterinarian, food and grooming bills
  • Insurance: Health, life, auto, disability

 

An asset and liability checklist: This is a summary of what you own and what you currently owe. You’ll need to bring or detail:

 

Assets:

  • Principal residence
  • Vacation home
  • Investment property
  • Bank accounts
  • Investments
  • Collectibles and personal property
  • Automobiles, other vehicles

 

Liabilities:

  • Mortgages
  • Credit card debt
  • Auto loans
  • College loans
  • Business loans

 

You should also be prepared to engage in a detailed and wide-ranging conversation that covers matters related to your attitude and experiences with money and financial decision-making.  Questions like how you choose investments or what kinds of information resources you consult or what risk means to you will be important to provide the planner with insight into your decision-making process and behavior type.  Armed with this information, a good planner will then be better able to make appropriate recommendations for your situation.

 

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