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investment

Should You Have Gold in Your Portfolio?

We had a great question come in by request this week that we address the question of whether folks should have gold in their portfolios. Gold can be included under the umbrella of a larger asset class known as commodities. Think of commodities as items used to make or produce other items – such as gold is used to produce jewelry, circuitry and coinage, while timber is used to make lumber and paper, while coal is used to make electricity and disappoint not-so-good kids on Christmas morning (sorry, couldn’t resist). Getting back to gold, the reason an investor may want to consider it as part of their portfolio is because gold is correlated differently from the stock market. Simply put; its pricing moves differently relative to the stock market. This does not mean I’m recommending investors buy gold. Here’s why. Imagine a lump of gold sitting on your kitchen table. […]

Capital Gains and Losses and Your Tax Return

When you own certain kinds of assets and you sell them, you may incur a capital gain or loss that is applicable to your income tax preparation.  If the original purchase price plus applicable expenses associated with the asset (known as the basis) is less than the proceeds that you receive from the sale of the asset, you have incurred a capital gain.  On the other hand, if the basis of your asset is greater than the proceeds from the sale, you have incurred a capital loss. Capital gains are taxable to you, using a separate tax rate – and capital losses can be deducted from your capital gains for the year.  Excess capital losses (above your capital gains for the year) can be used to reduce your income by up to $3,000 per year, carried forward until used up (or for your lifetime). The IRS recently produced their Tax […]

Market Returns Aren’t Savings

In 2013 the market and those invested in it experienced a nice return on their investments. The S&P 500 rose an amazing 29.6% while the Dow rose 26.5%. Needless to say 2013 was an amazing year for investors – but try not to make the following mistake: Don’t confuse investment returns with savings. While it is true that the more of a return an investor receives on his or her investments the less they have to save it still does not mean that your returns should take the place of systematic saving for retirement, college or the proverbial rainy day. And by no means should you reduce the amount you’re saving thinking that the returns from 2013 and other bull years will repeat and continue their upward bounty. Investment returns are the returns that an investor receives in a particular time frame. For 2013, if an investor was invested in […]

Why Watching the Stock Market Can Make You Sick

I recently read a fascinating article on the correlation between market declines and admission rates to hospitals. The authors point out that almost instantaneously; the effects of a market decline affect mental health such as anxiety. In a nutshell, the authors describe that expectations about the future play a role in investor’s utility (happiness) today. The research in this article can be beneficial on two fronts. One the one hand, the information can be beneficial to advisors in educating their clients that once proper assets allocation for a particular client is achieved there is little to be gained by logging into an account and watching the daily and even hourly fluctuations of the market. And every asset class will fluctuate – which is why we diversify and allocate assets accordingly such as real estate, large cap stock, small cap stocks, commodities, bonds, etc. It’s important to note that at any […]

Chasing Returns

Looking at this morning’s financial section of the paper inevitably had a piece regarding the assets classes and the respective investors (gamblers) that did exceptionally well in 2013. There was mention of a firm that bet heavily on Japanese stocks and did very well, another investor bet against gold and achieved glamorous returns and a hedge fund that bet on US stocks and looked like gods among mortals. But that’s the problem with these scenarios – we are mortal. Pick up any financial magazine that reports on funds or stock returns and you’ll see examples of mutual funds, stocks and bonds that have either beaten or done worse than their counterparts. For example, US stocks did very well in 2013 – so a domestic large cap fund would look amazing based on what it did for 2013. Herein lies the problem; the publication is reporting what the fund did, not […]

What’s in Store for 2014?

A few weeks ago I was interviewed by a local business journal about our firm’s thoughts as to how the market would react in 2014 and how to best prepare for that reaction. Essentially, the journal was asking us to predict where the market would be in 2014. Most of our clients know the answer I am about to write, which was, “No one can predict the direction of the market with any degree of accuracy.” “If that were the case, (as I told the interviewer) neither she nor I would be having this interview.” In other words, we’d be clinking our glasses on our respective tropical beaches because we’d have gotten filthy rich predicting and timing the moves of the market. Markets are pretty efficient – meaning that the price of any particular stock in any particular sector, industry or country is generally priced based on all available information […]

The Other Life Insurance – Annuities

The last few weeks I have been writing about the more conventional form of life insurance that most people are familiar with when I say ‘life insurance’ – which is protection against a premature death. The other life insurance is that which protects your from living too long – and that insurance is the annuity. Over the years annuities have gotten a bad rap – and rightfully so. Like life insurance, annuities are generally sold to the public via a sales force of licensed agents. In most cases, they are not the right vehicle for the individual (I know I am setting the blog up to receive the thunderous rebuttals) but there may be cases where an annuity makes sense.  The other reason annuities get a bad rap is because of the pure insurance (longevity) feature that they provide – especially pure life annuities. A pure life annuity is simply […]

Book Review: Winning the Loser’s Game

Timeless Strategies for Successful Investing Charles D. Ellis, the author of this book (in it’s Sixth Edition), has definitely hit the nail on the head with his subtitle.  The strategies outlined in this book are good for any investor in any economic/investing climate. Time and again throughout the book, Mr. Ellis points out that the real key to investment success has nothing to do with finding the right stock, bond, mutual fund or ETF – and everything to do with developing a sound strategy for investing and sticking to it. The strategy requires you to develop an understanding of your own personal tolerance for risk and your need for returns.  This can be a difficult undertaking, as it requires the investor to answer difficult questions about what kinds of losses he can stomach with his investments, as well as what sort of return you require for your investments over the […]

Avoid the Trap

Eating and dining out all the time can drain our money and potential retirement savings without us even being aware of it. We get asked from friends to go to lunch, coffee or we find ourselves skipping breakfast and getting in the line at the coffee shop for a scone and latte. Before we know it, we’re left asking, “Where did the money go?” Or worse, “I can’t afford to save for retirement.” What’s happened is we’ve fallen into the trap – a habit really, but it can be broken and we can relearn. Here’s how: The first thing you can do is to pass on that latte or scone all together. Instead, make yourself breakfast at home. Invest in a coffee maker if you don’t have one, and make your own coffee. Then make a nice meal of scrambled eggs and whole wheat toast, a cup of cottage cheese with […]

What is Risk Tolerance?

What is risk tolerance and why is it important to investors? As an investor you’ve probably been asked this question by yourself, or your financial advisor. It’s not an easy question to answer and not a question that can be answered with one word or a quick sentence. Risk tolerance is simply a particular investor’s appetite for risk. Some investors have little appetite for risk and their stomach churns when they think about losing money in the market. Generally these investors are considered risk averse or risk intolerant. Other investors aren’t really concerned about the ups and downs of the market and are willing to accept these market gyrations in or to receive the benefit of potentially higher returns. This is called the risk/return trade-off. In order for investors to receive higher returns they generally have to be willing to accept more risk for those returns. In other words, these […]

Why Diversify?

Remember Enron? I think we all do. Enron was once a powerhouse company that saw its empire crumble and took the wealth of many of its employees with it. Why was that the case? Many of Enron’s employees had their 401(k) retirement savings in Enron stock. This was the classic example of having all of your eggs in one basket and zero diversification. Let’s say that the employees had half of their retirement in Enron stock and half in a mutual fund. Enron tanks but their mutual fund stays afloat. This means that they lost, but only lost half of their retirement, all else being equal. Imagine if they had only a quarter of their retirement in Enron and the remaining 75% in three separate mutual funds. Enron’s demise is only responsible for a fourth of their retirement evaporating. This could go on and on. The point is that when […]

Book Review: Asset Allocation-Balancing Financial Risk

This was a re-read for me, with the recent publishing of the fifth edition of this very important book.  Roger Gibson has updated his excellent work with the results of his strategies during the Great Recession, up to date as of late 2012. Advisors have much to learn from Mr. Gibson’s tome regarding the optimal methods for allocating your investment assets. Throughout the first portion of the book, the concepts of market-timing and superior asset selection are summarily debunked, and the benefits of market index investment and diversification are shown to be optimal.  The author uses real-world data to underpin his findings.  The result is the explanation that, with known investment time horizons, an optimal mix of investments can be determined that will produce superior long-term risk-adjusted results. Much is written in the book, which is directed primarily to investment advisors, about the mind-set of the investor himself or herself.  […]

Book Review: The 7Twelve Portfolio

The 7Twelve Portfolio is an excellent concept for financial planners and novice investors alike. The book is very well written and easy to comprehend as Dr. Israelsen keeps the concepts simple and analogies easy to follow. The crux of the book is regarding diversification and Dr. Israelsen uses the analogy for making salsa as a reference. For example, you don’t have salsa of you just have diced tomatoes and it really doesn’t improve if you simply add some onions and salt. It improves a little bit, but still isn’t salsa. The same is true for diversification. You’re not diversified if you own one stock or bond in your portfolio and have all of your holdings in that one asset. The benefits of diversification begin when you start adding additional ingredients to the mix. This starts to lower risk and help maximize return. This is a concept us nerdy planners call correlation. The […]

The Airplane Analogy

Many parents face the decision during their working years to try to fund both retirement and college education. Some can adequately do both while others are forced to do the best they can with what money they can save. Sometimes parents can get caught up in wanting to save as much as they can for their children’s college education and forgo the need to save for or save more for retirement. When this situation presents itself, I have given my clients my airplane analogy. It goes something like this: Have you ever flown on an airplane before? If you have you know that once you’re scrunched in and belted and the plane makes its way from the gate the flight attendants break radio silence and start with their routine flight instructions. After you’re taught where the exit rows are and how to use your seat as a floatation device they […]

Book Review: A Random Walk Down Wall Street

Right from the start this book will be an excellent read for both financial advisors as well as their clients. Dr. Malkiel provides academic insight on the reasons why passive management works and some great commentary on the use of index funds as part of someone’s overall portfolio. This was the second time I read this book and certainly not the last. It’s great reinforcement on why we invest our clients’ money the way we do and provides solid academic evidence that doing anything to the contrary is counterproductive, more expensive and simply playing a loser’s game. Some of the bigger takeaways from the book are Dr. Malkiel’s thoughts and research on the different part of the Efficient Market Hypothesis or EMH. The EMH consists of three parts – the strong form, the semi-strong form and the weak form. The EMH essential admits that markets are efficient – meaning that current […]

What a Mutual Fund Manager Won’t Tell You

Most people reading this article will have some experience with mutual funds. Whether part of your IRA, 401(k), or other savings vehicle mutual funds play a key role in helping people achieve their savings goals with access to a wide variety of companies and diversification along with professional management. By professional management we mean an individual or team of managers that run the day-to-day activities of the fund such as buying and selling of stocks and bonds as well as running financial analyses of the different companies whose stock they are looking at adding to or selling from the fund. Mutual funds and their managers vary and from the macro level you essentially have two types of managers – active and passive. Active management means that the managers of the fund actively trade securities in hopes of achieving higher than market returns or outperforming their respective benchmark, such as the […]

The Crystal Ball

Every so often we get asked by our clients or prospective clients which direction the market is going to go. This is always and entertaining question to get – and some of our “regulars” already know the answer. Having a bit of a sense of humor (albeit dry sometimes) I’ll joke with clients and tell them that the day they handed out crystal balls in my investment class, it was the one time I called in sick – and you only get one chance at the coveted crystal ball. Thus, I forever lost the opportunity to predict the future of the markets. Darn. Inevitably, clients laugh and understand the joke – and take away the underlying theme of the jocularity – that we can’t predict the future, especially in securities markets. But this doesn’t mean we can’t plan ahead. So why do we invest? Why do we save for retirement? […]

Book Review: Think, Act, and Invest Like Warren Buffett

This book, by Larry Swedroe, is a must read for individual investors that are looking for the answer to the age-old question – How should I invest? Warren Buffett certainly makes any list of “best investment minds” of our era, no matter who you are.  Author Larry Swedroe would likely make any such list as well, given his many books that he has written on the subject, such as “The Only Guide to a Winning Investment Strategy You’ll Ever Need”, “Investment Mistakes Even Smart Investors Make”, and just as well, the subject of this review. Mr. Swedroe starts out with the basics of Mr. Buffett’s advice, with the sage’s commentary backed by the facts behind them.  For example, regarding market timing: “Our favorite holding period is forever.”  Swedroe follows this advice with evidence of why it pays off for the individual investor in the long run, due to the fact […]

A Money Back Guarantee

  You’ve heard the saying before that there are a few guarantees in life: death and taxes. I’d also like to add another: guaranteeing yourself a rate of return. I get asked this question frequently, usually by someone who’s a conservative investor or someone looking for a “sure thing”. This is what I tell them and I am telling you. Call this your money back guarantee. For the majority of readers, this will come into play as most of you have debt in some form or another. Whether it’s your mortgage, automobile, boat, credit cards, college, many Americans have different amounts of debt all at different interest rates. Typically, your consumer debt (credit cards) is going to have the highest interest rates. Here’s how to guarantee yourself a rate of return: PAY DOWN YOUR DEBT. By paying down your debt you will be guaranteeing yourself the rate of return equal […]

How Dollar-Cost-Averaging Can Work to Your Advantage for Your 401(k)

When you invest in your 401(k) plan with salary deferrals from each and every paycheck, you are taking part in a process known as Dollar-Cost-Averaging (DCA).  This process can be advantageous when investing periodically over a long span of time, by smoothing out the volatility of the market and giving you an average cost of your investment shares over time. How does this work, and how can it be advantageous? Dollar-Cost-Averaging When deferring income with each paycheck, typically you will be investing in your 401(k) plan each pay period, whether monthly, bi-weekly, or weekly.  Each pay period the same amount is deferred and invested, no matter what the price of the underlying investments are at the time.  Since you’re always putting the same amount into the investment, when the price of the shares is higher, you purchase fewer shares; when the price is lower, you are purchasing more shares. Note: […]