Dipping Your Toe in International Waters

At times, international markets can offer higher potential returns, but it’s important to remember that more return potential means more risk potential. That said, there are ways to manage that risk.

Let’s begin by reviewing why international investing can be riskier than domestic investing.

First, economic instability, often caused by abrupt changes in interest rates, inflationary pressures, trade agreements and gross domestic product, can affect the profitability of an investment. And different governments may have varying regulations regarding industries or even individual companies.

Second, with some foreign markets, particularly small ones, trade limitations, different accounting standards and obsolete technology can, at times, make it difficult to trade certain securities; this illiquidity can make it hard to buy and sell at a good price.

Third, the value of foreign currency fluctuates with changes in the supply of and demand for both the foreign currency and the U.S. dollar. This can affect the value of your investment.

Although the risks involved with foreign investments cannot be completely eliminated, there are ways to manage those risks.

One way: have a long-term horizon. Overseas companies need time to adjust to the profound changes in international political and economic conditions, the pace of technological development and global competition. Because short-term fluctuations are typical, it’s important to maintain a long-term perspective.

You can also consider investing via mutual funds. Most individual investors don’t have the experience, expertise or financial ability to create international portfolios of the scope and quality offered by professional investment managers. In addition to providing professional management, mutual funds can also provide diversification by investing in a portfolio diversified by region, country and industry.

If you need help determining if international investments meet your needs and risk tolerance, we can provide additional input and help you choose the right investments to balance growth potential and risk. We’re just a call or email away.

What Rising Interest Rates Could Mean for Your Investments

The U.S. economy shifted into higher gear over the summer, and an improving economy generally means higher interest rates, which can affect your investments in numerous ways, good and bad.

Why are people worried about a rate hike? A growing economy can lead to inflation, and to keep it in check, the Federal Reserve (Fed) raises interest rates. A change in the federal funds rate has a ripple effect on other interest rates. People then borrow and spend less, the economy slows and inflation isn’t a problem.

So how are different investments affected?

The yields on money market funds tend to rise with the federal funds rate. This means money market funds may be a good short-term investment option when rate hikes are on the horizon. Bond prices, on the other hand, tend to move inversely to interest rates, so bond prices generally fall with rate hikes.

Stock performance can be mixed when rates are hiked. If an interest rate rise is on the horizon, it’s because the economy is doing well and central bankers at the Fed don’t want it to overheat; that means businesses are probably performing well. But when investors think the Fed is going to raise interest rates (and restrain the economy), stock prices often fall.

Now that the economy is improving, investors are worried about whether it’s time for a rate hike, so please call or email us if you want to better understand how to protect yourself from this eventuality. We’re here for you.

Why Inflation Risk Is Critical to Understand

Investments involve many different kinds of risk, one of which is inflation. And that is particularly topical today, when the prospect of inflation looms large.

Inflation risk is the risk that the money earned on an investment won’t keep up with the rate of inflation. It hurts investors who are uncomfortable with volatility and decide to invest solely in Treasury bills, certificates of deposit and savings accounts.

Believe it or not, one of the riskiest things you can do with your money is not invest. Letting your money sit in a bank or in a money market account can chip away at your savings.

Let’s say when you were 45 years old you started investing $400 a month for retirement. You were convinced the market was going to tumble, so your money earned 5% a year in a low-risk investment vehicle. Today, 25 years later, you’re on the doorstep of retirement, and you have around $235,000. Will it last another 20 years or so? After 25 years, $235,000 is equivalent to around $112,000 (assuming annual inflation of 3%). That may not be enough for you to live on for 20 more years or so.

On the other hand, if you had invested that $400 a month in equities, your return could have been significantly higher. Of course, returns are not guaranteed when you invest in equities.

Please don’t hesitate to call or email us if you want to better understand how to protect your portfolio against inflation. We’re here for you.

Managing Risk by Spreading Out Your Assets

Managing risk is important regardless of your financial circumstances, and diversification is a good way to manage risk.

Diversification is investing in different types of securities. When you have a mix of investments, you may be able to better weather the ups and downs of the market. That’s because as the values of some types of securities decline, the value of others could increase, helping to create a cushion for your overall investment portfolio and providing you with increased return potential.

You probably know enough about diversification to understand the importance of having a mix of stocks, bonds and cash. But diversification doesn’t end there. There are many types of equity investments: growth, value, large-cap, small-cap, international and domestic stocks.

At any given time, one type tends to outperform the others. For example, in the late 1970s, many of the biggest, best-known stocks (those that investors often refer to as large caps) suffered. Fortunately, small-company stocks came to the rescue. By 1975, the tables had turned, and stocks of young, flexible corporations were soaring while the stocks of big companies were languishing.

So smart investors spread their portfolios across stocks, bonds and cash, and they spread the equity portion of their portfolios among large- and small-company stocks, value and growth stocks and domestic and international stocks.

But diversification can take effort. You can’t just diversify and forget about it. Some parts of your portfolio may grow faster than other parts. Eventually, your portfolio will become unbalanced. You’ll want to check your portfolio at least once a year to see if it needs rebalancing.

If you need help determining an appropriate mix of funds that meets your risk tolerance and needs, we can provide additional input and help you choose the right investments to balance growth potential and risk. Please call or email us.

What Is All the Fuss about Cryptocurrencies?

You’ve probably heard quite a bit about cryptocurrencies over the past year, and you may be wondering if you’re missing out on an investment opportunity. While that’s a valid question, there’s a lot to consider before investing in these very risky assets.

A cryptocurrency is a digital currency: a form of payment that can be exchanged online for many goods and services. The cryptocurrency “lives” in something called a “digital wallet,” which is basically a series of complicated passwords. Transactions are verified using a decentralized technology called blockchain.

Cryptocurrencies have proliferated in recent years. According to CoinMarketCap.com, thousands of different cryptocurrencies are publicly traded, and the total value of all cryptocurrencies was more than $2.2 trillion as of April 2021. But Bitcoin is the most popular, with a $1.2 trillion market cap as of April.

So why do people buy cryptocurrencies? Some like the fact that central banks can’t manage the money supply, since central banks tend to reduce the value of money via inflation over time. Others like the fact that because the blockchain is a decentralized processing and recording system, it can be more secure than traditional payment systems.

But cryptocurrencies have plenty of risks. First, if you lose your “digital wallet,” there is no way to recover your Bitcoin. Second, cryptocurrencies are considered speculative: like other currencies, they generate no cash flow, so in order for you to make money, another investor must pay more for your cryptocurrency than you did. Third, cryptocurrencies can be volatile: it’s not unusual to see them fluctuate by as much as 40% in a single day.

If cryptocurrencies intrigue you, we can provide additional input, helping you choose the right investments to balance growth potential and risk. Please call or email us today. We’re always here to help.

Ways to Withdraw Money from Your IRA Penalty-Free

Most people plan to leave their retirement savings, including their Individual Retirement Account (IRA) assets, alone until they can withdraw them at age 59 1/2 penalty-free. But emergencies occur, and people need to make exceptions. If you find yourself in this situation, how can you avoid the tax implications?

Typically, any early withdrawal from a traditional IRA is considered taxable income. What’s worse, if you make a withdrawal before age 59 1/2, you may get hit with a 10% penalty tax. While it is likely impossible to avoid the income tax, you may be able to avoid the penalty. How? There are several exceptions to the rule that may apply to you.

There are four key categories: (1) withdrawals to cover medical expenses that exceed 7.5% of your adjusted gross income (AGI) for any tax year; (2) withdrawals to cover health insurance premiums when used to pay the premiums for you or your family members while you are unemployed; (3) withdrawals to cover higher education expenses for you or your family; and (4) withdrawals taken as substantially equal periodic payments (SEPPs), which are regularly scheduled withdrawals taken, at minimum, annually.

Many of these techniques are complicated, however. For example, there are varying definitions of “family.” And to take advantage of the health insurance premiums category, you must also be receiving unemployment compensation under some fairly strict parameters.

The more information you have, the more prepared you can be should you need to withdraw money early from your IRA. Call or email us so you can get the information you need to make a decision that’s best for you.

Adjusted or Unadjusted Returns: Which Should You Consider?

There are two figures you can use to compare the performance of your mutual fund to other mutual funds or market indices: adjusted or unadjusted returns. Which should you use?

Returns are shown on your investment account statement. In reviewing it, you may notice sets of figures for each fund’s average annual total returns. One is adjusted for the maximum sales charge, and the other is unadjusted.

Why are there two numbers? The Securities and Exchange Commission (SEC) mandates that mutual funds show both figures to allow investors a fair and accurate comparison between funds or between a fund and a market index. But many shareholders wonder which number to use to assess the performance of their individual investments.

Both figures show the performance of a fund during the time periods indicated, taking into account changes in share value and assuming reinvestment of all income and capital gains distributions. But unadjusted figures do not account for sales charges. Adjusted figures factor in the effects of the maximum sales charge that can be applied to a certain share class.

Which should you use? Well, you want to reflect sales charges if you paid them. But the adjustment for a maximum sales charge may not provide an accurate barometer for your particular situation. Sales charges are sometimes waived or reduced. For example, for certain share classes, the maximum sales charge applies only if you redeemed your shares during the first years of your investment. In other words, because both unadjusted and adjusted performance figures are standardized, you may find that neither precisely reflects your own investment experience.

Do you want guidance on your individual portfolio’s actual performance? If so, it might be worth a conversation with us. We can help you understand your individual performance. Please call or email today.

Choosing an Appropriate IRA for Your Circumstances

These days, Americans hear a lot about the importance of saving for retirement, and individual retirement accounts (IRAs) are one way to do so. But the variety of these investments can be confusing.

A so-called “traditional” IRA requires you to deposit money before you pay taxes on it. It grows tax-deferred. When you withdraw it, it is taxed as ordinary income.

With a Roth IRA, you deposit after-tax money. It still grows tax-deferred. The difference is that withdrawals are tax-free in retirement.

In 2021, for both traditional and Roth IRAs, you can contribute $6,000 if you are under age 50 and $7,000 if you are older than age 50.

Which should you choose? A traditional IRA might be a good choice if you think you will be in a lower tax bracket in retirement. On the other hand, a Roth IRA might be a good choice if you think you will be in a higher tax bracket.

Also available are the SEP IRA or SIMPLE IRA, designed for individuals who are self-employed or operate a small business. In 2021, you can contribute 25% of your income (up to $58,000) to a SEP IRA. And for a SIMPLE IRA, contribution limits are $13,500 if you are under age 50 and $16,500 if you are 50 or older (some conditions apply).

That’s a lot of IRAs to consider. Do you need help choosing? Call or email us, and we can review your financial circumstances and make suggestions.

Are You Feeling Stretched Beyond Your Financial Resources?

Many families today may face dual challenges. They have children who need money for medicine, clothing, recreation and education, and they have aging parents who need help with long-term care.

Are you stuck in the middle, struggling to keep up with your current living expenses and put aside something for retirement? The pull of competing financial needs can be hard to endure, but careful planning can help.

First, start with yourself. With life expectancies rising, you could spend 30 years or more in retirement, so don’t use your retirement savings for anything but your retirement. Employer-sponsored 401(k) plans, Individual Retirement Accounts (IRAs), and annuities allow your investment earnings to grow tax-deferred until withdrawn, which could mean greater asset growth than if you contributed to a taxable account.

Next, straighten out your children’s future. The first step toward financing your child’s education is to develop a college funding plan. To start, anticipate how much money you’ll need to pay for college, then consider how much of that you will have to pay (after financial aid, scholarships, grants and loans). Finally, subtract the amount you’ll need to pay from the estimated amount your child will obtain from other sources, then work with us to develop an investment plan to make up the difference.

Lastly, untangle your parents’ finances. Here, planning starts with finding out if your parents are prepared for long-term care expenses. If they aren’t, you may want to consider shifting some of your or your parents’ portfolio to investments with insurance components, such as annuities. Or look into long-term care insurance, which is best to buy while your parents are healthy enough to qualify and young enough that rates are affordable.

Call or email us today, and we can help you review your financial situation in light of your needs, your children’s needs and your parents’ needs.

Avoiding Affluenza and Raising Money-Conscious Kids

Is your six-year-old begging for $100 sneakers? Does your teenager think a trip to Europe is her birthright? If so, your kids may be suffering from “affluenza,” which is a sense of entitlement affecting affluent young people. But how do you address it?

At times, most kids demand things and show little understanding that those things cost money. For most kids, this attitude fades over time. For some kids, however, it becomes a way of life.

Do you wish you could cure your child of affluenza? You can start battling the bug when your kids are as young as four by talking to them about finite resources and the importance of making choices. When shopping, discuss the difference between needs and luxuries. Shoes are needs; video games are luxuries.

From ages eight to 12, you can explain that there will always be kids less and more fortunate than yours. Teach them that they must make financial decisions within the context of what they have by offering them an allowance and refusing to provide more money when it runs out. Involving them in charity work may also help them appreciate how relatively fortunate they are.

When your kids become teenagers, you can involve them in family budgeting, bill paying, and investing discussions but also offer them an allowance to spend on nonessential items. For example, if your teenage son wants $100 sneakers, you might give him $50 to cover your portion and make him come up with the rest.

A mutual fund may help show your kids the importance of saving and investing, and there are ways to set up accounts in their names while they are minors.

We are always here as a resource and can give you more tips for raising money-conscious kids. We’re just a call or email away.