This Summer Kick-Start Your Teen’s Retirement Fund

For many teenagers, summer means a chance to earn extra cash – but earning money also means he or she can open an individual retirement account (IRA).

Minors who have reached age 14 and have earned income are eligible to open a traditional or Roth IRA. Traditional IRAs allow contributions to grow tax deferred until retirement, and contributions may be tax-deductible. In contrast, contributions to Roth IRAs are always taxable, but withdrawals made after age 59½ can be tax free.

Early start makes a difference

When it comes to investing, an early start can make a big difference. As an example, let’s assume 16-year-old Angela earns $2,500 from her summer job at the mall. She or her parents can deposit $2,000 in a Roth IRA in Angela’s name. Suppose that money is left untouched for 50 years, until Angela retires at age 66, and the investment grows at a hypothetical rate of 10% each year. Angela could have more than $230,000 in her Roth IRA – money that could be distributed tax free.

Not interested? You can still help

Teens being teens, you may find that he or she would prefer to spend the money rather than invest it.

So, while you may want to encourage your teenage child or grandchild to invest some of his or her hard-earned money in an IRA instead of spending it—if the teen doesn’t want to contribute, you can fund an IRA contribution for him or her.

Doing so will give your teen an invaluable kick-start on life.

Interest Rate Sensitive? Think Short Term

Do you want to stay in the fixed-income market but are afraid that a rise in interest rates might erode bond prices? A short-term bond fund may be a good investment vehicle for you.

When interest rates fall

First, let’s examine how interest rates affect individual bonds. Say interest rates are falling. If you buy a $10,000 bond when interest rates are at 8%, your bond yields 8%, or $800, annually.

Now let’s assume that after you purchase that bond, interest rates fall to 7%. A newly purchased $10,000 bond yields $700 annually. Because your existing bond pays $100 more a year, it is more valuable, and its price will tend to rise.

When interest rates rise

In contrast, when interest rates rise, bond prices fall. If you buy a $10,000 bond at 8%, your bond yields 8%, or $800, annually. Now let’s assume interest rates rise to 9%. A newly purchased $10,000 bond yields $900 annually. Because your existing bond pays $100 less a year, it is less valuable and its price will tend to fall.

Bond funds

The same holds true for bond funds ,which are simply portfolios of individual bonds and behave the same way.

When today’s historically low interest rates begin to rise and bond values fall,

you don’t want to be “locked in” to bonds that don’t mature for years, because they will be worth less than newly purchased bonds.

Consider short-term funds

So, how can you protect your bond fund against a possible rise in rates? You could switch to a portfolio of bonds with shorter maturities – a short-term bond fund. If you purchase faster-maturing bonds, you’ll be able to replace lower-price bonds as they mature. You can do this yourself by purchasing individual bonds, or you can purchase shares of a short-term bond fund. To decide what’s best for you, explore your options with your financial advisor.

Is the Bloom off U.S. Treasury Bonds?

U.S. Treasury bonds rallied in 2011, as a number of macroeconomic woes, including the European debt crisis, incited worries of a global market meltdown. Does that mean you should consider investing in them?

Yes, U.S. Treasuries are appealing. A portfolio of U.S. Treasuries with an average maturity of 20 years rose 28% in 2011, even better than its 26% jump in 2008, when we were in the midst of a financial crisis. The government securities haven’t seen a better year since 1995, according to Morningstar.

That doesn’t mean U.S. Treasuries are a sure thing. No investment is.

The U.S. Treasury rally could wind down at any moment. In order to match the 2011 price rally, the 10-year U.S. Treasury yield would have to drop to about 1.05%, far below its record low of 1.72% in September 2011.

Additionally, there are other high-yielding alternatives. For example, you may be able to obtain higher yields with only slightly more volatility via non-Treasury government-backed bonds such as those issued by agencies or supported by agency mortgage-backed securities.

One example is mortgage-backed securities supported by the Government National Mortgage Association, which guarantees investments backed by federally insured loans.

These securities carry the full faith and credit of the U.S. government and may offer a higher yield than comparable U.S. Treasuries.

Another example is a bond from less-well-known government agencies such as the Federal Farm Credit, the Tennessee Valley Authority and the Federal Judiciary Office Building Trust. As of mid-January, these 10-year bonds yielded about 2.6%, 0.6 percentage points more than the equivalent U.S. Treasury, according to The Wall Street Journal.

Of course, no investment is necessarily suitable for all investors. Contact your financial advisor for help in determining if the securities mentioned here are appropriate for your portfolio.

Factor Investing: Is It the Right Strategy for You?

The European debt crisis that arose late last year and has continued since is putting the best-laid investing plans to the test. The reason? Correlation.

Correlation refers to how securities or asset classes perform in relation to each other and/or the market. A 1.0 correlation indicates that two security types move in exactly the same direction. A -1.0 correlation indicates movement in exactly opposite directions. A zero correlation implies no relationship.

Last year, the correlation between the stocks in the S&P 500 index and the index itself went from as low as 0.4 in February to as high as 0.86 in October, according to Birinyi Associates.

That level of correlation can make the diversification you’ve worked so hard to create in your portfolio ineffective. Never fear, though. One option for addressing highly correlated markets like today’s is factor investing.

Factor investing replaces traditional asset allocation with a focus on specific attributes that researchers say drive returns. These factors can include familiar attributes, such as small-cap or dividend yield. They can also include more complex attributes, such as economic sensitivity and volatility.

To utilize factor investing, you would look at your current factor exposure. To simplify things, you may want to consider just a few factors – such as the three most researchers agree on, which are beta, size and style. Next, decide whether that’s appropriate. Finally, tilt your portfolio toward the factors you think will outperform.

Factor investing isn’t new. It originated in academia 20 years ago, and now is finding favor among institutional investors.