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.

Are GNMAs Right for You in Today’s Environment?

You’re probably familiar with GNMAs, but how do you know if they’re a good investment?

The Government National Mortgage Association (GNMA) packages together mortgages and issues bonds (in denominations of $25,000) based on those mortgages. Investors in GNMAs are paid monthly distributions representing interest payments and principal repayments on those mortgages.

Many investors have a hard time scraping together $25,000, so they usually purchase shares of a mutual fund that invests in GNMAs.

GNMAs are backed by the full faith and credit of the U.S. government, meaning they come with a guarantee that covers timely principal and interest payments of the loans underlying the securities. But the price of the securities will still rise and fall. So how do you know if GNMAs are good investments?

The major price fluctuations of GNMAs are due to the risk of homeowners paying their mortgages early. And you can get an idea of how many homeowners will do that by looking at the economic environment.

When interest rates decline, GNMA funds may perform poorly because people with mortgages usually refinance at lower rates. As they do so, more money is returned to the GNMA pool, and GNMA fund managers are forced to reinvest that money at prevailing lower interest rates.

When interest rates rise, GNMA funds may also perform poorly. GNMA funds hold a portfolio of mortgages purchased at lower interest rates, and people who took out those mortgages have no incentive to refinance them because interest rates are higher.

So, when do GNMAs tend to perform well? In any other environment (specifically, when interest rates are stable or rising only modestly).

If you would like to consider GNMAs for your portfolio, it might be worth a conversation with us. We can point you in the right direction given your individual financial circumstances and goals. Call or email us today.

Assessing the Performance of Your Portfolio

When markets are down, it’s easy to think your mutual fund is underperforming. But assigning a term like “underperforming” to a fund must take many factors into account.

First, should you be in the fund in the first place? A fund that has returned 10% over a certain period may seem “better” than a fund that has returned 3% over the same period, but the better-performing fund may have earned those higher returns by taking on risk that you can’t tolerate.

Second, how is the fund performing relative to other funds in its peer group? Different asset classes can be expected to perform differently because they have different risks. Even the performance of securities in the same asset class can vary. For example, government bond funds perform differently from corporate bond funds.

Third, how is the fund performing relative to its benchmark? Every mutual fund has a legal mandate that limits its investment options. For example, if a stock fund’s mandate is to invest 80% of its portfolio in stocks, portfolio managers cannot move more than 20% of assets to bonds or cash, even in a bear market. Because of this, the standard for measuring mutual fund performance is not positive returns but an appropriate index.

These factors are particularly important to remember after a decade in which double-digit annual returns were the norm because today’s investors tend to have unrealistic expectations.

Do you need help assessing the performance of your portfolio? We can review your portfolio and make suggestions. We’re just a call or email away, and we’re always here to assist.

How to Invest in Emerging Markets with Less Risk

Many retirees avoid investing in emerging markets, given their potential volatility, but a small allocation to increase your growth potential may be appropriate.

Also known as developing markets, well-known emerging markets include Brazil, India, Mexico, Pakistan, Russia, Saudi Arabia and many others. These markets may sound exotic, but emerging markets are not necessarily the significantly underdeveloped mysteries they used to be. In fact, some are economic powerhouses, such as China.

Why consider emerging markets?

First, investing in emerging markets can provide growth potential as they transition from industrial economies to digital economies. Many emerging markets have a high number of graduates in technology fields, significant venture capital funding and policy support for innovation (such as tax credits).

Second, emerging markets may also offer diversification, which means that emerging market stocks may perform well when developed market stocks are performing poorly. This is always a good thing to have in your portfolio.

But emerging markets are not appropriate for all investors. There are risks. The main risk is volatility: any political or currency-related crisis in an emerging market could cause its stocks to decline. Another concern is the potential impact of U.S. interest rate hikes, which can lead to a stronger U.S. dollar and may lead emerging markets to underperform. Those investors who are in or near retirement may not be able to tolerate these fluctuations. So, before investing in emerging markets, it is a good idea to be sure you understand the risks and are comfortable with them.

But if you understand the risks and would like the potential portfolio diversification and growth one can obtain through emerging markets, it might be worth a conversation with us. We can point you in the right direction, given your individual financial circumstances and goals. Please reach out today.

How to Use Capital Gains to Your Advantage

No one likes to pay taxes, especially on an appreciated investment, but you can minimize capital gains taxes with careful planning. Here are three ideas.

First, hold investments for the long term, which means at least a year. Short-term capital gains (on assets that you have held for less than one year) are taxed as ordinary income; long-term capital gains (on assets that you have held for one year or more) are taxed at rates of 0%, 15%, or 20% in 2021, depending on your tax bracket.

Second, use capital losses to offset capital gains. If you have a losing investment in your portfolio, you might want to sell it and use the loss to offset gains. If you have $4,000 in capital gains, for example, and you take a $4,000 capital loss, the two will cancel each other out, and your tax liability on the gains will be eliminated.

Third, consider low-turnover mutual funds. Any time your mutual fund sells a security at a gain, that gain is taxable, and the law requires mutual funds to pass most of their net gains on to investors. So, when you own shares of a fund, you realize a capital gain when the fund sells a security at a gain (either long-term or short-term, depending on how long the mutual fund held the securities). You can help avoid these types of gains by investing in a low-turnover mutual fund.

Do you need help minimizing capital gains taxes? We can review your portfolio and make suggestions. Call or email us. We’re always here to help.

Let’s Talk about Debt (Including How to Get out of It)

Americans’ debt is growing. Should you be concerned?

We are a nation in debt. According to the Federal Reserve’s most recent report on household debt and credit, total American household debt increased by $87 billion in the third quarter of 2020.

From a macroeconomic perspective, higher debt levels can be positive because they indicate that banks are comfortable lending; they can also lead to increased consumer spending, which drives economic growth.

As an individual, however, you should generally seek to lower your debt, especially as you near retirement, when you may want to live more modestly.

If you are in debt, you may want to look into ways to pay it down. High interest rate debt, such as credit cards, should generally be paid off first. Low interest rate debt, such as mortgages, should generally be paid off last (especially if the interest is tax-deductible, as mortgage interest often is).

Many people struggle to determine if they should pay off debt or save for retirement first. There is no one-size-fits-all answer, but the conventional wisdom is that you should pay off debt first if the interest rate on it is higher than the income you can earn by saving and investing. The “magic number” will vary by individual.

Some people also ask if they have extra money, which should they do first: pay off debt or invest? If the interest rate on your debt is low and you can get a higher rate of return by investing, you may want to consider investing before paying off your debt. You could also use some of the extra money to pay off debt and some to invest.

If you’re concerned about debt, call us or email us for some professional input. The more information you have, the better prepared you can be, and we are always here to help.

5 Compelling Reasons to Invest in Small-Cap Stocks

Small-cap stocks appeal to some investors because of their potential for strong growth. But are they right for you, right now?

Small-cap stocks are easy investments to understand. The market capitalization of a company is its stock price times the number of shares it has outstanding. While the definition varies, small-cap stocks may include companies with $250 million to $2 billion in market capitalization.

Small-cap companies are agile. Small companies may have greater growth potential than larger companies. Generally speaking, smaller companies are generally more nimble than larger companies, so decisions about new products and services and adjustments when problems arise can be made and implemented quickly.

Small-cap stocks may perform well when markets are down and improving. It is generally thought that small-cap stocks can perform better than larger-cap stocks when markets have been down and are improving.

Small-cap stocks may perform well in rising interest rate environments. Small-cap stocks also tend to perform well in rising interest rate environments. Today, we are not in a rising interest rate environment, but that could change.

The time may be right for small-cap stocks. You probably know, however, that it is wise to avoid trying to time the market; it is generally better to choose an appropriate asset allocation for your risk tolerance and financial goals and stay the course. It’s always a good idea to have diverse investments in your portfolio.

Do you need help investigating small-cap stocks for your portfolio? I’m here for you. Please contact me today, and we can make sure that you aren’t missing anything from your asset allocation.