Tactical Allocation for Tough Markets

Today’s economy may be booming and the markets rising (with some bumps here and there), but that doesn’t mean investors do not face challenges. Balancing growth with risk is always a concern, especially as you near retirement. Where can you turn for help?

According to traditional investing wisdom, the solution is diversification. Holding investments from different asset classes, including equities, bonds, and cash, allows you to increase your chances of obtaining a compelling total return.

Some diversification strategies are passive, meaning they buy and hold securities for the long term regardless of market fluctuations. A mutual fund, for example, may have a prescribed allocation mix of 60 percent equity, 30 percent bonds, and 10 percent alternatives. This would not change, even as the equity market rallies and the fixed-income market flounders.

Other diversification strategies are active, meaning they adjust to evolving market conditions by moving assets as the markets change. Portfolio managers using strategies such as these may have the flexibility to shift entire asset classes in response to market fluctuations, for example. If alternatives perform badly, the portfolio manager may exit alternatives altogether. These are also called tactical allocation strategies.

Advocates of tactical allocation strategies believe these strategies may benefit investors in volatile markets. When market risk is low, a portfolio manager can increase exposure to growth by allocating assets to the market’s top-performing sectors and countries; when market risk is high, the portfolio manager can preserve capital by shifting to bonds and cash.

Does it work? No investing strategy is appropriate for every investor. You have to find the one that balances your desire for growth with your tolerance for risk.

We can provide you with more information about what might be suitable for you given your individual financial circumstances, goals, and risk tolerance; please reach out to us for more information.

The Importance of Duration When Buying Bonds

Equity market volatility drives some investors out of stocks and into bonds, which are often perceived to be less risky. Certainly, bonds do not have the same kind of risk equities have.

But bonds also have risks, and perhaps the greatest such risk is interest rate risk. This risk can be managed by looking at something called duration.

First, it is important to understand how bond prices work. Typically, bond prices move in the opposite direction of interest rates. Higher interest rates drive bond prices down, and lower interest rates drive bond prices up.

The risk that your bond price will fall because interest rates rise is called interest rate risk. And when purchasing shares of a bond fund, you can help manage this interest rate risk by paying attention to the fund’s duration.

Duration may sound complicated, but it is just a number that indicates the percentage change in the price of a bond fund for each 1 percent change in interest rates. So, if the bonds in a particular fund have an average duration of five years, for each 1 percent change in interest rates, the bond fund’s price should move 5 percent in the opposite direction.

The lower the average duration of a bond fund, the less price sensitivity the bond should experience. So, if you are a risk-averse investor, you may want to consider bond funds with shorter durations.

It is typically easy to obtain this information from a bond fund’s website or prospectus. You can also ask us. Feel free to contact our office with any questions about bond investing.

5 Powerful Personal Finance Strategies

Getting your finances in order can feel overwhelming, but a few key strategies can help. Here are five.

1. Pay Off Debt

From mortgages to credit card debt, eliminating the high interest that you pay on loans allows you to invest that money elsewhere. Pay off your credit cards each month, and make more than the minimum payments on all other debt.

2. Build Multiple Income Streams 

Maximizing your income from multiple income streams brings in extra cash now and provides a backup in hard times. So even if you have the steadiest of jobs, you may want to assess your skills and consider starting your own small side business.

3. Buy Insurance in the Right Amount 

At times, it can seem like we have a lot of insurance: life insurance, medical insurance, home insurance, auto insurance, umbrella insurance. But insurance is an important part of any long-term personal finance strategy. Many people have too little coverage, while others pay high premiums to cover moderate or minimal risks.

Review your true needs to get the right coverage for your lifestyle and portfolio.

4. Watch Your Credit Score 

A good credit history will help you obtain a mortgage or some other loan at a lower interest rate. So, keep it clean.

In addition to maintaining regular loan payments, review your credit report periodically to identify and address any potential errors.

You can request a free credit report each year from the three leading credit bureaus: Experian, Equifax, and TransUnion.

5. Save the Entire Salary of One Spouse

This a stretch goal for most of us, but if you can swing it, you can see significant financial growth. If you and your spouse are both earning, develop a household budget that lets you live on one spouse’s income while saving the other’s income. You’ll have to be frugal, but you’ll be rewarded in retirement.

How Life Expectancy Should Shape Your Retirement Plan

Of all the questions when planning for retirement, two are crucial: How long will you live? And how healthy will you be? Estimating the answers to these questions will help you decide how to prepare for retirement.

Your lifespan determines how much you should save for retirement and how much you can spend once retired. It can also affect how you decide to take Social Security benefits (sooner or later), whether you buy or forgo annuities, and if you choose to obtain long-term care insurance.

Most people rely on wild guesses to determine how long they will live. In one survey by AIG Life & Retirement, more than half of people surveyed said they plan to live to 100 (an unrealistic expectation). The standard life expectancy for a 65-year-old woman today is 83, according to the Social Security Administration.

But what if you’re very healthy and you have a family history of longevity? Some calculators, such as the American Academy of Actuaries’ Longevity Illustrator atLongevity Illustrator, give you an assessment of the probability of living to different ages based on your age and health.

But life expectancy is just a part of longevity. Another important side of the equation is the number of years you have left in relatively good health. To answer this nuanced question, new technologies – from saliva-based tests to facial analysis software – offer some guidance.

Fundamentally, though, we just can’t know for sure. The healthiest among us could face a fatal car accident tomorrow. This uncertainty makes it important for would-be retirees to consider all possible scenarios when developing a financial plan.

Five Smart Moves for Your Financial Future

Looking to get your finances on track? Here are five smart financial moves that will help you plan for your financial future.

1. Merge your credit card debt.

Credit card debt, if you have it, is likely your most costly form of debt, thanks to high and variable interest rates. You can help lower your payments by consolidating your credit card debt with a personal loan. These loans generally range from $1,000 to $100,000 with typical repayment in two to seven years. And the best news: The average credit card interest rate today is around 15% vs. around 5% for a personal loan.

2. Pay down debt with your tax refund. 

While you may be tempted to use your tax refund to splurge on something shiny, a better use of that money may be to repay debt.

3. Get a side gig. 

Working a bit on the side can improve your income and help you pay off debt. Anyone can do it. Just think about your skills and hobbies. From web design to carpentry, tax returns to retail, and even selling handmade goods on Etsy, you can monetize your talents. You might be surprised how much you can make even delivering pizzas a few nights a week.

4. Build an emergency fund. 

You should have six months of daily expenses saved in an emergency fund. If you don’t, an unforeseen medical expense, home repair, or unemployment could destroy you financially. Make sure you keep the emerging funds in a separate bank account from your living expenses to ensure you aren’t tempted to tap them before they’re needed.

5. Improve your credit score. 

To access lower interest rates, you will need a solid credit score. FICO credit scores, among the most frequently used, range from 350 to 800 (the higher, the better).

How can you raise your score? Make on-time payments, improve your debt-to-income ratio by increasing your income, and manage your credit utilization.

What Should Your Next Financial Investment Be?

Are you wondering where to get started with investing or what your next investment should be? Here are answers to three common financial planning questions.

I didn’t start saving for retirement until later in life. Will I ever recover? If you waited until your 30s or beyond to start saving for retirement, you missed out on some valuable time. But hope is not lost. Start now, and put at least enough money into your 401(k) plan to maximize your employer match. If you don’t have a 401(k) plan, look into an IRA and/or a brokerage account. Then work with a financial professional to ensure that your assets are allocated in the best manner possible to meet your goals while adhering to your risk tolerance.

Should I invest in cryptocurrency? We can’t speak for everyone, but it is generally a good idea to avoid the latest investment trends, such as cryptocurrency. Trendy markets are risky markets with high volatility.

What insurance do I really need? Other than the obvious, health insurance, you may want to consider life insurance and renter’s insurance (unless you own your home, in which case your mortgage lender will require homeowner’s insurance). Life insurance isn’t just for married couples with children, and renter’s insurance will protect your belongings in case something happens to your home that’s not your fault, such as a burglary or fire. You may also want to consider disability insurance if you don’t have it through your employer. If you cannot work due to illness or injury, it will cover your expenses while you either wait to get back to your job or wait to get on permanent disability.

Do You Need to Have a Family Finance Meeting?

Financial planning isn’t just about numbers. Because your financial plan likely affects your family, there are personal relationships to consider.

Discord over finances is common for many families, and some pay dearly for it. It’s such a serious consideration that one organization, the National Family Business Council, specializes in helping families resolve the family issues affecting their ability to develop successful wealth planning strategies.

You don’t have to be wealthy to be affected. Helping aging parents manage their financial lives, for example, affects almost everyone at some point. And when it does, family dynamics and legal issues can make even the simplest tasks challenging. For example, you may rely on your siblings for assistance, only to find out that they aren’t equipped with the necessary skills or the willingness to help care for your parents.

It’s a good idea to determine now if you think you might be in such a situation. Keep an eye out for signs of financial stress in your parents. Ask how they’re doing.

Then, if you think your parents may reach the point at which they will struggle with their financial affairs, increase your family communication. Doing so now will help you avoid problems later.

Family meetings are an effective way to facilitate family communication. It’s usually best if your parents call the first meeting, but they may be reluctant to seek help. As you plan the family meeting, think about what you’ll want to cover. A good start is a summary of your parents’ current income, expenses, savings accounts, beneficiaries, and health.

3 Signs You Aren’t Ready for Retirement

Are you ready to retire? Many Americans aren’t, and it usually has something to do with money. Here are three signs that you may need to get your finances in shape to get through your golden years:

1. You’re still repaying debt.

Some debt is better than other debt, but if you’re paying it off as you approach retirement, you may need to stop and think.

The more debt you take into retirement with you, the more of your retirement income you will have to use to pay it off. So, when you’re trying to decide when to retire, incorporate how long it will take to pay off your debt.

2. You’re totally dependent on Social Security.

Some Americans think Social Security will cover all their retirement income needs. That’s not usually the case.

According to the Social Security Administration, if you have average earnings, Social Security will replace only about 40% of your preretirement income. That percentage is less if you’re in lower income brackets and more if you’re in higher income brackets.

3. You’ve borrowed from your retirement plans.

It can be tempting to dip into retirement accounts when you need a loan. Certainly, paying interest to yourself is better than paying interest to a bank. But borrowing money from your retirement plan can hurt your long-term financial outlook, because you’ll need to earn an even higher return to catch up. The situation is even worse if you took withdrawals before you reached age 59 ½ and thus incurred penalties and taxes.

Want an easy way to find out if you’re ready to retire? Divide your desired retirement income by 4%. For example, if you think you’ll need $50,000 a year in retirement, divide $50,000 by 4%, or 0.04. You’ll get $1.25 million. That’s how much you’ll need to have to be ready to retire.

A Bit of Inspiration for Your Financial Planning …

Financial planning is a continuous job, requiring careful decisions in an often complex market. Most of us could use a little inspiration from time to time.

That inspiration can take many forms. Some may enjoy reviewing charts or graphs, while others may be deeply affected by the successes and tragedies of friends and colleagues. At times, wakeup calls can come from the words of others. With that in mind, we’ve compiled three quotes about finances that may help you stay on track.

“The Stock Market is designed to transfer money from the Active to the Patient.”

From noted investor Warren Buffett, this quote illustrates the fact that investors tend to underperform when they trade frequently. Not only do they pay high commissions and face short-term capital gains tax rates, they are also often influenced by knee-jerk reactions to market events, which can hurt performance. A long-term investing strategy is the best. Look for stocks you can hold onto for many years, through market ups and downs.

“Every time you borrow money, you’re robbing your future self.”

From Nathan W. Morris, a personal finance expert and noted author, this quote suggests that when you take on debt (via a home equity loan or credit card balance, for example), you’re risking your future financial security. When you carry debt, you’re paying interest with money that could have gone toward retirement savings or other important financial goals.

“When buying shares, ask yourself, would you buy the whole company?”

From Australian entrepreneur, investor, investment advisor, and stockbroker Rene Rivkin, this quote conveys the idea that when you buy a stock, you’re buying a portion of a company. You thus become a part owner of the company, so it’s worth considering how comfortable you would be owning the entire company. Do you have confidence in its future? Concentrate your dollars on your best ideas, or the best ideas of your financial advisors.

Market Volatility: Is It a Cause for Concern?

Following U.S. Federal Reserve Chairman Jerome Powell’s press conference in early December 2018, it would have been easy to think the stock markets were ready to ease into a tranquil holiday season and a slow start to 2019.

But that didn’t happen. Volatility roiled the markets, sending many investors into a panic.

This leads to the following questions: what is market volatility, and is it a reason to be concerned?

Market volatility is arguably one of the most misunderstood investing concepts. Formally defined, it’s the range of price changes a stock or market experiences over a period of time.

If the price is relatively stable, the stock or market is said to have low volatility; if the price moves significantly or erratically, the stock or market is said to have high volatility.

Volatility is often measured by the CBOE Volatility Index, known by its ticker symbol VIX, which gauges the market’s anxiety level. At a level near 20 as of this writing, the VIX is relatively low (less volatile market). It was in the 30s this past December; during the financial crisis in 2008-2009, it was in the 70s.

But volatility isn’t necessarily a bad thing.

Most investors focus on downside volatility because they feel a loss more acutely than they do a win. But volatility also provides opportunities for the patient investor. Each purchase or sale of a stock has the risk both of failure and of success.

Without volatility, there is less chance of either.