Is It Time for You to Revisit Floating-Rate Funds?

When interest rates are as low as they are today, it is common for fixed-income investors to seek higher yields. One option to consider: mutual funds that hold floating-rate loans.

Floating-rate loans have “floating” interest rates, which simply means the rates are variable. The rates adjust periodically (usually every 30 to 90 days) based on changes in widely accepted reference rates, such as the London Inter-Bank Offered Rate, commonly referred to as LIBOR.

Floating-rate loans offer investors several potential benefits.

First, floating-rate loans offer a measure of protection from interest rate risk, which is the risk that your investments will yield less when interest rates are low. That is because floating-rate loans generally pay interest rates higher than many other fixed-income investments.

Second, floating-rate loans are typically well secured. They sit at the top of a company’s capital structure. This has led historically to higher recovery rates in the event of default.

Lastly, floating-rate loans may offer the potential for diversification: they have tended to have low correlations to other major asset classes.

That said, there are risks to investing in floating-rate loans, as there are with all investments. Because they generally invest in low-quality credit, floating-rate loans should be considered somewhat risky. Additionally, floating-rate funds may not have stable net asset values, which makes some investors uncomfortable.

If you think the pros outweigh the cons, however, some mutual funds buy floating-rate loans, thereby giving investors the opportunity to share in the potential earnings.

Contact us today if you are interested in floating-rate loans.

What Is Socially Responsible Investing and Is It Right for You?

Many people feel as if they have to choose between their values and their money, but that is not necessarily true. If you want to do well financially and do good in the world, you may want to investigate socially responsible investment funds.

At their most basic level, socially responsible investment funds use screens to exclude or include companies based on certain criteria. For example, a mutual fund might exclude stocks of companies that manufacture or sell weapons, tobacco, or alcohol. Alternately, a mutual fund might seek out companies involved in climate change mitigation, such as solar panel manufacturers.

But socially responsible investing can be even more robust. Some socially responsible investment managers conduct comprehensive reviews of companies to understand their operations and social impact, often traveling around the world to meet with management teams.

You may have heard of environmental, social, and governance (ESG) factors. These are often used to measure how a company stewards the natural environment, manages relationships with its employees and governs things like its executive pay. Third parties sometimes provide these ratings, but more and more managers have their own ESG teams and do their own research.

Good ESG factors have been linked to good performance. Companies prioritizing ESG factors have been shown to generate superior long-term financial performance across metrics that include sales growth, return on equity, and return on invested capital, among others, according to The Motley Fool.

If you want to invest in a socially responsible fund, you should check to ensure that the strategy and allocation match your financial goals. We can help you understand the options available to you and ensure they meet all of your needs, both personal and financial.

Call us today to learn more about socially responsible investing.

Why Municipal Bonds May Be Appealing amid Market Turmoil

Recent market turmoil has made many investors understandably nervous, but it has also created opportunities. Municipal bond funds, for example, may be appealing right now.

Municipal bonds are issued by governments (both state and local) and their agencies, such as counties, cities, schools, and water districts. They are used to finance public projects, such as schools and airports, and some private projects, such as nursing homes and toll roads. Municipal bonds are widely available via mutual funds.

Investors have traditionally purchased municipal bonds for two reasons. First, like all bonds, they may offer a measure of diversification and stability when equity markets are volatile. That is because increased equity market volatility causes bond yields to move higher and prices lower.

Second, municipal bonds offer potential tax-free income. You do not pay federal taxes on municipal bond interest. The interest may also be exempt from state and local taxes because most states do not require their residents to pay state and local taxes on interest received from bonds issued by governmental entities within their states. This may be the greatest appeal of municipal bonds.

One thing to keep in mind is that no investment is entirely immune from market volatility. While the overall default rate on rated municipal bonds is low, municipal bonds have certainly been affected by market volatility surrounding the COVID-19 pandemic. There are concerns about the longer-term effect a severe slowdown in economic activity could have on municipalities’ finances.

As a result, selecting the right municipal bond is of paramount importance. First, you should seek municipal bonds that are rated. Second, some municipal bonds are insured, offering greater safety. Third, you also want to choose a municipal bond that carries an appealing maturity.

Let me help you manage market volatility with the best options that fit your financial goals. Give me a call today.

When Markets Are Volatile, Measuring Value Is Critical

When markets are volatile, many investors want to understand how they can measure the true value of a stock. Conventional wisdom holds that price-to-earnings (P/E) ratio is the go-to gauge, but there are other options.

P/E ratio compares a company’s share price to its earnings per share, according to Investopedia. It is calculated by dividing market value per share by estimated earnings per share.

What does that mean? The lower the P/E ratio, the “cheaper” a stock, at least in theory. We say “in theory” because in today’s volatile economic and market environment, the “E” in P/E ratio can’t always be trusted. Corporate earnings estimates may be unrealistically high.

That’s why we recommend looking at ways to value stocks that do not involve corporate earnings, such as enterprise value and free cash flow.

Enterprise value calculates the worth of a company based on its entire capital base: short- and long-term debt, preferred stock, and minority interests minus total cash. Including debt is important because it helps investors determine if a company is using debt to inflate its profits.

Free cash flow, meanwhile, takes a company’s earnings and subtracts capital expenditures, thereby revealing the amount of cash a company is able to generate after maintaining or expanding its asset base. This measure thus gives investors an idea of a company’s ability to boost dividends or buy back shares.

If you are investing in stocks when markets are volatile, you may want to determine which of these measures is appropriate for you based on a number of financial measures.

Please reach out to me so I can support you and provide guidance during these unprecedented times.

3 Things to Understand about Your Investments

Investors who have financial advisors are on the path to financial freedom, but that does not necessarily mean they should sit back and ignore their portfolios. Investing is a never-ending process, and your relationship with your financial advisor is an ongoing partnership. That means it is a good idea to be educated about your investments. You can start by asking the three questions below.

How am I invested? You would be surprised by how many investors don’t know the answer to this question. Start with the basic asset classes: Are you invested in stocks, bonds, or cash? Then move on: Are you invested in any alternatives, such as real estate and commodities? Then ask about the allocation: How much of each asset class are you invested in? And are you invested directly in those assets or via mutual funds? And how might you expect that mix of assets and investment types to change over time?

Are changes warranted? When to buy or sell depends on several things. What is happening in the overall market (i.e., a bull or bear market)? What is happening in the asset class? Is the buy or sell price attractive? If you should buy or sell, how much and when? And what will you do with the proceeds? Are there other investments that you believe have more potential? As you can see, a change isn’t as simple as it seems.

What do I do with winners and losers? When your investments fare well, do you keep them or sell them? Not all investments work out, however well planned, and successful investors should know the answer to this question (and the reasoning behind it). In other words, have a plan for investments that are performing well and for those that are performing poorly.

If you need help answering these questions, please reach out to us.

7 Ways to Get Financially Healthy and Keep on Track in 2020

Investing advice may come and go, depending on the economic environment, the ebbs and flows of the markets, and the life stage of the investor. But foundational financial advice is timeless. Here are seven tips to keep us on track.

Save part of your income every month. This is true regardless of your life stage. If you are in your working years, save for retirement. If you are retired, save for emergencies.

Use automatic deductions if they are available. Maybe your employer offers automatic paycheck deductions, or maybe you can have a little transferred to a mutual fund each month.

Track your income and expenses. Again, this is true regardless of your life stage. You should do it when you are working, and you should do it in retirement. Knowing what comes in and goes out is the key to financial freedom.

Avoid overspending. Avoid buying on impulse. How? Create a budget. Plan your dinner menus in advance. Make a shopping list and stick to it. Keep the money in your wallet to a minimum.

Consider gifts carefully. Gifts and donations may seem like they do not count toward your spending, but your generosity should not threaten your financial security.

Take advantage of your employer’s offerings. If you have a retirement savings plan, a health savings account, or a pre-tax transportation plan, use them. They save money on taxes, and even small savings add up.

Be conscientious. Keep track of your bills, whether they are mailed or accessed online. Review your bank and credit card statements monthly. Pay your bills on time. Refinance mortgages and other loans when it makes sense. Don’t sign anything without reading the contract.

If you need help with your financial planning, please contact us.

How to Save for Retirement with Tax Deferral

A number of tax-deferred investment vehicles are available to individuals saving for retirement, and that is a wonderful thing. With tax deferral, the return on your investment is not reduced by income taxes every year: you pay taxes only when you withdraw the money, most likely in retirement, when you may be in a lower tax bracket and will thus pay fewer taxes on the distributions. So what are your options?

The first kind of retirement plan you may think of for its tax-deferral benefits is your employer-sponsored retirement plan. These plans include defined benefit plans (more commonly referred to as pension plans), which provide a specific benefit in retirement, and defined contribution plans (such as 401(k) and 403(b) plans), which provide a specific contribution to an account in your name, but the benefit you will receive upon your retirement depends on the investment experience of your account.

But you have other options, including individual retirement accounts (IRAs). Traditional IRAs (to which anyone can contribute) and SEP and SIMPLE IRAs (designed for self-employed individuals and smaller employers) are like employer-sponsored retirement plans, but you purchase them yourself. Roth IRAs are a little different: you make after-tax contributions and investment income accrues tax free, but distributions are generally not taxed.

Finally, you could consider a fixed annuity, which is a financial product that provides a stream of income based on guaranteed rate of return for a certain period of time or even for your entire life. Because of this, annuities are similar to defined benefit plans or traditional pensions.

Note that there are different eligibility rules for each of these investment vehicles, such as income phase-outs, age requirements, and contribution limits. Please reach out to us if you need help determining which of these options is most suitable for you given your financial circumstances.

Understanding Rules Around IRA Contributions

With tax time approaching quickly, many American investors are asking questions about their individual retirement accounts (IRAs).

One big question: “If I didn’t turn 70 1/2 until early 2020, can I still make deposits into my traditional IRA?”

The answer is yes. Because you didn’t reach age 70 1/2 in 2019, you are eligible to make a contribution for the 2019 tax year (which is the year before the year in which you turn 70 1/2).

The maximum contribution is $6,000, and because you are older than 50, you qualify for a catch-up contribution of $1,000, meaning your total 2019 contribution can be up to $7,000.

There are some rules to follow, however. You may not contribute more than 100% of your earned income (or salary from work, but not dividend interest from your investments). So, if your earned income for 2019 will be less than $7,000, you may not contribute the full amount.

Another question: “When can I start taking distributions from my IRA?”

Anyone may begin taking distributions from an IRA without penalty at age 59 1/2. But you must begin taking required minimum distributions (RMDs) by April 1 of the year following the year in which you turn 70 1/2 (April 1, 2021, in the case of the questioner above). RMDs are determined by dividing the total balance of all your IRAs as of December 31 of the prior year by your life expectancy, as listed by IRS Publication 590.

Sound complicated? It can be. That is why it is helpful to have a financial advisor guiding you. Please reach out to us for assistance with your IRA contributions or withdrawals.

Stocks: Should You Go Small or Large?

Small-cap stocks appeal to some investors because of their potential for strong growth. Still, not everyone can stomach their potentially higher volatility. Are they right for you, and if they are, how can you best add them to your portfolio?

First, some background. Small-cap stocks typically include companies with market capitalizations of $250 million to $2 billion, while mid-cap stocks range from $2 billion to $10 billion, and large-cap stocks have market capitalizations of greater than $10 billion. To review, the market capitalization of a company is its stock price times the number of shares it has outstanding.

Smaller-cap stocks typically have greater growth potential than larger-cap stocks. This is because 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. This flexibility often helps smaller companies perform well.

But that is not always the case. According to conventional wisdom, small-cap stocks can perform better than larger-cap stocks (a) when markets have been down and are improving and (b) when interest rates are rising. At other times in the market cycle, larger-cap stocks may perform better. For example, when markets are declining, investors may prefer the security of well-known names and shun small-cap stocks in favor of large-cap stocks.

You probably know, however, that it is wise to avoid trying to time the market. Instead, we recommend choosing an appropriate asset allocation for your risk tolerance and financial goals and sticking with it over time. You may want to ensure your distribution includes some allocation to small-cap stocks, perhaps through a small-cap mutual fund, so you have adequate diversification among a number of small-cap companies.

We can help you decide if small-cap stocks are right for your financial goals and, if so, in what allocation. Please reach out if you have any questions or would like to consider adding these investments to your portfolio.

Investing an Inheritance: What You Need to Know

An inheritance may be expected, or it may be a complete surprise. Either way, when we receive one, we worry that others do not: What should I do with the inheritance?

When it comes to investing in a windfall like an inheritance, there are many options. Spend it on a sports car? Donate it to charity? Invest it? And if the latter, how?

Let’s focus on the investing options. The steps for this are relatively simple.

First, determine appropriate asset allocation. Such an allocation should take into account the fact that no one knows how the market is going to perform.

Ideally, your assets should be divided among different types of investments based on your financial goals and appetite for risk. This is a mix of stocks, bonds, and other investments.

Next, you would invest the inheritance based on that mix of assets. You could do this all at once, which gets your money working more quickly and does not leave you too conservatively invested in cash for a period of time. Or you could use an approach called dollar-cost averaging, which involves investing the inheritance a little at a time. With this approach, you can take on less risk by slowly investing small chunks at a time rather than throwing it in all at once.

Regardless of which approach you choose (other than the sports car), we can help you determine the appropriate asset allocation.

Please reach out if you have received an inheritance or expect one in the future and would like assistance with this investment.