Author: production

You’ve probably noticed that your mutual fund account statement shows two sets of figures for average annual total returns: one is adjusted for the maximum sales charge; the other is unadjusted. Which figure should you use to compare the performance of your investment to its benchmark?

First, some background. The Securities and Exchange Commission (SEC) requires mutual funds to show both figures to provide investors with a fair and accurate comparison.

Unadjusted figures

Unadjusted figures show the performance of a fund taking into account changes in share value and assuming all income and capital gain distributions will be reinvested; however, they don’t adjust for sales charges.

Adjusted figures

Adjusted figures use the same calculation as unadjusted figures, but also factor in the effects of the maximum sales charge that can be applied to a certain share class.

Is either comparison right for you?

If you paid a sales charge, looking at unadjusted figures may not be a good comparison. On the other hand, the adjustment for maximum sales charge may not reflect your particular situation. For example, if you own Class A shares with a 5 percent up-front sales charge, the sales charge would have impacted your investment in the year of purchase, but the adjusted figures would show its performance as if you had invested today.

As well, sales charges are sometimes waived or reduced, so you may find that neither adjusted nor unadjusted sales charges reflect your own investment experience.

Personal performance data

You may want to look at your year-end account statement to see if it has personal performance data. Some mutual fund companies provide it, and when available, it will offer the most accurate measure of your investment, taking into account all transactions and any sales charges you paid.

As well, your financial advisor may be able to provide you with personalized return information and help explain it to you.

Foreign stocks had a losing year in 2014, with the MSCI EAFE Index, a wide benchmark of international stock markets, losing 4.90 percent. That’s far worse than the U.S. benchmark S&P 500 Index, which gained 13.69 percent. But that doesn’t mean you should avoid foreign stocks.

First, non-U.S. equities make up almost half of the broad MSCI All Country World Index, and foreign countries have become more prominent contributors to the world’s gross domestic product (GDP). Thus, foreign stocks give investors the chance to broaden their opportunities and their portfolios.

Second, the recent performance of foreign stocks might drive away some investors, but others see it as an opportunity to get a bargain. Different asset classes tend to perform differently at different times, with what’s down going up and vice versa. Indeed, many foreign stocks are cheaper than U.S. stocks based on such common measurements as price-to-earnings ratio and price-to-book value, and they may offer higher dividend yields. While cheaper valuations don’t guarantee higher returns, they may be appealing to certain investors.

Finally, over the long term, international stocks have outperformed U.S. stocks, with the MSCI EAFE Index returning an annual average of 7.67 percent over the past ten years ending December 31, 2014, vs. 4.43 percent for the S&P 500 Index.

Do you think international equities might be right for you? If so, please consult your financial advisor, who’s familiar with your individual financial circumstances and goals and can help you determine the role such investments may play in your overall portfolio.

MyRA – an Individual Retirement Account (IRA) for people without access to one-is the government’s way of encouraging saving.

After a pilot project, myRAs are now a reality. According to CNN, “The U.S. Treasury…says anyone who has direct deposit for their paycheck can sign up and start saving now.”

In this program, anyone with a household income below $191,000 a year can open a myRA. Employers don’t contribute; workers do. Minimum initial investments may be as low as $25, with additional contributions as low as $5, if they’re automatic payroll deductions. Savers will be able to contribute up to $5,500 a year.

The money in the myRA accounts will be invested solely in government savings bonds, backed by the U.S. government-account holders can never lose their initial investment. The accounts are expected to earn the same rate as the Thrift Savings Plan’s Government Securities Investment Fund that federal workers can access. The latest data available indicates its 10-year average annual return was 3.4% as of December 2013.

Otherwise, the account functions like a Roth IRA. In other words, you invest after-tax dollars, but when you withdraw the money in retirement (likely when your income is lower) it will be tax-free.

And you’ll have the option to switch to a private-sector Roth IRA at any time. Once your account balance reaches $15,000 or the account has been open for 30 years, it will automatically be rolled over to a private-sector Roth IRA, where the money can continue to grow tax-free.

Retirement brings freedom from many responsibilities, but it also comes with a set of responsibilities of its own, like the five outlined below:

• Learn to budget. It’s simple: Just figure out how much income you’ll obtain from Social Security, pensions, and other retirement savings, and estimate as closely as possible how much money you’ll spend. Ensure that the numbers are equal and revisit the budget frequently.
• Allocate your assets. You likely shifted your investment portfolio to focus on maximizing income as you approached retirement; once you retire this should become the number one goal of your portfolio. It’s not uncommon for your risk tolerance to diminish as you move into retirement.
• Don’t forget estate planning. Estate planning isn’t just for the wealthy; it simply refers to getting your estate in order so that transition, whenever it should happen, is easy. Ideally, you’ll have a will, a power of attorney, and a health care proxy. And you’ll keep current the beneficiaries listed on your financial accounts and insurance policies. Be sure to discuss your estate plans with your family so they understand your wishes and their responsibilities.
• Get advice. While people are in the workforce, earning and saving, they may not seek preretirement advice. But when you’re a retiree on a limited budget, this becomes essential. An experienced accountant, for example, can produce significant tax savings, and a financial advisor can help you time financial withdrawals from different accounts to minimize capital gains. Plus, you’ll need an attorney to draw up wills and powers of attorney.
• Develop a nonfinancial plan. With all the talk about financial planning, it’s easy to forget that a happy retirement is about much more. It’s important, both mentally and physically, for retirees to stay active and engaged. Plan ahead how you want to spend your time during your retirement.

We’ve seen a lot of situations affecting the markets lately. Oil prices declined by nearly 40%. There were fears of an economic slowdown in Europe. And the Bank of Japan (BOJ) eased its monetary policy. All of this impacted a variety of securities. But do events such as these affect your portfolio? Not necessarily.

Oil prices

As an example, let’s look at oil prices. They tumbled because growth in oil supply has been high, especially from countries that are not members of the Organization of the Petroleum Exporting Countries (OPEC), partly the result of new extraction technologies such as “fracking.” At the same time, demand has been depressed, in part by the slowing of the Chinese economy.

Bank of Japan

As another example, consider the BOJ’s actions in October 2014. When economic growth and inflation didn’t pick up as much as expected, the BOJ expanded its massive stimulus program. The move stunned financial markets, in part because BOJ recognized that there was deflation in the country’s economy, and this move was intended to counter it. It had a major impact on global markets.

Regardless of whether you hold oil stocks or Japanese securities, you could be affected by situations such as these; fear is contagious, and what happens in one market may affect another.

But it’s important to put such situations in perspective. For example, there are many segments of the energy sector, such as utilities, that are not directly impacted by volatility in oil prices; even companies that are, such as those in exploration and production, are used to fluctuations in the price of oil and manage most prudently to stay afloat when prices are down.

If you are concerned about the impact on your portfolio of market fluctuations, contact your advisor. He or she understands events such as those described above and will put them in perspective for you.

It appears likely that the U.S. Congress will pass a bill allowing investors to change the holdings in their 529 plans twice a year, making the plans much more appealing in the face of volatile market environments.

A 529 plan is a tax-advantaged savings plan designed to encourage saving for higher-education expenses. These plans allow you to save money before it’s taxed. Any earnings within the plan will be free from taxes.

The funds must be used to pay for “qualified education” expenses, which include tuition, books, fees, room, and board at any accredited school.

Under current tax rules, 529 plan holders are allowed to make changes to the investments in their accounts once a calendar year. However, many investors have turned away from 529 plans, as they want to change their 529 investments more often to respond to market changes.

Now, thanks to the Achieving a Better Life Experience (ABLE) Act, that rule may change; ABLE contains a provision that would allow 529 plan investors to make changes to their investment holdings twice a year.

However, 529 plans can be confusing. For example, they are offered by states, but you don’t have to choose a plan offered by the state in which you live. And establishing a plan in another state may have tax consequences. As always, it’s important to scrutinize the fine print.

Currently, only 3% of the population has a 529 savings plan, according to the Government Accountability Office. If you’re interested, your advisor will help you understand the complexities.

When interest rates are low, many fixed-income investors search for creative ways to obtain higher yield, leading many of them to floating-rate mutual funds.

Floating-rate loans are variable-interest-rate loans made by financial institutions to companies that have low credit quality. The loans are said to have “floating” interest rates because the interest rate paid on them adjusts periodically, usually every 30 to 90 days, based on changes in widely accepted reference rates and a predetermined premium over the reference rate.

A floating-rate fund buys those loans and gives investors the opportunity to share in the potential earnings. The potential benefit to investors may overcome the potential interest-rate risk – the risk that your investments will yield less when interest rates are low. That’s because floating-rate fund loans generally pay interest rates that are higher than those of many other fixed-income investments, such as money market funds and U.S. Treasuries. Additionally, floating-rate funds may offer the potential for diversification: They usually have low correlations to other major asset classes.

As with most investments, there are other risks to investing in floating-rate loans. Because these generally invest in the debt of borrowers with low-credit quality, floating-rate funds should be considered somewhat risky. And floating-rate funds may not have stable net asset values, which makes some investors uncomfortable.

If you’re comfortable with high-yield risks, however, a floating-rate fund may be appealing in today’s low-interest-rate environment. Be sure to consult your advisor to determine if this is an option for you.

As world economies become increasingly connected, more and more investors are investing abroad, but doing so raises a new risk. International investments are purchased in international currencies, and that can create what’s commonly called “currency risk.”

Currency risk stems from the change in the price of one currency relative to another. To illustrate, let’s say you buy $10,000 worth of shares in a Japanese company. To do so, you’ll need to convert your U.S. dollars to Japanese yen. At the time, one yen equals two dollars, so you end up with 5,000 yen invested in shares of the Japanese company.

Now, let’s say a few months later you want to sell your shares, which have neither increased nor decreased in market price. To do so, you’ll have to convert them back into U.S. dollars. If the exchange rate stays the same – one yen equals two dollars – you’ll get $10,000 back. But, let’s say the exchange rate changes so that one yen equals one dollar. In this case, your investment, for which you paid $10,000, will be worth only $5,000. The share value didn’t change; the exchange rate did.

When you invest in international mutual funds that follow indices which measure global equity performance, such as the MSCI EAFE, you take on currency risk. This may be beneficial during periods of a weakening U.S. dollar, but if the U.S. dollar strengthens against the international currency you’re invested in, you could lose money.

Currency-hedged investment

You don’t have to take on currency risk, however. If you prefer to avoid it, you can seek out a currency-hedged investment.

Investorwords.com  defines currency hedging as “a particular hedging strategy used to reduce risks in the foreign exchange market.” It’s fairly complicated, but professional fund managers do it well. So, if you’d like to invest internationally but avoid currency risk, ask your advisor about currency-hedged products.

In a yield-starved environment, investors are looking for bonds that pay more, and high-yield bonds, also called “junk” bonds, may be quite appealing to some.

Many years ago, a group of credit rating agencies (Moody’s Investor Service, Standard & Poor’s, and Fitch Ratings) developed a system to “grade” the relative credit quality of bond issuers. The highest-quality bonds are rated AAA, and the credit scale descends to D (for default).

Subsequently, many financial institutions restricted their investments to the highest-rated bonds, called investment-grade bonds. Lower-rated bonds, meanwhile, developed a negative connotation and soon became known as junk bonds.

But junk bonds aren’t necessarily junk. Over time, many investors have discovered that the risk-adjusted returns for junk bonds were high, and they began to buy them. Indeed, junk bonds tend to be particularly appealing when yields on other bonds are low, as they are today, when the U.S. Federal Reserve Board is opting to keep interest rates low. In fact, it may be more accurate to call them high-yield bonds instead of junk bonds.

Of course, while high-yield bonds may pay higher yields than investment-grade bonds, they may also have higher volatility and higher risk of default. While no investment is ever totally safe, portfolio managers try to minimize these risks by using credit analysis to evaluate the possibility of a bond issuer’s default. And they diversify their portfolios, which can help balance the ups and downs of individual bond prices; some might perform poorly, while others might be performing well.

 

 

Recently, the U.S. dollar has been on a roll: The U.S. Dollar Index (which measures the value of the greenback against the euro, Japanese yen, Canadian dollar, British pound, Swedish krona, and Swiss franc) reached a four-year high in the third quarter of 2014.

Good news in some ways, but what does it mean for your investments?

A rising dollar makes U.S. exports more expensive. That’s because American exporters sell their goods in foreign countries and are paid in a foreign currency that is now falling relative to the U.S. dollar. Their profits are thus lower, and their stock values could fall.

Alternatively, when the dollar rises against other currencies, imports are less expensive.

That’s because importers buy goods in a foreign currency that’s falling relative to the U.S. dollar, so they can pay less to obtain goods than they did previously. That could increase the profits of importers, which could drive their stock prices higher.

A soaring U.S. dollar can also detract from the returns on your foreign investments. Foreign stocks are bought and sold in local currency, meaning U.S. mutual funds and other such products must convert U.S. dollars to a local currency in order to make a purchase.

Then, when selling, the fund must exchange the proceeds for U.S. dollars.

As an example of the impact of currency fluctuations, consider that in 2013, Toyota Motor Corporation stock returned 63.1 percent in Japanese yen, but only 33.4 percent in U.S. dollars. That was because the U.S. dollar strengthened against the yen in 2013. U.S.-based investors lost more than 47 percent of the stock’s return in the exchange rate.

The U.S. Dollar Index’s third-quarter gain was its second-largest quarterly rise since the inception of the euro in 1999.

So keep a weather eye on the dollar, and contact your advisor if you need more information on your investments and our high-flying buck.