You learn lessons as you invest in pursuit of long-run goals. Some of these lessons are conveyed and reinforced when you begin saving for retirement, and others you glean along the way.
1. First and foremost, you learn to shut out much of the “noise.”
News outlets take the temperature of global markets five days a week (and even on the weekends), and fundamental indicators serve as barometers of the economy each month. The longer you invest, the more you learn to ride through the turbulence caused by all the breaking news alerts and short-term statistical variations. While the day trader sells or buys in reaction to immediate economic or market news, the buy-and-hold investor waits for sell offs, corrections and bear markets to pass.
2. You learn how much volatility you can stomach.
Volatility, also known as market risk, is measured in shorthand as the standard deviation for the S&P 500. Across 1926-2014, the yearly total return for the S&P averaged 10.2 percent. If you want to be casual about it, you could simply say that stocks go up about 10 percent a year – but that discounts some pronounced volatility. The S&P had a standard deviation of 20.2 from its mean total return in this time frame, which means that if you add or subtract 20.2 from 10.2, you get the range of the index’s yearly total return that could be expected 67 percent of the time. So in any given year from 1926-2014, there was a 67 percent chance that the yearly total return of the S&P might vary from +30.4 percent to -10.0 percent. Some investors dislike putting up with that kind of volatility, others more or less embrace it.
3. You learn why liquidity matters.
The older you get, the more you appreciate being able to quickly access your money. A family emergency might require you to tap into your investment accounts. An early retirement might prompt you to withdraw from retirement funds sooner than you anticipate. If you have a fair amount of your savings in illiquid investments, you have a problem – those dollars are “locked up” and you cannot access those assets without paying penalties. In a similar vein, there are some investments that are harder to sell than others.
Should you mis-gauge your need for liquidity, you can end up selling at the wrong time as a consequence. It hurts to let go of an investment when the expected gain is high and the P/E ratio is low.
4. You learn the merits of rebalancing your portfolio.
To the beginning investor, rebalancing when the market is hot may seem illogical. If your portfolio is disproportionately weighted in equities, is that a problem? It could be.
Across a sustained bull market, it is common to see your level of risk rise parallel to your return. When equities return more than other asset classes, they end up representing an increasingly large percentage of your portfolio’s total assets. Correspondingly, your cash allocation shrinks.
The closer you get to retirement, the less risk you will likely want to assume. Even if you are strongly committed to growth investing, approaching retirement while taking on more risk than you feel comfortable with is problematic, as is approaching retirement with an inadequate cash position. Rebalancing a portfolio restores the original asset allocation, realigning it with your long-term risk tolerance and investment strategy. It may seem counterproductive to sell “winners” and buy “losers” as an effect of rebalancing, but as you do so, remember that you are also saying goodbye to some assets that may have peaked while saying hello to others that you may be buying at the right time.
5. You learn not to get too attached to certain types of investments.
Sometimes an investor will succumb to familiarity bias, which is the rejection of diversification for familiar investments. Why does he or she have 13 percent of the portfolio invested in just two Dow components? The investor just likes what those firms stand for, or has worked for them. The inherent problem is that the performance of those companies exerts a measurable influence on the overall portfolio performance.
Sometimes you see people invest heavily in sectors that include their own industry or career field. An investor works for an oil company, so he or she gets heavily into the energy sector. When energy companies go through a rough patch, that investor’s portfolio may be in for a rough ride. Correspondingly, that investor has less capacity to tolerate stock market risk than a faculty surgeon at a university hospital, a federal prosecutor, or someone else whose career field or industry will be less buffeted by the winds of economic change.
6. You learn to be patient.
Even if you prefer a tactical asset allocation strategy over the standard buy-and-hold approach, time teaches you how quickly the markets rebound from downturns and why you should stay invested even through systemic shocks. The pursuit of your long-term financial objectives should not falter – your future and your quality of life may depend on realizing them.
Source- mtairynews.com
Investing is a savvy way to increase your net worth by essentially doing nothing. Create a solid investment strategy now to be set in the future.
It's important to be careful with your money, even when focusing on low-risk investments. There's no such thing as an investment with no risk, so you really need to research where you put your money. Learning how to invest money wisely can help you reach your goal a little faster.
1. How to decide how much to invest:
The right amount of money to invest differs for everyone. To figure out what's right for you, define your investment goals, determine how long you can go without accessing the funds and decide how much — if any — of your money you can afford to risk.
2. Diversify your assets:
Even the safest investments come with a risk, but you can decrease it by diversifying your portfolio. Distributing your funds among different types of investments helps you avoid systemic risk (which impacts the economy as a whole) and non-systemic risk (which affects a small portion of the economy or one company in your portfolio).
Create an asset allocation strategy where you include different types of investments in your profile, such as stocks, bonds, cash and real estate. This increases the probability that at least some of your investments will offer good returns if others lose value or prove to be stagnant.
3. Focus on tactical asset allocation:
So how much should you invest in each category? There are two strategies. A tactical asset allocation strategy calls for investing an array of percentages in every asset class, meaning you can increase your distribution in a particular category when the stocks are expected to perform well and decrease it when they're projected to perform poorly. Conversely, strategic allocation is a buy-and-hold strategy. You set initial targets and intermittently rebalance your portfolio as returns alter original asset allocation percentages or your targets change.
4. Try to beat inflation:
Since 2010, inflation rates in the United States have varied from a high of 3.2 percent in 2011 to a low of 1.5 percent in 2013. After accounting for inflation, there's a 1-in-3 chance that you won't get your investment back with a cash savings account, according to automated investing service Betterment, because nominal cash interest rates have recently been averaging around 1 percent or less.
If you're putting aside money for a long-term goal, such as retirement or your young child's future college education, strive for a 30 percent buffer over the original target to keep up with inflation.
4. Don't frequently monitor returns:
It's only natural to want to keep a close watch, but doing so can cause you to lose money, according to Betterment. If you're monitoring your returns on a daily, weekly or monthly basis, there's a pretty good chance you're going to see a loss. Obviously, this will be alarming, and it could ultimately cause you to make a poor decision to reallocate your assets, hindering your overall performance.
Do your best to resist temptation and only check your portfolio once per quarter.
Source - tampabay.com
Keeping it simple and understandable is key
Creating and executing an appropriate wealth management plan can be confusing and daunting for private investors. There’s no shortage of wealth management advice. But parsing true unconflicted advice from marketing is no easy task. And even figuring out how to assimilate good advice has its challenges.
As Rock and Roll Hall of Famer Tom Waits said, “We are buried beneath the weight of information, which is being confused with knowledge.”
Adding a sense of clarity to wealth and investment planning information overload is how advisors can add real value. One easy-to-read guide advisors can use when working with investors is Ashvin B. Chhabra’s new book, The Aspirational Investor.
Ashvin is one of the founders of Goals Based Wealth Management, which integrates modern portfolio theory with behavioral finance. The Aspirational Investor sets a path that incorporates many of the more macro issues families of wealth need to address and suggests ways for private investors to work with their advisors in setting a wealth plan that truly meets long-term goals. In other words, Ashvin helps investors see the forest through the trees.
Three Steps to Frame Plan
Over lunch, Ashvin and I discussed the application of this approach to investors across the wealth spectrum. Here are three steps to help frame a wealth plan, whether or not you follow a strict goals-based approach:
1. Identify personal goals and the amount of wealth that would be needed to achieve them.
Ashvin thinks about goals as falling into one of three buckets. The first covers necessities, such as a safety net in case of unemployment or illness and what would be required to cover basics such as shelter at an expected level. The second covers things that are important, such as lifestyle or education costs for children. The third is aspirational, those things that dreams are made of, such as philanthropy, owning a business or extensive travel.
Thinking about goals in this manners will help set a minimum floor and a stretch goal for what your client will need financially.
2. Focus more on risk allocation than on individual investments.
When creating an asset allocation, ensure all of a client’s existing assets are incorporated in the strategy and assigned to an appropriate goal. The purpose of the asset will be reflected in which bucket it’s assigned. For example, essential, or necessary, goals may include insurance and a home. Retirement assets would also be in this bucket and could include both low risk/low return capital preservation assets and market assets due to the long-term time horizon. Important assets would include market investments such as stocks, bonds, cash, private equity, commodities and real estate. Aspirational assets could include riskier assets, such as stock options or a business. But they could also include cash to fund opportunities.
Goal-setting will provide an estimate of the money needed. Once the amount of money needed is known, that can be a check to see if goals can be realistically obtained. The investment strategy must then be structured with the correct risk allocation—necessary, important, aspirational—to maximize the tradeoffs, for instance, achieving essential goals with high certainty.
3. Once the overall risk allocation is set, it’s important to have clear benchmarks that reflect the role of the assets and the mix.
Rebalance portfolios. Create customized benchmarks. These will be critical in helping clients understand how their portfolios are performing.
The key to a successful long-term client relationship is crafting an understandable strategy that can clearly demonstrate how it can help achieve goals. So next time you find yourself reaching for the Monte Carlo simulation—why not keep it simple?
Source - wealthmanagement.com
4 Considerations to Help You Prepare for an Early Retirement
How long do you want to work for???
Some people, whether for financial reasons or out of the sheer love of work, want to work for as long as possible. Others instead strive to reach retirement as quickly as possible.
If you’re dreaming of an early retirement, make sure you’ve reviewed these four things to help ensure you’ve covered all of your bases.
- How much you’ve saved: The earlier you retire, the more years you may have to finance with your savings. This means that, compared to someone who retires later in life, you’ll either need to have a larger nest egg that’s capable of funding a longer retirement or have a comparatively smaller withdrawal rate.
- Asset allocation: In a similar vein, in order to successfully fund your potentially longer retirement, you’ll likely need to stay invested and generate returns to help you keep up with inflation and maintain your standard of living. Some people reach retirement and immediately pull all of their money out of the stock market in order to avoid any risk of market volatility or losing principal on their investments. While this may insulate you from the ups and downs of the market, the steady impact of inflation could erode your savings and jeopardize the longevity of your money. A good financial advisor can work with you to make sure your asset allocation is aligned with your risk tolerance while still providing the potential for long-term growth.
In today's globalization and broader less trade, a multi-mixed of asset classes that invest into various countries and currencies is extremely important to preserve wealth.
Read more about about Asset Allocation and Currency Diversification.
- Health coverage: It’s important to have a plan for acquiring health coverage prior to becoming eligible for Medicare at age 65. Based on how quickly premiums have been rising in recent years, you could be paying significantly more on your health insurance by the time you reach Medicare eligibility than when you initially retire, and the premiums you’ll be paying will likely be a lot higher than what you paid while you were still working.
- Emotional costs: It’s easy to overlook the emotional costs of retiring early, but they should be taken into account before you receive your final paycheck. Will you miss your coworkers? Will you be bored? Make sure you find activities that you are passionate about that will help give your retirement a sense of purpose.
Source - desmoinesregister.com
Find the right asset allocation, use it and give it the time to work. That was the message at a recent event hosted by Fidelity Investments.
Your Funds
At a midyear outlook event hosted by Fidelity Investments last week, experts agreed that investors are better off with the right mix of funds — even average and mediocre funds — than they are trying to always find the “best” funds.
The message was clear: Find the right asset allocation, use it and give it the time to work.
But that’s easier said than done, as was proved by the conversation at Fidelity’s Inside/Out event, which included both Fidelity managers but top investment strategists from Oppenheimer Funds, State Street Global Advisors and others. While preaching patience and savvy allocation, the conversation kept veering back to current events and what to do now or next.
“It’s very tempting for a lot of investors when you see your portfolio go down to sell and when you see the market has been up, to buy in, but often times you sold after you already had the loss or you are buying after the market has already run up,” said Joanna Bewick, portfolio manager for global asset allocation for Fidelity.
“You need to focus on the risk profile you are trying to achieve, and what are the portfolio weightings that get you to that target,” she added. “Having disciplined rules in place around your asset allocation can be a very good way to discipline oneself to buy low and sell high.”
The problem is that most investors don’t have rules for themselves, or justify breaking the ones they have when it’s convenient. They’re not “buying the hot asset class” when they follow today’s hot trend into China funds, they’re “diversifying.”
I came away from the Fidelity event thinking about rules that would help most fund investors stick to their plans so that their asset allocation plan pays off.
The most common rule for allocation-oriented investors involves rebalancing, which involves selling leaders and buying laggards to put a portfolio back to its target allocation. An easy rule is to rebalance whenever the market moves a portfolio five or 10 percent, meaning that if your plan is to be 60 percent in stocks and 40 percent in bonds, you realign assets when the portfolio stands at 55-45, 65-35 or 70-30.
In thinking about rules that met the “set a course and stay with it through this cycle” message from the experts, my focus was on staying disciplined. Here are the self-restraint guidelines that came to mind:
•Ignore recent performance.
Consider money flowing into China Regions funds right now which, according to Morningstar, are up about 20 percent year-to-date, on average.
If you’re making a “diversification decision,” rather than chasing hot performance, consider that the average fund has an annualized gain less than half that size over the last five years and is up about 11 percent on average for the last decade.
Buy thinking you may get the long-term results of the asset class and you tune out the short-term market noise.
• Don’t sell a fund until it disappoints you twice, and “yesterday” and “this week” don’t count.
Even the best funds have disconcerting stretches. Don’t ax a fund just because it has a bad quarter or looks ugly year-to-date; make sure it has two different periods where you were disappointed, so that you don’t just pull the rip cord the first time there’s turbulence.
No one can suggest you were too reactionary when you wait for your second gut-level reaction to make a move.
• Have three key reasons for making changes.
The idea at the Fidelity conference was that performance alone is not a reason to make a change, so consider what else — good or bad — is prompting your change. It might be that the fund has changed managers, or that your risk tolerance has changed with age, or that you see the benefits of adding a new asset class to your long-term mix.
If performance is your only reason to change holdings, you’re chasing results and unlikely to catch good ones.
• Keep changes to no more than 5 or 10 percent of your portfolio at a time.
The idea here — as with rebalancing — is to stick with a sound allocation strategy, rather than knee-jerking after tactical plays based on what’s happening now kills an allocation plan.
Tweaking a portfolio on the edges helps provide the right mix of active management with letting your strategy work. It lets you tilt the portfolio strategically, without letting you blow it up.
“Buy on the assumption that they could close the market the next day and not reopen it for five years.”
Warren Buffett said that. It’s a great way to ensure that you don’t buy in without being ready to stay put. As much as anything, it gives your investments ample time to live up to the benefits of having the right asset allocation.
Source - The Seattle Times
