- As the U.S. markets are enjoying growth and “High Points” the speculators and certain talking heads are beginning to promote their “plays”- get out of U.S. stocks while they are up and buy “Fixed income.” If you’ve been reading my e-mails and taking my coaching for any length of time, you will be able to recognize this as Speculating and Market Timing – and Market Timing not only does not work, but brings harm to one’s portfolio.Speculating with Fixed IncomeThose who would turn their focus to Fixed Income will often “chase returns”, looking for higher rates and yields. This is actually speculating. You see, in the search for higher returns, a speculator may look for Bonds with longer maturity dates. When you have a Bond with a longer maturity, you increase your risk (volatility) as the value is likely to fluctuate before it matures. For example, Long Term Gov Bonds are currently -11.48% (as of July 5, 2013)If not Long Term Bonds, some may choose Municipal Bonds or even Emerging Market Bonds (down -8.22% for same period) and Corporate Bonds; again increasing their risk as these vehicles are more volatile.Those who ran to Treasury Bills after the downturn of 2008 (up +25.8% at end of 2008), experienced great losses in that Asset Class if they held those in their Portfolios through 2009: -14.90%*The Purpose for Fixed IncomeIn a properly diversified portfolio, Fixed Income helps improve stability, acting as a “cushion” against the full impact of the Equities Markets. While providing the opportunity for some growth, growth is not the first priority, maintaining Capital is the first priority followed by growth. Remember, we don’t want to speculate and “chase” higher returns with Fixed Income (thus increasing volatility) , that’s the job of the Equities portion, which should be spread out globally.A Hypothetical that has allocated 50% to Fixed Income and 50% to Equities has reduced its volatility (Risk) by reducing the exposure to the Equities Market; and should not expect to participate in the full downturn of the market when compared to having 100% of one’s portfolio in the Equities Market. The other side of that coin is, when the Equities markets grow, you cannot expect to benefit fully (meaning 100% of the growth) as you have sheltered half of your portfolio from equities.Stay Involved With Your PortfolioEducation- Coaching, is a key component to the growth and success of your portfolio, and with it, your financial dreams and aspirations.Last month’s Coaching Session- “Mind Over Money”, was so impactful, many in attendance wished they had their friend or family member. Because this is such a helpful, relevant class, I am teaching it again this month.Please mark your calendar and make every effort to attend, Thursday August 22, 6:30PM at The Hampton Inn in Lancaster.
R.S.V.P is required for attendance. For Clients and prospective clients only- no Agents or Licensed Advisers or Brokers.
Call 661-942-2141 by Aug 14, 2013 to reserve a seat
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Let’s start with the positives of the 401(k) plan before we get into the Pitfalls.
Number One, once you set up the plan your contributions are automatic; you do not have to think. You can view this as “forced discipline.”
Number Two, there may be a Company match; you make a contribution and they match your contribution , typically 25 or 50 cents for one of your dollars, and some will match dollar for dollar.
OK, that’s about all the positives…..now let’s reveal some “Pitfalls.” :
While this sounds like a no-brainer, many employees are under the impression that they cannot lose their money that is in “The Company Plan.” Setting the obvious aside, let’s look at the reality that most workers focus on what they are good at in their job, yet now that they are putting money into this plan they must now know how to navigate the choppy waters of the Stock Market!
This arduous task quite often leads to unwise behavior such as emotional based decisions, hyper-trading (frequently switching fund choices), timing the market and speculating and gambling. All of these factors, according to Dalbar Research, are why individuals investors on average earned a meager 4.25% annually over the past 20 years, while the S&P 500 averaged 8.21%.
[Dalbar’s Quantitative Analysis of Investor Behavior Dec. 31, 2013]
When the 401(k) was first introduced in 1981, one of the intentions was to direct your attention away from the “disappearing Company Pension Plan” and focus on the growth opportunity of having your retirement funds in the Stock market.
One of several risks that resulted was that workers went from having a Defined benefit plan, in which they knew with certainty (dependent upon age, years of service, and averaged salary) what their future monthly retirement income would be, to having no idea at all what their future income will be.
So instead of knowing that you are working towards a future monthly income of $3,800, for example, you are now encouraged to put your own money in the Stock Market, possibly matched by a contribution of the Company’s money, and are expected to figure the rest out on your own.
As I write this, the majority of public companies’ 401(k) plans have absolutely no income provisions at all! Meaning that when you get to the point of retirement and have say, $400,000 in your 401(k) (Should you be so fortunate), what do you do with it? Take withdrawals? How much? How long it last? What if the market keeps going down? Obviously a drop in value like we saw in 2008 will have a devastating effect on the income that can be generated from your retirement account. $200,000 doesn’t go quite as far as the $400,000 that was once in the account.
(Adapted from the book, Against The Grain, Avoiding the Financial Pitfalls of Conventional Wisdom, by Tim Rosen available for Kindle through Amazon, and paperback at www.AgainstTheGrain-Book.com
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