Rebuild Your Wealth on Solid Ground. (Part 3 of 4):
Can you find the next hot technology stock before other people do? Are you sure? Or better yet, can a stockbroker working at a big bank or brokerage find it for you, and then tell you to buy it before all the hedge funds and money managers and the rest of the world does? You should know the answer to that.
Let’s step back for a minute. What's the real reason that you invest in stocks? To lose sleep? To help replenish the profits of the bailed-out banks and brokerages by paying lots of hefty commissions when they sell you mutual funds and stocks? Of course not. Your purpose for owning stocks is to build wealth over a long period of time by the compounding of your returns, and to offset the wealth-destroying effect of inflation.
So why does it seem so hard to invest in stocks and achieve long term success? Do stockbrokers have some mysterious inside knowledge of which stocks to buy (and when to sell them) that they only share with their best customers? They’d like you to think that, but no, they don’t. Neither do the experts on TV. (Even if they occasionally did, after they announced their picks on TV, everyone who was going to use that information would already have acted on it.) The truth is, there's a lot of research that demonstrates that very few professional money managers (including managers of mutual funds) can consistently beat the stock market. They do in some years, and then fail to in other years. If those full time professionals can’t, how can your stockbroker, the cable TV screamers, your best friend, or even you—do it consistently?
The better way, in my opinion, is that you should quit trying to beat the stock market and join it. Over very long periods of time, the stock market itself (all stocks combined) has given good returns. Of course, over the last ten years, that hasn’t been the case. 2000 – 2009 has been called the “lost decade” because the stock market actually ended lower than it started, and the decade ended with a deep recession. But previous decades with very low or slightly negative returns for stocks, even when accompanied by a rough economy (such as the 1930s), have been followed by better times for both (stocks and the economy) in the next decade [1]. I think that’s likely to happen again in the next few years, although, of course, there's no guarantee.
What does it mean to “join the market” when you invest? It means to diversify your investments in stocks so well that your portfolio holdings are very close to the stocks that make up the whole market. One of the most efficient ways to achieve good diversification is to use index funds—which you can invest in as ETFs or traditional mutual funds. For example, the most widely known index funds are those that invest in the S&P 500. These funds own the stocks of 500 of the largest companies in America. Other index funds invest in mid cap and small cap stocks, as well as in other groups of large cap stocks in the U.S. By investing in a group of broad-based index funds (meaning those that don’t concentrate on certain industries), the returns of the U.S. portion of your portfolio can be very close to that of the stock market itself. You should also have a part of your portfolio invested internationally, and you can achieve great diversification there with index funds.
Index mutual funds also help keep your costs low, compared to actively managed mutual funds. “On the whole, expense ratios [ongoing annual fees charged by the fund] range from as low as 0.2% (usually for index funds) to as high as 2%. The average equity mutual fund [in U.S. stocks] charges around 1.3%-1.5%. You'll generally pay more for specialty or international funds...” [2] Since the SEC says that "Higher expense funds do not, on average, perform better than lower expense funds,” [3] there is rarely a good reason to buy higher expense mutual funds.
Another expense you can avoid with index mutual funds is the commission, or “load” that you pay brokers and agents to buy mutual funds. If you pay a broker a front end commission of up to 5% to buy a mutual fund, you often also pay annual 12b-1 fees of 0.25%. If the broker or agent sells you a fund with a “contingent deferred sales charge” instead of a front end commission, your annual 12b-1 expenses and shareholder service fees can add up to as much as 1%. In this case, your annual bill (embedded in your mutual fund) can be 2% or even higher. Ouch. Much better to invest in index mutual funds with no broker “load”, redemption fee, or 12b-1 charges, and a very low management fee.
Buying ETF index funds is a little different. ETFs have very low expense ratios, but you buy and sell them just like stocks. So, you have to pay a commission each time to a broker unless you are buying them in a fee-based account where commissions are waived. Many stockbrokers and insurance agents have caught on to the popularity of ETFs, and are using them as trading vehicles to generate commissions from their clients—just like they used to do with individual stocks. This can be bad for two reasons: short term trading isn’t investing, and when a broker receives a commission every time you buy or sell, he has a big incentive to get you to trade—which is a distinct conflict of interest.
Keeping your total investment costs low is very important to your long term success as an investor. To control your costs, understand what they are, and think about whether you benefit from the incentives they create for the person you’ve hired to help you.
[1] Tom Lauricella, “Investors Hope the ‘10s beat the ‘00s,” WSJ, 12-21-2009, p. C1.
[2] Quote [with information in brackets added by me] is from Investopedia at http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp See also: William J. Bernstein, The Investor’s Manifesto: Preparing for Prosperity, Armageddon, and Everything in Between (New York: John Wiley & Sons, 2010), p.140. The SEC web site that explains types of mutual fund fees is http://www.sec.gov/answers/mffees.htm#distribution
[3] Investopedia, http://www.investopedia.com/university/mutualfunds/mutualfunds2.asp
Wednesday, March 3, 2010
Thursday, February 11, 2010
Stocks vs. Bonds and Cash: How Much Should You Have?
Rebuild Your Wealth on Solid Ground (Part 2 of 4):
Deciding on the amount you should have in stocks vs. bonds and cash (known as “asset allocation”) is one of the most important decisions an investor can make. The goal of “asset allocation” is to earn high enough returns to achieve your goals, while limiting the amount of risk that you’re taking.
Over long periods of time (say, ten years or more), stocks almost always return more than bonds. Because stocks are shares of ownership in businesses, they reflect the long term trends of growth in the economy. People invest in stocks because they want their assets to grow. If you are younger and are investing for the distant future (such as retirement that’s at least 15 or 20 years away), and won’t need to withdraw money until then, you can afford to have a fairly high percentage allocated to stocks—even though you will probably go through some major stock market downturns along the way.
If you are closer to the time when you’ll need to start using the money you’ve invested, such as within 15 years of retirement, you should have a lower weighting in stocks than you did when you were younger. This is because in the short run, the stock market has a lot of risk. We don’t have to look any further back than the last couple years to see how much stocks can decline at times. As you approach retirement, you should gradually reduce your weighting in stocks. The best times to do this are during periods when the market has been rising for a while rather than after a big selloff in the market. After you retire, you will probably still need to have a modest allocation to stocks to be able to keep up with inflation.
Bonds and cash are a counterbalance to stocks in your portfolio. These are your preservation and income assets. The biggest long term risk to bonds, assuming you’ve invested in high credit quality bonds, is inflation. It would be very appealing to retire with, say, a $1 million bond portfolio that gives you $50,000 in annual interest income—just the amount you need—and just avoid the stock market altogether. The problem is that inflation will reduce the buying power of that $50,000 each year. In five to ten years, you’ll be drawing down on the principal or looking for a job because the interest income from your bond portfolio can’t pay your bills.
So—what should your personal asset allocation be? What’s the formula to figure it out? For people over 45, the general rule of thumb says that the percentage you have in stocks should be 100 minus your age. However, the best allocation for you may not be quite that simple. For example, if you are behind on the amount you have saved and invested, you may need to have a somewhat higher percentage in stocks at age 50 in order to increase your potential for having enough money when you retire. On the other hand, if you are 55 and worry a lot about losing money during market downturns, you may only be able to handle a small percentage in stocks—and perhaps lower your lifestyle expectations for retirement.
There is nothing wrong with tactically, or temporarily, deviating modestly from your asset allocation target to try to avoid temporary losses or to take advantage of selloffs in the market. However, the temptation we all have is to follow our emotions (and the emotions of the “experts” on the business programs) and sell stocks after the market is already down, and get too optimistic when the market has been rising for an extended period. Try hard to avoid acting on these “knee-jerk” emotions.
A much better approach is to rebalance periodically. This means selling a little of the asset class that has increased its weighting in your portfolio recently, and buying a little of the one that has declined—to get back to your target allocation. If you do that at least annually, you will usually be “buying low and selling high.”
At Tampa Asset Management, we will recommend an asset allocation that we’ve designed specifically for your needs. We’ll pay a lot of attention to how you feel about investing and your personal “go to sleep at night” factor. Over time, we’ll help you change your asset allocation as you get closer to retirement, and as you enter it. It’s part of the solid ground that you should build your wealth on.
Deciding on the amount you should have in stocks vs. bonds and cash (known as “asset allocation”) is one of the most important decisions an investor can make. The goal of “asset allocation” is to earn high enough returns to achieve your goals, while limiting the amount of risk that you’re taking.
Over long periods of time (say, ten years or more), stocks almost always return more than bonds. Because stocks are shares of ownership in businesses, they reflect the long term trends of growth in the economy. People invest in stocks because they want their assets to grow. If you are younger and are investing for the distant future (such as retirement that’s at least 15 or 20 years away), and won’t need to withdraw money until then, you can afford to have a fairly high percentage allocated to stocks—even though you will probably go through some major stock market downturns along the way.
If you are closer to the time when you’ll need to start using the money you’ve invested, such as within 15 years of retirement, you should have a lower weighting in stocks than you did when you were younger. This is because in the short run, the stock market has a lot of risk. We don’t have to look any further back than the last couple years to see how much stocks can decline at times. As you approach retirement, you should gradually reduce your weighting in stocks. The best times to do this are during periods when the market has been rising for a while rather than after a big selloff in the market. After you retire, you will probably still need to have a modest allocation to stocks to be able to keep up with inflation.
Bonds and cash are a counterbalance to stocks in your portfolio. These are your preservation and income assets. The biggest long term risk to bonds, assuming you’ve invested in high credit quality bonds, is inflation. It would be very appealing to retire with, say, a $1 million bond portfolio that gives you $50,000 in annual interest income—just the amount you need—and just avoid the stock market altogether. The problem is that inflation will reduce the buying power of that $50,000 each year. In five to ten years, you’ll be drawing down on the principal or looking for a job because the interest income from your bond portfolio can’t pay your bills.
So—what should your personal asset allocation be? What’s the formula to figure it out? For people over 45, the general rule of thumb says that the percentage you have in stocks should be 100 minus your age. However, the best allocation for you may not be quite that simple. For example, if you are behind on the amount you have saved and invested, you may need to have a somewhat higher percentage in stocks at age 50 in order to increase your potential for having enough money when you retire. On the other hand, if you are 55 and worry a lot about losing money during market downturns, you may only be able to handle a small percentage in stocks—and perhaps lower your lifestyle expectations for retirement.
There is nothing wrong with tactically, or temporarily, deviating modestly from your asset allocation target to try to avoid temporary losses or to take advantage of selloffs in the market. However, the temptation we all have is to follow our emotions (and the emotions of the “experts” on the business programs) and sell stocks after the market is already down, and get too optimistic when the market has been rising for an extended period. Try hard to avoid acting on these “knee-jerk” emotions.
A much better approach is to rebalance periodically. This means selling a little of the asset class that has increased its weighting in your portfolio recently, and buying a little of the one that has declined—to get back to your target allocation. If you do that at least annually, you will usually be “buying low and selling high.”
At Tampa Asset Management, we will recommend an asset allocation that we’ve designed specifically for your needs. We’ll pay a lot of attention to how you feel about investing and your personal “go to sleep at night” factor. Over time, we’ll help you change your asset allocation as you get closer to retirement, and as you enter it. It’s part of the solid ground that you should build your wealth on.
Next in the “Rebuild your Wealth on Solid Ground” series (Part 3 of 4):
Guidelines for investing in stocks, bonds, CDs, and cash - while keeping costs low.
Wednesday, February 3, 2010
Have A Good Investment Plan. Follow The Plan.
Rebuild Your Wealth on Solid Ground (Part 1 of 4):
Feeling shell shocked? You aren’t alone. After the great collapse of the stock market in 2008 and early 2009, most investors are looking for a way to rebuild their assets. Unfortunately, many people are so shaken by the losses they’ve incurred that they don’t know how to invest now without taking more risk than they can stomach. Some have sworn off investing entirely, vowing to stay in cash and CDs. Others feel like they have missed the rebound in stocks, so now they are just…waiting. More than a few are questioning the whole concept of investing, after the “lost decade” that they have just been through.
Don’t feel bad if any or all of these describe you. This has been a treacherous period for almost all investors. Retirement savings, including 401(k)s and IRA rollovers were cut nearly in half for many investors across the country, although they have rebounded somewhat since March.
A good investment plan is as important to your financial success as a good map is when you’re traveling in an unfamiliar part of the world. You wouldn’t fly to Sydney, Australia, rent a car, and then set out driving across the continent to Perth without a roadmap—would you? You might end up chasing kangaroos in a rainforest.
Just like a roadmap, a good investment plan identifies your destination (your investment goal), where you are now, and the best road to take to get from here to there. Of course, a roadmap can’t forecast all the problems you might encounter along the way—heavy rain storms, a section of the highway that’s closed, or a flat tire. But it can help you adjust, deal with those problems when they come, and then continue along in the right direction to reach your intended destination.
Simple, right? But what does a good investment plan have in it? The answer is that it has everything that is important and relevant to reaching your goal. The essential elements include:
It should be clearly written (yes, written down on paper), designed specifically for your needs, and should not be built on somebody’s forecasts of future market performance.
Do you have a good investment plan that is designed just for your needs? Your future is too important to you to avoid this first step. If you need to rebuild after the market decline of 2008, do so on solid ground—starting with a good plan.
Feeling shell shocked? You aren’t alone. After the great collapse of the stock market in 2008 and early 2009, most investors are looking for a way to rebuild their assets. Unfortunately, many people are so shaken by the losses they’ve incurred that they don’t know how to invest now without taking more risk than they can stomach. Some have sworn off investing entirely, vowing to stay in cash and CDs. Others feel like they have missed the rebound in stocks, so now they are just…waiting. More than a few are questioning the whole concept of investing, after the “lost decade” that they have just been through.
Don’t feel bad if any or all of these describe you. This has been a treacherous period for almost all investors. Retirement savings, including 401(k)s and IRA rollovers were cut nearly in half for many investors across the country, although they have rebounded somewhat since March.
A good investment plan is as important to your financial success as a good map is when you’re traveling in an unfamiliar part of the world. You wouldn’t fly to Sydney, Australia, rent a car, and then set out driving across the continent to Perth without a roadmap—would you? You might end up chasing kangaroos in a rainforest.
Just like a roadmap, a good investment plan identifies your destination (your investment goal), where you are now, and the best road to take to get from here to there. Of course, a roadmap can’t forecast all the problems you might encounter along the way—heavy rain storms, a section of the highway that’s closed, or a flat tire. But it can help you adjust, deal with those problems when they come, and then continue along in the right direction to reach your intended destination.
Simple, right? But what does a good investment plan have in it? The answer is that it has everything that is important and relevant to reaching your goal. The essential elements include:
- A clear statement of your investment objectives. These are the tangible reasons you are investing—the amount of inflation-adjusted income you’ll need when you retire, paying for your children to go to college, or buying a vacation home in North Carolina.
- An evaluation of your current assets—individual stocks, mutual funds, CDs, municipal bonds, 401(k), IRAs, and any other assets, as well as your debts. This is the starting point.
- An assessment of how much you’ll be able to save and invest, as well as any other sources of income or lump sum payments you expect.
- A realistic assessment of risk—including identifying current weaknesses in your portfolio, the risk of loss from investing, future inflation, debt risk, and the risk of running out of money when you retire. They can’t all be neatly quantified or eliminated, but you can work to prepare for them.
- A target for asset allocation (% to invest in stocks vs. bonds, CDs, and cash). This depends on a lot of things—your age, when you want to retire, how far short of your goals you are now, your “go to sleep at night” factor, and some consideration of where the markets are now.
- A diversification plan for your growth assets (across large cap, mid cap, and small cap U.S. stocks, as well international and emerging markets stocks).
- A preservation plan for your bonds and CDs, which takes into account potential changes in inflation and interest rates, credit risk, and your tax bracket, and includes a policy of laddering bond maturities from short to long.
- Investment guidelines for what to do in good and bad market conditions—such as when stocks go up substantially, or enter a sustained downturn, or when interest rate changes affect bond prices.
- A specific plan to reduce or eliminate debt.
It should be clearly written (yes, written down on paper), designed specifically for your needs, and should not be built on somebody’s forecasts of future market performance.
Do you have a good investment plan that is designed just for your needs? Your future is too important to you to avoid this first step. If you need to rebuild after the market decline of 2008, do so on solid ground—starting with a good plan.
Next in the “Rebuild your Wealth on Solid Ground” series (Part 2 of 4):
Stocks vs. Bonds and Cash: How Much Should You Have?
Tuesday, January 12, 2010
NEWS RELEASE: Tampa Asset Management Celebrates Successful First Year Anniversary
For immediate release:
INVESTING IN CLIENTS, NOT WALL STREET
Local Tampa investment advisor celebrates firm’s successful one year anniversary with over $95 million dollars of assets under management, and total freedom from commissions and corporate hidden agendas.
South Tampa, FL—Bob Garey, CEO of Tampa Asset Management, LLC, has twenty-five years of experience providing investment advice to families and individuals, most of it spent under the auspices of big name firms like Shearson/American Express, Smith Barney and Wachovia Securities. In December 2008, after the near collapse of several of the biggest banks and brokerages fueled increasing turmoil in the minds of investors, Bob took the financial bull by the horns and went independent, founding the fee-only registered investment advisor firm of Tampa Asset Management, LLC.
“Founding a new registered investment advisor (RIA) firm at a time when trust in the market was at an all time low was a big leap,” says Bob, “but if I had no confidence in the current system, how could I expect my clients to? It made sense to go independent, and take my clients with me. They weren’t just faceless, numbered accounts—they were people, many of whom have become personal friends.”
A January 2009 article in The Wall Street Journal1 supports Bob’s strategy, citing how financial turmoil and tarnished reputations have resulted in a major shift in the financial industry as assets are transferred away from big name brokerages and into low cost custodial accounts at neutral firms like Charles Schwab and TD Ameritrade, to be managed by registered investment advisors like Tampa Asset Management.
Most of Bob’s original clients opted to follow his lead, transferring their accounts from his former brokerage firm into low cost custodial accounts, which he manages on a fee-only basis. One year later, he’s certain everyone involved made the right decision.
“What people may not realize is that RIAs like Tampa Asset Management have a fiduciary responsibility to act in each client’s best interest,” Bob says. “Brokers and insurance agents, who charge commissions for the products they sell, do not. Simply put, our registration with the SEC holds us to a higher standard, and our clients are the ones who benefit. My clients receive all the benefits of the personalized financial guidance and management I was giving them before, with lower costs, no hidden fees, commissions or corporate agendas,” Bob states. “It’s a win-win scenario for everyone involved, except the big banks and brokerages.”
(1)E.S. Browning, “More Brokers Flee Big Firms, Taking Investors With Them”, Wall Street Journal, 1/4/2009
Bob Garey has a B.S. in mathematics and an M.A. and Ph.D. in political science from the University of South Carolina. Prior to his graduate studies, Bob was a pilot and captain in the U.S. Marine Corps. After receiving his doctorate, he was a research associate at Oak Ridge Associated Universities in Tennessee. He and his wife, Terri, have three children, are active in the South Tampa community, and are members of Logos Dei Community Church.
Visit Tampa Asset Management on the web at http://www.tampaasset.com/.
Contact info:
Bob Garey at Tampa Asset Management, LLC
4221 W. El Prado Blvd.
Tampa, FL 33629
813-675-8011 (office)
813-390-2577 (cell)
bob.garey@tampaasset.com
INVESTING IN CLIENTS, NOT WALL STREET
Local Tampa investment advisor celebrates firm’s successful one year anniversary with over $95 million dollars of assets under management, and total freedom from commissions and corporate hidden agendas.
South Tampa, FL—Bob Garey, CEO of Tampa Asset Management, LLC, has twenty-five years of experience providing investment advice to families and individuals, most of it spent under the auspices of big name firms like Shearson/American Express, Smith Barney and Wachovia Securities. In December 2008, after the near collapse of several of the biggest banks and brokerages fueled increasing turmoil in the minds of investors, Bob took the financial bull by the horns and went independent, founding the fee-only registered investment advisor firm of Tampa Asset Management, LLC.
“Founding a new registered investment advisor (RIA) firm at a time when trust in the market was at an all time low was a big leap,” says Bob, “but if I had no confidence in the current system, how could I expect my clients to? It made sense to go independent, and take my clients with me. They weren’t just faceless, numbered accounts—they were people, many of whom have become personal friends.”
A January 2009 article in The Wall Street Journal1 supports Bob’s strategy, citing how financial turmoil and tarnished reputations have resulted in a major shift in the financial industry as assets are transferred away from big name brokerages and into low cost custodial accounts at neutral firms like Charles Schwab and TD Ameritrade, to be managed by registered investment advisors like Tampa Asset Management.Most of Bob’s original clients opted to follow his lead, transferring their accounts from his former brokerage firm into low cost custodial accounts, which he manages on a fee-only basis. One year later, he’s certain everyone involved made the right decision.
“What people may not realize is that RIAs like Tampa Asset Management have a fiduciary responsibility to act in each client’s best interest,” Bob says. “Brokers and insurance agents, who charge commissions for the products they sell, do not. Simply put, our registration with the SEC holds us to a higher standard, and our clients are the ones who benefit. My clients receive all the benefits of the personalized financial guidance and management I was giving them before, with lower costs, no hidden fees, commissions or corporate agendas,” Bob states. “It’s a win-win scenario for everyone involved, except the big banks and brokerages.”
(1)E.S. Browning, “More Brokers Flee Big Firms, Taking Investors With Them”, Wall Street Journal, 1/4/2009
Bob Garey has a B.S. in mathematics and an M.A. and Ph.D. in political science from the University of South Carolina. Prior to his graduate studies, Bob was a pilot and captain in the U.S. Marine Corps. After receiving his doctorate, he was a research associate at Oak Ridge Associated Universities in Tennessee. He and his wife, Terri, have three children, are active in the South Tampa community, and are members of Logos Dei Community Church.
Visit Tampa Asset Management on the web at http://www.tampaasset.com/.
Contact info:
Bob Garey at Tampa Asset Management, LLC
4221 W. El Prado Blvd.
Tampa, FL 33629
813-675-8011 (office)
813-390-2577 (cell)
bob.garey@tampaasset.com
Tuesday, December 1, 2009
“Will you be able to afford to retire?” – Investment game plan for 2010 if you have less than 10 years to retirement.
We all hope to be able to retire some day with peace of mind, knowing that we will have enough money to last throughout our lives. Unfortunately, many Americans in their 50s and early 60s lost a lot of money in their investment accounts and IRAs in the last two years. Now they wonder if they will ever be able to retire. Does this describe you?
Adding to the confusion is the wide range of predictions about where the stock market is likely to go in the months ahead. Many commentators, who are looking at our well-known problems (the declining dollar, mammoth new government debt, high unemployment, etc.), look for another big decline in the stock market. Others, who see the glass half full (because of a simultaneous recovery from the recession beginning around the world, rapid corporate earnings growth, low interest rates), think the market may go much higher. The truth is, it’s too early to tell which will be right. So where does that leave you? You need to rebuild your portfolio so you’ll have enough money to retire, but you don’t want to take too much risk and lose a lot more money. How do you go about it?
The first and most important step is to have the right mix of stocks (for growth) vs. bonds, CDs and cash (for safety and income) for your needs. There’s no one pat answer or formula. The best mix for you (called “asset allocation”) depends on a number of factors, such as: How many years will it be till you retire? How much annual income will you need from your investment assets when you retire? What is the size of your portfolio now? How much will you be able to save each year? How do you emotionally handle losing money during market declines?
Don’t take too much risk for you. It’s great to try to build up again. However, if you have a short number of years to retirement, don’t take so much risk that you won’t have enough time to build back up—if the market has a big downturn again. Also, don’t have more in stocks than you can psychologically endure if the market has another big drop.
On the other hand, don’t be falsely conservative. After last year’s market crash, almost everybody felt afraid of losing even more money. It’s been very tempting to say goodbye forever to the stock market, and keep everything in government bonds and CDs. However, if you plan on retiring in a few years but no longer have as much money as you should at this point, it’s probably not a good plan to put everything in CDs—even though it might make you feel better. Having some amount in stocks will give you a better chance of building up to the amount you’ll need—and thus may actually reduce your risk of not having enough money to retire. If you are close to or just entering retirement, and have everything in CDs, inflation will steadily eat away at the buying power of your income each year. Having some of your assets in stocks may help you keep up with inflation in the years ahead.
As the stock market goes up, gradually reduce the percentage you have in stocks. As stocks rise, you will be gaining on the amount of money you’ll need to have when you retire. Use the opportunity to reduce your risk of loss by cutting back a little on your weighting in stocks. If the market goes up more, reduce your risk even further.
Prepare for an increase in interest rates by investing your bond and CD money in very short maturities. Eventually, probably in the second half of 2010 or in 2011, interest rates will start going up—perhaps a lot. While interest rates are low, resist buying bonds with maturities longer than 2 – 4 years. Better yet, invest money you would normally put into bonds in CDs instead. That way, you’ll be ready when higher rates come.
Don’t base your investment plan on your feelings about politics. Political swings to the far left (or right) in American politics have always come back to the middle (over the last 225 years, at least), and they very likely will again. At any rate, political news, forecasts of the economy, and other news events tend not to be useful indicators of which way the financial markets are going to go.
Adding to the confusion is the wide range of predictions about where the stock market is likely to go in the months ahead. Many commentators, who are looking at our well-known problems (the declining dollar, mammoth new government debt, high unemployment, etc.), look for another big decline in the stock market. Others, who see the glass half full (because of a simultaneous recovery from the recession beginning around the world, rapid corporate earnings growth, low interest rates), think the market may go much higher. The truth is, it’s too early to tell which will be right. So where does that leave you? You need to rebuild your portfolio so you’ll have enough money to retire, but you don’t want to take too much risk and lose a lot more money. How do you go about it?
The first and most important step is to have the right mix of stocks (for growth) vs. bonds, CDs and cash (for safety and income) for your needs. There’s no one pat answer or formula. The best mix for you (called “asset allocation”) depends on a number of factors, such as: How many years will it be till you retire? How much annual income will you need from your investment assets when you retire? What is the size of your portfolio now? How much will you be able to save each year? How do you emotionally handle losing money during market declines?
Don’t take too much risk for you. It’s great to try to build up again. However, if you have a short number of years to retirement, don’t take so much risk that you won’t have enough time to build back up—if the market has a big downturn again. Also, don’t have more in stocks than you can psychologically endure if the market has another big drop.
On the other hand, don’t be falsely conservative. After last year’s market crash, almost everybody felt afraid of losing even more money. It’s been very tempting to say goodbye forever to the stock market, and keep everything in government bonds and CDs. However, if you plan on retiring in a few years but no longer have as much money as you should at this point, it’s probably not a good plan to put everything in CDs—even though it might make you feel better. Having some amount in stocks will give you a better chance of building up to the amount you’ll need—and thus may actually reduce your risk of not having enough money to retire. If you are close to or just entering retirement, and have everything in CDs, inflation will steadily eat away at the buying power of your income each year. Having some of your assets in stocks may help you keep up with inflation in the years ahead.
As the stock market goes up, gradually reduce the percentage you have in stocks. As stocks rise, you will be gaining on the amount of money you’ll need to have when you retire. Use the opportunity to reduce your risk of loss by cutting back a little on your weighting in stocks. If the market goes up more, reduce your risk even further.
Prepare for an increase in interest rates by investing your bond and CD money in very short maturities. Eventually, probably in the second half of 2010 or in 2011, interest rates will start going up—perhaps a lot. While interest rates are low, resist buying bonds with maturities longer than 2 – 4 years. Better yet, invest money you would normally put into bonds in CDs instead. That way, you’ll be ready when higher rates come.
Don’t base your investment plan on your feelings about politics. Political swings to the far left (or right) in American politics have always come back to the middle (over the last 225 years, at least), and they very likely will again. At any rate, political news, forecasts of the economy, and other news events tend not to be useful indicators of which way the financial markets are going to go.
Thursday, October 15, 2009
Interest Rates Are Low, Which Means Bond Prices Are Very High. Resist Buying
The government is in a pickle. The Treasury is spending itself into an ocean of new debt in the name of fixing everything. Last fall, Congress funded $700 billion to bail out the big Wall Street banks and brokerages, and this year it passed a $787 billion "stimulus" bill. The proposed health care plan will cost upwards of $900 billion, and who knows what will come up next. Meanwhile, tax receipts are lower because we are in a recession. So, that means it all has to be borrowed-to the tune of $1.5 trillion or more this year alone, and $9 trillion over the next decade. Ouch.
The way the government borrows money is by issuing treasury bonds-so that's a lot of new bonds to sell. So far, interest rates on treasury bonds have stayed very low, in part because investors are still gobbling them up (because they're afraid of the economy and the stock market, and want to feel safe). Individual investors now own $606 billion of treasury bonds (mostly through mutual funds), up from $240 billion at the beginning of the year. In addition, the Federal Reserve Board is right beside investors, printing enough money to buy nearly half of the treasury bonds being issued this year. All of this has kept treasury-and other bond-prices high and interest rates low in 2009 ("Eager Fed Helps Keep Treasury Rally Alive," WSJ 9/21/09 page C1).
This won't last forever. At some point-I believe in the next year or two-yields (interest rates) will rise and treasury bond prices will fall. This could be triggered by a precipitous decline of the dollar, an increase in inflation, the Fed stopping its purchases of treasuries, or just a general upturn in the economy. When treasury prices fall, they will likely drag other bond prices down with them, at least somewhat.
Recommendations: (1) Hold on to your high quality corporate and municipal bonds, especially if you bought them at or below par (face) value as TAM recommends. (2) Consider selling treasury bonds with maturities longer than five years if you purchased them in the last 15 months (when yields have been very low). (3) Most importantly: for now, invest new money that you would normally put in bonds (including money from matured or called bonds) in CDs or high quality bonds with maturities of 3 years or less. Wait out this low interest rate period with short maturities, and I believe you will be able to lock in higher rates when they mature in a year or two.
The way the government borrows money is by issuing treasury bonds-so that's a lot of new bonds to sell. So far, interest rates on treasury bonds have stayed very low, in part because investors are still gobbling them up (because they're afraid of the economy and the stock market, and want to feel safe). Individual investors now own $606 billion of treasury bonds (mostly through mutual funds), up from $240 billion at the beginning of the year. In addition, the Federal Reserve Board is right beside investors, printing enough money to buy nearly half of the treasury bonds being issued this year. All of this has kept treasury-and other bond-prices high and interest rates low in 2009 ("Eager Fed Helps Keep Treasury Rally Alive," WSJ 9/21/09 page C1).
This won't last forever. At some point-I believe in the next year or two-yields (interest rates) will rise and treasury bond prices will fall. This could be triggered by a precipitous decline of the dollar, an increase in inflation, the Fed stopping its purchases of treasuries, or just a general upturn in the economy. When treasury prices fall, they will likely drag other bond prices down with them, at least somewhat.
Recommendations: (1) Hold on to your high quality corporate and municipal bonds, especially if you bought them at or below par (face) value as TAM recommends. (2) Consider selling treasury bonds with maturities longer than five years if you purchased them in the last 15 months (when yields have been very low). (3) Most importantly: for now, invest new money that you would normally put in bonds (including money from matured or called bonds) in CDs or high quality bonds with maturities of 3 years or less. Wait out this low interest rate period with short maturities, and I believe you will be able to lock in higher rates when they mature in a year or two.
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