Typically, during the summer six-months period of May through October, the U.S. stock market under performs the remaining six-month period of November through April.

According to the Stock Trader’s Almanac, since 1950, the Down Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.

Every year around this time, the popular press gets all excited will bring up the issue of whether you should “sell in May and go away”. They always have some justification for making a forecast and they like to pretend they can predict the future.

And every year, I get asked by friends and investors if there’s any truth to this adage.

Especially this year.

This year the S&P 500, a good representation of the US stock market, is up a whopping 10.5% year-till-date (as of April 29th).

Considering that the market was up strongly in the past couple of years and then gave back all the returns in May, should we at least consider selling in May and going away?

No, we shouldn’t. While the average return has been 0.3%, it might very well be 7%.

You shouldn’t try to time the market.

No one can reliably or consistently predict when the market will top, and conversely, when it will bottom. If they could, they surely wouldn’t be sharing their secrets with the press, or bother managing your money.

Secondly, if you’re invested in a well-diversified portfolio, you don’t even need to worry about timing the market.

A well-diversified portfolio has allocations to many different sectors — U.S. stocks, international stocks, emerging market stocks, commodities, real estate and bonds, just to new a few.

While the S&P 500 may have had a terrific year so far, the rest of the market has been lagging.

Bonds and international stocks are flat, emerging market stocks have lost a few percent, and commodities have seen a major decline.

So while the largest stocks in the US have had a great year, the other sectors have not.

If you’re using a financial advisor, you’re probably in a well-diversified portfolio with specific allocations to various sectors.

This portfolio was carefully chosen for your unique situation by considering your personal finances, your risk tolerance, and investment objectives.

If your advisor is like me, he spent a lot of time and effort constructing a custom portfolio that’s forward looking, and attempted to match the market (or a benchmark return) with less volatility. (Being able to match a benchmark return with less volatility is called improving the Sharpe Ratio of a portfolio. The Sharpe Ratio is the only way to do a true apples-to-apples comparison of two portfolios, but that’s a topic worthy of a separate discussion).

Hopefully, he’s not just creating a portfolio of last year’s winners that is rebalanced once a year in to the current batch of “last year’s winners”. Performance chasing never works and only serves to generate fees for certain types of brokers.

Regardless, he would regularly rebalance your portfolio to bring it back in line with your target allocations.

What is rebalancing? It’s where you sell some of your winners, and use the proceeds to buy some of the losers. Yes, it sounds counter-intuitive, and no one likes to sell a winner and buy a loser. But it’s been academically proven to increase returns while reducing the volatility of the portfolio.

Nothing goes up forever. Sooner or later, your winners will fall. And your losers will outperform the market.

Take Apple (AAPL) for instance. It’s down 20% this year. Meanwhile, Microsoft (MSFT), which has gone nowhere for a decade, is suddenly up 23% in the same time frame.

It’s impossible to determine which stock, or sector, is going to outperform in the short-term.

Supposing you had a 35% allocation to US large-cap stocks in your portfolio. The 10.5% rise would mean nearly 39% of portfolio was now in that sector. If you sold just 4% and reallocated to the sectors that had underperformed, you would effectively be selling high and buying low.

This is one of the few true secrets to making money in the stock market. Yes, it’s that simple.  You use a rebalancing system to sell high and buy low.

A study by Crestmont Research shows that infrequent rebalancing in a bull market adds 0.3% return. However, during a bear market, frequent rebalancing adds 1.3%. Yale Endowment stated that regular rebalancing added 1.6% return in 2003.

Let’s say over the next six months, the largest U.S. stocks did in fact decline 5%. Meanwhile the other sectors in your portfolio appreciated beyond their target allocation. In six months time, you’d again rebalance and sell some of the winners to buy back the same sector you sold in April – the largest U.S. stocks. Just in time for the November – April run up in prices.

On the other hand, if the largest U.S. stocks didn’t decline, but instead continued their upward ascent, the 35% of your portfolio that was allocated to them would benefit from that exposure.

In a way, you get the best of both outcomes without choosing a preference.

This is the strategy we follow for our clients, as well as our personal portfolios. Of course, our strategy is slightly more complicated. We use a proprietary system that considers percentage threshold, time and standard deviation in rebalancing.

It may be a simplistic idea, but it’s academically proven to work over the long term. In fact, it’s the same method followed by large billion-dollar endowments.

The two most common complaints to rebalancing are trading costs and taxes.  We’ve managed to eliminate the excess trading costs by using a brokerage company that charges our clients a flat monthly fee, regardless of number of trades. And since for a majority of people, the majority of their investments are held in retirement accounts, taxes aren’t an issue either. We also use tax-loss harvesting to minimize the effects of taxes in non-retirement accounts.

The only real drawback to rebalancing a well-diversified portfolio is that it might underperform in an extended bull market. But, as any investor who has been investing for several years knows, nothing goes up forever. If you manage risk well, you don’t have to stretch for returns.

Last week gold prices dropped 15% in two days. This was the largest drop in 30 years, and created widespread panic on Wall Street.

Hedge funds and traders who were betting on the rise of gold prices via futures and the gold ETF found themselves having to unwind their positions in a hurry. The ensuing panic selling probably fueled the downward decline.

All over the news, the pundits came out saying that the bull market in gold is now over.

Several investors called in, quite concerned about what was happening and what they were reading in the media. After all, a couple of our portfolios hold a small allocation to gold.

So, should you panic about the collapse of gold?

First of all, consider why do we own gold?

I like to think of gold as a form of insurance. As one of my friends’ likes to call it, a chaos hedge – for when things get really bad. 

Historically, gold has provides a long term hedge against  monetary mismanagement. That’s one of the reasons why it’s price has been increasing for 12 years. As the Federal Reserve and the European Central Banks keep printing more money to solve their countries financial problems, gold prices have risen every single year for a dozen years.

You can’t expect an asset class to go up without taking a break now and then.

Besides, as confidence in the economy improves and the stock market keeps hitting new all-time highs, gold prices can and will take a backseat.

So if we know that gold prices are going to lag stock returns, should we  sell it in favor of stocks?

No.

Mainly because no one can predict the future.

Also, academic research has shown that even if the expected real return of an asset class is zero, when added to a diversified portfolio and coupled with regular rebalancing, it will improve the overall returns and reduce volatility. In plain English, this means that even if the long-term price of an asset is unlikely to beat inflation, it can increase your returns and reduce the sharp declines in your portfolio.

Besides, the panic selling seems to be driven by the futures market – the domain of speculators and Wall-street traders. There have been reports from Dubai, India, China and Bangkok about a shortage for physical gold. People who actually buy gold are jumping over themselves to use this pull-back to buy more.

In the short-term prices may fluctuate wildly, but unless you’re short-term speculator on margin, you should be fine.

So, as usual, my recommendation is to keep calm. There’s always something to worry about in the investment world. But unless, you’re in Cypress and all your wealth is in the bank, you shouldn’t have anything to worry about.

The Cypress reference is about a retiree who worked for 35 years in Australia and moved back to Cypress with $1 million that he deposited in the bank. When the Cypress bank folded last month, he lost nearly all his life’s savings. Maybe this is why people are still buying physical gold?

Probate subtly reduces the value of many estates. It can take more than a year in some cases, and attorney’s fees, appraiser’s fees and court costs may eat up as much as 5% of a decedent’s accumulated assets. Think tens of thousands of dollars, perhaps more.¹

 What do those fees pay for? In many cases, routine clerical work. Few estates require more than that. Heirs of small, five-figure estates may be allowed to claim property through affidavit, but this convenience isn’t extended for larger estates.

 So how you can exempt more of your assets from probate and its costs? Here are some ideas.

 Joint accounts. Jointly titled property with the right of survivorship is not subject to probate. It simply goes to the surviving spouse when one spouse passes. There are a couple of variations on this. Some states allow tenancy by the entirety, in which married spouses each own an undivided interest in property with the right of survivorship. A few states allow community property with right of survivorship; assets titled in this way also skip the probate process.^2,3,4

  Joint accounts may be exempt from probate, but they can still face legal challenges – especially bank accounts when the title is modified by a bank employee rather than a lawyer. The signature card may not contain survivorship language, for example. Or, a joint account with rights of survivorship may be found inconsistent with language in a will.⁵

 POD & TOD accounts.  Payable-on-death and transfer-on-death forms are used to permit easy transfer of bank accounts and securities (and even motor vehicles in a few states). As long as you live, the named beneficiary has no rights to claim the account funds or the security. When you pass away, all that the named beneficiary has to do is bring his or her I.D. and valid proof of the original owner’s death to claim the assets or securities.³

 Gifts. For 2013, the IRS allows you to give up to $14,000 each to as many different people as you like, tax-free. By doing so, you reduce the size of your taxable estate. Please note that gifts over the $14,000 limit may be subject to federal gift tax of up to 40% and count against the lifetime gift tax exclusion, now at $5.25 million.⁶ 

Revocable living trusts. In a sense, these estate planning vehicles allow people to do much of their own probate while living. The grantor – the person who establishes the trust – funds it while alive with up to 100% of his or her assets, designating the beneficiaries of those assets at his or her death. (A pour-over will can be used to add subsequently accumulated assets; it will be probated, however.)^2,7,8

The trust owns assets that the grantor once did, yet the grantor can use these assets while alive. When the grantor dies, the trust becomes irrevocable and its assets are distributed by a successor trustee without having to be probated. The distribution is private (as opposed to the completely public process of probate) and it can save heirs court costs and time.⁷

Are there assets probate doesn’t touch? Yes. In addition to property held in joint tenancy, retirement savings accounts (such as IRAs), life insurance death benefits and Treasury bonds are exempt. Speaking of retirement savings accounts…²

Make sure to list/update retirement account beneficiaries. When you open a retirement savings account (such as an IRA), you are asked to designate eventual beneficiaries of that account on a form. This beneficiary form stipulates where these assets will go when you pass away. A beneficiary form commonly takes precedence over a will, because retirement accounts are not considered part of an estate.⁸

Your beneficiary designations need to be reviewed, and they may need to be updated. You don’t want your IRA assets, for example, going to someone you no longer trust or love.

If for some reason you leave the beneficiary form for your life insurance policy blank, it could be subject to probate when you die. If you leave the beneficiary form for your IRA blank, then the IRA assets may be distributed according to the default provision set by the IRA custodian (the brokerage firm hosting the IRA account). These instances are rare, but they do happen.^9,10

To learn more about strategies to avoid probate, consult an attorney or a financial professional with solid knowledge of estate planning.

Citations.

1 – www.nolo.com/legal-encyclopedia/why-avoid-probate-29861.html [4/17/13]

2 – www.kiplinger.com/article/retirement/T021-C000-S001-four-facts-of-living-trusts.html#iwrC4LSHbmjf9emt.99 [4/4/13]

3 – www.inc.com/articles/1999/11/15611.html [11/99]

4 – www.law.cornell.edu/wex/tenancy_by_the_entirety [8/19/10]

5 – www.newyorklawjournal.com/PubArticleNY.jsp?id=1202585770799 [1/28/13]

6 – www.chron.com/news/article/New-act-clears-up-estate-gift-tax-confusion-4301217.php [2/22/13]

7 – blog.nolo.com/estateplanning/2011/08/24/trusts-revocable-v-irrevocable/ [8/24/11]

8 – www.nytimes.com/2011/02/10/business/10ESTATE.html [2/10/11]

9 – www.investopedia.com/articles/retirement/03/031803.asp [11/8/09]

10 – www.smartmoney.com/taxes/estate/how-to-choose-a-beneficiary-1304670957977/ [6/10/11]

<font size=-1>This material was prepared by MarketingLibrary.Net Inc.</font>

31 NFL players just lost $40 million in a shady casino investment that was recommended by their “financial advisor”. 1

For some of the players, the amount lost was a majority of their networth.

Of course, their financial advisor wasn’t advising them in a fiduciary capacity. He was only selling them an “investment” that generated the highest commissions for him – in this case, an tiny ownership stake and $500,000.

This is why it’s important to know how your advisor gets compensated and whether he’s really your advisor, or just a financial-product salesman.

You should always ask if he has a fiduciary responsibility to his clients. If he doesn’t, he is a broker, and his primary responsibility lies with making the most money for his brokerage company. This doesn’t mean he’s bad, but you should be aware of this. He just gets compensated from commissions and sales of products, which (in my opinion) doesn’t usually provide the best outcome for the client.

The fee-only (not even fee-based) method for compensation results in the best outcome for the client. And the entire financial planning/investment management industry is slowly moving in this direction.

Right from the beginning, Qubera Wealth Management has been set up as a fee-only advisor, with a fiduciary responsibility to our clients. We put a lot of thought in to the fee structure, but we realized that not all of our clients understood the significance. As a fee-only advisor, our only source of revenue is fees paid (and fully disclosed) by our clients.

So here are the five key reasons why you should always choose a fee-only advisor:

No pressure to buy or sell investments. Investment brokers are sometimes guilty of “churning” – pressuring clients into buying or selling so that they can earn a commission linked to a transaction. Fee-only management mitigates that threat.

No conflict of interest. Full-commission brokers are sometimes encouraged to “push” certain investments. That may be good for the brokerage and its employees, but it may not be good for you.  Under fee-only portfolio management, the emphasis is not on product sales, it is on investment performance.

The investor and the advisor share the same goals. Through fee-only portfolio management, we are paid from the assets we manage. It benefits you to increase your net worth and achieve your investment objectives, and it also benefits us as part of my compensation relates to the performance of your portfolio. For certain tasks, we sometimes charge a flat-fee for our efforts. Since we don’t receive a commission for our recommendations, this means you’re getting our unbiased advice.

The investor and the advisor stay in touch. At a brokerage, financial consulting may be offered to a client once, and then never again. Fee-only portfolio management promotes continual communication between the advisor and client – a real relationship.

Wealth management becomes the true priority. Fee-only management promotes a clear, holistic approach that addresses many financial issues and needs.

Citations

1 – foxbusiness.com/investing/2013/03/07/finra-bans-broker-after-nfl-players-lost-40m-in-shady-casino-deal

Here’s an important reminder: April 15 is the deadline for funding your IRA for 2012. (If you have a SEP IRA, you have until October 15 if you filed an extension on your personal tax return.)

You may contribute up to $5,000 to a traditional IRA or a Roth IRA for the 2012 tax year. If you were 50 or older in 2012, your contribution limit is $6,000. (If you own multiple IRAs, your total IRA contributions for 2012 cannot exceed $5,000/$6,000.)

Please note that income phase-outs may limit Roth IRA contributions. Single filers and heads of household can make a full Roth IRA contribution for 2012 if their MAGI is less than $110,000; the phase-out range is from $110,000-125,000. For joint filers, the MAGI phase-out occurs at $173,000-183,000; couples with MAGI of less than $173,000 can make a full contribution. (See IRS Publication 590 for details.)

If you have a SEP IRA, you can contribute up to $50,000 or 25% of your compensation for 2012, whichever is less. The 2012 compensation cap is $250,000. If you are a sole proprietor, your maximum 2012 SEP IRA contribution is the lesser of $50,000 or 20% of your net earnings from self-employment.

Again, April 15 is the contribution deadline for tax year 2012. (That is a postmark deadline.) Be sure to write the tax year in the memo field of your check to remind the financial institution that your contribution is for TY 2012. You can’t file an extension for IRA contributions; those made after the deadline will apply to the following tax year.

While you’re at it, you might also want to fund your IRA for 2013 as well. For 2013, the $5,000 limit has been raised to $5,500.

Behaviors worth changing for the New Year.

Do bad money habits constrain your financial progress? Many people fall into the same financial behavior patterns year after year. If you sometimes succumb to these financial tendencies, the New Year is as good an occasion as any to alter your behavior.

#1: Lending money to family & friends. You may know someone who has lent a few thousand to a sister or brother, a few hundred to an old buddy, and so on. Generosity is a virtue, but personal loans can easily transform into personal financial losses for the lender. If you must loan money to a friend or family member, mention that you will charge interest and set a repayment plan with deadlines. Better yet, don’t do it at all. If your friends or relatives can’t learn to budget, why should you bail them out?

#2: Spending more than you make. Living beyond your means, living on margin, whatever you wish to call it, it is a path toward significant debt. Wealth is seldom made by buying possessions. Today’s flashy material items may become the garage sale junk of 2025. Yet, the trend continues: a 2012 Federal Reserve Survey of Consumer Finances calculated that just 52% of American households earn more money than they spend.¹

#3: Saving little or nothing. Good savers build emergency funds, have money to invest and compound, and leave the stress of living paycheck-to-paycheck behind. If you can’t put extra money away, there is another way to get some: a second job. Even working 15-20 hours more per week could make a big difference. The problem is far too common: a CreditDonkey.com survey of 1,105 households last fall found that 41% of respondents had less than $500 in savings. In another disturbing detail, 54% of the respondents had no savings strategy.²

#4: Living without a budget. You may make enough money that you don’t feel you need to budget. In truth, few of us are really that wealthy. In calculating a budget, you may find opportunities for savings and detect wasteful spending.

#5: Frivolous spending. Advertisers can make us feel as if we have sudden needs; needs we must respond to, needs that can only be met via the purchase of a product. See their ploys for what they are. Think twice before spending impulsively.

#6: Not using cash often enough. No one can deny that the world runs on credit, but that doesn’t mean your household should. Pay with cash as often as your budget allows.

#7: Gambling. Remember when people had to go to Atlantic City or Nevada to play blackjack or slots? Today, behemoth casinos are as common as major airports; most metro areas seem to have one or be within an hour’s drive of one. If you don’t like smoke and crowds, you can always play the lottery. There are many glamorous ways to lose money while having “fun”. The bottom line: losing money is not fun. All it takes is willpower to stop gambling. If an addiction has overruled your willpower, seek help.

#8: Inadequate financial literacy. Is the financial world boring? To many people, it is. The Wall Street Journal is not exactly Rolling Stone, and The Economist is hardly light reading. You don’t have to start there, however: great, readable and even entertaining websites filled with useful financial information abound. Reading an article per day on these websites could help you greatly increase your financial understanding if you feel it is lacking.

#9: Not contributing to IRAs or workplace retirement plans. Even with all the complaints about 401(k)s and the low annual limits on traditional and Roth IRA contributions, these retirement savings vehicles offer you remarkable wealth-building opportunities. The earlier you contribute to them, the better; the more you contribute to them, the more compounding of those invested assets you may potentially realize.

#10: DIY retirement planning. Those who plan for retirement without the help of professionals leave themselves open to abrupt, emotional investing mistakes and tax and estate planning oversights. Another common tendency is to vastly underestimate the amount of money needed for the future. Few people have the time to amass the knowledge and skill set possessed by a financial services professional with years of experience. Instead of flirting with trial and error, see a professional for insight.

Citations:
1 – business.time.com/2012/10/23/is-the-u-s-waging-a-war-on-savers/ [10/23/12]
2 – www.creditdonkey.com/no-emergency-savings.html [10/9/12]

This material was prepared by MarketingLibrary.Net Inc.

i>Make sure you give them a look as you prepare your 1040

Every year, taxpayers leave money on the table. They don’t mean to, but as a result of oversight, they miss some great chances for federal income tax deductions.

While the IRS has occasionally fixed taxpayer mistakes in the past for taxpayer benefit (as was the case when some filers ignored the Making Work Pay Credit), you can’t count on such benevolence. As a reminder, here are some potential tax breaks that often go unnoticed – and this is by no means the whole list.

Expenses related to a job search. Did you find a new job in the same line of work in 2012? If you itemize, you can deduct the job-hunting costs as miscellaneous expenses. The deductions can’t surpass 2% of your adjusted gross income. Even if you didn’t land a new job in 2012, you can still write off qualified job search expenses. Many expenses qualify: overnight lodging, mileage, cab fares, resume printing, headhunter fees and more. Didn’t keep track of these expenses? You and your CPA can estimate them. If your new job prompted you to relocate 50 or more miles from your previous residence in 2012, you can take a deduction for job-related moving expenses even if you don’t itemize.1

Home office expenses. Do you work from home? If so, first figure out what percentage of the square footage in your house is used for work-related activities. (Bathrooms and other “break areas” can count in the calculation.) If you use 15% of your home’s square footage for business, then 15% of your homeowners insurance, home maintenance costs, utility bills, ISP bills, property tax and mortgage/rent may be deducted.2

Health insurance & Medicare costs. About 7% of us pay health coverage costs out of pocket. If you are in that 7%, you may write off 100% of your premiums as an adjustment to your business income per the Small Business Jobs Act of 2010. That write-off privilege extends to you, your spouse and 100% of your dependents.2,3

Some small business owners have qualified for Medicare. If you are one of them, and you and/or your spouse aren’t eligible for coverage under an employer-subsidized health plan, then you may deduct premiums paid for Medicare Part B, Medicare Part D and Medigap policies. You don’t have to itemize to get this deduction, and the 7.5%-of-AGI test for itemized medical costs isn’t relevant to this.1

State sales taxes. If you live in a state that collects no income tax from its residents, you have the option to deduct state sales taxes paid in 2012 per the fiscal cliff bill passed into law on January 2.1

Student loan interest paid by parents. Did you happen to make student loan payments on behalf of your son or daughter in 2012? If so (and if you can’t claim your son or daughter as a dependent), that child may be able to write off up to $2,500 of student-loan interest. Itemizing the deduction isn’t necessary.1

Education & training expenses. Did you take any classes related to your career in 2012? How about courses that added value to your business or potentially increased your employability? You can deduct the tuition paid and the related textbook and travel costs. Even certain periodical subscriptions may qualify for such deductions.2

Eating out on business. The cost of a business lunch, breakfast or dinner – or a lunch, breakfast or dinner associated with business development – qualifies for an itemized deduction.2

Those small charitable contributions. We all seem to make out-of-pocket charitable donations, and we can fully deduct them (although few of us ask for receipts needed to itemize them). However, we can also itemize expenses incurred in the course of charitable work (i.e., volunteering at a toy drive, soup kitchen, relief effort, etc.) and mileage accumulated in such efforts ($0.14 per mile for 2012, and tolls and parking fees qualify as well).1

Superstorm Sandy losses. The IRS allows filers living in federally declared disaster areas to file casualty claims for the year in which the disaster occurred, and the flexibility to amend the previous year’s return. This means that you can deduct 2012 casualty losses on either your 2011 or 2012 federal tax return.4

Armed forces reserve travel expenses. Are you a reservist or a member of the National Guard? Did you travel more than 100 miles from home and spend one or more nights away from home to drill or attend meetings? If that is the case, you may write off 100% of related lodging costs and 50% of meal costs and take a 2012 mileage deduction ($0.555 per mile plus tolls and parking fees).1

Estate tax on income in respect of a decedent. Have you inherited an IRA? Was the estate of the original IRA owner large enough to be subject to federal estate tax? If so, you have the option to claim a federal income tax write-off for the amount of the estate tax paid on those inherited IRA assets. If you inherited a $100,000 IRA that was part of the original IRA owner’s taxable estate and thereby hit with $35,000 in death taxes, you can deduct that $35,000 on Schedule A as you withdraw that $100,000 from the inherited IRA, $17,500 on Schedule A as you withdraw $50,000 from the inherited IRA, and so on. If you withdrew such inherited assets in 2012, you have the opportunity to claim the appropriate deduction for the 2012 tax year.1

And now, some opportunities for quasi-deductions that often go overlooked…

The child care credit. If you paid for child care while you worked in 2012, you can qualify for a tax credit worth 20-35% of that amount. (The child, or children, must be no older than 12.) Tax credits are superior to tax deductions, as they cut your tax bill dollar-for-dollar.1

Parents as dependents. If you have parents whose taxable incomes are underneath the $3,800 personal exemption for 2012 and you pay more than half of their support, they might qualify as dependents on your federal return even if they live at a different address.4

Filing status shifts. Are you a single filer? Do you have a relative or one or more children who qualifies as a dependent? If so, you could change your filing status to head of household, which could save you some tax dollars.4

Reinvested dividends. If your mutual fund dividends are routinely used to purchase further shares, don’t forget that this incrementally increases your tax basis in the fund. If you do forget to include the reinvested dividends in your basis, you leave yourself open for a double hit – your dividends will be taxed once at payout and immediate reinvestment, and then taxed again at some future point when they are counted as proceeds of sale. Remember that as your basis in the fund grows, the taxable capital gain when you redeem shares will be reduced. (Or if the fund is a loser, the tax-saving loss is increased.)1

As a precaution, check with your tax professional before claiming the above deductions on your federal income tax return.

Citations:
1 – www.kiplinger.com/article/taxes/T054-C000-S001-the-most-overlooked-tax-deductions.html [1/3/13]
2 – money.msn.com/tax-tips/post.aspx?post=382d5150-a740-4f31-b091-4711dc07bafc [1/18/13]
3 – vaperforms.virginia.gov/indicators/healthfamily/healthInsurance.php [1/23/13]
4 – www.cnbc.com/id/100400925 [1/23/13]

This material was prepared by MarketingLibrary.Net Inc.

Investors in longer-term Treasuries could see some rocky road ahead.

How long can it last? The Federal Reserve has said that it will do what it can to keep interest rates low, but these efforts cannot stem the tide forever; it’s inevitable, at some point, that interest rates will rise and diminish bond prices. The only question is: when and how much? 1

A fifth year of easing has left some of the decision makers at the Fed thinking it’s time to reverse gears; the minutes of a December meeting cited “several” policymakers wanting to raise interest rates sooner rather than later. Considering how long and open-ended the easing period has been, this caused a slight decline in the stock market.2

The Fed’s easing is tied to the unemployment rate. The U.S. has made great strides in improving the economy and helping people find jobs; the December 2012 reckoning has unemployment at 7.8%, down from October, 2009’s high water mark of 10.2%. The official Fed policy is to continue the easing until unemployment reaches a more comfortable 6.5%; this is roughly where we were at in 2008, as the financial crisis emerged. While we’re getting closer to this goal all of the time, 6.5% could take a year or more to reach.2,3

In the short term, meaning the next few months, the bond market climate may not change. The question is: what happens when it does?

Are bond investors going to pay for it? At some point, interest rates will rise again; bond market values will fall. That’s because bond prices and interest rates (or yields) are inversely correlated. When that happens, how many bond owners are going to hang on to their 10-year or 30-year Treasuries until maturity? Who will want a 1.5% or 2.5% return for a decade? Looking at composite bond rates over at Yahoo’s Bond Center, even longer-term AAA corporate bonds offered a 2.5%-4.15% return in the first part of January.4

What do you end up with when you sell a bond before its maturity? The market value; if the federal funds rate rises 3%, a longer-term Treasury might lose as much as a third of its market value as a consequence.

This risk aside, what if you want or need to stay in bonds? One avenue may be to exploit short-term bonds with laddered maturity dates. The trade-off in that move is accepting lower interest rates in exchange for a potentially smaller drop in the market value of these securities if rates rise. If you are after higher rates of return from short-duration bonds, you may have to look to bonds that are investment-grade but without AAA or AA ratings.

If you think interest rates will rise in the near future (to the chagrin of many bond investors), exploiting short maturities could position you to get your principal back in the short term. That could give you cash which you could reinvest in response to climbing interest rates. If you really think bond owners are in for some pain in the coming years, you could limit yourself to small positions in bonds.

Appetite for risk may displace anxiety faster than we think. Why would people put their money into an investment offering a 1.5% return for 10 years? In a word, fear. The fear of volatility and a global downturn is so prevalent this spring that many investors are playing “not to lose.” Should interest rates rise sooner than the conventional wisdom suggests, owners of long-term bonds might find themselves losing out in terms of their portfolio’s potential.

Citations:
1 – money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/09/19/rough-waters-ahead-for-bond-funds [9/19/12]
2 – usnews.com/news/blogs/rick-newman/2013/01/04/interest-rates-wont-rise-as-much-as-wall-street-fears [1/4/13]
3 – ncsl.org/issues-research/labor/national-employment-monthly-update.aspx [1/4/13]
4 – finance.yahoo.com/bonds/composite_bond_rates [1/28/13]

This material was prepared by MarketingLibrary.Net Inc.

A varied portfolio is a hallmark of a savvy investor.

You may be amused by the efforts of some of your friends and neighbors as they try to “chase the return” in the stock market. We all seem to know a day trader or two: someone constantly hunting for the next hot stock, endlessly refreshing browser windows for breaking news and tips from assorted gurus.

Is that the path to making money in stocks? Some people have made money that way, but others do not. Many people eventually tire of the stress involved, and come to regret the emotional decisions that a) invite financial losses, b) stifle the potential for long-term gains.

We all want a terrific ROI, but risk management matters just as much in investing, perhaps more. That is why diversification is so important. There are two great reasons to invest across a range of asset classes, even when some are clearly outperforming others.

#1: You have the potential to capture gains in different market climates. If you allocate your invested assets across the breadth of asset classes, you will at least have some percentage of your portfolio assigned to the market’s best-performing sectors on any given trading day. If your portfolio is too heavily weighted in one asset class, or in one stock, its return is riding too heavily on its performance.

So is diversification just a synonym for playing not to lose? No. It isn’t about timidity, but wisdom. While thoughtful diversification doesn’t let you “put it all on black” when shares in a particular sector or asset class soar, it guards against the associated risk of doing so. This leads directly to reason number two…

#2: You are in a position to suffer less financial pain if stocks tank. If you have a lot of money in growth stocks and aggressive growth funds (and some people do), what happens to your portfolio in a correction or a bear market? You’ve got a bunch of losers on your hands. Tax loss harvesting can ease the pain only so much.

Diversification gives your portfolio a kind of “buffer” against market volatility and drawdowns. Without it, your exposure to risk is magnified.

What impact can diversification have on your return? Let’s refer to the infamous “lost decade” for stocks, or more specifically, the performance of the S&P 500 during the 2000s. As a USA TODAY article notes, the S&P’s annual return was averaging only +1.4% between January 1, 2001 and Nov. 30, 2011. Yet an investor with a diversified portfolio featuring a 40% weighting in bonds would have realized a +5.7% average annual return during that stretch.1

If a 5.7% annual gain doesn’t sound that hot, consider the alternatives. As T. Rowe Price vice president Stuart Ritter noted in the USA TODAY piece, an investor who bought the hottest stocks of 2007 would have lost more than 60% on his or her investment in the 2008 market crash. Investments that were merely indexed to the S&P 500 sank 37% in the same time frame.1

Asset management styles can also influence portfolio performance. Passive asset management and active (or tactical) asset management both have their virtues. In the wake of the stock market collapse of late 2008, many investors lost faith in passive asset management, but it still has fans. Other investors see merit in a style that is more responsive to shifting conditions on Wall Street, one that fine-tunes asset allocations in light of current valuation and economic factors with an eye toward exploiting the parts of market that are really performing well. The downside to active portfolio management is the cost; it can prove more expensive for the investor than traditional portfolio management.

Believe the cliché: don’t put all your eggs in one basket. Wall Street is hardly uneventful and the behavior of the market sometimes leaves even seasoned analysts scratching their heads. We can’t predict how the market will perform; we can diversify to address the challenges presented by its ups and downs.

Citations.
1 – usatoday30.usatoday.com/money/perfi/retirement/story/2011-12-08/investment-diversification/51749298/1 [12/8/11]

This material was prepared by MarketingLibrary.Net Inc.