rebalancing

#MeToo Movement, Rebalancing and Approaching Retirement

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We started this week off with Robert in St. Louis, a long-time civil servant who is approaching retirement and is a bit concerned about his asset allocation.  Should he rebalance? 

Next up was Meredith from South Carolina.  She's only in her 30s, yet Meredith wanted to know how to best protect assets when approaching retirement.  Fascinating question from a person still many, many years from retirement.  

We've been getting bombarded with emails so we finished up hour one answering as many as possible.

As the #MeToo movement sweeps across the world, it’s time for employers to address the issues of sexual harassment, workplace inequality and the gender wage gap.

After recently interviewing two experts in their respective fields, Leigh Gallagher from Fortune and author Jack Myers, here are some key ideas and trends that will help push the movement in the right direction:

  • HR departments will become increasingly more independent
  • Women will take jobs previously held by men
  • Organizations will need to teach, embrace and support young men coming into the workforce -Workplace mentoring programs will be instrumental to imbue companies with a culture that supports diversity
  • Women who develop characteristics of assertiveness, confidence and aggressive behavior, and who know when to use these behaviors, will find more success in the workplace

Let’s stop with the talk and move to action mode...it’s way past time to address these issues. 

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5 Retirement Mistakes to Avoid

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Some retirement mistakes are out of our control. For example, you may decide to call it quits amid a terrible recession, which can upend all of the best calculations in the world. But there are plenty of missteps that we can easily avoid, with just a bit of attention and planning. Here are my top 5 Retirement Plan Mistakes to Avoid. 1. Withdrawing instead of Rolling Over: During the recession, many were forced to take withdrawals from their retirement accounts to survive. Unfortunately, there are still too many workers who leave their jobs, cash out plan assets and pay a tax penalty, instead of rolling over the funds into another retirement account. Cash-outs are most prevalent among younger workers, the ones who would most benefit from keeping the money in a tax-deferred retirement account.

Plan administrators usually automatically withhold 20 percent of the balance and sends that amount to the IRS. In addition to federal and state income tax, investors younger than 59½ who cash out have to pay a 10 percent early withdrawal penalty. The potential result: Cashing out $50,000 in 401(k) savings may leave just $35,000 in cash. And regardless of the age, the retirement saver who withdraws plan assets no longer gets the compounded growth the savings would have occurred in the account.

2. Not Rebalancing: The old “set it and forget it” mentality can be problematic, because it can ensnare you in one of the classic retirement plan mistakes: Not rebalancing on a periodic basis (quarterly, biannually or annually). It has gotten easier to complete this task, because a lot of plans now have an auto-rebalance option. A side benefit of using this feature is that it can help take emotions out of the investment process, essentially forcing you to buy low and sell high.

3. Not Diversifying/Owning too Much Company Stock: You know that you shouldn’t put too many eggs in one basket. But some participants don’t realize how much overlap they may have among their retirement funds. It’s far more important to diversify among asset classes (stocks, bonds, commodities and cash) than in the total number of funds. Additionally, if your company stock is an option in your plan, limit your exposure to five percent of your total investment holdings. Sure, the stock may be awesome now, but do you really need to risk your retirement on the company’s performance? Since many companies match in their stock, it is incumbent on you to keep an eye on your allocation…or use that auto-rebalance!

4. Choosing High-Fee Mutual Funds: One way to increase your return without risk is to reduce the cost of investing. If your plan offers index funds, you may be able to save for retirement at a fraction of the cost of managed funds. If your plan is filled with expensive funds, gather your co-workers and lobby your boss to add low-cost index funds to your plan.

5. Tapping Retirement Funds to Pay Down a Debt: Workers sometimes dip into retirement funds to whittle away their outstanding credit card balances and other bills. While the IRS does allow for hardship withdrawals in certain instances, pulling money from retirement accounts should be a last resort, due to the aforementioned fees and taxes. Additionally, many workers who are over 59 ½ are tempted to use retirement assets to pay down a mortgage as they approach retirement. The biggest risk in doing this is that you may deplete your liquid assets to eliminate a debt on a non-liquid one.

2015 Economic Intermission

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Every January, I outline the big issues and economic predictions for the year ahead. With six months down, the Independence Day weekend is a perfect intermission, where we can review the highs and lows of Act I, and look ahead to Act II. US Economy: There were great hopes coming into the year, but a trio of events conspired to dash them. For the third time in five years, the US economy contracted in the first quarter of the year (2011, 2014 and now 2015). The combination of bad winter weather, the West Coast port shutdown and shrinking investment in the energy sector due to lower oil prices, caused Q1 GDP to shrink by 0.2 percent. There are a number of encouraging signs that growth has snapped back in the second quarter and beyond: Despite a weak reading in March, job growth is accelerating and wages are edging up; new and existing home sales have reached six to seven hear highs; personal income and spending have jumped; and consumer sentiment is at a five-month high.

Federal Reserve Rate Hikes: Back in January, I predicted that “the first rate hike will occur in the third quarter of the year.” I’m sticking to my guesstimate that the Fed will increase rates for the first time in over nine years at the September meeting, especially after Fed Chair Janet Yellen said that she expects “the economic data to strengthen.”

Oil: Oil prices bounced up from the $40-lows to $60 per barrel and have settled into a trading range. While drivers may miss those sub-$2/gallon prices at the pumps, they can take solace in the fact that prices are down about 90 cents from a year ago.

Housing: The improving economy and labor market, combined with still-low mortgage rates and loosening credit conditions, should help housing in the second half of the year.

Markets: Stocks have bounced around a bit more this year than last, but the story is the same: Investors are laser-focused on Fed rate hikes and the bond yields appear to have started the long-anticipated drop in price and rise in yields.

Greece: I didn’t specifically mention Greece back in January, but I would put this under the category of “geopolitical”. After a five-month standoff, Euro group leaders and Greece officials came to a major impasse at the end of June. At issue was €7.2 of European rescue funds, which Greece needs to make loan repayments throughout this summer. In order to get the lifeline from the Euro group, Greece must agree to more taxes and an increase in employee pension contributions. Greece’s Prime Minister Alexis Tsipras called for a surprise referendum for July 5th, where Greek citizens will have the opportunity to vote on the euro group’s demands and essentially determine whether or not the country remains in the euro zone.

As always, these big picture events are out of your hands, but during the economic intermission here are some actions you can take in your financial life to gain control!

Investments: Review your investment accounts and be sure to rebalance them so that your asset allocations remain in check. Make sure that your allocation remains at your desired levels. If you don’t know what’s the right allocation for you, there are plenty of resources on line that help incorporate your risk tolerance and your investment time horizon. Remember that rebalancing a diversified portfolio is not meant to time the market, but it should help you sell high and buy low, when your emotions might otherwise prevent you from doing so.

If you have any big expenses coming up within the next 12 months, like a college tuition or a home down payment, it’s time to free up cash. You don’t want to risk having to sell an asset if it happens to be down at the wrong moment. Finally, if you work with a financial advisor or broker, schedule an appointment to review your progress. Ask a lot of questions and clarify how you pay for the services.

Retirement: Use EBRI’s “Choose to Save Ballpark E$timate” (www.choosetosave.org/ballpark/) to calculate where you stand. If your cash flow has improved, bump up your retirement plan contribution, even if it's just by one percent!

Homeowners and Renters insurance: Make sure that your property insurance is up to date, especially with the summer tornado, fire and hurricane season upon us. It’s important to review your policy before an event occurs, to make sure that it is adequate. The three biggest mistakes that people make with their homeowners or renters insurance are: 1) under-insuring; 2) shopping for price only and not comparing apples to apples; and 3) not reading policy details before a loss occurs. If you have questions, give your sales agent a jingle and he or she can walk you through some of the fine print.

Estate Planning: Hire a qualified estate attorney to prepare a will, power of attorney and health care proxy/living will. Those with larger estates, or who want more control over the disposition of their assets, may want to consider a revocable or changeable trust. In 2015, the estate tax exemptions are $5.43 million for individuals and $10.86 million for couples.

Bear Market Anniversary: Are you Still a Lousy Investor?

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March 9 2014 marks the five-year anniversary of the stock market’s recent bear market closing low. That trading day, the Dow Jones Industrial Average was at 6547, its lowest level since April 15, 1997; the S&P 500 was at 676, its lowest level since Sept 12, 1996; and the NASDAQ was at 1268, its lowest level since Oct 9, 2002. Since then, U.S. markets have charged higher. Through the end of February, the S&P 500 has shot up 175 percent and including dividends, returns have more than tripled since the bear market low. For the first few years of the recovery, ordinary investors were largely on the sidelines. The experience of watching a retirement account plunge by half prompted many to say that they would never again put themselves through the pain. But over the past few years, many risk-averse investors have reentered the market, though this time, hopefully a little bit wiser.

Not so fast. According to Morningstar, which regularly reviews investors' performance results versus the funds that they own, people are lousy investors. In fact, in the ten years through the end of 2013, the typical investor lagged the mutual funds in which she was invested by 2.5 percent EACH year. What explains the underperformance? We are mere mortals, who are prompted to make emotional decisions -- at precisely the wrong times -- in our portfolios!

There are two main emotions that infect most investors: fear and greed. In 2007, when stocks were flying high and financial crisis had not yet entered the vernacular, many  allowed greed to rule, piling into risky asset classes, like stocks. Then at some point, maybe near the bottom in 2009, or even earlier in 2008, fear prompted many to sell.

Conversely, those who adhered to a more balanced approach were better able to keep those emotions in check. Yes, you may have been handsomely rewarded if you kept all of your money in stocks from the bottom until today, but the fact that so much of your nest egg was vanishing before your eyes in 2008-2009, made it more likely that you would not be able to withstand the pain. That's why the unsexy advice of maintaining a thoughtful, balanced approach to investing, which incorporates periodic rebalancing, can help you avoid the emotional decisions that greed and fear often prompt.

Here are the three ways to keep fear and greed in check:

1. Keep cool: If you had sold all of your stocks during the first week of the crisis in September 2008, you would have been shielded from the additional losses that occurred until March 2009. But how would you have known when to get back in? It is highly doubtful that most investors would have had the guts to buy when it seemed like stock indexes were hurtling towards zero.

2. Maintain a diversified portfolio and don’t forget to rebalance. One of the best ways to prevent emotional swings is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. In September 2008, a then-client shrieked to me that “everything is going down!” But that was not exactly the case: the 10 percent allocation in cash was just fine, as was the 30 percent holding in  bonds. That did not mean that the stock and commodities positions were doing well, but overall, the client was in far better shape because she was diversified.

3. Maintain a healthy emergency reserve fund. Bad luck can occur at any time. One great lesson of 2008-2009 is that those who had ample emergency reserve funds (6 to 12 months of expenses for those who were employed and 12 to 24 months for those who were retired) had many more choices than those who did not. While a large cash cushion seems like a waste to some (“it’s not earning anything!”), it allowed many to refrain from selling assets at the wrong time and/or from invading retirement accounts.

Year-End Planning: Investments

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Before you shut down for the holidays, remember that just a few hours spent reviewing your financial life may help boost your bottom line - and put a dent in your holiday shopping bills! Here are six ideas to consider for your investment accounts before we ring in the new year. 1. Sell winners in taxable accounts. Although capital gains rates increased for individuals earning $400,000 and joint filers who earn more than $450,000, in 2013 married tax filers with taxable income up to $72,500 (singles up to$36,250) still have a zero percent tax rate on long-term capital gains and qualified dividends. If you are at the zero percent capital gains rate now, but expect your income to be higher later, you may want to realize capital gains today at the lower rate. Your taxable income includes the gain, so make sure that you factor that in when you make your decision.

2. Sell losers. If you have investment losses in a taxable account, now is the time to use those losers to your advantage. You can sell losing positions to offset gains that you have taken previously in the year to minimize your tax hit. If you have more losses than gains, you can deduct up to $3,000 of losses against ordinary income. This is particularly useful, since your ordinary income tax rate is higher than your capital gains tax rate. A $3,000 loss against ordinary income could be worth anywhere from $300 to $588 in reduced taxes. If you have more than $3,000 of losses, you can carry over that amount to future years.

3. Avoid getting soaked by a wash sale. If you are starting to clean up your non-retirement accounts to take losses, don't get soaked by the "wash sale" rule. The IRS won't let you deduct a loss if you buy a "substantially identical" investment within 30 days, which is known as a wash sale. To avoid the wash sale, wait 31 days and repurchase the stock or fund you sold, or replace the security with something that is close, but not the same as the one you sold- hopefully something cheaper, like an index fund.

4. Minimize your dividend-paying positions. Dividend income tax rates jumped this year for high wage earners. The net investment income tax levies an additional 3.8 percent on net capital gains, dividends, interest, rents and royalties. If you forgot to make the change last year, or think that your tax bracket could rise next year, consider shifting dividend-paying stocks and mutual funds into retirement accounts, where the increase will not be in effect.

5. Give appreciated stock or fund shares to charity: Get in the holiday spirit, with the help of Uncle Sam. One way to lower your tax bill in April is to donate appreciated securities, like stocks, bonds or mutual funds, to a charity. If you itemize deductions, you'll write off the current market value (not just what you paid for them) and escape taxes on the accumulated gains. The low cost basis does not impact the receiving charity, as long as it is a tax-exempt organization.

One note: For 2013, the overall limit on itemized deductions was reinstated for certain taxpayers. The limitation (known as Pease limit) is applied to single filers who earn more than $250,000 and joint filers who earn more than$300,000. Be sure to factor in the change when accounting for the value of the donation.

6. Rebalance your investment accounts: The suggestions above should be part of a larger analysis of your investment accounts. The soaring stock market has probably thrown your allocation out of whack, so it's time to rebalance and get back on track. One of the best aspects of rebalancing is that it can force you to sell while the asset value is high and buy when other asset values are depressed. Compare that with the usual "buy high-sell low" cycle that can ensnare emotional investors!

Radio Show #141: Ode to Big Al

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This was my first show back since my father (aka "Big Al" or "Albie") passed away. Dad loved the show-he thought it was so cool that you  shared your financial concerns and questions with me, and that I was able to help you out in any way that I could. If you missed the Father's Day show with Big Al, check it out here. And this is my syndicated Tribune column that I wrote for Father's Day.

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We started the show with a great call from Jo in Atlanta, who wanted a solution to her rebalancing needs. Beth from NY recently lost her father and asked about how to invest proceeds of insurance for her mom.

Ed weighed in with a question about Required Minimum Distributions (RMD) and Karl is wondering whether or not to grab an early retirement offer from the USPS.

Two listeners are at opposite places: Patrick wants to know how to jump into the stock market and Andrew is worried about how to get out!

Thanks to everyone who participated and to Mark, the BEST producer in the world. If you have a financial question, there are lots of ways to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

Financial Crisis Anniversary: 5 Investor Lessons

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Five years ago, when the financial crisis blew across the nation like a massive storm, it left a wake of destruction in its path. The Federal Reserve Bank of Dallas estimates that the total cost of the crisis (assuming economic output eventually returns to its pre-crisis trend), to be between $6 and $14 trillion. To put those big numbers into perspective, the loss amounts to $50,000 to $120,000 for every U.S. household. Ouch! The crisis tested every investor, from the neophytes to the most jaded traders on the street. With five years of distance from the eye of the financial storm, here is my list of the top 5 lessons every investors can take away:

1. Keep cool: There are two emotions that influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed. If you had sold all of your stocks during the first week of the crisis in September 2008, you would have been shielded from further losses (stocks bottomed out in March 2009). But how would you have known when to get back in? It is highly doubtful that most investors would have had the guts to buy when it seemed like stock indexes were hurtling towards zero.

2. Maintain a diversified portfolio…and don’t forget to rebalance. One of the best ways to prevent emotional swings is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. In September 2008, a client shrieked to me that “everything is going down!” But that was not exactly the case: the 10 percent allocation in cash was just fine, as was the 30 percent holding in government bonds. That did not mean that the stock and commodities positions were doing well, but overall, the client was in far better shape because she owned more than risk assets.

3. Maintain a healthy emergency reserve fund. Bad luck can occur at any time. One great lesson of the crisis is that those who had ample emergency reserve funds (6 to 12 months of expenses for those who were employed and 12 to 24 months for those who were retired) had many more choices than those who did not. While a large cash cushion seems like a waste to some (“it’s not earning anything!”), it allowed many people to refrain from selling assets at the wrong time and/or from invading retirement accounts. Side note: the home equity lines of credit on which many relied for emergency reserves vanished during the crisis.

4. Put down 20 percent for a mortgage (and try to stick to plain vanilla home loans (15 or 30 year fixed rate mortgages), unless you really understand what you are doing!) Flashback to 2004 – 2007 and you will likely recall that you or someone you knew was buying a home or refinancing with some cockamamie loan that had “features” that allowed borrowers to put down about 3 cents worth of equity. There’s a good reason that old rules of thumb work. Yes Virginia, house prices can go down. And despite the recovery, please shun the advice from so-called experts like Suze Orman, who are once again saying that 10 percent down is just fine.

5. Understand what is in your target date fund: Pre-crisis, many investors had started to use target date funds, in which the fund manager “targets” your future date of retirement and adjusts the allocation as you near the time that you will need to access the money. Unfortunately, many of these funds were far riskier than investors understood. Whether it’s a target date fund or an age-based investment for your kid’s college fund, be sure to check out the risk level before you put a dollar to work.

Radio Show #122: Financial Independence Day

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In between parades, fireworks and barbeques, check out this week's show, where we help callers declare Financial Independence Day!

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Thanks to everyone who participated and to Mark, the BEST producer in the world and Christina, who is vying for "Intern of the Year". If you have a financial question, there are lots of ways to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE 

Radio Show #121: Mid-year update: Rebalance, reallocate, relax!

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It’s half time! The Dow posted its strongest first half of the year since 1999 and the S&P 500 logged its best first half performance since 1998. It was perfect timing (but not market timing, of course!) for Mitch Tuchman from Rebalance IRA and MarketRiders to join us for a visit. Tuchman’s two websites offer a great deal for those investors who need guidance, but don’t want to pay through the nose for it!

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After Mitch's segments, we fielded a bunch of allocation/retirement questions from Tom from IL, Donna from MN, Howard from KY and Mark from NY. Tim from NY has ample assets and wants to make sure that he has the proper allocation, so that he can leave money to his 17 year-old grandson.

Steve from MN wanted advice about Vanguard funds, while Aurora is trying to select among various index funds.

Alexia from Buffalo is weighing the purchase of a single-family home versus a two-family home, which would provide income.

Finally, Nhu is about to enter college and wanted advice on credit vs. debit cards and general advice about how to handle money, as she enters a new phase of her life.

Thanks to everyone who participated and to Mark, the BEST producer in the world and Christina, who is vying for "Intern of the Year". If you have a financial question, there are lots of ways to contact us:

  • Call 855-411-JILL and we'll schedule time to get you on the show LIVE