So what should you do in 2009 to make your portfolio and overall financial picture better? Here are some general ideas to employ as markets and economies hopefully stabilize in the New Year:

Start with a plan (or review an old one): If you’ve worked with a financial planner in the past, now is a good time to review your plan to make sure you are still on track to meet your goals. If you haven’t worked with a financial planner before, or if you haven’t prepared a financial plan before, it might be time to meet with a Certified Financial Planner™ to create a plan. Much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long-term specific goals such as retirement or a college education.

Check all your assets in banks: As a result of federal economic bailout legislation, the Federal Deposit Insurance Corporation (FDIC) temporarily raised the per-deposit account, per bank coverage level from $100,000 to $250,000 through Dec. 31, 2009. Certain retirement-related accounts carry $250,000 of FDIC coverage, but again, check in with your bank to make sure you’re covered, and if not, get the right advice for moving funds so you don’t incur an unexpected tax liability or fees.

Review your risk tolerance: Having a plan doesn’t mean make the plan and leave it to sit for years. You and your planner should decide when it’s time for a review of your investment goals and your feelings about them. An annual conversation makes sense if nothing’s going on, but when unusual circumstances in life or the markets take place, a phone call might be a good idea.

Prepare to stay invested: Stock downturns are always filled with panic selling – and buying. If your financial plan is sound, be prepared to stay the course, but work with your advisor to make sure you have your priorities covered. While times are tough, it’s wise to examine all your investment choices, but if they make sense, definitely put what you can afford in. You’ll reap rewards when the market returns.

Check your credit: No one knows how long it might take to unravel the nation’s current credit situation. That’s why creditworthy individuals might want to delay looking for new lines of credit until things loosen, and it’s definitely a good time to schedule review of each of your latest credit reports at staggered intervals throughout the next year. Why? Because in tough economies and times of tight credit, identity theft might be on the rise, and you’ll need to make sure the information on your credit data is truly your own.

Pay attention to your cash: You should have an emergency fund of three to six months’ worth of living expenses in case your job situation goes south, but the market turbulence we’ve experienced also highlights the need to be somewhat liquid in your investment positions so you can take advantage of certain opportunities. Not every investment that’s lost value is necessarily a bad investment, and with careful study, you should be able to have cash on reserve so you can capitalize on legitimate opportunities.

Re-budget: It’s a good time to make a budget or re-assess the one you have. Though the federal government would love for consumers to start spending again to lift the economy, that doesn’t mean you have to jump in with both feet. Keep your spending smart, your debt low so it’s easier to set savings and investment priorities that will do you the most good when the economy and the market come back.

Check your retirement: How will the activity in the market affect your retirement timetable? You might want to continue working full-time or plan a phased-in approach as you continue to build assets. There is a great danger now that people may become either too risk-adverse or assume too much risk in planning for their retirement, and that’s why it’s wise to get advice.

December 2008 — This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided (and edited) by Kristine McKinley, a local member of FPA.

Here’s what Walter Updegrave with Money Magazine has to say about this:

But as understandable as the urge may be to transfer all your money into the investments that seem safest – stable value funds, capital preservation funds, money market funds and the like – that would be a mistake.

Yes, you have the option of switching back into stock and bond funds later on. But getting the timing right is difficult, if not impossible. You could easily end up missing the early stages of a market rebound, which would make it even harder for your 401(k) to regain lost ground.”

Updegrave goes on to say that now may be a great opportunity to take a more comprehensive review of your retirement planning strategy.  While you should review your retirement plan on a regular basis anyway, it’s even more important after a bad year like 2008 to make sure you’re still on track to retire on time.

Updegrave has three retirement resolutions for investors for the new year:

Resolution #1: Kick up your savings a notch

For example, if someone 35 years old who makes $40,000 a year and gets 3% annual raises contributes 10% of salary to a 401(k) that earns 7% a year, that person would have $535,000 by age 65. But if the markets whack that 401(k) for a 25% loss on the eve of retirement, its value would fall to just over $400,000, requiring this would-be retiree to significantly scale back his retirement lifestyle or postpone retiring altogether.

But if this person had socked away just two percentage points more a year, or 12% of salary, he’d have a 401(k) worth about $642,000. That same 25% hit would drop his account’s value to roughly 482,000. While still a big loss, he might be able to retire on schedule by scaling back his spending a bit rather than postponing retirement altogether. Or he might not need to put off retiring for as long.

The point is that by saving more during your career, you’ll end up with a larger nest egg than you otherwise would, which gives you more maneuvering room if the markets turn against you or, for that matter, if you find you’re forced out of the workforce sooner than you would like.

Resolution #2: Create an actual retirement plan

Clearly, there are lots of moving parts here, so you can’t nail down all these variables with decimal-point precision. But you can make reasonable estimates. You can then fine tune your planning as your circumstances change and as you near retirement (and even once you begin living it).

Resolution #3: Resist the impulse to overreact when the markets go haywire

This is probably the hardest resolution to keep. The point of having a comprehensive plan is to set you on a course that can lead to a secure retirement even though the economy and financial markets will go through major upheavals along the way.

You can’t predict these ups and downs in advance or insulate yourself from them entirely. But a plan based on reasonable savings and realistic investing should allow you to roll with the economic punches and improve your chances of reaching retirement with the resources you’ll need.

The problem is sticking with the plan. When the markets take a dive as they have over the past year, there’s a natural tendency to feel you must take quick action to protect your nest egg. The same impulse to act arises when the markets soar to absurd heights as they did in the late 90s. Unfortunately, following these urges usually leads to trouble. It makes us more apt to invest too conservatively after a market setback and more likely to take on too much risk when the market is approaching unsustainable highs.

So once you’ve gone to the trouble to create a plan, don’t be so quick to dump it. Review it? Sure. Maybe you were overconfident when you originally set your stocks-bond mix, in which case you might want to re-think your asset allocation and re-assess how much you should be saving.

But if you abandon your plan whenever the economy slumps (or soars) or the stock market crashes (or takes off), then you don’t really have a plan at all. You’re winging it, which is the same as entrusting your retirement security to luck.”

You can read the complete article here: http://money.cnn.com/2009/01/05/pf/expert/retirement_resolutions.moneymag/index.htm?postversion=2009010609

Similarly, if you’re investing for long-term goals such as retirement, you will encounter some market volatility, probably several times along your journey.  While you may be tempted to pull over and wait out the rough times, it will delay or may even prevent you from reaching your goals.

So what should you do when the road to investing gets bumpy?

Buy Low, Sell High:  The whole premise behind investing is to buy low and sell high.  You can’t do that if you pull out of the market or stop investing when the market goes down.  If you’re investing for the long-term, you should be glad when the market is down, because then stocks are “on sale” and you can pick up more shares at a lower price.  Who doesn’t love a good sale?

Diversify: One of the best ways to defend your portfolio against market losses is to have a portfolio that is properly diversified.  If you review the history of the stock market, you’ll see that the best performing assets vary from year to year and that it’s not easy to predict which asset class will perform well in any given year.  Therefore, by having a mix of asset classes, based on your risk tolerance, your goals and your timeframe, you are more likely to meet your goals.  In addition, having a mix of asset classes reduces your risk of loss, since you won’t have all of your eggs in one basket.

Rebalance Once a Year:  Just like keeping your car maintained, you should review and rebalance your portfolio once a year.  You should have an asset allocation that is right for your risk tolerance, goals and time frame.  Once a year, you need to review your portfolio to ensure that your assets are still allocated properly to meet your goals.  Doing this periodic maintenance will help ensure that your portfolio performs well on a long-term basis, and will help you reach your investment goals.

Stay the Course: When the market gets volatile, your best bet is to stay the course. If you pull out of the market when it’s down, you could do more harm than good.  In addition, if you pull out of the market with the intent of getting back in when the market recovers, you will likely miss the best days, months or even years of the market, which could result in a much smaller nest egg than if you had just stayed in the market.

It’s normal to be nervous when the market gets volatile, but it’s important to continue to follow your long-term investment plan so that you remain on the road to reaching your financial goals.

The most important thing you can do during volatile market times is to have a plan, and to NOT make rash decisions based on emotion. During volatile markets, planning is essential to minimize your stress level. That doesn’t mean that you won’t feel nervous if your investments decline, but focus and confidence will help you fight the natural human tendency when it comes to your own nest egg to sell when the market is down. Remember the old adage “Buy low, sell high”? Now is the perfect time to “buy low”.

A well diversified portfolio is one of your best allies when markets are volatile. Remember, you are investing for the long term; even if you are retired your investment horizon could still be 20+ years. Market downturns can be great buying opportunities for the long-term investor. For example, your regular 401K contributions this month are purchasing more shares than 6 months ago. When you actually need these funds in 5, 10, or 20 years, chances are very good they will have significantly increased in value. So by buying when the market is low, you are actually leveraging your money to work harder for you in the future.

On the other hand, if you are reaching the end of your accumulation years and/or entering the distribution phase of your life, you will not want to make any rash decisions based on the market’s short-term volatility. The worst thing you can do is to fall prey and “sell low” because you are panicked. So, give yourself a 10 day breather after any big market event – whether up or down – and give me a call before you make any buy or sell decisions. There may be some tweaking we can do to your portfolio to help you get through the volatility, without selling out when the market is down.

No matter which stage of investing you are in, the message I am trying to communicate to you is this: if your financial plan and investment strategy was sound a week ago, it is still sound today. Unless something has changed in your life, it is unlikely that you should take radical action. If you feel like your portfolio does not reflect your goals or risk tolerance, then now may be a great time to schedule a financial checkup to review your portfolio. Otherwise, remember that you are investing for the long-term, and this short term volatility will eventually pass.

Expect the market to be volatile this year. In addition to the recent recession fears (the media is not our friend in this case), we are in an election year, so expect more volatility in 2008. However, this too shall pass! Keep focused on your goals, post them in plain sight and review them often.

Probably the best advice I can give you is something I heard a CNBC analyst say this morning (while we waited for a low opening on Wall Street): “If you’re investing for more than 12 months, you should turn the news off, it doesn’t affect you today”.

1.  Why aren’t my bond funds performing well?  or
2.  Why do I need bond funds in my portfolio?

The main purpose of bond funds (or bonds) is to provide diversification for your portfolio.  Diversification reduces the risk that your portfolio will lose money in a market downturn.

Bond funds typically go down when the stock market is performing well, and up when the stock market takes a turn down.  So when your stocks and stock funds are performing well, it’s normal for your bond funds to have a small or even a negative return. 

A balance of stocks and bonds in your portfolio reduces the volatility of your overall portfolio, and reduces your potential losses during market downturns.

Still not sure if you need bond funds in your portfolio?  Check out these returns of stocks and bonds during market downturns:

Total Returns of Stocks and Bonds During Market Downturns
	From December 31, 2000 to October 31, 2002	From June 30, 1990 to October 31, 1990	From July 31, 1987 to December 31, 1987	From December 31, 1972 to October 31, 1974
Bonds	29.07%	2.93%	2.97%	6.17%
Stocks	-37.39%	-14.09%	-21.39%	-32.99%

Source: Calculated by American Century Services, LLC, using information and data presented in Ibbotson Investment Analysis Software ©2007 Ibbotson Associates, Inc. All rights reserved. Used with permission. Stock returns are represented by the S&P 500 Stock Index, an unmanaged group of stocks considered to represent the stock market in general. Bond returns are represented by the Lehman Brothers Intermediate Government/Corporate Bond Index, an unmanaged market value weighted index of government and investment grade corporate fixed rate debt issues with maturities between one and 10 years. Stocks may be volatile. Past performance is no guarantee of future results.

]]> http://www.beacon-advisor.com/2007/07/why-you-need-bond-funds-in-your-portfolio/feed/ 0 http://www.beacon-advisor.com/2007/04/vanguard-changes-their-fee-schedule/ http://www.beacon-advisor.com/2007/04/vanguard-changes-their-fee-schedule/#comments Fri, 27 Apr 2007 19:23:35 +0000 Kristine McKinley http://beaconfinancialtips.com/?p=82 Vanguard has eliminated several account related fees and replaced them with a single account service fee, effective April 26, 2007.

Here’s a summary of the changes:

The following annual $10 account-related fees have been eliminated:

• The custodial fee on traditional IRAs, Roth IRAs, and SEP–IRAs with a balance of less than $5,000.
• The maintenance fee on index fund accounts with a balance of less than $10,000.
• The custodial fee on education savings accounts (ESAs) with a balance of less than $5,000.
• The low-balance fee on all nonretirement accounts with a balance of less than $2,500.

These fees have been replaced with a single account service fee. This $20 fee will be charged annually for each Vanguard® fund in which you have a balance under $10,000 in an account.

The annual account service fee can be avoided by:

1. Signing up for account access on Vanguard.com® and choosing electronic delivery of shareholder materials, including statements, confirmations, fund reports, and prospectuses.
2. Consolidating your accounts or investing additional assets to bring all account balances in all funds to $10,000 or more.
3. Maintaining total Vanguard mutual fund assets of $100,000 or more.

To learn more about Vanguard’s new fee policy, please click here.

Tags: investment fees

Market cycles are normal and should be expected.  You shouldn’t allow your emotions to influence your investing decisions.  Remember these important points when making investment decisions:

Diversify to reduce risk.  Spread your investments among various asset classes (stocks, bonds, cash) based on your goals, time frame and risk tolerance.  If your portfolio is properly diversified, a decline in one asset type will be balanced out by a gain in another asset type.

Focus on long term goals and your overall portfolio.  Short term blips are insignificant if you are investing for 10, 20 or 40 years.  In addition, it’s more important how your overall portfolio performs than how each individual investment performs.  Remember, 90% of your investment return is determined by how your portfolio is allocated, rather than the individual investments you choose.

Make market fluctuations work for you.  If you are in the accumulation phase, take adantage of a market drop to buy investments.  Remember the old adage "buy low, sell high"?  The best time to buy low is right after a market drop.  If you are close to retirement, use market fluctuations to evaluate your portfolio for appropriate risk tolerance and diversification.  If the drop in your portfolio was more than you can tolerate, consider rebalancing to an asset mix that is more appropriate for you – however, don’t make any rash decisions; wait a few days and use dollar cost averaging so that you don’t sell low and buy high.

Here are some great articles addressing the market drop last week, and how to handle financial anxiety:

How to cope with financial anxiety

Market misbehavior calls for wary eye, not grounding

You only want to invest in CDs, savings, or money market deposit accounts if they are insured by the FDIC.

The FDIC – short for the Federal Deposit Insurance Corporation – is a goverment agency that protects depositors against loss of deposits in the event the bank or savings institution fails. 

Your accounts are insured up to $100,000, per person and per bank.  Accounts covered by FDIC include checking, NOW, and savings accounts, money market deposit accounts, and time deposits such as certificates of deposit (CDs).

Investments such as stocks, bonds and mutual funds are not covered by FDIC, even if purchased through an FDIC insured bank.

To check whether a bank or savings association is insured by the FDIC, call 1-877-275-3342, or visit www2.fdic.gov/idasp.

Tips to protect yourself:

1. Never buy an investment you don’t understand
2. Understand the risks involved – non FDIC insured investments may earn a higher rate, but they are riskier as well
3. Know who you’re investing with – is it a bank, credit union, brokerage company?  What do you know about this company?
4. Make sure the investment is appropriate for you – a 20-year CD is not appropriate if you need income now.
5. Ask questions, ask questions, ask questions.  If you’re not getting satisfactory answers, don’t invest.

ETFs are similar to index funds, but they trade like a stock, meaning they can be bought and sold throughout the day instead of just once a day.

Advantages:

Low cost – ETFs have a lower annual expense than most mutual funds, including most index funds.  According to Morningstar, the average expense ratio for ETFs is 0.30%, compared to 0.35% for no-load index funds, and 0.96% for all mutual funds.

Tax efficient – ETFs don’t have to sell stock positions to meet shareholder redemptions, which cuts down on taxable transactions.  Also, redemptions by large shareholders are paid in kind, protecting investors from unnecessary taxable events.

Disadvantages:

The main disadvantage of ETFs is that they can only be bought through a broker, which means you will pay transaction costs each time you purchase an ETF. 

Conclusion:  ETFs can be a great way to diversify your portfolio, especially if you are making a one-time purchase.  But if you make regular purchases, such as with dollar cost averaging, the transaction costs can end up costing you more than if you had purchased an index mutual fund.

To learn more about ETFs, check out the Exchange Traded Funds Center at Morningstar.  In addition, you can read more about iShare ETFs managed by Barclays Global Investors, or Vanguard’s ETFs.

I agree.  Keeping investment costs at a minimum is one of the most important things you can do to have a successful portfolio.

Investment costs (for mutual funds) include:

Annual operating costs – mutual funds have an annual operating cost to cover fund manager salaries, marketing costs, etc.  These can range from 0.20% up to 3.0%.  Index funds and Exchange Traded Funds (ETFs) will be at the lower end of the range, with specialized, actively-managed funds at the top end. 

Commissions – many mutual funds charge a commission, which goes to the person who sold you the fund.  Commissions can be charged up front, when you sell the fund, or continuously, and typically range from 3% to 6%.

Redemption fees – to discourage market timing, or active trading, some funds have a redemption fee.  Redemption fees average about 2% and usually occur if you sell shares of a fund within a certain time period, such as 6 months to a year.

Transaction costs – unless you purchase the mutual fund directly from the mutual fund company, you will probably have to pay a transaction fee to purchase or redeem shares.  This is true for ETFs, shares of stock, or individual bonds as well.  Transaction fees can be a flat fee per trade, or they can be a percentage based on the value of the securities traded.  Discount brokerages will have lower fees than full service brokerages, but fees vary widely, so you’ll need to shop around.

In addition, there are many other fees you may encounter, such as account maintenance fees, IRA fees, inactivity fees, transfer fees and more.

The bottom line is that money that’s not working for you is money wasted.  The more money you pay for investment fees, the less money that is working for you.  Saving 1% per year in investment costs, could mean 20% more money in your portfolio after 20 years.

More resources:

Don’t Let Brokerage Fees Undermine Your Returns
Mutual Fund Fees and Expenses
About.com – Mutual Fund Fees