Financial Symmetry News & Views

Posts Tagged ‘Retirement’

Many illustrations of investment performance calculate the growth of a hypothetical investment from a given starting point.  Typically there is a benchmark, such as the S&P 500 index, charted alongside for comparison purposes.  The models show that had you invested a specific dollar amount, for example $10,000, you would have the initial $10,000 plus whatever growth through dividend re-investments and asset price appreciation at the end of the evaluation period.  This measures an investment’s total return for the period and is based on a buy-and-hold strategy that is quite different from how most people invest.

Controlling Your Emotions?

Morningstar, an independent investment research company, compiled returns for how the average mutual fund investor did during the 2000’s. The research added a layer of analysis to the total return calculation by also tracking the cash flows in and out of the mutual fund.  They wanted to see what the performance looked like if you took into account additional buys and sells in the fund during the same time frame.  Then they compared the findings to the buy-and-hold strategy that mutual funds use to report investment performance.  What the findings show is that most investors suffer from bad timing as they get in when prices are high and get out when prices are low.  This is a reflection of how market forces can drive investor emotions and result in behaviors that cause poor relative investment performance.

Slow And Steady

Another interesting discovery is how fund companies provide different investing experiences for the average investor.  The institutions that stick to fundamentally sound investment principles were proven to have better investor returns relative to total returns than those companies that use a short-term, current-trends marketing strategy to attract investors.

Financial Symmetry’s composite results for the decade were an average annual rate of return of 4.93% compared to the average annual investor return of 1.68% across all funds.

Photo Credit: TheGiantVermin

No one likes potholes.  Not only because of the annoyance they create, but also the added cost of getting your car realigned as a result. Often times, you may not hit anything major but your steering wheel begins to shake and your car starts to pull to the left after reaching 45mph.  This more subtle warning sign lets you know it’s time for an alignment to prevent extra wear and tear on your tires or even worse, a blow-out.

Watch Out For Potholes

Unfortunately, with an investment portfolio we don’t always hit a pothole or get a steering wheel shake to let us know it’s time for realignment.  In fact, when investors do begin seeing bad returns, it often leads them to make bad choices with their investments resulting in costly mistakes. We have become well aware of this natural human tendency which is why we rely heavily on our research themes.  By conducting our investment review process quarterly, we can review client portfolios and realign according to our research themes if necessary. During our analysis, we monitor how closely the client’s current investment mix matches our long-term investment strategy.  We also measure the level at which our clients’ stocks are positioned within the allocation ranges we establish during our initial planning work.  If the stock percentage is above or below the range, we know an adjustment should be made.

Mental Accounting

Many investors have a tendency to bucket their investment accounts.  They assign different purposes for their accounts which in turn require different investment strategies for each account.  For an investor to reach their optimal portfolio return, we feel it’s vital to have a coordinated investment strategy across all investment accounts.  Qualified plans give us the best example of this philosophy.  Many investment choices offered in 401k’s and 403b’s are limited compared to what you might be able to access in other accounts.  In a 401k, there may be a great international fund choice but only average domestic choices.  In this scenario, we may want to use the attractive international investment for all the funds in the 401k and surround it with more quality choices in other accounts where we have more investment selection.

I’ll Owe More in Taxes?!?

Don’t let the tax tail wag the investment dog.  In other words, there are times when heavy realized gains in a holding could lower the motivation to sell if you were strictly looking at the scenario from a tax perspective.  However, if this same security represented 75% of the portfolio and was comprised of one individual stock, the concentration risk would most likely outweigh the desire to hold on to the stock to avoid incurring a large capital gain.  Decisions such as these take careful evaluation and can only truly be assessed by taking the “big picture” into consideration.

Other Factors

Our investment review process allows us to assure our client’s portfolio is in good working order. To accomplish this, we also consider specific factors such as a client’s age, family relationships, tax considerations, risk levels, and the latest notes and communications with the client to assure we are not missing any potential improvements that could be made to their overall investment situation.  Our investment review process helps us take great care in assuring our client’s investment mix matches their risk preferences. Do you have a review process for your investments?

This is the second part of a 3-part series we’re calling “Behind the Scenes.” It is our hope that this series will give our clients a more transparent look at our business so they can better understand the diligence we employ with each client review.

In response to the many fears and uncertainties that arose during the recent economic crisis, The National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation sponsored multiple financial advice events around the country as part of the “Your Money Bus” tour.  On Tuesday January 19^th, the “Your Money Bus” rolled in to downtown Raleigh, in partnership with NC State Treasurer Janet Cowell’s office.

With unemployment hovering around 10% and dramatic swings in the stock market, the need for financial advice was very apparent in the crowd of more than 85 that showed up at the State Government Complex in downtown Raleigh.  The impressive turnout of people came with a wide mix of questions that dealt with everything from how much and in which accounts they should be saving to which debts they should be paying down the quickest.

Partners of Financial Symmetry, Allison Berger and Chad Smith, participated in the event for the second consecutive year.

“We’ve really enjoyed being involved with the ‘Your Money Bus’ tour over the last two years.  It’s a great opportunity to spread financial literacy and make a difference in our community.” -Allison Berger

“Volunteering our advice has been a neat way to provide people with action steps that can help them gain some peace of mind when dealing with their finances.” -Chad Smith

When selecting mutual funds to use in our client’s accounts we use various quantitative and qualitative factors to evaluate if we believe a fund can add value.  Morningstar is the most widely used source of mutual fund data and analysis, so we rely on their data for a significant portion of our research.  One thing we have learned over the years, however, is to take their star ratings with a grain of salt. This is because the star ratings are really a measure of past performance and are not an indicator of what the future will hold.

“Advisor Perspectives” recently reviewed the predictive ability of the star rating system over a full market cycle and the results of their study were similar to our experiences.  In a recent letter published by Robert Huebscher, he states, “We concur that the ratings are not an effective forward-looking measure, but that is not how they are used in the industry.  By calling this calculation a rating, Morningstar imparts at least the implicit endorsement of higher- rated funds and an expectation that their relative performance advantage will endure.”

To read the full article and learn more about fund performance over a full market cycle go to:

http://www.advisorperspectives.com/newsletters09/Morningstar_Ratings_Fail_over_a_Full_Market_Cycle.php

Article published on FiLife.com by Financial Symmetry’s Allison Berger, CFP.

Naturally parents want to provide the best for their children. For many parents today this means paying for them to earn a college degree. This is an admirable goal, and one that their children will greatly appreciate when they graduate free from student loan debt. But what does saving for the ever-rising cost of college tuition mean for their other lifestyle goals?

529 plans have become the gold standard of saving for college. They are a great choice because they do not have an annual contribution limit or income threshold. They also allow tax-deferred earnings and tax-free withdrawals for qualified education expenses. While these features are beneficial, 529s also have some negative aspects. The biggest drawback is that the funds must be used for college. Therefore if your child receives a scholarship, decides not to go to college, or you have excess money left over in the 529 after they graduate, your earnings will be subject to federal and state income taxes in addition to a 10% penalty. This emphasizes the importance of not over-funding 529 plans.

While the 10% penalty is enough to discourage over-funding, parents should also consider how they are planning for their own future. Too often retirement planning is put on the back burner until children are off the family payroll. However, student loan options are abundant; retirement savings loans…not so much. Another variable is that parents may have enough income by the time their children go to college that they can pay their expenses out of cash flow.

For these reasons I encourage parents to consider maxing out contributions to their own retirement accounts before funding 529 plans or other education savings accounts. If you are eligible, the Roth IRA is a tool that can work toward both goals. Roth IRAs are funded with after-tax dollars and provide for tax-free withdrawals in retirement. While this is a retirement account, a feature often overlooked is that you can always withdraw your contributions from a Roth IRA tax and penalty free. This makes it a great tool for college planning as well because you can plan to max out contributions every year and withdraw those contributions for use toward college expenses if necessary. In the event you earn enough income that you don’t need to make any withdrawals or your child receives a scholarship, you can leave that money to grow for your own retirement.

The goals and resources of every family are unique. To develop a savings plan most appropriate for your personal situation, seek the guidance of your financial adviser.

This issue of our In the Know will discuss the contribution limits for Qualified Retirement Plans, Traditional and Roth IRAs as part of your 2009 savings plan review.

Make your 2008 Roth IRA contribution:

If you have not yet made the maximum contribution, you still have time! Tax payers have until April 15th of 2009 to make their Roth contributions for the 2008 tax year. If you are within the income limitations to make contributions, a Roth IRA is an excellent investment as investment growth is tax deferred and withdrawals in retirement can be tax free.

Looking forward for 2009 contributions, there are a few increased contribution limits for this year and a few that have stayed the same. While the limits for the Roth and Traditional IRAs have not increased, the limits for the majority of employer sponsored plans such as 401ks and 403bs, have.

A very good practice is to contribute enough of your salary to receive at least the employer match. Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Qualified Plans	2008	2009
401k, Roth 401k, and 403b plans	$15,500	$16,500
- Catch-up for ages 50 & over	$5,000	$5,500
457 Plans of tax exempt employers	$15,500	$16,500
- Catch-up for ages 50 & over	$5,000	$5,500
SIMPLE IRA or SIMPLE 401k plans	$10,500	$11,500
- Catch-up for ages 50 & over	$2,500	$2,500
Limits on annual additions to SEP Plans	$46,000	$49,000
Traditional and Roth IRAs	$5000	$5000
- Catch-up for ages 50 & over	$1000	$1000

Our wealth management service monitors your income and determines every year how much you should be contributing to each of these investment accounts. It also reviews your income tax and estate picture, which may provide opportunities for tax savings.

If you are interested in this service, please contact us.