|
Softpanorama
(slightly skeptical)
Open Source Software Educational Society |
May the
source be with you,
but remember the KISS principle ;-)
|
401K Investing Webliography
This is ad-hoc bibliography collected mainly
from mainstream (you can call it "yellow", if you wish ;-) press. Recommendations
should treated very critically. Among mainstream media recommendations I would
like to single out John Waggoner, a personal finance columnist for USA TODAY. He
has nice no-nonsense approach and some of his recommendation not only have perfect
sense but were extremely well timed. For example, he recommended to cut the
share of high yield bonds in Dec 2006. High-yield market "crushed" in summer
of 2007: spreads widen dramatically due to "subprime" mess (actually a solvency
crisis).
December 27, 2007
There's some great investing advice out there, and of course, there's some pretty
bad advice as well. If you've ever heard "It doesn't matter how high the
price is -- buy all the Enron you can," that probably falls into the latter category.
While you can spend all day listing smart and useful investment advice, I got
to thinking about great advice that is limited to four words.
Let's check the results.
"Buy what you know"
This is probably the second-most-famous four-word piece of investing advice.
It comes from, or is at least most popularly attributed to, Peter Lynch's
One
Up on Wall Street. In a timeless article from several years ago, Jeff Fischer
writes
at great length about this phrase:
[I]t is most often read to mean buy the brands that you know, buy the companies
that make products that you like, and buy the company names that you always
hear in daily life.
When large-cap stocks are soaring, this strategy, simple as it is, appears brilliant.
"If I just buy Coca-Cola (NYSE:
KO), General Electric, and Hershey,
I could double my money every three years!" Of course, when large caps go into
long periods of rest or retraction, the strategy requires patience and offers
less-than-blistering returns, especially if you "bought what you knew" as it
was hitting a seven-year peak.
Buy what you know is one-dimensional advice for three reasons. First, what
you know may not be worth investing in. Second, the practice of buying
what you know is rarely interpreted to mean buy the business model, the cash
flow statement, and the balance sheet that you know backwards and forwards.
It too often is seen as "buy your favorite brand." Period. If you happen to
know and love Kmart, but you didn't learn about its financials, you [were] in
a sorry situation because you were an uninformed investor. Third, I've never
heard the term "buy what you know" coupled with anything regarding valuation.
It seems to be "buy what you know -- at any price."
Thank you, Jeff. "Buy what you know" may help new investors get comfortable with
the process, but it simply won't help you pick particularly good stocks if you don't
get into the valuation side of the equation. Plenty of people bought Krispy Kreme
because they "knew it," and that was a disaster. Alternatively, in the late '90s,
plenty bought Microsoft because they "knew it," but, because of the valuation back
then, they haven't been well rewarded despite the accomplishments of the company
in the interim. Plenty of other people have bought Starbucks because they knew it,
and that's worked out fantastically. Simply put, acting on "buy what you know" doesn't
lead you anywhere in particular.
"Buy low, sell high"
I'm pretty sure this is the most famous four-word piece of investing advice
ever, and as guidance, the phrase is unarguable ... yet largely useless. By definition,
if you succeed in buying low and selling high, you've made a profit. Any purchase
is made with the expectation -- or at least hope -- that in absolute dollar terms,
you're going to be selling at a higher price than what you've bought for. But since
the advice itself gives no guidance as to what is "low" and what is "high," it can't
be used without a whole lot of addendums. Buy stocks with low P/Es, or at 52-week
lows, or during bear markets, or any number of other interpretations of "buying
low." Selling high might or might not be useful advice. After all, as Philip Fisher
has famously written and as adopted by Warren Buffett, the best time to sell a stock,
if it's properly researched, may be almost never.
We can all tell plenty of stories about someone selling a stock at a quick profit
that seemed high but turned out to be several hundred or thousand percent below
what they could have made by holding onto the stock. Tom Gardner frequently mentions
Daktronics (Nasdaq:
DAKT), Websense
(Nasdaq:
WBSN), Dell, and Whole Foods
when confessing
his own bad calls. Not to pick on Tom -- his results speak for themselves. But these
were mistakes that came out of the "buy low, sell high" mold.
"Buy an index fund"
This is the most actionable, most mathematically supported, short-form
investment advice ever. If you look up The Motley Fool in the encyclopedia -- or
at least on Wikipedia -- you'll find that we are "famous for [our] view that, for
the majority of people who have little time to keep track of stocks, the best investment
strategy can be summed up in four words: 'Buy an index fund.' "
And that remains true. If you've got little time to keep track of stocks, this
really is the best investment advice around. It's not perfect -- after all, you
might be asking, "Which index fund?" And then you'd want to specify certain characteristics,
such as:
- No load.
- Low annual cost.
- Low turnover.
- Broad index.
That means a fund like Vanguard Total Stock Market Index (VTSMX),
or the Vanguard Total Stock Market ETF (AMEX:
VTI), which coincidentally may hold a lot of what you know, including
GE, Microsoft, Coca-Cola, Hewlett-Packard (NYSE:
HPQ), Verizon
(NYSE:
VZ), and Procter & Gamble
(NYSE:
PG).
When cornered at cocktail parties for investment advice, this is the one piece
I usually provide. After all, barely 25% of mutual funds beat the relevant market
index over time. I don't think that you can really improve on this advice if you're
stuck using four words or fewer.
But you can spend more than four words on investment advice, and as
with the other four-word mantras above, doing so usually yields even better advice.
Like the classic index fund, a managed fund can have no load, low costs, low turnover,
and strong diversification. It can, on rare occasions, have managers capable of
properly allocating capital and valuing businesses, thereby adding value beyond
the overall increases of the market. When you combine all of these factors, you
get a fund that improves on its index -- and helps you make money.
Such funds are out there. They take more than four words' worth of work to find,
but
Motley Fool Rule Your Retirement has uncovered a number of them. Along
with a selection of exchange-traded funds that it recommends, as well as index funds
beyond the S&P 500, our retirement newsletter focuses on inexpensive, diversified
ways to save and invest for a healthy and happy retirement.
For much more on planning for retirement, including tools, investment recommendations,
and a suite of discussion boards where you can ask questions to your heart's content,
try Rule Your Retirement for the
next 30 days, free of charge.
This article was originally published on Jan. 13, 2006. It has been updated.
Bill Barker does
not own shares in any of the companies mentioned in this article. Whole Foods, Starbucks,
and Dell are Motley Fool Stock Advisor recommendations. Microsoft, Coca-Cola,
and Dell are Inside Value selections. The Motley Fool has a
disclosure policy.
Lies, damn lies and (retirement) statisticsReluctant retirement savers may
be scared straight by these data
By
Robert Powell, MarketWatch
Last update: 7:14 p.m. EST Dec. 26, 2007
BOSTON (MarketWatch) -- What's the best way to motivate Americans to save,
invest and prepare for retirement? Some behavioral finance experts suggest using
the carrot. Others suggest using the stick. And still others suggest using a
combination of carrot and stick.
As for me, I suggest the use of statistics. Consider just a sampling of the
numbers that have been released this year:
IRAs and 401(k)s
There's $4.23 trillion in individual retirements accounts, but that figure
hides the fact that very few Americans contribute to an IRA and even when they
do the amount is small.
On average, just 10% of eligible Americans contributed to an IRA for the
years 2000 to 2002, according to the latest issue of EBRI Notes. And in 2004,
the median contribution to a traditional IRA was just $2,300, according to the
Investment Company Institute. The maximum you could contribute to an IRA in
2004, by the way, was $3,000 or $3,500 for those 50 and older.
Now you might say that's not so bleak given that working Americans are presumably
saving for retirement using an employer-sponsored plan, such as a 401(k), 403(b),
457 or Thrift Savings Plan. But again, the numbers are somewhat depressing.
There are nearly 100 million Americans age 21 to 64 working full-time, full-year.
But of that number, just 60% or 58.4 million work for an employer that sponsors
a retirement plan, and only 52.7%, or 50.8 million participate in a retirement
plan.
That means roughly half of all working Americans don't participate in a retirement
plan or don't have an employer-sponsored plan in which to participate. It also
means that a huge number of adult Americans -- by my estimate 150 million of
a potential 200 million -- aren't saving for retirement in any meaningful way,
if at all.
Retirement risks
According to the Society of Actuaries' 2007 Risks and Process Retirement
Survey, roughly half to 60% of retirees worry about three things: the cost of
health care, the effect of inflation on their nest eggs and not being able to
maintain a reasonable standard of living for the rest of their life.
Those worries are justified given the lack of savings in America. But what's
really bothersome is the degree to which those who aren't worried should be.
Consider, for instance, health-care costs. Fidelity Investments estimated
earlier this year that a 65-year-old couple retiring today would need $215,000
set aside just to pay for medical expenses over a 20-year span. And if that
wasn't depressing enough, other estimates are even higher.
Paul Fronstin of the Employee Benefit Research Institute, for instance, said
a 65-year-old couple retiring today would need, assuming average life expectancy
of 82 for men and 85 for women, more than $300,000 set aside to pay for health-care
costs (premiums and out-of-pocket expenses) in retirement, and more than $550,000
if the couple lives to age 92.
What's even more depressing is that neither the EBRI nor Fidelity estimates
factor in the cost of nursing homes, long-term care or assisted-living facilities,
or home health aides. And those costs are staggering.
According to the MetLife Mature Market Institute, it costs $69,000 per year
for a semiprivate nursing-home room, $35,628 per year for a unit in an assisted-living
facility, $19 an hour for a home health aide and $61 per day for an adult day
care center. Where's that money going to come from?
Retirement expenses
Retirees and would-be retirees are also right to fret about maintaining their
standard of living. Consider, for instance, these numbers: The median household
income (half above, half below) in America is $48,451 and the average is $65,527,
according to the U.S. Census Bureau. But in retirement, income falls dramatically.
The average total income for those 65 and older in America is $25,610, and
the median was a meager $16,770, according to EBRI Notes. That means retirees
are living on roughly one-third of their preretirement income. And that's a
far cry from the 70% to 80% income replacement experts suggest Americans need
to maintain their preretirement standard of living.
Besides not having the income to maintain a similar standard of living, retirees
will face expenses that are certain to rise faster than the average rate of
inflation.
Consider, for instance, the results of the 2002 Consumer Expenditure Survey.
On average, retirees spent 32.6% on housing, 14% on food, and 13% on health
care. But that's the average. What's interesting is the degree to which money
spent on health care in retirement changes over time.
For instance, those 55 to 64 spend 6.8% on health care, those 65 to 74 spend
11.2% and those 75 and older spend 15.1%. That percentage rises in part because
the cost of health care is rising twice as fast as the core rate of inflation
(less energy and food), 5% vs. 2.3%, according to the U.S. Bureau of Labor Statistics.
But it also rises because older retirees tend to spend more on health care than
younger retirees.
Source of retirement income
So where do retirees get their income once in retirement? Again, the numbers
are depressing (and deceiving). On average, retirees get 39.8% from Social Security,
23.7% from earnings, 19.4% from pensions and annuities, 15.4% from assets (IRAs
and the like) and 1.9% from other sources, according to EBRI Notes.
But the composition of the income changes dramatically based on income. Retirees
in the bottom fifth of income, those with less than $8,261 in 2006, got 87.6%
of their income from Social Security while those in the top fifth of income,
those with greater than $34,570, got 36.4% from earnings, 22.6% from pensions,
20.5% from assets, and just 18.5% from Social Security.
The moral of story
If you are among the 150 million who are not saving for retirement, now would
be a good time to do so. If you are among the 50 million who are saving for
retirement, now would be a good time to save more.
If you are among those who aren't worried about health-care costs, inflation
or maintaining a standard of living in retirement, now would be a good time
to start worrying.
If you are among those who worry about retirement risks, now would be a good
time to do something about it: Set aside money for health care, for instance.
And if you are among those who don't know what your sources and composition
of retirement income will be, now would be a good time to figure that out. After
all, waiting to see how things might work out isn't the world's best plan.
Robert Powell has been a journalist covering personal
finance issues for more than 20 years, writing and editing for publications
such as The Wall Street Journal, the Financial Times, and Mutual Fund Market
News.
CNBC anchor Mark Haines stated on air today
at 11:00 am: “The two people I don’t trust are realtors and
car salesmen. Not that they are dishonest. They just have a
vested interest in keeping spirits up.”
Doesn’t that take
the cake?
With respect to Mr. Haines and the subject
of “keeping spirits up”,
readers know my views.
CNN calls themselves “The most trusted name
in news” and CNBC is all about “The greatest story never told”.
It’s all a crock that nobody believes, so why they play this
mindless game is beyond me.
But -- and this is important -- it’s only
been in recent years that Wall Street has permitted their best
people to speak their minds -- as long as they cover themselves
with disclaimers. We need to encourage that.
Wall Street is full of brilliant minds,
and these professional players don’t all agree with their colleagues,
or with Talking Heads. We need to hear their differences of
opinion, directly.
From the media, many of whom are on the
sidelines cheerleading advertisers and promoters and their friends,
we need to tune out. If they were simply journalists, we should
listen.
From readers comments:
If you view CNBC as 50% entertainment with some factual information as background,
it isn't so bad.
Anyone who blindly invests based on what they hear or read, without doing some
of their own analysis, is doing themselves a disservice -- they should get someone
else to make their investment decisions. But your main thesis here is right
on. Analysts provide value by providing insight into why they think a stock
should be valued at some level, and we as investors are free to weight or reject
those varied opinions. A difference of opinion could result from a variety of
different assumptions, and our assessment of those assumptions is what makes
markets move.
====
Yes, Wall Street is "full of brilliant minds". You can witness this by the
"brilliant" performance of the in-house mutual funds that the brokerages cram
down the accounts of their hapless customers. While this is a travesty, even
worse is the current move afoot by the SEC and Congress to prevent the retail
investor or pension plans from putting any money into funds that can short the
market or use leverage.
The S&P 500 only recently recovered back to even after six years and a 40%+
drawdown. Of course, that represents a excellent investment choice according
to the regulators and the index fund distributors. Just buy and hold into the
sunset.
Q: I am in a quandary regarding my 401-K portfolio allocation. I am
56 years old and understand that in my age category I should have a 60%-40%
mix between stocks and bonds in my portfolio.
For the past couple of years, I have been mostly invested in equities but recently
shifted to the recommended 60-40 split --- except that right now the 40% is
currently in a Money Market fund. This is because
investing in bond funds has seemed to be more speculative than equities in these
times.
My company 401-K plan provides me with 5 choices and a none of them includes
owning bonds directly. Our bond fund return cannot keep pace with the Money
Market return. The best choice has been the Equity Index Fund which is an S&P
500 Index Fund.
What do you recommend for people in my situation?
---B.D., Houston, TX
A. Your judgment has been excellent. Bond fund figures for
the last three years have been dismal and cash has been a better choice.
You might consider some research by Peter Bernstein. Disappointed with bonds,
he found that a 75/25 stocks/cash allocation produced the same volatility as
the traditional 60/40 stocks/bonds allocation. In other words, if you hold cash
instead of bonds, you can afford to hold more stocks because the cash is more
stable than bonds.
Another option would be to look among your fixed income choices and try to find
a fund that was what some analysts call "near cash"--- a very short term fund
with an average maturity of 1-3 years
- Yeah, annuities are one of the biggest rip-offs in the financial services
industry. Here are some reasons why:
1) Very high internal expenses
2) Outrageous surrender penalities (for the first several years) that handcuff
you to the product
3) The insurance is nearly worthless
4) The tax deferral aspect is WAY over-rated since index funds accomplish
virtually the same thing at a fraction of the cost
5) Money taken out of an annuity is taxed as ordinary income versus the lower
(usually) cap gains tax rate
6) Poor estate planning tool b/c the assets don’t receive a step up in cost
basis at death and are taxed at the beneficiary’s ordinary income tax rate
Below are sample for simulation "reasonably conservative investor" responses.
The sample was done of Sep 4, 2007 so the allocation looks a little bit strange
for the market conditions but we have what we have...
Here are the results of your profile questionnaire. The possible allocation
models are Very Defensive, Defensive, Conservative, Moderate, Moderately Aggressive,
Aggressive, and Very Aggressive. Your risk propensity suggests a Conservative
portfolio allocated with the following mix:
Published: February 17, 2008IT has been a time to worry even the
savviest investors. The credit markets have been in a crisis, the
domestic stock market has been shaky and overseas markets haven’t been
much better.
for The New York Times
David F. Swensen manages investments for
the $22.5 billion endowment at Yale.
What should an individual investor do?
Don’t try anything fancy. Stick to a simple diversified portfolio,
keep your costs down and rebalance periodically to keep your asset
allocations in line with your long-term goals. That is the advice of
David F. Swensen, who has run the Yale endowment since 1988, relying on
a complex strategy that includes investments in hedge funds and other
esoteric vehicles. The endowment earned 28 percent in its last fiscal
year, which ended June 30, beating all other endowments. It finished the
year with $22.5 billion.
For most people, he recommends a very basic approach: use index
funds, exchange-traded funds and other low-cost instruments, and stick
to your long-term asset allocation — even when the markets are in
tumult.
Don’t be distracted by market forecasts, he said. “You have to
diversify against the collective ignorance,” he said. “I think nobody is
in a position to react to these big macro-issues. Where is the dollar
going to be or what is G.D.P. growth going to be in China? For every
smart person on one side of the question, there is another smart person
on the other side.”
For most individual investors, he said, copying the strategies of
institutions like Yale is virtually impossible: big investors have
access to fund managers and arcane strategies that are beyond the reach
of most people.
“The only people who should get involved are sophisticated
individuals who have significant resources and a highly qualified
investment staff,” Mr. Swensen said.
“Most people do not have the resources and time to pick
market-beating managers” of hedge funds, private equity funds or funds
of funds, he said. And he said that the techniques used by hedge funds
often result in higher taxes than those of index funds.
So he advocates another approach, which he outlined in the book
“Unconventional Success: A Fundamental Approach to Personal Investment”
(Free Press, 2005). He proposes a portfolio of:
- 30% domestic stocks,
- 15% foreign stocks,
- 5% emerging-market stocks
- 20% in real estate
- 15% each in Treasury bonds and Treasury
inflation-protected securities, or TIPS.
The real estate investment can be made through real estate index
funds. Though the real estate market has declined and your portfolio is
below its target allocation to it, he said, don’t try to time the
market. Go ahead and rebalance because no one really knows where the
market’s bottom is.
Diversification will buffer a portfolio from declines in specific
asset classes. For example, he said: “If the dollar declines
dramatically, you have foreign and
emerging-market equities. And a declining dollar may well
be associated with inflation, but a diversified portfolio would include
TIPS,” to provide a hedge. “That means if any of these scenarios play
out, an investor has sizable chunks of his portfolio that protect
against them,” Mr. Swensen said.
When possible, he said, rebalancing should be done in a tax-sheltered
account, like an I.R.A. or a 401(k), to avoid tax liabilities. “When you
are putting fresh money to work,” he said, “you put it in an asset class
where you are underweight and take money out of a class that is
overweight.”
He says it is fruitless for individual investors to pick stocks.
“There is no way that an individual can go out there and compete with
all these highly qualified and compensated professionals,” Mr. Swensen
said.
... ... ...
Mr. Swensen says investors should forget market timing entirely. Once
an individual sets up a program, it should be rebalanced quarterly or
semiannually, he said, “but it should be disciplined.”
When the markets decline, try not to pay attention, he said. “Let
yourself off the hook,” he said. “If you pursue the sensible long-term
policy, look at it over a 5- to 10-year
period. Don’t look at five months.”
12/13/2007 |
USATODAY.comSometimes, the questions we don't ask are more important
than the ones we do.
Had someone asked, for example, "Can he hit?" the Red
Sox might never have traded pitcher Babe Ruth to the Yankees. Had someone asked,
"Do we really need a New Coke?" we wouldn't still be making New Coke jokes.
One question every investor needs to ask is, "How much
money can I lose?" It's a particularly urgent question in uncertain economic
times — now, for example. So for the second column in our series on dealing
with stormy financial markets, we're going to talk about how to make your portfolio
as recession-proof as possible.
Let's start with the proposition that the more narrowly
focused your portfolio, the larger the potential gains or losses. Suppose, for
example, you had invested in the Hey, Boy & Howdy fund, which owned five stocks.
If one of its stocks had been Google, then you would have made a great deal
of money. But if one of those stocks had been Enron, then you'd be sitting on
some big losses.
Highly concentrated funds, particularly those that focus
on one sector, enjoy the biggest potential for outsize losses and gains. If
you're worried about a downturn, you should look for funds with many holdings.
You'll give up the chance for a 100% gain in one year, but you probably won't
lose 70%, either.
One easy choice would be Vanguard Total Stock Market
Index, which holds 3,685 stocks and tracks the MSCI US Broad Market Index. (Vanguard's
rival, Fidelity, offers the Fidelity Spartan Total Market fund, which has 3,411
holdings and tracks the Dow Jones Wilshire 5000 index.)
These funds will protect you somewhat if one stock, or
even one whole sector, takes a bruising. Keep in mind, though, that they're
still stock funds and will follow the stock market faithfully — even if it walks
off a cliff. If you want further protection, you have to invest in something
that might not move in lockstep with the broad stock market.
You can use two statistical measures to determine how
closely one type of fund tracks another. The first is a fund's statistical correlation
with another fund or a broad index. A 100% correlation is a perfect match; a
0% correlation means the two funds' movements are unrelated. A negative correlation
means the two move in opposite directions.
Consider, for example, the Lipper large-cap core fund
index, which measures the performance of the largest funds in that category.
The index has a 98.9% correlation with funds that track the Standard & Poor's
500-stock index. If you own an S&P 500 fund and a large-company core fund, you're
not getting much diversification from owning the two funds.
Another measure, called r-squared, shows how much one
fund's movements can be traced to the movements of a benchmark, such as the
S&P 500. The closer the r-squared is to 100, the more the returns from the fund
are attributable to the returns from the benchmark. The Lipper equity-income
fund index, for example, has an r-squared of 95.4% with Lipper's index of S&P
500 index funds. Again, pairing the two types of funds in your portfolio won't
give you a great deal of added benefit.
You can find both these statistical measurements at
www.morningstar.com , and many funds'
websites provide the information, as well.
What types of funds don't correlate with the S&P 500?
International funds have only a 75% correlation
with S&P 500 index funds. Still, you should remember that when
the U.S. stock market melts down, foreign markets melt right alongside us. Among
sector funds, the lowest correlations with the S&P 500 have been among gold
funds, natural resources funds and Japan funds.
But you get better diversification if you mix in funds
that invest in different asset classes, such as money market securities or bonds.
Over the past three years, funds that invest in
Inflation Protected Securities, or TIPS, have had a negative correlation with
S&P 500 index funds. So have government securities funds. Municipal
bond funds also have a very low or negative correlation with S&P 500 index funds.
Some experts also consider real estate funds to be a
separate asset class. In the past three years, real estate funds have had a
53% correlation with S&P 500 funds.
If we were to construct a
Cowardly Portfolio, then, we might consider a 20% allocation each to a mix of
U.S. stocks, international stocks, real estate, bonds and money market funds.
In broad terms, this gives us 60% in stocks, 20% in bonds and 20% in money market
securities, or cash.
For ease of calculation, we used Vanguard funds for a
low-cost model portfolio. You can create your own cowardly portfolio with funds
from different managers, if you like.
The portfolio performs brilliantly in down markets and
reasonably well in up markets. Had you invested, for example, in the Vanguard
Total Stock fund on Dec. 31, 1999 — the eve of the 2000-02 bear market — you'd
have gained about 21% through the end of November. By contrast, the Cowardly
Portfolio would have gained 86%, thanks to gains in its other holdings, particularly
real estate. The past 12 months, however, the Cowardly portfolio has trailed
the Vanguard Total Stock portfolio.
You can adjust the degree of cowardice in the portfolio
by adjusting the proportions of your total portfolio that you hold in the different
funds. You can also improve your returns by rebalancing
periodically. The best method: Rebalance the entire portfolio if one holding
rises to 30% of your holdings, or falls to 10%.
If you have a long-term outlook (20 years or more) then
you probably shouldn't build a portfolio based on short-term gloom. In the long
term, stocks will fare best. But if the question you're most worried about is,
"How much will I lose?" then consider a Cowardly Portfolio.
Water Undegrave discredits himself calling seismic shift "market freak-out".
Debt based expansion might run out of steam. The recommendation "But generally someone
your age should have roughly two-thirds of your retirement portfolio in a diversified
blend of stocks and the rest in bonds." is not suitable for the storm coming.
I doubt that 66% of stocks can be considered a defensive strategy in the current
environment but it is better then 100% for sure :-). Also
the assumption that S&P500 outperforms bonds during any 10 years period is not always
true and it will definitely be false for the last ten years if S&P500 falls to 1300
level in 2008. Of course much depends on you access to specific stock
funds but generally 100-your age dictates opposite percentage (44 stacks and 56
bonds). Pimco probably got higher return this year then S&P500. All-in-all
with cost averaging and starting from zero S&P500 is equal to the bond fund that
returns on average 6.5% a year if we are talking about the last 10 years.
Instead of panicking and dumping stock funds
in a downturn, be cool and rethink your strategy,
says
Money Magazine's Walter Updegrave.
Question: I'm 56 and have my most
of my nest egg in stock funds. But with the
stock market crashing so much lately, I've
become concerned and am considering switching out
of stocks. Do you think this is a good idea? - Sharon Bollmann
Answer: I certainly understand
your apprehension about the stock market's behavior
this year.
After reaching an all-time high in May, the
Standard & Poor's 500 stock index - which
is a better barometer for stocks overall than the
more often watched
Dow Jones Industrial Average - has undertaken
a series of white-knuckle ups and downs that's made
investing in stocks a bit like riding one of those
loop-de-loop roller coasters.
And with a seemingly unending litany of bad news
on the economic front - declining housing prices,
ongoing subprime woes, a slowing economy - you can't
help but wonder whether we're in for another stomach-churning
dive from which it may take many months to recover.
This kind of situation is unsettling for all
investors, but even more so for people like yourself
who are nearing the end of their careers. After
all, the last thing you want is to see the money
you've worked so hard for, saved so diligently and
invested so carefully get whacked with a big loss
just when you're in the home stretch to retirement.
But this isn't the
time to give in to fear. Rather, it's a time to
re-assess your investing strategy and consider what
you need to do to remain on track toward a secure
retirement.
If you're like most people in their mid 50s,
you probably have a good 10 or more years before
you can realistically think about retiring. During
that time, you've got to pull off a bit of a balancing
act.
On the one hand, you don't want to do anything
to unduly jeopardize the savings you've accumulated
in 401(k)s and other retirement accounts. But you
still need to make that money grow.
It's not as if you'll
only be investing until age 65.
After calling it a career, you'll probably spend
another 20 or more years in retirement.
Which means you still
need to bulk up the value of your nest egg so it
can generate enough income to maintain your purchasing
power until you're well into your '80s or even longer.
So even though your
gut may be telling you otherwise, you don't want
to abandon stocks. Nor do you want
to embark on what may seem like a plausible strategy
of getting out now with the idea of jumping back
in at a more opportune time in the future.
As I pointed out in a recent column, that sort
of
market timing is very difficult to do and
can easily backfire. A better strategy is to decide
on a mix of stocks and bonds that's likely to get
you the long-term growth you need, but that also
offers enough protection so that your nest egg isn't
totally scrambled should stocks take even more of
a hit.
The blend of stocks and bonds that's right for
you will depend on a number of factors, including
the size of your nest egg, the value of other resources
you have to draw on (Social
Security, a
pension,
home equity,
cash value in life insurance policies, etc.)
and how much risk you're comfortable taking.
But generally someone your age should have roughly
two-thirds of your retirement portfolio in a diversified
blend of stocks and the rest in bonds.
It's also important that you continue to contribute
to
401(k) and other retirement accounts in the
last stages of your career. That may not seem like
a very sensible thing to do when the stock prices
are falling and the economic outlook appears iffy.
But remember, the shares you buy while the
stock market is down will likely be the ones
that will have generated the biggest gains a decade
or more down the road. And the money you invest
during market setbacks could very well provide the
spending cash you'll need in your later retirement
years.
One final note. While I've tailored my answer
to people like you who are nearing the end of their
career, the fact is that a tumultuous market like
this one presents a challenge no matter where you
are in your retirement planning.
So for those of you out there who have more than
10 years before you'll call it a career, you can
get a suggested retirement portfolio blend by clicking
here, while anyone who's already retired can get
a recommend mix by clicking here.
But whatever stage of retirement you're in, remember:
no matter what the market is doing, you're always
better off setting a reasonable strategy and following
it rather than letting your gut or your emotions
lead the way.
Copyrighted, CNNMoney. All Rights Reserved.
$6000 is true for 2008 and 2009, not true for 2007 ($5000 for 2007)
November 29, 2007 | Kiplinger
Build tax-free retirement income. Contribute to a
Roth IRA while you're working. If you're 50 or older next year, you and
your spouse can each contribute up to $6,000 to Roth accounts--$5,000 in basic
contributions plus a $1,000 catch-up-as long as you meet income requirements
(in 2008, your income can't exceed $169,000 if you're married filing jointly
or $116,000 if you're single). [link to Roth stories]
November 28, 2007 | WSJ
The toughest questions. The best calculators. The coolest strategies.
And a lot more.
Starting in January, the first of an estimated 78 million baby boomers turn
62 years old and become eligible for
Social Security.
Time to reach for the aspirin.
Now in its eighth decade, Social Security is arguably more important -- and
certainly more complicated -- than ever before. Boomers, for the most part,
are on their own when it comes to planning for later life; pensions and related
safety nets are disappearing from the workplace. Thus, Social Security checks
-- the closest thing to a sure bet in most retirement budgets -- are expected
to play an ever-larger role in older Americans' financial security.
The process of getting that check, however, is sure to cause headaches for
boomers and bureaucrats alike. The
Social Security Administration's 1,300 offices nationwide already see
850,000 visitors each week and field about 68 million telephone calls a year.
Would-be retirees, meanwhile, are about to discover that many factors -- taxes,
a spouse's
earnings history, life spans -- can muddy decisions about how and when
to file for benefits.
You can, of course, keep things simple and take the plunge on your 62nd birthday.
(About half of workers do.) Even if that's your plan, you owe it to yourself
-- and your spouse -- to learn about Social Security and how to get the most
out of the system.
"Don't let Social Security just 'happen,' " says Joseph Matthews, a lawyer
in
San Francisco and author of a guide to the program. "There really are
a number of variables that people should consider before they start."
The basics are available from the Social Security Administration. (More about
that in a moment.) But to supplement your education, consider the following
-- some of the most interesting, obscure, misunderstood and surprising parts
of the 72-year-old program:
The most frequently asked question at the Social Security Administration
"How much can I earn and still receive
Social Security benefits?" Based on a survey of visits to the agency's
Web site, more people -- 315,847 in the first six months of this year -- wanted
the answer to that question than any other.
The question refers to the agency's "earnings test" and the apparent penalty
for collecting a salary and Social Security at the same time. It works this
way: If you are under your "full retirement age" (the age at which you qualify
for full benefits) when you first receive Social Security payments, and if you
have
earned income, $1 in benefits will be deducted for each $2 you earn above
the annual limit. In 2008, the limit is $13,560.
In the year you reach your full retirement age, the "penalty" shrinks: $1
in benefits is deducted for each $3 you earn above a higher limit, $36,120 in
2008. Then, starting with the month you reach your full retirement age, the
deductions end.
What most people don't realize, says Andrew Biggs, deputy commissioner for
Social Security, is that once they reach full retirement age, the agency recalculates
their future benefits to compensate for any benefits lost due to the earnings
test. For most people, Mr. Biggs adds, "the earnings test isn't a 'tax' so much
as a delay in benefits, and so they shouldn't stop working or limit their
earnings in order to avoid it."
The most frequently asked question about Social Security in
financial advisers' offices
"When should I file for benefits?" Invariably, that's the question planners
hear first.
When it comes to the answer, the conventional wisdom is changing. Where many
advisers once recommended grabbing benefits at age 62 (at which point your monthly
check is reduced permanently by as much as 25%), experts today say extended
life spans and the demise of traditional pensions argue for waiting until your
full retirement age, or later, to collect a paycheck. (You get your largest
possible benefit at 70.)
Even "foolproof" strategies are no longer looked upon as foolproof. "Let's
say your doctor tells you that you have six months to live," says Bruce Schobel,
a
New York actuary who worked in the
Social Security Administration in the 1980s. "So, it's obvious: You take
benefits at 62, right?" Maybe not. Because of
Social Security rules involving spousal benefits, Mr. Schobel says, "taking
a reduced benefit at 62 could serve as a cap on the surviving spouse's payout,
reducing that person's future benefits by tens of thousands of dollars."
"So even an apparently simple decision becomes complicated," he says.
Calculators, of course, can help. (We discuss some of the better ones below.)
But first, take a few minutes to read a new report: "Rethinking Social Security
Claiming in a
401(k) World," written by James Mahaney and Peter Carlson, retirement
specialists at
Prudential Financial Inc. It's the best discussion we've seen about filing
for benefits and possible strategies for doing so. (Note to the give-me-my-money-at-62
crowd: The authors conclude that changes in Social Security in recent years
"make the value of delaying the receipt of...benefits greater than in the past.")
The report, published in August, can be found at the Pension Research Council,
part of the Wharton School at the University of Pennsylvania. (Go to
pensionresearchcouncil.org
and click on "Working Papers" and 2007. Registration is free.)
Coolest strategies you've never heard of for claiming benefits
One way many couples can maximize
Social Security benefits over their lifetimes is for wives to claim benefits
at age 62, and for husbands to delay filing until almost 70, says Alicia Munnell,
director of the Center for Retirement Research at Boston College. (That's based
on a number of factors, including income levels, life spans and survivor benefits.)
You can find Dr. Munnell's research in the June issue of the Journal of Financial
Planning. (See
fpanet.org/journal
and click on "Past Issues and Articles.")
![[Image]](http://s.wsj.net/public/resources/images/EN-AA314C_SOCIA_20071116164442.gif)
Of course, 70 is a long time to wait for Social Security. So, here's a way
-- courtesy of Steve Potter, a retired public-affairs specialist at Social Security
-- to avoid the wait and still get a sizable benefit at age 70.
The scenario: George, at his full retirement age of 66,
expects a benefit of $2,000 a month. His wife, Martha, at her full retirement
age of 66, expects a benefit of $1,000 a month.
The strategy: Martha files for a reduced benefit on her own at age 63, or
$800 a month. George, at age 66, files for just a spousal benefit, based
on Martha's
earnings. He would get $500 a month as Martha's spouse. (Yes, Social
Security allows George to get half of what Martha was projected to receive
at her full retirement age.) Then, at age 70, George applies for benefits based
on his earnings history. With the "delayed retirement credit" (the additional
dollars one receives for waiting until age 70 to claim Social Security), George's
benefit would be 32% higher, or $2,640 a month.
Social Security would stop George's spousal benefit of $500 a month because
he's entitled to the $2,640, based on his own earnings, at age 70. Again, for
this to work, George must wait until his full retirement age or later to file
for a spousal benefit.
The nice part about this strategy is that George -- if he's trying to maximize
his and Martha's combined benefits -- doesn't have to wait three or four years
beyond his full retirement age for a paycheck; he can start collecting benefits
at 66 based on Martha's earnings history -- and jump to a considerably bigger
benefit at age 70. As far as the "break-even" point goes -- the age at which
the accumulated value of benefits from this strategy will start to exceed the
accumulated value from both spouses filing for full benefits at age 66 -- it's
79. Beyond that age, the 63-66 strategy yields a larger
total return. (This example assumes George and Martha are the same age.)
Note: Some Social Security representatives we spoke with weren't aware of
this strategy. If you try this at your local
Social Security office -- and if the staff balks -- ask them to confirm
the strategy with Social Security headquarters in
Baltimore, which confirmed it for us.
>
Best calculators and sources of information
Start with the
Social Security Administration and its Web site,
ssa.gov.
The calculators alone are worth the visit. Three benefits calculators --
"Quick," "Online" and "Detailed" -- estimate payouts using different retirement
dates and levels of future
earnings. (Click on "Calculate your benefits" on the home page.)
In addition, an "Earnings Limit" calculator illustrates how a salary -- if
you file for benefits before full retirement age and are still working -- might
affect your monthly check from Uncle Sam. A "Retirement Age" calculator shows
how retiring early reduces your monthly payout (as a wage earner or spouse).
And a "Break-Even" calculator shows the age at which the accumulated value of
higher benefits -- for a person who claims
Social Security, say, at age 66 -- will start to exceed the accumulated
value of lower benefits for a person who opts for Social Security, say, at age
62.
The site also provides extensive lists of frequently asked questions in 24
categories; offers access to dozens of forms and publications; and, perhaps
most important, allows you to perform a number of tasks online -- including
filing for benefits (and, thus, avoiding a trip to the
Social Security office). In all, a very valuable tool.
Another useful resource is
analyzenow.com, a Web
site devoted to retirement issues. Started by Henry K. "Bud" Hebeler, a retired
aerospace executive and author of two books about retirement planning, analyzenow
features a number of helpful articles about Social Security and two calculators
that can help users determine the best age to file for benefits.
Two other online resources: The National Committee to
Protect Social Security and
Medicare, a
Washington advocacy group, has a spot on its Web site called "Ask Mary
Jane" (www.ncpssm.org/maryjane).
There, you can email a question to Mary Jane Yarrington, a congressional caseworker
who joined the group in 1986 as a senior policy analyst. (Before you write,
check the archives for earlier questions and answers.)
Second, Stanley A. Tomkiel
III, a New York lawyer, is the author of the "Social
Security Benefits Handbook" -- the contents of which are available free
at
socialsecuritybenefitshandbook.com.
Finally, if you prefer print, Mr. Matthews, the San Francisco lawyer, is
co-author of "Social Security, Medicare and Government Pensions," one of the
best general guides to the program.
Biggest myth -- and most misused words
The biggest myth is that Social Security will go "broke" or "bankrupt" in
coming decades.
The
Social Security Administration, in its
annual report to Congress this year, identified three important dates
regarding the health of the program. First, starting in 2017, the agency will
begin paying out more in benefits than it collects in
revenue. Second, in 2027, Social Security will have to tap the principal
in its "trust fund" (its
savings account, if you will) to meet its monthly obligations. (The trust
fund itself is a flash point in debates about the health of the program. Some
observers, including
President Bush, say the fund, which lends excess revenue to the federal
government and receives special-issue bonds in exchange, is simply a box full
of IOUs. But it's a safe bet that when Social Security needs to draw on the
trust fund, future Congresses and presidents will make sure the Treasury doesn't
default on those bonds.)
Finally, in 2041, the trust fund will be exhausted, at which point the agency
will be able to pay only about 75% of promised benefits.
It's certainly not a pretty picture. But at no point will Social Security
collapse. Uncle Sam, it's safe to assume, will continue to collect taxes in
2041 and beyond. Part of that revenue will go to Social Security, which will
continue to write checks. Again, starting in 2041 (as things stand now) beneficiaries
will wind up with payouts worth 25% less than current rules call for. And that's
grim.
But broke? Bankrupt? No.
Best source of information on how to
fix Social Security
Earlier this year, the Center for Retirement Research at Boston College published
"The Social Security Fix-It Book." The cover of the 52-page booklet describes
it as "everything the earnest but over-burdened citizen needs to know. Cheerfully
narrated and handsomely presented."
That quirky beginning belies what follows: the single best guide we've seen
that explains why Social Security is in the mess it's in -- and the leading
proposals for restoring it to health. You can download a copy free at
crr.bc.edu. Keep it handy when presidential candidates hold forth
on their plans to fix Social Security.
Most arcane, but important, debating points
Speaking of presidential politics, the following issues could well figure
in the fine print of any "solutions" involving Social Security. Depending on
a candidate's stance on these issues, his or her particular solution could end
up sounding very painful -- or just painful. Try dropping these nuggets into
the conversation at your next dinner party:
Time Horizons: Some policy makers argue that we should look
ahead 75 years when estimating the shortfall in Social Security's finances --
in which case, about $4.7 trillion is needed to close the gap. Others argue
for adopting an "infinite horizon" -- in which case about $13.6 trillion is
needed. (A trillion here, a trillion there...)
Changing Work Force: Some evidence suggests that older workers
are remaining in, or rejoining, the work force in greater numbers. If so, and
if the trend continues, it could ease (somewhat) the coming strains on Social
Security. But there's no telling what baby boomers actually will do in retirement.
Buying Power: Annual cost-of-living adjustments in Social
Security are based on the CPI-W, the
consumer price index for urban wage earners and clerical workers. But
groups including the Senior Citizens League argue that adjustments should be
tied to CPI-E, an experimental index for the elderly started in the 1980s. This
index tracks expenditures among individuals age 62 and older and better reflects
(theoretically) this group's higher spending on health care and other goods
and services.
Biggest misunderstanding
The biggest misunderstanding is that your particular tax dollars are being
set aside for you at Social Security.
Social Security is not, and never has been, a
savings account. " 'Your' money is not in 'your' account," says Dennis
Oliver, a retired
Social Security Administration manager who now works as a Social Security
consultant in
Cookeville, Tenn. Rather, Social Security is largely a pay-as-you-go
system, in which your tax dollars are used to pay current benefits. (Since the
mid-1980s, Social Security has been running annual surpluses that have gone
into the trust fund.)
Consider Ida May Fuller, who received the very first monthly Social Security
check in January 1940. She was 65 at the time. Ms. Fuller worked for three years
under Social Security before retiring, and the taxes on her salary totaled $22.54.
By the time she died in 1975 at age 100, she had collected $22,888.92 in
Social Security benefits.
Biggest surprises
In 1983, Congress raised the age at which people qualify for full Social
Security benefits. Once pegged to age 65, the threshold is increasing gradually
until it hits 67 for workers born in or after 1960.
The problem: According to a survey earlier this year by the Employee Benefit
Research Institute, 30% of all workers think -- incorrectly -- that they will
be eligible for unreduced benefits at age 65. Worse, 21% think they will be
eligible for unreduced benefits before age 65.
Separately, for all the discussion about claiming benefits at age 62 or at
full retirement age, the decision isn't an either-or proposition. You can take
benefits at any point -- any day, month or year -- after 62. The longer you
wait, of course, the smaller the reduction in your benefits.
If your full retirement age is 66, and if you file for benefits at 62, your
monthly check will be reduced about 25% from your full benefit; file at 63,
the reduction is about 20%; file at 64, the reduction is about 13.3%; file at
65, and the reduction is about 6.7%.
Best day of the year to visit a
Social Security office
The Friday after
Thanksgiving. Yes, the agency's local offices are open on that day --
and are usually very quiet.
--Mr. Ruffenach is a reporter and editor for The Wall Street Journal in
Atlanta and the editor of Encore.
Clients often come to me with this same question, and I can't answer it without
knowing how much they are spending. Some clients making $100,000 per year are
only spending $50,000, while others are earning $110,000 and getting further
in
debt.
So you should really ask, What percent of my current annual expenditures
should I expect to spend in retirement?
The best place to start is determining how much you are spending in pre-retirement.
If you're not doing advanced tracking with a software program, then at least
have a look at your
checking account.
Your current annual expenditures amount to all your income (take-home pay,
dividends, etc...) less what you put into savings.
Then you should think about what adjustments you'll make in retirement. Here
are just a few life changes that might dramatically reduce expenditures:
Housing: Did you just pay off the
mortgage or are you going to downsize the house? The savings could really
add up here.
Education Expenses: Are you paying college for the kids
and is this an expense that's about to go away?
Auto expenses: Kiss that long commute goodbye, not to mention
the bundle you'll save in fuel and maintenance.
Clothes: Maybe you have no more expensive suits to buy and
clean frequently.Unfortunately, retirement can bring about changes that increase
our expenditures as well. All of that new found time away from the office also
brings additional opportunities to spend money.
Travel: I've found many retirees traveling across the country
and the world. In some cases, their pre-retirement expenditures can actually
double.
Entertainment: Now we've got more time to golf or whatever
we enjoy. If what we enjoy costs money, we need to add it to our budget.
Healthcare: Maybe you're lucky and have an employer that
pays healthcare insurance. For the rest of us, we need to take into account
insurance premiums, Medicare supplemental plans, out of pocket costs and the
like. And these costs are going up much faster than general
inflation. Make sure you factor this in to the retirement budget.
There are also some good tools out there to use in this process, such as
the AOL Money and Finance Retirement Estimator. They can give you a better idea
of what your retirement expenses might be.
After I go over this with clients, I typically see that they are spending
just as much after retirement as before. That's just fine as long as you've
built up the portfolio to support it.
There are times I'll show a client that their portfolio is not adequate to
support their desired retirement expenditures. The response I often get is that
they won't continue to spend at this level as they get older. This assumption
can be risky since we often find other things to spend money on later in life.
My advice is to figure out what you think you will spend in retirement based
on your specific needs and desires. Once you have this amount, add 10 percent
to it, because we always seem to have these unexpected expenses that come up.
I take a very conservative stance in this area with my clients. I tell them
I'd much rather have them come to me in 10 years and say they wish they had
spent more, than have them tell me they are out of money and ask what they do
now.
Ask Money Magazine's undercover
financial planner a question. Send e-mails to:
themole@moneymail.com.
Copyrighted, CNNMoney. All Rights Reserved.
It reminds me of the index funds. You're buying 500 companies in the S&P
500 and whether there's an Enron in there or whatever, you're holding it until
you're forced to sell or S&P has finally decided to eliminate it from the index.
...More turbulence, in other words, is a distinct possibility. And, collectively,
investors are heading into this uncertain period with highly aggressive portfolios.
Employees in 401(k) plans recently held nearly 70
percent of their accounts in stocks, marking their biggest bet on
equities since July 2001, according to Hewitt Associates. And, many of those
portfolios have gravitated toward some of the riskiest types of stocks.
SmartMoney.com
The average account balance for a person in their
60s who makes between $80,000 and $100,000 a year is just $230,000, according
to Hewitt. One unexpected event and that nest egg could be wiped
out.
Vanguard LifeStrategy Income (NASDAQ:VASIX
- News)
This is a fund of funds that keeps most of its money in fixed-income portfolios:
Vanguard Total Bond Market (NASDAQ:VBMFX
- News) and Vanguard Short-Term
Investment-Grade (NASDAQ:VFSTX
- News).
But its equity stake can vary from 5% to 30% depending
on the asset-allocation calls of Tom Loeb and his team at Vanguard
Asset Allocation (NASDAQ:VAAPX
- News), which gets 25% of
assets here (Vanguard Total Stock Market Index (NASDAQ:VTSMX
- News) accounts for the
rest of stock holdings).
Loeb uses quantitative models to figure out how much of his portfolio to devote
to S&P 500 stocks and the Lehman Brothers Long-Term Treasury Index, and
his calls have been consistent and accurate over the years. (Currently
Loeb's fund has about three fourths of its assets in stocks, so this fund's
equity allocation hangs around 20%.)
That give this conservative fund a little upside potential, but it's really
designed to preserve capital and generate income. The fund's bear market rank
is better than 97% of its conservative-allocation category peers and in the
third quarter through Aug. 28 it eked out a small gain that put it ahead of
96% of its peer group.
Investors who are further away from their goals or who are more risk tolerant
can check out Vanguard LifeStrategy Conservative Growth (NASDAQ:VSCGX
- News) and Vanguard LifeStrategy
Moderate Growth (NASDAQ:VSMGX
- News), which devote more
money to equity funds and have done well in bear markets relative to their peers.
Vanguard Wellesley Income (NASDAQ:VWINX
- News)
A colleague of mine recently told me that this portfolio, which keeps most of
its money in bonds, was the first fund she ever bought. My first reaction was
to say that it seemed awfully conservative for someone whose retirement was
still decades off. She retorted that she was looking for a one-stop fund that
wouldn't burn an inexperienced investor. Since then she has built a more age-appropriate
asset-allocation plan around this fund, but she has never regretted her first
purchase because the fund has been so reliable. It has lost money in just three
of the last 20 years, has done better than 97% of its peers in bear markets,
and has succeeded in delivering a steady stream of income with a portfolio of
undervalued, high-yielding stocks and high-quality (mostly corporate) bonds.
That the fund has held up well (better than nearly 90% of its conservative-allocation
peers for the third quarter through Aug. 28) in the middle of a credit crunch
with such a large corporate bond stake is testimony to the security-selection
skills of long-time fixed-income manager Earl McEvoy and his team from Wellington
Management. Wellington's John Ryan on the equity side is no slouch either. He's
leaving the fund next year but has a seasoned understudy lined up in Michael
Reckmeyer III. My colleague argues that there are worse newbie-investor mistakes
than buying this fund, and I'd have to agree.
Vanguard Short-Term Tax-Exempt (NASDAQ:VWSTX
- News)
This fund is cautious and consistent. Longtime manager Pam Wisehaupt-Tynan keeps
the portfolio's duration, a measure of interest-rate sensitivity, low and its
credit quality high. Low expenses allow the fund's conservative approach to
work in its favor over time. Put too much of your portfolio here and you could
run the risk of not keeping up with inflation or not seeing enough appreciation
to meet your goals, but it can take the edge off a taxable portfolio. It's done
better than 96% of its peers in bear markets and outpaced almost 80% of them
in the current quarter through Aug. 28.
Vanguard Balanced Index (NASDAQ:VBINX
- News)
Once again, simplicity and low costs work in a Vanguard fund's favor. A mix
of 60% MSCI U.S. Broad Market Index (essentially Vanguard Total Stock Market
Index ) and 40% Lehman Aggregate Bond Index has produced reliable absolute returns.
It's done better than 86% of its peers in bear markets and has bested about
four fifths of them so far in the third quarter. The fund's correlation with
the overall market is higher, but it's still a solid core holding.
Vanguard Wellington (NASDAQ:VWELX
- News)
This is another old stalwart managed by the redoubtable Wellington Management.
In June, my colleague Chris Davis highlighted this one of Morningstar's favorite
"sleep-at-night funds", or offerings that don't keep you awake at night wondering
what they are doing. Since then the fund has acquitted itself relatively well.
It posted a 1.9% loss for the third quarter through Aug. 28, but that was still
better than 82% of its moderate-allocation peers. Its long-term bear market
rank also is still better than 86% of its rivals. And like its sibling Wellesley
Income it has delivered consistent absolute results, losing money in just three
of the last 20 calendar years.
Read more about Vanguard funds in our Vanguard Fund Family Report.
To view a risk-free trial issue, click here.
Dan Culloton does not own shares in any of the securities mentioned above.
Sep 10, 2007 | MarketWatch
SAN FRANCISCO (MarketWatch) -- In the past several years, retirement plans
have been busy adding mutual funds and expanding investment options. But more
isn't always better.
"There are still very few 401(k) plans with a lot of investment options we'd
enthusiastically recommend," said Paul Merriman, of Merriman Capital Management,
a registered investment adviser in Seattle.
So what if your defined-contribution plan at work features a lineup of mutual
funds that seems lackluster
"I've never run across a 401(k) plan so bad that I would discourage someone
from using it completely," said Raymond Benton, a longtime Denver-based adviser.
"You should at least be able to find one fund to invest in."
And that's important, as Merriman says, because "you want to take advantage
of any matching contributions by your employer."
So rather than compound the problem by making lousy choices within a lousy
401(k) plan, you can make the best of your situation. Here are five suggestions:
1. Use a target-date or life-cycle fund only
Within 401(k) plans, many advisers suggest target-date retirement or life-cycle
funds. These include stocks and bonds, both international and U.S. Target-date
funds fine-tune portfolio allocations along preset timelines. As you get
closer to retirement, they'll gradually reduce stock exposure in favor of
bonds.
Life-cycle funds are a bit different. An example is Vanguard LifeStrategy
Growth Fund (VASGX
) . An investment board sets allocations between stocks
and bonds with more aggressive investors in mind. Sister funds are offered
aimed at more conservative investors.
"Life-cycle funds stick with more static allocations depending on risk tolerance
and investment time horizons," said Valerie Antonioli, another Denver-based
adviser. "You've got to actually move out of one fund and into another if
you become more conservative or aggressive."
Both types of funds might be best-suited for investors with smaller accounts,
she added. "They generally offer fairly basic choices in terms of diversifying
a portfolio," Antonioli said.
By automatically leaving allocation and asset class choices up to fund companies,
you're also sacrificing an ability to make tweaks as your circumstances
change.
Of course, that might not be such a limitation, given that investors tend
to make the wrong moves at just the wrong time, says Antonioli.
"For people with more saved up in their 401 (k) accounts, target-date or
life-cycle funds alone probably aren't going to be optimal," she said. "But
these types of funds are better options than just putting everything in
something like a large-cap value fund or a real estate fund. They're a good
place to start."
The popularity of such options means that in all likelihood, some form of
one-stop shopping is in your plan. At least 50% of all defined-contribution
plans now have either target-date retirement or life-cycle funds, according
to the Profit Sharing/401(k) Council of America.
2. Use a balanced fund
The odds improve if your plan has a more traditional umbrella fund. Such
so-called balanced funds include stellar long-term performers like Dodge
& Cox Balanced Fund
(DODBX
) and American Funds Income Fund of America
(AMECX
) .
"Balanced funds of some sort are in almost all plans today," said David
Wray, the profit sharing council's president.
But they usually offer less diversification than most target-date and life-cycle
funds, says Patrick Geddes, chief investment officer at Aperio Group in
Sausalito, Calif.
3. Stick to the index funds
Aperio, which develops and runs portfolios for advisers around the country,
suggests that investors consider creating their own simple portfolios using
low-cost index mutual funds.
Stock index funds found in some 401(k) plans include Fidelity Spartan Total
Market Index Fund
![]() FSTMX)
and Vanguard Total International Stock Fund Index
(VGTSX
) .
"You can really build a good, long-term oriented and well-diversified
portfolio with three basic index funds," Geddes said. "One should
cover a broad range of top U.S. stocks, the other provide exposure to foreign
stocks and a third to bonds."
The same tack can be applied to actively managed funds. Although managers
can shift into different corners of the market when cycles change, they're
also typically much more expensive than index funds. Actively managed funds
are also less transparent than index funds, says adviser Merriman.
4. Get help with your picks
While your own company or plan provider isn't the best place to turn for
advice since they are the ones that saddled you with the poor options in
the first place, there are outside sources of aid.
For example, Merriman's Web site, FundAdvice.com, contains a 401(k) help
section that reviews more than 80 different corporate retirement plans,
including U.S. government options. Some of the private companies listed
include Microsoft Corp.
(MSFT
Microsoft Corporation.
There is also a money-market option that figures into the mix of the
moderate and conservative portfolios.
The site notes that the plan covers U.S. large-cap and small-cap growth
stocks. But it also says that value offerings are light in small-caps, both
internationally and domestically. The plan also lacks a dedicated emerging
markets fund, point out the analysts. "It's rare we see a perfect plan,"
said Mark Metcalf, an adviser at the firm. "But most 401(k) plans have at
least one good role player you can use as part of a larger diversified portfolio."
Focus on an overall allocation plan and build from there, Metcalf adds.
"Look for strong support players instead of a lineup of home-run hitters,"
he said.
5. Work all your accounts into the mix
And don't forget to include Individual Retirement Accounts and possibly
a separate taxable account into the mix, says Bryan Lee, a Plano, Texas-based
adviser.
"People have a tendency to focus on their 401(k) plans," he said. "But they
can also take advantage of other types of accounts like IRAs." Says Metcalf:
"Pick and choose from the best in each asset class across all of your different
accounts, from IRAs to 401(k) plans." That way, he adds, even if your 401(k)
leaves something to be desired your overall portfolio will still be solid.
Murray Coleman is a reporter for MarketWatch in San
Francisco
Yahoo! Personal Finance You're not a kid. Stop investing like one by Dan Kadlec
You're not a kid. Stop investing like one
September 6, Money Magazine
How do you know when you've crossed the invisible line and you're not young
anymore? Maybe it's the first time you look at Billboard's top 20 list and don't
recognize a single name. Or when your kids start staying out later at night
than you can keep your eyes open.
Or maybe it hits you when you realize that if the stock market falls 30 percent,
as it does from time to time, you'll lose the equivalent of a year's pay, not
a week's, and you don't want to have to work forever to make the money back.
In the last case at least, there's a silver lining. It means you've managed
to put away a substantial sum, reaping the benefits of 30 or so years of steady
saving and compounding returns.
But that's a once-in-a-lifetime deal. You will never get those 30 years back.
If you're a boomer, in other words, the math has started to work against you:
Whether you're 49 or 56 or 60, odds are you have more to lose than ever and
less time than ever to recover if something goes wrong.
So your age demands that you become more risk-averse. And with the market
coming off record highs, the housing market taking forever to find a bottom
and a host of other troubling financial signals, you've got reason to worry
about stock prices tumbling.
Yet with many good years still in front of you, getting out of the market
isn't an option either. You need your savings to keep growing to outpace inflation
and reach your goals.
How are you supposed to do all of these contradictory things at once?
Get some perspective
Although it may not feel like it, you probably have time to ride out a decline.
Consider the bear market that started in 2000, one of the worst ever. Standard
& Poor's 500 dropped 49% over nearly three years, and the index took more than
seven years to fully recover.
Do you have seven years before you'll start drawing down your savings? Plus,
you're not going to withdraw the whole shebang on Day One but rather over 20
to 30 years or more.
Keep this in mind too: Drops of that magnitude occur only about every 30
years. Declines of 20% to 30% are more typical, and on average the S&P 500 gets
back to even 3.5 years after a pullback begins, says Sam Stovall, chief investment
strategist at S&P.
In every market drop of less than 15% since 1970 (there have been many),
the index has fully recovered within a year.
Do a gut check
That doesn't mean you shouldn't take action to minimize your losses in a
pullback, especially if you reach for the Tums every time you listen to the
financial news.
"If you're worrying because you can't accept a market drop, now - before
there's another big one - is a great time to adjust your asset allocation,"
says Steven Sheldon, president of SMS Capital Management in Houston.
To assess your age-appropriate tolerance for risk, ask a few simple questions.
How much longer do I want to work? Has my health declined? Do I have any large
expenses fast approaching, like college tuition or elder care for a parent?
These will give you an idea of how much money you'll need fairly soon and
how securely it should be tucked away.
Pick an asset mix that suits you - the sooner you need the money, the less
you should hold in stocks - then rebalance once a year to maintain that blend.
For help, check out the Asset Allocator tool. A conservative recommended
mix for someone who doesn't need current income and will retire in about 10
years: 40% large stocks, 15% small stocks, 15% foreign stocks, 25% bonds and
5% cash.
Minimize the downside
You want to spread your money among the broad asset classes of stocks, bonds
and cash, obviously, but you should also diversify within them. Your stocks
or stock funds, for instance, should include foreign shares and a mix of small,
medium and large companies, especially big companies that pay a dividend and
have consistently grown earnings.
Your bonds should be Treasuries and high-grade corporates. An inflation hedge
like gold or Treasury Inflation-Protected Securities (TIPS) wouldn't hurt either.
How effective is broad diversification? Consider the Vanguard Wellington
fund, which takes such an approach. In the last bear market - one of the worst
ever - this fund actually rose 2.4%. It has lagged the S&P 500 since then but
by only a small amount.
Then too, in the seven or so years that the large-cap S&P 500 was falling
and clawing back to even, foreign stocks rose 30%, small stocks doubled and
real estate investment trusts more than doubled.
The amazing truth: Folks who had properly spread their bets back in 2000
didn't feel much of a pinch at all.
Don't sell after prices fall
When today's bull market finally ends - and it will - don't give in to temptation
and sell. It's not easy to stand firm. But selling after a drop almost always
backfires.
In fact, if your nerves can stand it, buy more shares while prices are down.
Although making a big bet on a market bottom is reckless, a regimen of investing
the same dollar amount every paycheck, month or quarter lets you actually benefit
from dips, corrections and bear markets.
This discipline can't work quick magic on large losses, but it virtually
guarantees that you'll bounce back faster. So instead of worrying about the
next bear market, get ready for it and sleep well - at least until the kids
get home and wake you.
"... limit it [your company stock --NNB] to ~10
percent of your portfolio."
Under a law passed last year, you can even sell shares that your employer
contributed to your account, as long as you've been there for three years.
Being too conservative
Plowing too much money into low-risk choices like stable value, bond and
money funds may seem safe since it protects your 401(k) from market setbacks.
But it's dangerous in the long run because your savings won't grow enough
to provide you with an adequate income in retirement.
A better approach: Create a blend of stocks and
bonds that provides a cushion against price drops but also gives you a shot
at the gains you'll need to amass a sizable nest egg.
For help setting the appropriate mix for your age, check our Asset
Allocator tool.
Doin' the smorgasbord thing
In an attempt to diversify, some people spread their money evenly across
all the options on their 401(k) menu.
That doesn't produce a well-rounded portfolio any more than scarfing every
item at a buffet assures a balanced meal. You might wind up with too big a helping
of growth or bonds, depending on your plan's options.
What to do? First plug your choices into the Instant X-Ray tool at morningstar.com
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