Asset Allocation

You Own Too Much Company Stock

September 11th, 2007  |  Published in Asset Allocation  |  1 Comment

Okay, perhaps not you personally but in a recent study by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) it was shown that the average employee has approximately 11% of their portfolio in the stock of their employer. This is a fall from 19% back in 1996 but it’s still waaaaay too much to have in any one company, let alone the one that also sends you a paycheck each pay period.

This also doesn’t take into account the fact that plenty of employer 401k programs don’t even offer company stock. For example, my company doesn’t have company stock and so I can’t invest any of my 401k in it; this means that there are lots of folks investing way more than 11% in their own company. The average of those who actually can invest in company stock have 18% to 21% invested. If 11% is way too much, 18% to 21% is certainly way too much.

Don’t put all of your eggs in one basket.

Adjusting Retirement Assets In A Bad Market

August 28th, 2007  |  Published in Asset Allocation  |  Comments Off on Adjusting Retirement Assets In A Bad Market

My retirement is broken up into four accounts, the first is a SEP-IRA, the second is a Roth IRA, the third is a Rollover IRA (traditional IRA whose originated funds came from a former 401k), and a 401k. Within the four, I’m basically in a mix of mutual funds with the exception of the Roth IRA, which is half in a Target Retirement and half in individual stocks for me to play with. So, given the turbulent market and the fears of the subprime meltdown, and the after effects, do you know what I’ll be doing with my asset allocation?

Nothing. Yep, I’m doing nothing. This is the from the guy who liquidated his Target Retirement 2050 position a few weeks ago because of how the market looked. I still stand by that decision and I conceded that I sold the 2050 because I didn’t have a good plan and, when I figured out the plan, I realized I shouldn’t have been in 2050 in the first place.

So why the apparent reversal? It’s not truly a reversal, I have a clear cut plan with my retirement assets, in part because of legal mandates, and in the long term stocks will recover whatever minor blips there could possibly be, which this will be. Even if you think the financial markets will recess, as you must have expected after the dot-com bubble, they will eventually correct themselves and in the long term you will be perfectly okay.

Play It Safe With Investments As You Age

August 16th, 2007  |  Published in Asset Allocation  |  Comments Off on Play It Safe With Investments As You Age

The recent stock market peaks and valleys have probably given your heart a bit of workout lately huh? This is probably especially true, the heart workout part that is, if you’re close to retirement and underscores the reason why you should try to shift your investments to less volatile vehicles as you get closer to when you’ll start needing the money. If the volatility is worrying you and you’re about the retire, use it as a wake-up call that you should adjust your allocations.

Are you concerned you’re going to get too conservative? There’s some great actionable advice from CFP Steven Kaye. First, consider your risk tolerance and then use that to figure out how much of your retirement fund you’ll want in equity (stocks) and how much you’ll want in income producing vehicles. Here is what you should do based on your risk profile:

For his clients with an aggressive risk tolerance, he makes sure they have five years’ worth of cash flow in fixed income. For clients with a moderate risk tolerance, he sets aside eight years’ worth. And for the conservative, he makes it 10, more if they’re ultra-conservative.

Don’t Worry About Geopolitical Events

April 6th, 2007  |  Published in Asset Allocation  |  2 Comments

I’ve been reading Ask Carrie, a blog over at Charles Schwab, and there was a recent post that caught my eye where a reader was concerned about geopolitical events such as the continued Iraq war, Iran troubles, and North Korean issues; and how they could adjust their portfolio or adjust their retirement planning to help mitigate these risks.

In short, Carrier recommends that you do nothing if you are already following a prudent investing strategy of diversification and risk mitigation in the first place. If you look towards history and see what has happened in the past and how the markets have responded, you’ll see that “The value of the financial assets goes up, dips in response to destabilizing events, and then continues to rise.”

There’s no sense in worrying about the things you can’t control such as what’s going to happen with Iran because you can’t control them. Just try to control the things you can such as a saving a proper amount, diversifying your assets, and being smart with your money – those things will get you farther than tweaking your investments in response to those macroeconomic issues.

Your House: Not A Retirement Asset

March 13th, 2007  |  Published in Asset Allocation  |  1 Comment

I was surprised to read in a recent article from the Motley Fool that the the actual appreciation rate of residential real estate over a long period of time, in their study they looked at two time periods, barely beat Treasury bonds in one case and lost to T-bills in the second case. In the period from 1963 to 2005, residential real estate returned 1.73% (inflation adjusted) compared to Treasury bills returning 1.44% over that period, stocks returned 5.84% and bonds returned 3.18% over that same period. They also looked at any ten year period over that time and saw that appreciation reach 1.62% compared to 6.47% from stocks.

Read the article if you’re a numbers type of person but the article really does illustrate something most of us probably wouldn’t have thought of on our own, that residential real estate was out performed by bonds and barely beat Treasury bills (it’s almost a given that stocks outperform real estate).

So, what does that mean for your retirement? If you don’t have a 401K or any other retirement assets and were hoping to lean on the appreciation of your house, that may not be the best strategy because you would do better to take that money and put it in an index fund.

Source: Yahoo Finance

Money Markets Are Dangerous!

February 28th, 2007  |  Published in Asset Allocation  |  2 Comments

Many people have believed that cash, as an investment, is safe but it isn’t and it’s the subject of Walter Updegrave’s latest column in which he explains why cash (“invested” in traditionally safe vehicles) is risky. While Updegrave focuses on the opportunity cost aspect of it, how the money can be earning higher returns elsewhere, such as in a 401K; I think that doesn’t do as well of job explaining the entire story – there are a couple reasons why cash is risky.

Exchange Rates
The value of a dollar, on the international markets, fluctuates every single business day and lately, it’s been at record lows compared to other currencies. You may know that all the money that hold, those are dollars and as each day passes there is a risk that your dollar is going to be worth less and less (or more and more) each day depending on the demand in the world markets. Usually this won’t affect you since everyone around you accepts dollars, so you won’t need to exchange them, but as anyone who does a fair bit of traveling knows, exchange rates can mean the difference between cheap and expensive vacations. So, when you keep your money in a money market, and perhaps too much of it, you’re not diversifying on the basis of country risk – which is risky.

Inflation
By now everyone is familiar with inflation, it’s like an exchange rate but for time. As time passes, your dollars are worth less and less. A hundred bucks in 1970 is worth $521.69 today (2007)… a hundred bucks in 1913 is worth a cool $2,044.61 today! Unless you invested correctly (i.e. earned a rate of return higher than inflation), your $100 in 1913 would be worth only $100 today.

Invest Aggressively While Young

February 21st, 2007  |  Published in Asset Allocation  |  1 Comment

Do you know why the experts recommend that young investors should be aggressive while older investors should be more conservative? It comes down to the fact that in the long run the stock market, and investments in general, appreciate but in the short run they can be entirely random and extremely volatile, so if you can stick out the roller coaster, because you have more years to wait, then you can take the volatility and perhaps take advantage of the higher growth rates.

Take for example a hot new technology or biotech company. In a single day you can see double digit gains or losses, over a week can you see it double or half its value, but if you are willing to wait a year, two years, ten years; you can potentially see higher growth rates than if you invested in a blue chip technology company like Microsoft. If you are older, you have a shorter amount of time to “wait” for a hot company to come back from a big loss and so you’re less willing to accept the risk involved with huge short term gains. If you’re young, you can risk that because if you are chasing a big spike but instead see a big drop, you can just wait for the stock to recover (hopefully it recovers). See the logic?

So, that’s why they recommend that you take your age minus 120 for your percentage in stock, the rest in bonds, because stocks are seen as riskier and bonds are seen as safer. If you’re young, swing for the fences. If you’re a little older, bat for average and keep on playing. 🙂

Don’t Invest In Your Employer

February 19th, 2007  |  Published in Asset Allocation  |  1 Comment

If you have a choice, as many people do, of where to put your retirement assets, I recommend not investing it at all with your employer. Other places may recommend that you don’t put all of your retirement eggs in your employer’s basket, but I go one step further and say that you shouldn’t put any of your money with your employer. Why? I’ll get into that after we go over why the typical investment allocation advice.

Why Not All In One?
Sure, you’ve seen the numbers of how rich someone would’ve been if they invested $1,000 in Microsoft when it went public, so why not put your faith with an investment you have some control in, since you work there, and slam all your assets into your company’s stock? You can give yourself incentive and you can give yourself a good reason to work hard right? Yes, you would! Except that’s a terrible idea from an investment perspective because you never put all your eggs in one basket, that’s why the adage exists. For every one guy who bet it all on black, there are thousands that put it on red and lost it all.

Okay, not full tilt, but why not a little investment in my company?
The reason is because you’re working for them and that’s enough risk already. Let’s say things go well and you don’t invest with your company, you still have your job, which is paying you, and you still have your investments in something else, which may not appreciate as well as your company did but probably performed admirably. Let’s say you get fired and it’s because the future of your company looks bleak. Now, not only do you not have a paycheck, your investments have gone down. Just as there are plenty of fish in the sea, there are plenty of investments in the market and you can pick one you don’t have such a tightly coupled interest in.

Why You Should Rebalance Your Portfolio

January 31st, 2007  |  Published in Asset Allocation, Investing  |  2 Comments

What is rebalancing? Rebalancing is when you re-assess your investment portfolio and adjust your holdings such that you return to the percentage allocations you planned for when you started the year. So, if you started the year 80% stocks, 20% bonds and, through the course of gains and losses, you find yourself at 75% stocks and 25% bonds at the end of the year – you should rebalance it by selling off some of your bonds and moving it into stocks. Rebalancing your portfolio is a crucial component of your retirement investing strategy for many reasons – not the least of which is the fact that you should stick to your plan and not let the latest hot run-up distract you.

1. Buy Low, Sell High

This is the cornerstone of rebalancing. If at the end of the year you have a higher percentage than you initially planned, then one can only surmise that it increased in value relative to the other holdings you have. Thus, it is now high and so you should sell it. The proceeds from that investment should go towards the allocation that has fallen during the course of the year – thus you are buying low. Buy low, sell high. You’ve been hearing it for years!

2. Stick To Your Plan
After you decided 80% stocks and 20% bonds should be your mix, you need to stick to your plan unless you have a good, unemotional reason not to continue on that path. Maybe you recognize the absence of international exposure, so you want 50% stocks, 20% bonds, and 30% international. Maybe you recognize an overallocation into stocks and want to ratchet it back to 60% stocks and 40% bonds. Unless you have a concrete reason for changing, you should rebalance and follow the plan of attack you set up for yourself twelve months ago.

3. It Makes Mathematical Sense
The math behind it is irrefutable and it does in part have to do with Reason 1: Buy Low, Sell High. For a the math explanation, please read Why Portfolio Rebalancing Works ? It?s More Powerful than You Probably Think.

So go rebalance!