Posts tagged with: Retirement

Most 401(k) plans contain a variety of fund choices, so it can be hard to decide which ones to put your money into.  In this episode, I explain the best way to evaluate funds, separating the winners from the losers.  I also give my recommended asset allocations for the remainder of 2017, based on where we stand as of May.

 

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Section 1: Stock Funds

  • Domestic vs. international
  • Market cap (small/mid, or large)
  • Growth vs. value
  • Active vs. passive
  • Expense ratios

Section 2: Bond Funds & Fixed Income

  • Treasury bond funds
  • Corporate bond funds
  • Mixed bond funds
  • Bond fund duration: long-term, intermediate-term, short-term
  • Active vs. passive
  • Stable value funds
  • Money market funds

Section 3: Target Date Funds

  • How they work
  • Dangerously simple, and simply dangerous

Section 4: Alternative Funds

  • Commodities
  • Real estate
  • “Real value” funds
  • Should you invest in these?  When?

Section 5: My Target Long-Term Asset Allocation



Resources

401(k) statistics from the ICI

 

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Newsflash: If a financial advisor or fund manager brags to you about “beating the market”, it’s NOT what you want to be hearing right now!  In this episode, I debunk the popular myth that you should be trying to “beat the market” when times are good.  I also lay out the questions you must ask instead when evaluating a mutual fund or investment manager.  Don’t get caught chasing high-beta strategies after one of the longest bull markets in history has already unfolded.  Investing and trading are contests of endurance, not of raw speed.

 

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Section 1: Today’s Market in Historical Context

  • There are bull markets, bear markets, and range-bound markets
  • Long-term chart of the S&P 500


Section 2: The Unpleasant Truth: How Mutual Funds and Managers Beat their Benchmarks

  • Cherry-picking returns
  • Sketchy math
  • “Marking the close” – see Resources section below
  • Leverage
  • High-beta stocks
  • Illiquid portfolios
  • Lack of diversification
  • Asymmetric risk profiles
  • Very few: superior management
  • Focus on how they did during the more challenging years in the market
  • Size of fund: rapid growth can limit future opportunities

Section 3: The Questions to Ask Instead


Section 4: The Real Way to Beat the Market Over the Long-Term


Resources

Study: Mutual Fund Managers “Mark the Close” to Manipulate Quoted Returns

Mutual Funds & Performance Manipulation

 

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Keep a Defensive Stance, and Be Selective


Today, I’m releasing new asset allocation targets for long-term oriented investors of all ages, as well as active traders.    Remember, these are aimed at a general audience and are not personalized recommendations for any single investor.  Consider your own personal goals and risk tolerance when making your final selections.

I’ve made two updates recently.  First, I added a brand new asset class: Cryptocurrency.

Bitcoin, Ethidium, Litecoin, and other cryptocurrencies are exploding in popularity in 2017.  This is only the beginning of a long-term trend though.  We’ll see these digital currencies fully enter the mainstream over the coming decades.  For now, I’m suggesting only a small allocation, close to 1% of total assets.

Make sure to spread this allocation across a bunch of different digital currencies: at least 10 different ones, the more the better.  Keep the most in Bitcoin for its (relative) stability and wider acceptance, but include some investments in smaller ones too (known as “altcoin”).  The majority of “altcoins” will ultimately become worthless, I believe, due to their ease of creation – but you are looking to invest in a basket of many of them, so you end up with at least one that explodes in value (20x, 50x, or more) and dwarfs the losses in the ones that don’t pan out.  Altogether, don’t put any more than 2% of your assets into this area unless you carefully research it and you know what you are doing – don’t gamble with your money.  If you are closer to retirement or just a conservative investor, you might want to buy a tiny amount of Bitcoin (less than 0.5% of assets), let it sit, and just leave it at that.

Cryptocurrency carries many of the same benefits as precious metals (PMs), such as anonymity and preservation of purchasing power over the long-term.  Yet there are key differences, the most significant being the high degree of volatility in digital currency.  It’s still a very new market, therefore we can expect high volatility to continue but also tremendous potential for growth.  Wait for a bit of a pullback before investing, but don’t get FOMO (Fear of Missing Out).  It’s not too late to jump on board: cryptocurrency is the real deal and a legitimate asset class already.

For more information on cryptocurrency, check out Coinbase, where you can set up a digital wallet and make an investment, and Let’s Talk Bitcoin, where you’ll find links to a variety of podcasts and blogs about the subject.

The second update I made was to increase the allocation to real estate by a few percentage points.  Many investors will already have this much exposure to real estate through equity in their personal residence.  For those that don’t, REITs will get you there.  Listen to my introductory podcast on REITs to learn about this exciting asset class.  I also recently published a video on one of my favorite picks.  I’m careful to choose REITs that I think are most likely to maintain or grow their share price over the long term while paying a good dividend yield.  Stay away from most REITs in the health care, office building, and retail areas.

OK – now for the asset allocations.

If you’re a long-term oriented investor, making adjustments to your portfolio only a couple times each year, these are the baseline targets:


If you are an active trader, consider these allocations instead.  They’re based upon the long-term targets, but adjusted for my latest intermediate-term market outlook (6-18 month horizon).  These change much more frequently, as chart patterns emerge and develop.


You read that right: 0% to equities.  This is not the time to be reaching for dividend yield or jumping onto a trendy growth stock.  You can still keep some stocks in your portfolio, but put on some tactical short positions in the weakest areas of the market so that you’re market-neutral overall.  You might also consider preferred stock for the greater protection it provides, over common stock, but remain cautious because preferred stock will drop if we see a big downturn in the market.

Wealth-building is a marathon, not a sprint.  Staying defensive in a market like this one will keep your portfolio intact.  A big cash reserve will position you to leap on bargain prices when we see them.

Going forward, members of our community platform will receive updated asset allocations at least one week ahead of when I release them to the public blog.  Members will also get detailed sector-by-sector breakdowns within several of these asset classes (e.g. retail stocks vs. utilities, consumer staples, etc.).  Membership starts at only $5/month for the Bronze level.


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The mainstream advice on using 401(k), 403(b), IRA, and Roth IRA accounts to build wealth is flat-out wrong if you want to retire early or achieve financial independence.  I talk through the reasons why you should limit your use of these types of accounts if you want to achieve better results than ordinary investors do.  I also explain the limited exceptions to my advice on retirement accounts.

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Section 1: Background

  • Strengths and weakness of retirement accounts
  • Annual contribution limits

Section 2: The Uncomfortable Truth: They Own Your Money

  • Never forget: Taking control of your own money puts you on the path to financial freedom
  • Mandatory contribution schemes – it’ll happen sooner than you think
  • Politicians are always thinking of ways to put themselves between you and your money

Section 3: It’s Better to Pay off Debt First, Including Your House

  • Most investors don’t achieve a high enough return in retirement accounts to beat what they’re paying on debt
  • There are plenty of very good reasons to rent – Just be aware that if you’re renting, you’re paying your landlord’s debt, and the balance isn’t dropping
  • A prolonged period of low returns is coming – or something much worse

Section 4: Max Out Your Health Savings Account First

  • If you have a qualifying high deductible health plan (HDHP), you are eligible to contribute to a Health Savings Account (HSA)
  • Limits and conditions
  • If spent on qualifying expenses, the money will never be taxed.  That’s never, not ever!

Section 5: A Better Way

  • Contribute enough to your 401(k) to get the employer match, not a penny more
  • If not covered by a 401(k), 403(b), or 457 plan, contribute $5,500/year to an IRA instead
    • If you are covered, only contribute if you don’t already have an IRA or Roth IRA yet
    • There are limited circumstances that let you take penalty-free withdrawals
  • Be an active investor
  • Build a truly diversified portfolio
  • Develop a business, or invest in someone else’s quality business
  • Invest in real assets that produce cash flows

Section 6: Exceptions

  • You are certain you will be in a lower tax bracket for a period of time, starting soon
  • Your company has excellent fund options in its 401(k)
  • You are already doing all the things listed above, have a high income with extra money to spare, and understand all the downsides of traditional retirement plans
  • You plan to work until you drop
  • You hate investing, and will accept mediocre to poor returns just to not have to think about your money

 

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(Part 1 of ten-part series on Financial Truths)

 

Section 1: The old model of: go to school, get a stable job, get pension / save in your retirement accounts, buy-and-hold for the long run, retire with lots of money set aside – it’s dead, over, gone, buried in history.

Section 2: You can easily become over-concentrated in a few highly correlated asset classes; correlations rise in a crisis

Section 3: “Leaving it to the experts” is leaving money on the table

 

 

Section 1: The old model of: go to school, get a stable job, get pension / save in your retirement accounts, buy-and-hold for the long run, retire with lots of money set aside – it’s dead, over, gone, buried in history.

  • Employment/population ratio (data.bls.gov) – peaked at 65% around 2000, down to 60% now and will keep dropping
  • Shift towards part-time jobs, freelancing: A survey by Upwork and the National Freelancers Union suggests that 55 million people, or 35% of the US workforce, made money by freelancing in 2016 – up by 2 million in the last 2 years. The largest growth rate has been in “diversified workers” who combine different part-time and freelance gigs into a full-time income. http://www.citylab.com/work/2016/10/the-two-sides-of-the-freelance-workforce/502955/
  • Today, 27% of private sector workers have access to defined benefit plans, and 58% to defined contribution (Bureau of Labor Statistics) https://www.bls.gov/ncs/ebs/retirement_data.htm
  • IRAs only became popular starting in 1981; Roth IRA began in 1997, 401(k) in 1980; there isn’t a long track record of them working for people from start to finish
  • Need a diverse skill set and good financial literacy to be successful today – take charge of your life
  • Fortune: nearly two-thirds of Americans can’t pass a basic test of financial literacy, 5 point drop since 2009 (http://fortune.com/2016/07/12/financial-literacy/ ).  Example – calculating interest on a loan.
  • Dave Ramsey: “Growth stock mutual funds make 12%/year”; Suze Orman says to dollar-cost average, it’s nonsense. Past performance does not indicate future results.

 

Section 2: You can easily become over-concentrated in a few highly correlated asset classes; correlations rise in a crisis

  • What does diversification really mean?
  • Examples of alternative assets that offer real diversification
  • Diversification is NOT: (but these are a start)
    • Having more than one brokerage account or retirement account
    • Different stocks, like in an ETF, mutual fund, tracking a market or index
    • A bunch of ETFs or mutual funds, tracking different markets or indices; all paper assets
    • Having money denominated in various currencies
    • Different paper assets like bonds (beyond a certain point)

 

Section 3: “Leaving it to the experts” is leaving money on the table

  • If you need your savings to be there for you when you retire, you need to know what you’re invested in, and why
  • Very few of the real experts are managing public money
  • They cost too much, extract lots of fees out of you
  • Some are compensated based on revenue they bring to the firm
  • Narrow-minded thinking, limited skill/knowledge of these experts, not looking at big picture
    • Thomas Picketty on demographics: In Capital in the Twenty-First Century (2013/2014), he states that global output grew at an average annual rate of 1.6% from 1700 to 2012, 0.8% of which reflects population growth and 0.8% of which came from growth in output per person.  Growth averaged 3.0% from 1913 to 2012, but this was largely due to population growth and is not sustainable.
  • Robo-advisors are selling a lie
    • Same type of garbage mathematical models that were used to justify mortgage-backed securities before the 2008-2009 financial crisis
    • Short time horizon, static models, not accounting for enough inputs or qualitative factors
    • Might seem cheap but what are you getting?  They don’t offer anything other than a very short list of ETFs, like a 401(k) – no PMs, no digital currencies, no country- or region-specific ETFs, no way to use options to manage portfolio risk.
    • Wash sales – not integrated with other holdings outside of that robo-advisor – false sense of security.
  • More sophisticated strategies achieve better results
    • Hedge funds (before they grew too large) – http://www.businessinsider.com/hedge-funds-and-sp-500-nearly-identical-2013-8 Hedge funds outperformed the S&P 500 only slightly from 1993-2006, but with much less volatility and far smaller drawdowns.  Risk management matters.
    • Private equity – https://www.bloomberg.com/gadfly/articles/2016-05-11/private-equity-has-diminishing-returns – The Cambridge Associates US Private Equity Index returned 13.4% annually net of fees from 4/1986 to 12/2015, with a standard deviation of only 9.4% (vs. Russell 2000 at 9.9% return, 16.7% standard deviation)
    • Picketty research (Capital in the Twenty-First Century) – the largest university endowments consistently outperform the smaller ones.  These have the funds needed to employ sophisticated advisors and invest in alternative assets that improve portfolio returns and reduce volatility
    • You can learn and apply many of the same strategies these sophisticated investors use to manage multi-billion-dollar portfolios.  In fact, you have an advantage they don’t.

 

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