October 2011 Newsletter

As the Seasons Change, Should Your Investments Follow?

Fall is a time for change, which means there's never been a better occasion to review your investments. But before making any big decisions, take some time to educate yourself - being able to assess the quality of your portfolio is a huge part of the process.

Retirement:
Your 401(k) plan is likely your biggest retirement savings vehicle. Be sure to allocate your assets to match your retirement goals and risk tolerance and contribute as much as you can. If you have investments outside the 401(k) plan, distribute your 401(k) as part of an overall portfolio, not as a stand-alone account. And remember, your 401(k) may be enough for you to retire on, but it also may not.

Real Estate:
We're at a point where prices can't drop much farther and the markets will reach an "organic" bottom, free from the influence of government stimuli like the tax credit. What does this mean for you? As an investor, this is the moment. It's the ideal time to buy, as prices aren't expected to go much lower and you shouldn't have to hold on long to see appreciation.

Stock/Bond Portfolios:
Instead of focusing on high returns, it's better to save consistently for retirement. While there have been a number of mutual funds that averaged over 10 percent over the past 10 years, the majority of these funds were invested in precious metals, natural resources, emerging markets and other risky market segments. This is not to say that these types of investments are inappropriate for everyone, but given the risk involved, it is unlikely that a portfolio consisting exclusively of these types of investments would be appropriate for most folks saving for retirement. Remember that the key is to have a plan, monitor your progress and save consistently.

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From the Blog: Improving Returns Without Increasing Risk

Written by Dan Solin

Volatile markets make everyone nervous. Investing in stocks involves risk. Risk means you can lose money. No one likes that.

What if you could increase your returns without taking any risk? You can, and with limited effort. Here are some suggestions, gleaned from Allan Roth's excellent book, How a Second Grader Beats Wall Street:

1. Maximize your cash. Where is your cash deposited? I suspect you could obtain greater returns on it without taking any more risk. The trick is to use the Internet to find out who is paying the highest rates on certificates of deposit and money market accounts. Remember, if your bank is FDIC insured, and your deposits are within coverage limits, your deposit is backed by the full faith and credit of the U.S. government. Go to Bankrate.com and find the FDIC-insured bank paying the highest rate.

If you have access to a credit union, check to be sure the National Credit Union Administration backs it. If it does, you get the same U.S. government-backed assurance. Credit unions are able to offer higher rates of return than banks because they return profits to their owners.

For details on coverage limits, go to FDIC.gov and NCUA.gov.

2. Reduce your debt. Debt comes in many forms: mortgages, car loans and credit cards are the most common. It makes no sense in this low-interest-rate environment to have cash earning 1% while paying 15% (or more) on credit card debt.

I am not suggesting you deplete your emergency cash resources. Most financial planners agree you should have at least six months' worth of expenses in cash. However, it would be far better to have a home equity line of credit, which you could use for emergency cash, than to pay obscene rates of interest on nondeductible debt.

3. Buy low-cost index funds. Investors have two choices: they can buy expensive, actively managed funds (where the fund manager attempts to beat a designated benchmark) or they can buy far less expensive index funds. The right decision is counterintuitive. The less expense index funds are more likely to outperform the more expensive actively managed funds over the long term, based on extensive historical data. This is an excellent example of how you can actually reduce your risk and improve your returns. Just limit your investments to a globally diversified portfolio of low-cost index funds in an asset allocation appropriate for you.

4. Put your assets in the right buckets. It's not what you make - it's what you keep that counts. Investments that throw off taxable income (like bonds) belong in your tax-deferred or tax-free accounts (like traditional and Roth IRAs). Index stock funds are very tax efficient. You should hold them in your after-tax accounts. Tax efficiency is another reason you should not purchase actively managed funds. They are tax inefficient due to much higher turnover in their portfolios.

With some modest effort, you can significantly increase your returns without taking any risk. It's the holy grail of investing.

Dan Solin is a senior vice president of Index Funds Advisors. He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read and The Smartest 401(k) Book You'll Ever Read. His latest book is The Smartest Retirement Book You'll Ever Read.

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