Mid-year financial update: What to do with your money now

The Federal Reserve has thrown a wrench into what was shaping up to be a very good six months for investors. Since you can’t do much about the timing of the Fed’s policies and the gyrations in the market, six months into the year is a perfect time to revisit the financial issues over which you actually have control: your investments, retirement savings and some of those other financial to-do’s that have been on your list for a while.  Investments: Quit complaining about the markets and DO SOMETHING. Remember that if you are a long-term investor, periodic market pullbacks are great opportunities to rebalance your accounts so that your allocation remains in check. This requires that you override your emotional urge to keep winning funds and dump those that are lagging. But that’s the point of asset allocation—various funds are supposed to move in different directions at different points in the economic cycle.

Bonds: Given the recent move in the bond markets, you may be tempted to sell all of your bonds. But of course that would be market timing and you are not going to fall for that, are you? Here are alternatives to a wholesale dismissal of the fixed income asset class:

• Lower your duration: This can be as easy as moving from a longer-term bond into a shorter one. Of course, when you go shorter, you will give up yield. It may be worth it for you to make a little less current income in exchange for diminished volatility in your portfolio.
• Use corporate bonds: Corporate bonds are less sensitive to interest-rate risk than government bonds. This does not mean that corporate bonds will avoid losses in a rising interest rate environment, but the declines are usually less than those for Treasuries.
• Explore floating rate notes: Floating rate loan funds invest in non-investment-grade bank loans whose coupons "float" based on the prevailing interest rate market, which allows them to reduce duration risk.
• Keep extra cash on hand: Cash, the ultimate fixed asset, can provide you with a unique opportunity in a rising interest rate market: the ability to purchase higher yielding securities on your own timetable.

Retirement: Many people say they are worried about retirement, but most of them haven’t done any planning to help themselves. Any conversation about retirement must start with an easy step: calculating  your retirement numbers. EBRI’s “Choose to Save Ballpark E$timate” (www.choosetosave.org/ballpark/) is easy to use, or check out your retirement plan/401(k) website for more retirement tools.

Homeowners and Renters insurance: It seems like the past year has seen an unusual number of natural disasters from tornados to hurricanes to wild fires. Summer often brings more scary weather, so before an event occurs; make sure that your current coverage is adequate. The three biggest mistakes that people make with their homeowners or renters insurance are: 1) under-insuring; 2) shopping for price only and not comparing apples to apples; and 3) not reading policy details before a loss occurs.

Estate Planning: If you haven’t done so already, PLEASE DRAFT A WILL! I advise hiring a lawyer to prepare a will, power of attorney and health care proxy/living will. If you insist on doing it yourself, you can use a software program like Quicken WillMaker. All of your estate documents and final instructions should be stored in a safe place – don’t forget to provide copies to your executor/trustee.

If your total estate is greater than $5.25 million this year, a revocable or changeable trust will shelter your unified tax credit against federal estate and gift taxes. Many states impose a state death tax at lower levels, so check the rules. Even if your estate is unlikely to incur estate taxes, you may want a trust to better control the disposition of your assets. Revocable trust assets are not subject to probate.

Volatile markets are always unsettling, but doing what you can now, may help you feel more in control and enjoy the second half of the year a little more.

Distributed by Tribune Media Services

Bonds away: How to protect against rising interest rates

When investors look back at the spring of 2013, they may say it was the moment when the bond market finally shifted and a new trend of higher interest rates emerged. It appears that the long-awaited reversal of the bond market has begun. In early May, the yield of the 10-year treasury hovered at just above 1.6 percent. While that wasn’t the all-time low (1.379 percent in July 2012), it was pretty close. We have all known that bond yields would have to rise, eventually. We’ve known that at some point the fear of the financial crisis would recede, the economic recovery would become self-sustaining and the Fed would stop purchasing bonds. Whenever that occurred, the 30-year bull market in bonds would come to an end, pushing down prices and increasing yields

Many bond market moves look benign in the rear view mirror, but they can feel pretty dramatic in real time. The rise in 10-year yields from 1.62 percent in the beginning of May to a 16-month high of 2.35 percent in mid-June might not seem like a big deal – just 0.73, right? But it’s important to realize that it’s a 45 percent move in just 6 weeks!

What does that kind of move mean to your portfolio? It means that many of your bond positions have lost value, because as interest rates rise, the price of bonds drops. The magnitude of your hit is partially tied to the duration of the holding. Duration risk measures the sensitivity of a bond’s price to a one percent change in interest rates.

The higher a bond’s (or a bond fund’s) duration, the greater its sensitivity to interest rate changes. This means that fluctuations in price, whether positive or negative, will be more pronounced. Short-term bonds generally have shorter durations and are less sensitive to movements in interest rates than longer-term bonds. The reason is that bonds with longer maturities are locked in at a lower rate for a longer period of time.

For those of you who own individual bonds, the price fluctuations that occur before your bonds reach maturity may be unnerving, but if you hold them to maturity, you can expect to receive the face value of the bond.

If you own a bond fund, it may be scary to see the net asset value (NAV) of the fund drop when rates increase. To soothe you a bit, remember that when NAV falls, the bonds within the fund should continue to make the stated interest payments. As the bonds within the fund mature or are sold, they can be replaced with higher-yielding bonds, which could create more income for you in the future. Additionally, if you are reinvesting interest and dividends back into the fund, you may benefit from purchasing shares at lower prices.

To help protect your portfolio against the eventual rise in interest rates, you may be tempted to sell all of your bonds. But of course that would be market timing and you are not going to fall for that, are you? Here are alternatives to a wholesale dismissal of the fixed income asset class:

Lower your duration: This can be as easy as moving from a longer-term bond into a shorter one. Of course, when you go shorter, you will give up yield. It may be worth it for you to make a little less current income in exchange for diminished volatility in your portfolio.

Use corporate bonds: Corporate bonds are less sensitive to interest-rate risk than government bonds. This does not mean that corporate bonds will avoid losses in a rising interest rate environment, but the declines are usually less than those for Treasuries.

Explore floating rate notes: Floating rate loan funds invest in non-investment-grade bank loans whose coupons "float" based on the prevailing interest rate market, which allows them to reduce duration risk.

Keep extra cash on hand: Cash, the ultimate fixed asset, can provide you with a unique opportunity in a rising interest rate market: the ability to purchase higher yielding securities on your own timetable.

So even if this truly is the turnaround in the bond market that we’ve all been waiting for, there’s no reason to be afraid. Just pay closer attention to your bond holdings, and know how to protect yourself from rising rates!

Distributed by Tribune Media Services

Global market roller coaster: Stay on or get off?

During his May 22^nd testimony on Capitol Hill, Fed Chairman Ben Bernanke dropped a bombshell when he said that the Fed could pull back on its bond buying “in the next few [FOMC] meetings,” depending on prevailing economic data. Many investors interpreted the comment as a hint that the Fed’s stimulus was coming to an end. Remember that the Fed keeping interest rates low has spurred many investors into stocks, because they seemed preferable to cash, bonds or commodities. If rates start to rise, that decision may change. Guess what? Things are changing!

In the US, stocks are only down about 2 percent from the intraday high on May 22nd (now dubbed "B-Day" for Bernanke), but other markets are down more dramatically: bonds plunged about 7 percent; emerging market stocks have tumbled 10 percent; emerging market currencies are off sharply; and Japanese stocks have sunk 15 percent from recent highs.

With markets on a seemingly-unending daily roller coaster ride, here’s what you should do: NOTHING. This prescriptive measure is geared towards investors who have been sticking to their game plans and rebalancing ever quarter or so. If you are in that category, please sit still and don’t do anything.

But if you have been flying by the seat of your pants, use this market volatility as an opportunity to review where you stand, create a target allocation and force yourself to rebalance according to your goals.

Here are 6 more tips for every investor:

1. Dont let your emotions rule your financial choices. There are two emotions that tend to overly influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed.
2. Maintain a diversified portfolio. One of the best ways to prevent the emotional swings that every investor faces is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. (Owning 5 different stock funds does not qualify as a diversified portfolio!)
3. Avoid timing the market. Repeat after me: “Nobody can time the market. Nobody can time the market.” One of the big challenges of market timing is that requires you to make not one, but two lucky decisions: when to sell and when to buy back in.
4. Stop paying more fees than necessary. Why do investors consistently put themselves at a disadvantage by purchasing investments that carry hefty fees? Those who stick to no-commission index mutual funds start each year with a 1-2 percent advantage over those who invest in actively managed funds that carry a sales charge.
5. Limit big risks. If you are going to make a risky investment, such as purchasing a large position in a single stock or making an investment in a tiny company, only allocate the amount of money you are willing to lose, that is, an amount that will not really affect your financial life over the long term. Yes, there are people who invest in the next Google, but just in case things don't work out, limit your exposure to a reasonable percentage (single digits!) of your net worth.
6. Ask for help. There are plenty of people who can manage their own financial lives, but there are also many cases where hiring a pro makes sense. Make sure that you know what services you are paying for and how your advisor is compensated. It’s best to hire a fee-only or fee-based advisor who adheres to the fiduciary standard, meaning he is required to act in your best interest. To find a fee-only advisor near you, go to NAPFA.org.

Alphabet soup of financial advice

The Consumer Financial Protection Bureau (CFPB) has honed in on an important question: What do the various “senior designation” titles that financial advisers use to market their services really mean? To answer, the CFPB recently delivered a report to Congress and the Securities and Exchange Commission, entitled “Senior Designations for Financial Advisers: Reducing Consumer Confusion and Risks”. There are more than 50 different senior designations used in the marketplace and while some do convey special training and experience in providing financial advice to seniors, others are a way to target older consumers and sell them “inappropriate and sometimes fraudulent financial products.” In the topsy-turvy world of advice, a salesman can call himself an “Accredited Retirement Advisor (ARA)” even though the CFPB reported that this designation is not accredited at all.

How can consumers sift though the designations? The CFPB admits that seniors have insufficient information to determine the legitimacy and value of different senior designations. To help consumers, the report recommends the creation of a centralized tool through which senior investors can verify a financial adviser’s designations; the establishment of a mechanism to capture complaints and enforcement actions against senior designation holders; and the requirement that senior advisers to disclose their qualifications and the meaning of the senior-specific certification.

Unfortunately, the CFPB did not weigh in on the elephant in the room: the fiduciary standard, a set of core principles that advisers can adhere to, most importantly a commitment to put the interests of their clients first. Consumers can eliminate many of the hucksters by only doing business with professionals who commit to the standard.

Because I receive so many questions about financial professional designations, I am once again repeating my favorites:

CFP® certification: The Certified Financial Planner Board of Standards (CFP Board) requires candidates to meet what it calls “the four Es”: Education (Education (through one of several approved methods, must demonstrate the ability to create, deliver and monitor a comprehensive financial plan, covering investment, insurance, estate, retirement, education and ethics), Examination (a 10-hour exam given over a day and a half; most recent exam pass rate was 62.6 percent), Experience (three years of full-time, relevant personal financial planning experience required) and Ethics (disclosure of any criminal, civil, governmental, or self-regulatory agency proceeding or inquiry). CFPs must adhere to the fiduciary standard.

CPA Personal Financial Specialist (PFS): The American Institute of CPAs® offers a separate financial planning designation. In addition to already being a licensed CPA, a CPA/PFS candidate must earn a minimum of 75 hours of personal financial planning education and have two years of full-time business or teaching experience (or 3,000 hours equivalent) in personal financial planning, all within the five year period preceding the date of the PFS application. They must also pass an approved Personal Financial Planner exam.

Membership in the National Association of Personal Financial Advisors (NAPFA): Becoming a member of NAPFA maintains a high bar for entry: Professionals must be RIAs and must also have either the CFP or CPA-PFS designation. Additionally, NAPFA advisers are fee-only, which means that they do not accept commissions or any additional fees from outside sources for the recommendations they make. Fee-only advisers can charge based on an hourly or flat rate, or based on a percentage of your portfolio value, often called “Assets Under Management” (AUM). Either method is fine with NAPFA; however, if the adviser collects a commission from an insurance company or a fee from a mutual fund company as part of the financial plan, then that adviser is precluded from membership.

In addition to being fee-only, NAPFA advisers must be fiduciaries and must provide information on their background, experience, education and credentials, and are required to submit a financial plan to a peer review. After acceptance into NAPFA, members must fulfill continuing education requirements. The requirements make NAPFA members among the tiniest percentage of registered investment advisers, with only 2,400 total current members.

It’s certainly possible to get good advice from an adviser without these designations, but they do help protect investors from some of the most egregious salespeople out there. No matter what, if you feel pressure from any financial professional, run the other way!

Distributed by Tribune Media Services, Inc.

7 Investment sins

Hate to burst your bubble, but you are probably not a great investor. Need proof? Check out this chart from Blackrock that shows just how poorly average investors have been doing over the past two decades:

From 1992 – 2011, the average investor has only seen a 2.1 annualized return, compared to 7.8 percent for stocks and 6.6 percent for bonds. The explanation is obvious: investors feel good as asset levels rise, prompting them to buy; then after the asset plunges, some of those same investors panic and cash out.

The problem becomes even more pronounced during times of extreme market volatility and can leave a lasting impression. According to Bankrate.com’s Financial Security Index, a whopping 76 percent of respondents are simply avoiding stocks. Evidently, the combination of the worst recession since the Great Depression, plus the 55 percent stock market wipeout from October 2007 to March 2009 has made investors gun shy.

Economists call this “recency bias,” which means that we use our recent experience as a guide for what will happen in the future. So when stocks are soaring, we think markets will keep rising, but when the market plunges, we become convinced that it will never go up again.

Recency bias is just one of the 7 investment sins that continue to trip up investors—here are six more:

Allowing your emotions to rule your financial choices. There are two emotions that tend to overly influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed.

Not maintaining a diversified portfolio. One of the best ways to prevent the emotional swings that every investor faces is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. (Owning 5 different stock funds does not qualify as a diversified portfolio!)

Timing the market. Repeat after me: “Nobody can time the market. Nobody can time the market.” One of the big challenges of market timing is that requires you to make not one, but two lucky decisions: when to sell and when to buy back in.

Paying more fees than necessary. Why do investors consistently put themselves at a disadvantage by purchasing investments that carry hefty fees? Those who stick to no-commission index mutual funds start each year with a 1-2 percent advantage over those who invest in actively managed funds that carry a sales charge.

Assuming too big a risk. If you are going to make a risky investment, such as purchasing a large position in a single stock or making an investment in a tiny company, only allocate the amount of money you are willing to lose, that is, an amount that will not really affect your financial life over the long term. Yes, there are people who invest in the next Google, but just in case things don't work out, limit your exposure to a reasonable percentage (single digits!) of your net worth.

Not asking for help. There are plenty of people who can manage their own financial lives, but there are also many cases where hiring a pro makes sense. Make sure that you know what services you are paying for and how your advisor is compensated. It’s best to hire a fee-only or fee-based advisor who adheres to the fiduciary standard, meaning he is required to act in your best interest. To find a fee-only advisor near you, go to NAPFA.org.