tag:blogger.com,1999:blog-62995126347301684322024-03-13T14:38:42.648-07:00Mutual Funds Explained@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.comBlogger104125tag:blogger.com,1999:blog-6299512634730168432.post-50501195090642194632013-04-24T05:01:00.000-07:002013-04-26T06:36:21.553-07:00on REITsThere are an enormous amount of investment options available to the average investor or <a href="http://bluecollardollar.com/retirementplanningbooks/retirementplanning.html">retirement planner</a>, enough to confuse most of us. And when you ask the question whether you should own this or that, we ask it too. When we wanted to know what a REIT was, we asked an expert.
<p>As a quick review, a REIT or real estate investment trusts is a stock and because of this, it can be purchased by you as a share or buy a mutual fund or <a href="http://mutualfunds.answers.com">ETF</a>. This sort of investment is required to pay the shareholder 90% of the profits - after expenses. This is referred to as the yield. And in many instances, it can be a worthy rival to many other fixed income investments.
<p>Our expert explained many of the nuances of a REIT and what they focus on, their methods of surviving economic downturns and most importantly why they should be part of a diversified portfolio.
<p><strong>In this edition of the Financial Impact Factor Radio with <a href="http://paulpetillo.com">Paul Petillo</a>,</strong> Dave Kittredge and Dave Ng, we had someone who has focused his career on real estate as an investment: Brad Thomas. Mr. Thomas researches and writes on a variety of real estate based fixed- income alternatives including both publicly-traded and non-traded REITs or real estate investment trusts. He has a broad background in capitalization and sustainable net lease investing. Mr. Thomas currently writes weekly articles for Seeking Alpha and Forbes where he maintains real-time research on many of the equity REITs and retailers.
<p>Among the topics Brad explained included the risk of owning these investments, how they are structured and the dividends they offer, how to analyze their worth and most importantly, how these investments react to various economic forces. REITs have been around for over five decades and are a widely suggested part of a diversified portfolio.
<p>This is a must listen show for not only the curious investor but those looking to better understand the subject of REIT investments.
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</div></p><p>Listen to Financial Impact Factor Radio with your hosts:
Paul Petillo of <a href="http://bluecollardollar.com">BlueCollarDollar.com</a> and Dave Kittredge and Dave Ng.
<p>(reprinted with all permissions from bluecollardollar.com)@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-29152396754585107302013-03-09T13:33:00.000-08:002013-05-30T13:35:04.316-07:00The importance of a mutual fund portfolioThere are three things to consider when building a mutual fund portfolio. First, the most respected investors in history believe in what a mutual fund portfolio provides the small investor. Second, the most respected investors in history may never advocate for a mutual fund only portfolio. And lastly...
You can read the full article <a href="http://mutualfunds.answers.com/types-of-funds/mutual-funds-the-importance-of-a-mutual-fund-portfolio">here</a>.@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-84346863385449109922013-03-07T13:30:00.000-08:002013-05-30T13:31:45.018-07:00Mutual Funds: investing in fixed incomeMutual funds are numbered in the tens of thousands investing in every conceivable investment opportunity. They range from equity (stocks) to fixed income (bonds) to money markets, commodities and beyond. And they break down even further to investments focused on domestic offerings to international, emerging markets to total global coverage.
You can read the full article <a href="http://mutualfunds.answers.com/types-of-funds/mutual-funds-investing-in-fixed-income">here</a>.@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-48161547368042857652013-03-06T13:27:00.000-08:002013-05-30T13:28:21.224-07:00What is an Index Fund?Before they downturn in 2008, now commonly referred to as the Great Recession, indexed mutual funds were used mostly by the conservative investor and the investor new to the experience. These two groups found the experience of investing with other mutual funds disconcerting.
Read the full article <a href="http://mutualfunds.answers.com/types-of-funds/what-is-an-index-fund">here</a>.@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-9129439778435524962013-03-05T13:23:00.000-08:002013-05-30T13:25:07.134-07:00Index funds: The mutual fund for most investors.Recently, Etrade began advertising their mutual fund selection. They boasted an inventory of 8,000 mutual funds. Choosing among those available mutual funds can be a daunting task for even an experienced investor. You will need to know not only who you are but what you hope to achieve.
You can read the full article <a href="http://mutualfunds.answers.com/types-of-funds/top-five-things-to-look-for-in-a-mutual-fund">here</a>.@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-3289184631669592892013-03-02T13:19:00.000-08:002013-05-30T13:21:17.508-07:00Mutual Fund Investing: Buying a mutual fund for the first timeFor millions of investors, finding the right mutual fund is as easy as tapping your company's retirement plan. For millions of other potential investors, the mutual fund can provide a unique investment opportunity to build your own retirement plan.
You can read the full article <a href="http://mutualfunds.answers.com/types-of-funds/mutual-fund-investing-buying-a-mutual-fund-for-the-first-time">here</a>.@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-27193849758505616362013-03-01T13:15:00.000-08:002013-05-30T13:16:19.409-07:00What is a mutual fund?For decades, mutual funds have been a part of the investing landscape. They are easy to use, are available in a wide range of investment options, and are generally accessible to everyone. Mutual funds offer a safety in numbers approach that benefits the investor in numerous ways by spreading risk, offering diversity, and for better or worse, a mutual fund manager to guide the process.
Read the full article <a href="http://mutualfunds.answers.com/types-of-funds/what-is-a-mutual-fund">here</a>.@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-7959824806562663472012-04-04T07:21:00.000-07:002012-04-04T07:21:22.552-07:00On ETFs: Part Two of What Investment WhenThis is the mutual fund: There was a time when the art of a fallen empire portrayed something opposite of the reality. In an exhibition at the Asia Society in New York, images from a period in India's past, when the Mughal ruled an empire that spanned from 1707 to 1857, offer the viewer a look at a facade of peacefulness. You are forced to avoid looking at the reality of life in those pre-British days by focusing on images of receptions, celebrations of holidays and the opulence of serenity. While beneath the surface an empire was crumbling under the rule of these princes on palanquins, the art suggests otherwise. We derived the word mogul from these rulers who dressed in pearl-embroidered shoes and decorative tunics.<br />
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This is the mutual fund in 2012. The facade belies the undercurrent of decline. It is a time when what was is slowly being replaced by another ruling party, a new-comer to the scene of investing: the ETF. This investment, like the invasion of this nineteenth century country by the British, is on the cusp of replacing the empire of the mutual fund. If you are paying even passing attention to the world of investing, this displacement comes with a price.<br />
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The exchange traded fund or ETF is slowly moving to the forefront of our investment options. The question for you, the one you will ask yourself: is this an investment worthy of my attention? Should I look at the picture the enthusiasts of this financial product paint for you and simply admire the brush stroke and the nuance or should you instead focus on the placard alongside the painting for a deeper understanding of the product?<br />
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The ETF is building an enviable empire based on the decline of the mutual fund. Largely made of the same materials, the ETF offers many of the same attributes as a run-of-the-mill index fund with several exceptions. Those differences are part of the marketing strategy proponents of this investment push to the forefront. The decision, they suggest goes beyond the what traditional indexed mutual funds offer, giving the investor a different sort of control.<br />
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They will tell you that these funds can be bought throughout the trading day. For the average investor, this added ability to buy and sell a fund like a stock on an exchange only leads to more questions. What does this attribute mean to you? Why should this mean anything at all?<br />
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Most mutual fund investors are of the buy and hold variety. We use them largely in our defined contribution plans or 401(k)s. They populate a world that is bound by the whim of our plan providers and sponsors. And inside that world, they offer a vision of retirement that is directed by you for you. And while ETFs are making inroads into this closed circle, your current exposure to this investment is largely on the outside of these plans.<br />
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The exchange traded fund offers additional options than simple tradability. It offers lower fees in many instances when compared side-by-side with the mutual fund. The difference can be slight but noteworthy over long periods of time. So it may be the best buy-and-hold option for the investor with that mindset. If that is the case, then actively trading ETFs is not a selling point and the fractionally lower fees may make them not worth the effort - or cost.<br />
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What does set this investment apart is the construction of the fund itself. Unlike the mutual fund, which is built (or deconstructed) with every contribution (or withdrawal). A mutual fund must sell shares to pay for those exiting the fund and buy shares with new money. ETFs buy a basket of stocks in advance of you ever investing a single dollar. And that dollar doesn't impact the overall "basket" one iota whether you invest in or out. This attribute leads to more stability in the investment, less price variation and more transparency.<br />
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But like the Mughal painters whose courtly portrayal of an empire in decline, whose story is masked by opulence and celebration, the artist of the ETF may be masking some truths as well.<br />
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The ETF offers a new empire. While the definition of empire is based on how much geographic impact the rulers had at a particular time, the ETF empire is still growing, grabbing investor real estate at an enviable rate. If history offers any indication, the ETF empire will continue to grow, amassing population and expanding boundaries.<br />
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And as they do, the territory they claim as their own will be like all empires, hard to rule, sparsely inhabited and lorded over by tribes that only offer allegiance in passing. This will be where ETFs are tested. Not in the traditional and heavily populated markets; but on the fringes.<br />
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And this is where you should exercise caution. Like all expansive empires, the rules change the farther one travels from the most populated places. You may think that you are still in the ETF empire and from all indications on the map you are. But the danger in this investment grows with every footfall beyond the center of the empire. This is how the mutual fund began its decline, as fund families looked for more arcane offerings further afield. Will ETFs suffer the same fate, offering the rule of law where law is not always embraced?<br />
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Quite possibly. To use ETFs, one must stay close to the glow, the core of the investment idea. Because the farther out you venture, the more likely you will find investment options with higher risks and less transparency, higher fees and more narrow focus. So as ETFs make their land grab be cautious of what the ETF actually is. It is an investment. It does cost less. The risk seems to be lower.<br />
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But venture into the hinterlands of this growing empire and you will see the dangers increase, the risk become more apparent and while the names of these far flung locales will always suggest ETF, it won't be the same ETF. It is on the fringes that the mutual fund has begun its decline. It will be the same for the ETF if history is any indication.@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-72525238934031695912012-03-15T05:54:00.000-07:002012-03-15T05:54:06.632-07:00The Decline of Mutual Funds<p style="text-align: left;">The nineteenth century was a time when philosophers were wondering what exactly was free will. To these thinkers, it was a concept that needed help to achieve what they believed was control over your soul. Identifying the seven deadly sins were a product of this effort, blocking their passage into your life allowed your free will to soar where they thought it ought to go.</p><p style="text-align: left;">But often, in this day and age, the exercise is also pressured by more than those temptations of sloth and greed, wrath, pride, lust, envy and gluttony. It is a social one that makes us look to our peers for guidance in what is right and what is wrong. This is certainly true of investors. And because our free will is actually more bound than footloose, this becomes a conundrum of sorts for those inside their company's 401(k) plan.</p><p style="text-align: left;">Call them schools of social thought, call them religion, but once an idea makes sense it becomes the must-have. This is certainly true of exchange traded funds, which have very smart people in this investment's corner. And with good reason that we'll discuss in a future post. For now, it is the mutual fund, that stalwart investment inside those 401(k) plans that is the focus. Why has it lost its luster? In my opinion, the downturn of several years past had a great deal to do with it but something else changed in those fateful months in 2008. But what?</p><p style="text-align: left;">Mutual funds are what we have to work with at the moment. Although you will begin seeing the addition of ETFs to the mix of options available, and there might even be an all-ETF plan coming to your workplace in the future, the mutual fund will reign supreme inside this bounded world of free will investing. You have the right to choose which investments you want. You have the right to contribute as much as the IRS allows. You have the right to make your retirement possible.</p><p style="text-align: left;">And yet, few of you do what is necessary to achieve the goal, a point in life that might be aptly referred to as "from the free choices of your working life" to the "free choices in retirement." Both are bounded by the amount of money you have. You also have the right to choose how tight those bounds will be.</p><p style="text-align: left;">You will soon find out how much everything costs within this plan. It will be a dry read without a doubt but if it does what it is supposed to do, it will shed some light on how much every dollar you invest in your plan is divvied up amongst the providers of the plan. It might be 1% of $100 or a dollar for every contribution of that amount. You can use this as a benchmark on whether your plan is expensive or not.</p><p style="text-align: left;">But what if it's higher than one percent? Fleeing is not an option (in the free will scenario). What that one percent actually does is begins to limit your investment options in two ways. All of the funds in your 401(k) will charge a fee of their own. So the higher the plan's cost, the more higher priced mutual funds as a result becomes unattractive - if inly from the fee perspective. And for some investors, this removes some of the risk they might have found worth taking. What you are left with, and this is in no way a criticism of this kind of investment, is the index fund.</p><p style="text-align: left;">Index funds are incredibly inexpensive. The fund manager is almost non-existent and the stock (or bonds) in the fund are tracking a predetermined basket of stocks (or bonds). The risk is still there but it is greatly underplayed by the those who are fans of this type of fund. The risk however is, as they say, much less than any actively managed mutual fund available. This is a truism with caveats.</p><p style="text-align: left;">When an index fund is created, the real decision is built on how much of which stock will be bought to mimic the index. An S&P 500 index fund may hold 500 stocks. The question is the proportion or as they refer to it, weighting. The risk is also in the lockstep with that decision. If the market goes up, so does your index fund. If the market goes down, you will also shadow the drop in your index fund. If you index didn't keep pace withe index it is mimicking, then weighting is to blame or credit. Not all indexes are created the same.</p><p style="text-align: left;">In some instances, diversification across a basket of index funds helps offset this sort of risk but if the drop is comprehensive, involving all sorts of regions and investments, this will be of little comfort. So you will pay less for an index but not fully eliminate the risk of owning it.</p><p style="text-align: left;">If your plan costs less than 1%, you have some wiggle room, the opportunity to take on a little more risk than you might have otherwise considered. The smaller more drilled down index funds can provide some of this risk at a lower cost. But some funds who may be benchmarked to the indexes of smaller sized companies and off-shore regions, even some alternative type investments, might seem appealing in small portions.</p><p style="text-align: left;">The best 401(k) is one that mimics your life, the boundaries you have set or have been set for you. You can follow some simple rules here than should reflect the basis of that life.</p><p style="text-align: left;">First: take care of your business. In real life this is paying the bills (on time) and making the money you earn part of a budget. In your 401(k), this means making the matching contribution or 5% if your employer doesn't match. Both numbers have little or no impact on that fragile take home pay and huge difference in your future.</p><p style="text-align: left;">Second: taking care of your retirement. The brutality of numbers suggests that even if you maximize your contribution, putting as much as the law allows, you will only end up with 75% of your current income in retirement. This simply means that if you can live on 75% of what you make now (ideally socking the rest away for retirement), the transition will be a breeze. You will have lived within that 19th century thinking: your free will will have a budget.</p><p style="text-align: left;">Third: the fun part of the plan. Boring leads to angst and takes away our human-ness. This ignores who we are and the habits we have. If we like to "cut loose" on occasion, our investments should reflect a little of that habit as well. Your "bad habits" or the fun things you do take up less than 10% of your time in real life. Your retirement plan should have 10% devoted to something less conservative, something a little more risky.</p><p style="text-align: left;">I see it as a way to keep you engaged (you will check your plan more often) and to learn balance. Keep that "risky" portion at 10% and the other ninety percent nicely indexed across five or six categories, and you will begin to watch what you are doing in this "retirement life" more closely.</p><p style="text-align: left;">One final word on the lost luster of mutual funds. They have gotten cheaper since the Great Recession and probably will continue to do so. Some will shine, some will falter and others will follow the markets. We provide the luster and if we fail to use the tools we have, we won't be able to see our reflection in the shine.</p><p style="text-align: left;">Next up: <a href="http://target2025.com/the-glow-of-exchange-traded-funds/">The Glow of Exchange Traded Funds</a></p>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com1tag:blogger.com,1999:blog-6299512634730168432.post-61795295286737913822012-02-26T06:52:00.000-08:002012-02-26T06:52:20.490-08:00You Need a Financial House FirstThat person staring back at you in the mirror has a personal finance plan that is hard to argue with or ignore. Your reflection is probably suggesting to you what it suggested back at the turn of the calendar year: to save more, spend less and focus on getting your debt in line. Intimidated by what is obviously an imperfection in your financial life, you agree. Again. Something needs to be done.<br />
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Those mirror conversations are often forgotten as soon as you walk away from your own reflection. And with good reason. Only when you are looking directly at yourself do you see someone who has made these types of promises before. Once the two of you part ways, the reality of past decisions thwarts many of these well-intentioned pledges to do better. The question isn't what is better - that answer we know - it is more like how can you do better?<br />
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Improving your <a title="personal finance" href="http://bluecollardollar.com/personalfinance.html" target="_blank">personal finances</a> is much easier than you might imagine. So let's look at why your reflection is suggesting an overhaul in the first place. You can't avoid the idea that retirement or at least the time of retirement is closing in, often quickly. You can't dodge the fact that in order to retire at all, let alone comfortably, you need to set aside larger portions of your paycheck. No one has ever told anyone they are saving too much. Everyone, on the other hand will suggest that you and millions of others just like you, aren't saving enough.<br />
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<strong>In this scenario</strong>, they will tell you to max out your 401(k). To do this, the average American with the average paycheck in the average 401(k) can set aside $17,000. This number for this average person amounts to almost a third of their paycheck. And most will agree, this is an austerity measure that will not happen no matter how much the financial profession points out its wisdom. The over 50 crowd can toss another $5,500 into these accounts in order to play catch-up pushing the total contribution in this "maxed-out" situation to almost half of the average wage earners paycheck.<br />
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Knowing you are under-contributing often is the first roadblock in doing what you've told yourself you need to do. Resignation sets in and the next time you are in front of that reflection you quip: "I'll never retire" or "I'll just have to work longer". These will, without any argument help you achieve your retirement goals. But in suggesting that lengthening your work life is an adequate solution, you are subtracting from your retirement life. Think of it this way: If the speed limit is 55 mph and you drive 45, you will arrive at your destination; it will simply take longer as as you watch your fellow cohorts pass you, you will become discouraged and this will begin to weigh on the journey.<br />
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<strong>So forget the limits.</strong> Instead focus on the percentages: five percent (5%) of your paycheck contributed and producing a modest return will net you about 25% of the income you currently own, ten percent (10%) will get you about 50% of your current wage while fifteen percent (15%) will get you very close to 75% of what your current income is. Of course you will need to contribute and do so over a span of at least 20-years. But is much more do-able that the whole number that is the maximum contribution.<br />
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But even if that is do-able, as I suggest it is, something will have to give. A recent New York Life survey, done as they suggested, across the kitchen table, portrays the average American as someone who will try and manage their debt better. This is translated into spending less. Debt as we all know works against you in many different ways. More than simply spending what you don't have and exceeding what your paycheck brings, the cost of servicing that debt acts as a direct subtracting to that 15% and any return you might get in your plan.<br />
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So not only will you need to contribute more but at the same time, you will need to draw down that debt faster. What that reflection in the mirror is suggesting is often too austere for even the most parsimonious among us. Who looks at themselves in the mirror and says: "this year, I live on 30% less." While this might be excellent practice for the retirement you probably will experience, it is quickly dismissed.<br />
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<strong>Fourteen percent of those surveyed</strong> in the New York Life conversation with an agent revealed you will seek help. What you are doing is trading the reflection for a person who will tell you what you have told yourself. Of course this suggests that this financial professional has access to better tools to do what you have promised yourself to do. Ironically, they don't. For a fee, they will tell you what you already know.<br />
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Fear might be a motivator and many have taken to making these threats. But fear also brings a natural human reaction: to run in the opposite direction. Comparing where you are now with where you will be because you have done so little so far is a from of this fear. So is comparing you to your cohorts.<br />
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<strong>The simplest solution: 5, 10, 15.</strong> Contribute 5% to your retirement, 10% to your debts and 15% to your mortgage. A five percent contribution to your 401(k) will not impact your take home pay and will probably meet your companies matching contribution. A ten percent increase in payments to your debts will shave years and hundreds of dollars off of the interest you might pay. A fifteen percent payment towards the mortgage principal will reduce the length of your loan by as much as ten years. Doing this will have you arriving at the point of retirement with no debt and no mortgage.<br />
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Once the plan is in place and you have done this for five years, begin increasing the contribution by a single percentage point each year. This will be much easier to do as the debt you own is paid off and once the mortgage is satisfied, you will find your reflection congratulating you. This is far better than the criticism it once offered.@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-71970544030246103332012-01-29T07:26:00.000-08:002012-01-29T07:26:38.959-08:00Talking Investments on the RadioEvery weekday, I host a financial talk radio show online. The Financial Impact Factor Radio with Paul Petillo, Dave Kittredge and Dave Ng is the one place where talk about money comes alive. Tune in whenever you like. Archived version of the <a href="http://fifradio.com">Financial Impact Factor can be found here</a>.<br />
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As Jeffrey Kluger writes: “We’re suckers for scale. Things that last for a long time impress us more than things that don’t, things that scare us by their sheer size strike us more than things we dwarf. We grow hushed,” he writes in his book Simplexity “at say, a star and we shrug at a guppy. And why not?” he asks. “A guppy is cheap, fungible, eminently disposable, a barely conscious clump of proteins that coalesce, swim about for a few months, and then expire entirely unremarked upon.” He then suggests that “a star roars and burns across the epochs, birthing planets, consuming moons, sending showers of energy to the limits of its galaxy.” Yet, he points out, “the guppy is where the magic lies.” A star is just a furnace whereas a guppy is a symphony of systems. So it is with the world of finance.<br />
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And joining us today on the <a title="Financial Impact Factor Radio with Paul Petillo" href="http://paulpetillo.com" target="_blank">Financial Impact Factor Radio</a> we have <a title="Roger Wohlner" href="http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2012/01/18/target-date-funds-another-bad-year" target="_blank">Roger Wohlner</a>, Certified Financial adviser at <a title="Asset Strategy Consultants" href="http://www.assetstrategyconsultants.com/bio_wohlner.html" target="_blank">Asset Strategy Consultants</a> based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Roger also blogs at Chicago Financial Planner and columnist for USNews and World Report. He has been kind enough to join us today to help us sort through the complexity, the scale we are so impressed with.<br />
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That scale, that complex mechanism that Roger has agreed to speak about is the target date fund. If you use one, you should listen to this explanation. If you invest, you should tune in as well.<br />
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Listen to Financial Impact Factor Radio with your hosts:<br />
Paul Petillo of <a href="http://target2025.com">Target2025.com</a><strong>/</strong><a href="http://bluecollardollar.com">BlueCollarDollar.com</a> and <a href="http://financialfootprint.com" target="http://financialfootprint.com">Dave Kittredge and Dave Ng</a> of <a href="http://financialfootprint.com" target="http://financialfootprint.com"> FinancialFootprint.com</a><br />
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The show is broadcast daily, online at 6amPST/9amEST.<br />
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</div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-84594602865819889452012-01-23T06:43:00.001-08:002012-01-23T06:44:16.111-08:00The Forgetful Investor<br />
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In 1933, Junichiro Tanizaki, Japanese author and novelist wrote and essay entitled “In Praise of Shadows” in which he offers a cultural view of the differences between east and west; where the eastern cultures appreciate light and shadows, the west is looking for clarity. He wrote:<strong> “</strong>Find beauty not only in the thing itself but in the pattern of the shadows, the light and dark which that thing provides.” Today we are going to take a look at some of those shadows or should I say, those investments that have been pushed to the edge of the conversation.</div>
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Today on our daily radio show <a data-mce-href="http://fifradio.com" href="http://fifradio.com/" target="_blank" title="Financial Impact Factor Radio">Financial Impact Factor</a> we visit elocution corner, a feature on this show that deals with a phrase or word that we toss about with great ease without any real foundation in definition. Today’s catch phrase: <strong>set-it-and-forget-it</strong>.</div>
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We have had numerous experts on the show who have suggested that indexing and using ETFs to index the marketplace is hands down the best way to approach the world of investing. In most instances, we view these types of investments as set-them-and-forget them. They offer a simple way to track the marketplace but also provide just enough confusion that using them as the whole of your retirement plan is now consider not only smart but at the same time suggest that it is foolish to construct a portfolio otherwise.</div>
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And here’s the problem I have: if your indexed investment for example follows the marketplace, in other words, mimics its performance, and that performance is well-documented as being about 3.2% over the past decade, why is the target retirement return still north of 7-8%?</div>
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Ed Easterling of Crestmont Research authored two excellent books on the subject of market cycles—<em>Unexpected Returns – Understanding Secular Stock Market Cycles</em> … and most recently … <em>Probable Outcomes – Secular Stock Market Insights</em>.</div>
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In his latest book, Easterling lays out four points on market cycles and their effects on investors:</div>
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<li>“First, secular stock market cycles deliver returns in chunks, not streams." This refers to the volatility that makes news on a day-to-day basis and the fact that these swings are often much more dramatic that the overall span of an investor's plan.</li>
<li>"Second, most investors live long enough to have the relevant investment period extend across both secular bulls and secular bears." This is the time span contingent that suggest that the longer you remain invested, the higher the likelihood you will benefit from those swings.</li>
<li>"Third, investors do not get to pick which type of cycle comes first." Although you may think you can time the market, our emotions still play a role in how we place our goals and what, if any role the media plays in our decision.</li>
<li>"Fourth, investors need to be aware that they will likely encounter both types of cycles." To this dollar-cost averaging creates a way to master the market swings by purchasing your investments over time and doing so in an even manner.</li>
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Easterling continues: "Those who experience secular bears during accumulation are generally better prepared than investors who are spoiled by a secular bull. A secular bull market is a pleasant surprise to retirees who endured a secular bear on the way to retirement. For retirees who grew to expect a secular bull during accumulation, the unexpected secular bear can be considerably disruptive.”</div>
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So I ask my cohosts: is set-it-and-forget-it an investment strategy? <a data-mce-href="http://www.fifradio.com/2012/financial-impact-factor-radio-01-17-12/" href="http://www.fifradio.com/2012/financial-impact-factor-radio-01-17-12/" target="_blank" title="Financial Impact Factor Radio with Paul Petillo">Listen to the conversation here</a>.</div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-61993344342140360332012-01-01T02:00:00.000-08:002012-01-01T02:00:02.016-08:002012: The six resolutions that matter<br />
This article written by Paul Petillo originally appeared at Target2025.com<br />
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Jimi Hendrix once wrote: "I used to live in a room full of mirrors; all I could see was me. I take my spirit and I crash my mirrors, now the whole world is here for me to see." When it comes to the reflection staring back at us, our <a data-mce-href="http://target2025.com/as-we-enter-2012-a-few-thoughts-on-retirement/" href="http://target2025.com/as-we-enter-2012-a-few-thoughts-on-retirement/" target="_blank" title="retirement">retirement</a>, like those images, are a search for imperfection. We don't look at ourselves to admire how good we look; we look for flaws. We don't imagine a future; we see the relics of past decisions.</div>
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If you consider yourself a Baby Boomer, the reflection in the mirror is an image that polarizes: we are comfortable in the what the future holds or we are worried. There is good reasons for this feeling of either hope or dispair, with no real middle ground. This group has seen the demise of the defined benefit plan (pensions) and the introduction of the defined contribution plan (<a data-mce-href="http://target2025.com/retirement-and-your-401k-changes-in-201/" href="http://target2025.com/retirement-and-your-401k-changes-in-201/" target="_blank" title="401(k)">401(k)</a>). You have seen the greatest bull market in investing history and witnessed two major crashes that have rattled your confidence in the decade following. You are the first generation to realize that your future is in your hands and you were not ready for the responsibility.</div>
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If you are younger than a Boomer, you are the first generation to have never seen any other opportunity to finance your future than with a 401(k). And you have come to realize that this is not the plan it was intended to be. 401(k) plans were not designed to be the one and only vehicle for retirement. We were sold a notion that this was the end-all-to-be-all plan that would afford us a better retirement than our parents only to find out that it hinged on two extremely volatile concepts: your ability to consistently earn money and your level of contribution. Your 401(k) became your anchor and your wings.</div>
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I imagine that many of you will look back on the highlights of 2011 and find yourself in either one or two camps: you were able to hold onto your job, pay your bills and put some money away for retirement or you will be looking back at a year of indecision, regret and the promise to do better in 2012. You may be celebrating simply getting through it or wishing it never happened. To that, I offer some simple resolutions to embrace in 2012.</div>
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<strong>One: Revisit your idea of retirement.</strong> You can promise to save more money for your future, increasing your contribution to your plan or perhaps, in the absence of a plan, begin one of your own using IRAs. But you do this without really looking at that future. Retirement will not be the same of any two of us. For some it will be a life of struggle, an ongoing effort to make ends meet when they may never met while they were working. For some it will be the realization that the balance between the now and the future relies on a level of personal sacrifice we were smart enough to embrace while we were working. For others, it will simply be a resignation of sorts, a belief that it will never happen.</div>
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Retirement is three things: A time when we find new opportunities outside the confines of what we called a career, a place of unimaginable risk and/or a chance to take a breather. It is not a place of no work and all play. It is not a time spent waiting for the end to come. It is not what we imagine because, if we looked closely at that image we see flaws. So we don't look as closely at those who are retired, examine how they live and ask if this is what they had planned. In revisiting the idea of retirement, your concept of that future, consider looking closer. If you don't like what you see, resolve to change it. But don't look away.</div>
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<strong>Two: Don't reflect on what you've done.</strong> You made mistakes; we all have. Some of us took too much risk, some not enough. Some contributed as much to their retirement as their budgets allowed, others did not. Some of us made poor mortgage or credit decisions, others did not. No matter what you did or didn't do, looking back will not improve the look forward.</div>
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Looking forward doesn't mean turning your back on on any of those events. It means focusing all of your energy on fixing them. This is a twofold effort, the first being getting the budget you may not have in line with your paycheck and focusing on paying down your mortgage (keep in mind that even if your home is underwater - meaning your mortgage is greater than the value of the house itself - the interest you pay on than loan is eating away at your future invest-able or save-able dollars). Does this mean you should not put money away in a 401(k) plan and redirect every dollar to the day-to-day? Not at all. Keep in mind that a 5% contribution will, in almost every instance, not impact your take home pay.</div>
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<strong>Three: Don't over think the process.</strong> From every corner of the financial world you will hear: rebalance your 401(k). If you chose a minimum of four index funds spread across four sectors, or four ETFs that do the same thing, rebalancing is a waste of time. You diversify so you can capture ups in one market and downside moves in another and your contribution doesn't allow you to buy more when one market moves up and allows you to buy more when it goes down.</div>
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We want to think we are in control when in fact, the only thing you actually control is how much money you want to put in. Markets will do what they do best: move. It might be up one day and down the next. It doesn't really matter. What matters is that you do something and in 2012, it should be significantly more than you are doing now.</div>
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<strong>Four: Stop being selfless.</strong> One of the hurdles we are told, for women investors specifically, is their inability to put themselves before their family. This is a cause for concern of course but not a disaster in the making. Take a good long and hard look at your family and ask yourself: could I spend my retirement years living with any of them? Do they want you to?</div>
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<strong>Five: Embrace the truth.</strong> Now there will be an increased amount of pressure from every financial professional to get advice on your investments. This educational effort will evolve in the next several years from long, drawn out seminars on how your 401(k) works to short, ADD friendly videos that last several minutes and offer key points on what to do. The truth still relies on your ability to put more money away. Five percent will net you 25% of your current take home in retirement. A ten percent contribution over the average working career will pay you about 50% of what you earn today in retirement. Fifteen percent contributed to a 401(k) plan with average (modest) historical returns will allow you to live on 75% of your current income. Can you handle that truth?</div>
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<strong>Six: Stop worrying about it.</strong> According to HealthGuidance.org, you are killing yourself with worry. Michael Thomas writes: "Worrying leads to stress and stress has been linked with a number of health problems. People who suffer from high levels of stress are much more prone to cardiovascular disease, gastrointestinal issues, weight problems and there has even been a link made between stress levels and certain cancers." Instead resolve to do more saving than you have ever done, spend less than you did last year and embrace the reality of what fixed income is. Retirement is fixed income. Resolve to live like that now.</div>
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<a href="http://paulpetillo.com/">Paul Petillo</a> is the Managing Editor of <a href="http://bluecollardollar.com/">BlueCollarDollar.com</a>/<a href="http://target2025.com/">Target2025.com</a></div>
<br />@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-4018470340240436612011-12-20T15:30:00.000-08:002011-12-20T15:30:00.944-08:00Investing in the New Year: Are Mutual Funds Important in 2012?<p>This article originally appeared at <a href="http://bluecollardollar.com">BlueCollarDollar.com</a> and was written by <a href="http://paulpetillo.com"> Paul Petillo</a>
<p><strong>"Time is free, but it's priceless. You can't own it, but you can use it. You can't keep it, but you can spend it. Once you've lost it
you can never get it back." Harvey MacKay</strong>
<p>One of the key elements in any financial transaction is time. If you want to retire, you must consider the amount of time. If you want to borrow, how long you have to pay it back can be translated into dollars and cents. Investing; timing they suggest can't be down but is important nonetheless.
<p>If you are twenty, time is on your side. If you are thirty, there is time left. If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone. And older than that, time is no longer on your side. It accompanies us through life like some dark passenger. It reflect back on us from the mirror. And when we look at our retirement plan, it stares at us without guilt or shame. Time is the truth.
<p>When I first began writing these predictions, and I've been churning out these year end ditties for over a decade, many were laced with optimism, some with an urging that we learn the lesson and move forward armed with knowledge of past mistakes, and still others were exercises in reality. In 2012, we have some opportunities and some problems awaiting us, left on the table as we symbolically turn the calendar wiping out 2011. But it won't leave quietly.
<p>So I have a few thoughts about what you can do - resolutions of sorts but not the drastic sort we make and break almost within hours of promising ourselves at midnight.
<p><strong>Increase your contribution</strong> I start with this obvious chant for two reasons: you aren't making a large enough contribution and two, I would be remiss in not telling you this right from the start. And I'm not just speaking to those with a 401(k).
<p>There are the millions of you who are forced to (and because of that are not likely to) finance your own retirement through an individual retirement account. We lament at the worker who literally only has to sign up at his workplace and doesn't. And far too often, we say little about the person who has to sign-up (after finding a fund), commit with a fortitude that is somewhat lacking and to contribute some of their paycheck via direct deposit every week or month. That effort, it seems is a much more involved hurdle.
<p>In 2012, the investment world will be little changed. It will roil and confuse and gyrate and possibly even nose dive - just as it has for decades. It will react to news - if not from Europe form China or even the presidential elections (which ironically tend to be excellent years to invest). This will have you second-guessing your investments. But this will only apply if you have no idea how much risk you can take.
<p><strong>Pay attention to diversification</strong> You may not be capable of rebalancing, the act of making sure that your investments are directed evenly across many investments. This is much harder than it seems. As long as you are involved - and that is YOU in capitals - the struggle to keep balance will not get any easier.
<p>For the vast majority of us, mutual funds will be the investment vehicle of choice. These investments will see more movement towards fee reductions. Which is a good thing. Fees will and always have been a subtraction of gains. This makes an excellent argument for indexing.
<p>Choosing six index funds across the following cross-sections of the markets will not solve the problem of rebalancing (some will do better than others) but it will provide diversification. Index the largest companies (an S&P 500 fund), a mid-cap fund (the next 400 companies in size), small-caps (the next 2000), an international fund (an index of the largest countries (those with established banking systems even if they are currently troubled and will continue to be so in 2012), an emerging market fund (after international funds, the most risky) and a bond index (one that covers as much fixed income as possible).
<p>Some of you will wonder if exchange traded funds (ETF) wouldn't be just as good if not better than simple indexing. In 2012, ETFs will continue to drill down ever deeper into sectors of the markets that add risk along with the illusion of an index. ETFs will become more actively managed in 2012 offering you more risk at a lower cost. Cheap doesn't mean better. 2012 will be year of the ETF. If you are unsure what these investments are, consider this conversation I had with <a href="http://www.fifradio.com/2011/financial-impact-factor-radio-11-14-11/">David Abner of Financial Impact Factor Radio</a> recently to help explain what these investments are and how they work.
<p><strong>Focus on your financial well-being</strong> This refers to your credit score. It continues to impact your financial future and will become increasingly harder to ignore. A new <a href="http://bluecollardollar.com/credit-scores-corelogic-reports-120311.html">credit rating service agency </a>will add to the difficulty in 2012 and not only will the current scoring impact costs such as insurance, it will seek to trace the breadcrumbs of your financial life more thoroughly that the big three do.
<p>There is little likelihood that the job market will increase as many of our returning troops will flood the marketplace, taking numerous jobs from your kids just out of college. Which means another year with your kids at home. The only answer to this problem is to continue to tighten down your budgets in 2012. As I mentioned earlier: "If you are forty, time is of the essence. If you are fifty, time is running out. If you are sixty, where has the time gone."
<p>And you must do this understanding that inflation - not the reported number but the real number in your grocery bill - will still chip away at your wealth. This means you will move in two opposite directs in 2012: saving and investing more for your fleeting future (at least 6% but 10% would be best) and spending less in the present (easy of you don't use credit).
<p>And the housing market will improve for those who have repaired any damaged credit or who have saved enough of a down payment to buy a house. people are still buying and selling. These people have found that while the market is not accessible to all, it is for those that have done right by their personal finances.
<p>Do all of that this may not seem like a new year - but it will be a better year!@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com1tag:blogger.com,1999:blog-6299512634730168432.post-72324454251242539962011-11-15T12:07:00.001-08:002011-11-15T12:09:03.036-08:00Don't Know ETFs: Here's the ExpertThis past week, on the <a title="Financial Impact Factor Radio" href="http://fifradio.com" target="_blank">Financial Impact Factor</a> with <a title="Paul Petillo" href="http://paulpetillo.com" target="_blank">Paul Petillo</a>, <a title="Financial Footprint" href="http://financialfootprint.com" target="_blank">Dave Kittredge and Dave Ng</a> we had David J. Abner. He is the Director for Institutional Sales and Trading at Wisdom Tree and the author of <a href="http://www.amazon.com/gp/product/047055682X/ref=as_li_ss_tl?ie=UTF8&tag=bluecollardol-20&linkCode=as2&camp=217145&creative=399369&creativeASIN=047055682X">The ETF Handbook: How to Value and Trade Exchange Traded Funds (Wiley Finance)</a><img style="border: none !important; margin: 0px !important;" src="http://www.assoc-amazon.com/e/ir?t=bluecollardol-20&l=as2&o=1&a=047055682X&camp=217145&creative=399369" alt="" width="1" height="1" border="0" />
These funds, that trade like stocks have been coming to the forefront of the investment world for almost a decade. But even after all that time, their purpose isn't clearly understood, their benefits less so and the media, suggesting volatility has dampened our enthusiasm towards them. Mr. Abner discusses these products, what they are and why they are important. <a title="target2025.com" href="http://http://target2025.com/the-debate-continues-mutual-funds-or-etfs/" target="_blank">ETFs</a> will begin showing up in your 401(k) as investor demand and plan administrator's fiduciary responsibility tightens. This increase exposure is good for the funds; but are the good for you?
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</div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-16854936908666173852011-11-09T12:05:00.000-08:002011-11-15T12:06:30.260-08:00Melville's Mutual Fund Advice<br />
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There is a passage in Moby Dick where Ishmael reflects on the sight from the masthead. He could have been speaking to the world of <a href="http://target2025.com/investing-in-mutual-funds-your-ballot-has-been-cast/" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #447099; font-size: 14px; font-weight: 700; font: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.1em; padding-left: 0px; padding-right: 0px; padding-top: 0.3em; position: relative; text-decoration: none; vertical-align: baseline;" target="_blank" title="investing in mutual funds">investing in mutual funds</a> as much as he was discussing the meditative sights below his perch. Melville writes that from that vantage “you stand, a hundred feet above the silent decks, as if the masts were gigantic stilts, while beneath you and between your legs, as it were, swim the hugest monsters of the sea… The tranced ship indolently rolls; the drowsy trade winds blow; everything resolves you into langour.” And from our desks we watch our investments swim below us, our <a href="http://bluecollardollar.com/mutualfundsinvest/mutual_fund.html" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #447099; font-size: 14px; font-weight: 700; font: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.1em; padding-left: 0px; padding-right: 0px; padding-top: 0.3em; position: relative; text-decoration: none; vertical-align: baseline;" target="_blank" title="mutual funds">mutual funds</a> existing in a world of murky depth, and our distance providing perspective on how well they are doing and giving us, at the same time, no perspective at all.</div>
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Melville writes a cautionary tale with a well-known outcome. And as we enter the fourth quarter of what is turning out to be one of the more volatile years for investors, where advice on what to do has mostly proved wrong (move to cash, they said to avoid, as Melville writes “the universal cannibalism of the sea”) and to coin a nautical term “stay the course” has proved profitable. We set sail and hope for the best and yet are wary at every change in the investment weather while we worry about what swims beneath the surface.</div>
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Such events leave us wanting to gain some control over where we are and what we determined as the course we’ve set. No one enters the ocean of investment choices without wondering if the plot we have set in motion will be the right one. One of the monsters of the deep however may breach the surface of your calm sea and take back the adventure. This will happen if you are not careful. But even care may not help.</div>
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It is often recommended that you watch over your investments, periodically rebalancing and adjusting your portfolio to follow the course you may have set. You can, as many do in the final months of the year, increase our contributions to your 401(k)s and IRAs to grab the tax advantage. But that act might not turn out as expected; particularly when the funds you invest in may also be considering a chart change as well.</div>
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You can’t invest without considering the tax consequences. You invest, often in a pre-tax way to capitalize on the advantage your plan offers. And when you invest otherwise, you sell what you own to grab the gains you have made and if you are tax-savvy, sell the losers in order to offset those profits. But what if you have no losers? What if the year was good enough to book the profits? What if you are a mutual fund manager and those profits need to be sold despite your best efforts, to satisfy the redemption of less confident investors who may have heard the siren song of another investment opportunity?</div>
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Several things you need to consider in the coming months as you contemplate what to do with the investments you own. When Melville wrote: “We cannot live only for ourselves. A thousand fibers connect us with our fellow men; and among those fibers, as sympathetic threads, our actions run as causes, and they come back to us as effects” he was not writing about mutual fund investors and the thousand fibers that this sort of investment connects us to others like us. Yet mutual fund investors simply can’t and in many instances, won’t consider the group as a whole when making investment decisions – and they shouldn’t. But what you do and how the fund manager reacts matters.</div>
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The fourth quarter as I mentioned is often the time when you consider changing your investment balance. And this consideration is often recommended. But the fourth quarter may very well be the worst time to do what would seem to be the right thing to do. The tax implications of selling shares in one fund and buying those of another may give you the very thing you don’t want: capital gains without the capital gain.</div>
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Investors looking to purchase shares in another fund might find the fund manager has the same motive: rebalancing. had you been in that fund for the whole year or longer, the capital gains is welcome. Enter the fund in the weeks prior to this event, and you get all of the taxable downside and none of the profit.</div>
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It isn’t s if this comes without a warning. A fund’s website will often estimate these distributions and your research (you do research right?) should give you reason to hesitate. What is often less clear, is the fund manager’s reason when it is due to redemptions. Redemptions in mutual funds trigger a series of events. The exiting shareholder must be paid and to pay them, something must be sold. When the redemptions are small, the event is almost unnoticeable. When the exits are packed however, the selling impacts the remaining investors. If it was good year, then gains are sold.</div>
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According to Christine Benz, Morningstar’s director of personal finance “The strong market rebound since early 2009 means that many funds now have more gains than losses on their books: In fact, fully half of the equity mutual funds in our database have positive potential capital gains exposure, meaning that they have gains on their books that they haven’t yet paid out to shareholders, and more than 200 stock funds have potential capital gains exposure of more than 50%.”</div>
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While a domestic mutual fund may have large profits that may or may not be realized before years end, some emerging markets and International funds will need to satisfy exiting shareholders in greater numbers than in years past. Many of the funds concentrated in areas like China, Brazil or even Latin America are on the small side. The smaller the fund, the greater the impact of an investor exodus. With Europe hanging in the balance, many small and mid-cap funds may find their ship sailing in choppier waters than the previous three quarters.</div>
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Of course, if you need to rebalance, do so. But do so with a word of caution. If you can wait, that would be wise and even prudent. But do your homework well in advance of any sudden changes. While you can’t time markets, you can time these distributions. And failing to do so could cost you dearly. As Melville points out: “Ignorance is the parent of fear…”</div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-78065085603128673262011-09-28T16:50:00.000-07:002011-09-28T16:50:31.037-07:00Mutual Fund Investing: Can You Be Blamed for the Global Crisis?<span class="Apple-style-span" style="background-color: white; color: #444444; font-family: Arial, Helvetica, sans-serif; font-size: 14px; line-height: 21px;"></span><br />
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It is in our natures to place blame. As Doug Copland once quipped: “Blame is just a lazy person’s way of making sense of chaos.” That said, have mutual funds played a larger role in the ongoing crisis globally? And if so, why do we look to much smaller elements of the equation when the sheer size of these “investment communities” might be responsible, all be it unwittingly, for keeping the embers of (a global) recession burning?</div>
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Mutual funds as we all know are investment communities, an organized structure of similarly minded individuals (or as similarly minded as any large group can be) who seek to in many instances, lower the risk of investing by investing as one. With one theoretical manager at the helm, although we know that it can be many managers, we tend to think of them as one unit in most cases, the community gathers around their expertise and know-how in part because we believe we have limited expertise and know-how. We defer the heavy lifting and decision making to someone else. But mutual fund managers also fear us as investors. In part because we blame.</div>
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Now, this group think, achieved with only limited knowledge of what is really going on, and the fear of blame, which signals the herd that something is amiss may actually be responsible in a much greater way than previously considered, to have prolonged the fears of additional global slowing even as it should be plateauing, if not showing signs of recuperation. While the evidence to back this thinking is just emerging, the dynamics of the mutual fund do add credence to the theories being developed by <strong style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 14px; font-weight: 700; font: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: baseline;"><a href="http://www.voxeu.org/index.php?q=node/4746" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #447099; font-size: 14px; font-weight: 700; font: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.1em; padding-left: 0px; padding-right: 0px; padding-top: 0.3em; position: relative; text-decoration: none; vertical-align: baseline;">Claudio Raddatz</a>, </strong>Senior Economist in the Macroeconomics and Growth Unit of the World Bank’s Development Economics Research Group and <strong style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; font-size: 14px; font-weight: 700; font: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; vertical-align: baseline;"><a href="http://www.voxeu.org/index.php?q=node/4719" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #447099; font-size: 14px; font-weight: 700; font: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.1em; padding-left: 0px; padding-right: 0px; padding-top: 0.3em; position: relative; text-decoration: none; vertical-align: baseline;">Sergio Schmukler</a>, </strong>Lead Economist at the World Bank.</div>
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First, what do we know about mutual funds and those that invest in them. Every mutual fund manager does what she/he can do to keep their finger on the pulse of those who have entrusted their money to her/his expertise. No easy task when the group is numbered among the tens of thousands. This group can find favor with the manager and inject money into the fund at such a rapid pace as to overwhelm the fund or on the flip side, pull so much of their investment out as to make the fund weaker for those who remain.</div>
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Although there has been some evidence of late that suggests that funds size has little to do with its overall returns and performance, any moves in either direction add pressure to the fund manager and their investment goals. Add to that the reasons why – disturbing financial news for instance and the pressure compounds. So we have one root cause: investors either looking to increase their exposure in one fund as they escape the other.</div>
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This creates the second reason that mutual funds play a bigger role in what the authors of a recent paper suggest: the portfolio adjustments that need to be made because of what the underlying investors are doing. Think of a bad movie, where the audience begins to head for the doors. Those remaining wonder if they should leave as well, even though many will stay for one reason or the other. In a mutual fund, the manager doesn’t necessarily bar the exits so much as adjust the portfolio in the hopes of retaining those that have remained in their seats. And we have this shift occurring to add to the problem.</div>
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The last problem is what those remaining investors say to the managers. Their input is sacrosanct and although not necessarily embraced, it is heeded. According to Radditz and Schumkler: “We find that both the underlying investors and managers of mutual funds are behind their large investment fluctuation across countries, retrenching from countries in bad times and investing more in good times.” They posit that unlike investors, the single minded type who understand that when markets sell it is because either the seller has information that no one else does or that the seller doesn’t have the information needed as simply wants out because they see danger on the horizon.</div>
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Mutual funds cannot act as agents at a equity fire-sale. They rely on the manager to do as chartered and this is often contrary to what she/he would like to do: bulk up on bargains that they know are selling at less than their true market value. They have information that you may have acquiesced by joining the fund but you simply won’t let them react. So they do what you want even if it does not seem to be in your best, long-term interest, and they sell. They sell to fund redemptions and they sell to retrench. But the key here is they sell.</div>
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While the authors of the <a href="http://www.nber.org/papers/w17358.pdf" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; color: #447099; font-size: 14px; font-weight: 700; font: inherit; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.1em; padding-left: 0px; padding-right: 0px; padding-top: 0.3em; position: relative; text-decoration: none; vertical-align: baseline;" target="_blank">paper</a> point their evidence on international funds, the ripple effect is felt even in domestic, US-based funds as well that hold companies doing business on an international scale. In “normal times” the authors point out can be simply a retrenchment based on the inability of some countries to do as expected, abnormal times force a larger scale move that impacts the whole of the marketplace.</div>
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The information that investors in the these funds creates an imperative for the managers to make some sort of move to retain those investors while catering to those who have left the theater. This creates a supply-side shock to not only the fund but also to the banks of countries these funds might invest in. Call it idiosyncratic risk.</div>
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Should we blame te mutual fund? Quite possibly in part because of the mutualized investor is actually in the driver’s seat. They vote with their investable dollars and walk if there isn’t an expected return on their money. The real question lies not so much in the risk that the investors in the fund have or do not want but whether the fund is a bargain even as the risk of what it owns, increased by the departing shareholders, creates. And where does the money go? Into money market investments that benefit banks in the US while taking money from the countries who may need their borrowing/lending increased to help alleviate the crisis.</div>
@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-26247025376158270032011-07-02T16:47:00.000-07:002011-07-02T16:47:00.840-07:00Mutual Funds and Performance: At the Half Way Point for 2011<div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial initial; background-repeat: initial initial; font: normal normal normal 13px/19px Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.6em; padding-left: 0.6em; padding-right: 0.6em; padding-top: 0.6em;">For the vast majority of investors - mutual fund investors in particular, watching the major indices and judging your performance against them distorts the reality of not only where you should be but where you could have been. If you were to look only at the difference between the former highs the markets hit in October 2007 and those at the most recent close on Thursday (the Dow Jones Industrial Average <a _mce_href="http://www.marketwatch.com/investing/index/DJIA?link=MW_story_quote" href="http://www.marketwatch.com/investing/index/DJIA?link=MW_story_quote">DJIA +1.36%</a> is around 12% below its all-time high of 14,165, and the S&P 500 index <a _mce_href="http://www.marketwatch.com/investing/index/SPX?link=MW_story_quote" href="http://www.marketwatch.com/investing/index/SPX?link=MW_story_quote">SPX +1.44%</a> is nearly 16% below its October 2007 high of 1,565.) you might be considering jumping back in.<br />
<a _mce_href="http://target2025.com/wp-content/uploads/2011/07/070211_RP9nb56gfrtt5667_TRGT2025.jpeg" href="http://target2025.com/wp-content/uploads/2011/07/070211_RP9nb56gfrtt5667_TRGT2025.jpeg"><img _mce_src="http://target2025.com/wp-content/uploads/2011/07/070211_RP9nb56gfrtt5667_TRGT2025.jpeg" alt="" class="alignleft size-full wp-image-2457" height="133" src="http://target2025.com/wp-content/uploads/2011/07/070211_RP9nb56gfrtt5667_TRGT2025.jpeg" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; float: left;" title="070211_RP9nb56gfrtt5667_TRGT2025" width="200" /></a><br />
But you would have been much better off had you done absolutely nothing. Back in those desperate times, many people did what the rest of the herd did as stocks began to tumble. You sold. But three years later, that would have proved to be the wrong thing to do. During that period, most folks fled the <a _mce_href="http://target2025.com/mutual-funds-investing-it-is-what-you-believe-it-is/" href="http://target2025.com/mutual-funds-investing-it-is-what-you-believe-it-is/">actively managed mutual fund</a>, particularly the domestic issues in favor of bond funds and in far too many instances, to <a _mce_href="http://target2025.com/the-target-target-date-funds-miss/" href="http://target2025.com/the-target-target-date-funds-miss/">target date funds</a>.<br />
<br />
Let's consider the indices that are often compared to the riskier funds, a benchmark that has proven to be less than accurate in terms of performance. The Dow and the S&P 500 track the largest companies, a group that has struggled to assure the investor that dividends and size were enough to best the market. Turns out, that picking and choosing, as actively managed funds do, would have been the better approach.<br />
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Two things come into play. One, these funds tend to have higher fees. Less those fees, you would have still found yourself in a better position than had you simply put your money in a benchmark S&P 500 index.<br />
<br />
And secondly, there is the liquidity issue that comes with buying mid-cap and small-cap companies. Liquidity refers to the amount of stock available in smaller companies weighed against the amount of stock held by the principals. This makes these companies more volatile and even under-purchased in indexes that track those larger markets (the Wilshire 5000 for instance may track all available stocks but the indexes crafted based on this index only own.<br />
<br />
To complicate matters somewhat, the Wilshire 5000 actually has 5700 stocks in the index, Wilshire 4500 is the Wilshire 5000 without the S&P 500 stocks in it. A Wilshire 5000 index fund (usually called total market index) will probably own around 4000 stocks. A Wilshire 4500 index contains those same stocks less the top 500 companies.<br />
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As Mark Hulbret noted in a recent column for Marketwatch, "According to a report produced earlier this week by Lipper (a Thomson Reuters company), 45% of the domestic-equity funds for which they have data back to October 2007 were, as of the end of May, ahead of where they were on the date of the stock market’s all-time high."<br />
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So the indexes are lower than where you would have been had you stayed put - of course this is based on the assumption that many of you where using actively managed funds in your 401(k) plans, that many of those funds did not have indexes available and the post 2007 products such as target date funds or even ETFs, weren't a consideration or even an option during those days. You embraced risk and ignored fees and looking at your portfolio, that was probably seen as a good thing.<br />
<br />
Does that mean index funds shouldn't be part of your portfolio? The simplest answer is no. Index funds still provide a low cost and low turnover environment to <a _mce_href="http://momsmakingamillion.blogspot.com/2011/03/dressing-badly-when-your-investment-has.html" href="http://momsmakingamillion.blogspot.com/2011/03/dressing-badly-when-your-investment-has.html">invest</a> in. More importantly, the largest cap indexes add dividends to the mix. This brings these investments closer to the domestic out-performance over the last half of the year.<br />
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Diversity in this investment environment, which is still far more volatile than anyone would like it to be, with global issues remaining a major concern, means taking a little less - in terms of performance. You should be in index funds now. To do this would be considered a defensive move for those that kept the actively managed faith.<br />
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A portfolio of five, perhaps six index funds, tracking sectors from the S&P 500, a mid-cap index, a fund tracking the small-cap, an international index (which tracks the companies of what is considered the developed world), an emerging markets index (contains investments from countries like China, India, Russia, Brazil and others) along with a bond index. This sort of diversification keeps the low cost features of index funds and avoids any crossover investment (owning the same stocks in different funds).<br />
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You can be proud of your investment accumen in getting back to those 2007 highs and perhaps beyond. But show your real prudence and protect what you have done. This economy, both domestic and globally is far from recovered and the stock market is painting a better picture than reality suggests. Being a little defensive at this juncture will keep you in the game without risking what you have gained.</div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-18360431180904417922011-06-24T17:01:00.000-07:002011-06-24T17:01:12.030-07:00The Lure of ETFs<div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial initial; background-repeat: initial initial; font: normal normal normal 13px/19px Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.6em; padding-left: 0.6em; padding-right: 0.6em; padding-top: 0.6em;">I know two things about exchange traded funds (<a _mce_href="http://target2025.com/?s=etfs" href="http://target2025.com/?s=etfs" target="_blank" title="etfs">ETFs</a>). There is a high degree of likelihood that your 401(k) will soon have these investments available to you and that some of the basic selling points of why they might be a good choice will be too tempting to pass up. But you should consider the consequences of biting that ETF apple, not just from the consideration of whether the investment is worth the effort, but also from whether you are the investor you think you might be.<br />
<a _mce_href="http://target2025.com/wp-content/uploads/2011/06/061411_RPs275g3h56_TRGT2025.gif" href="http://target2025.com/wp-content/uploads/2011/06/061411_RPs275g3h56_TRGT2025.gif"><img _mce_src="http://target2025.com/wp-content/uploads/2011/06/061411_RPs275g3h56_TRGT2025.gif" alt="" class="alignright size-full wp-image-2403" height="109" src="http://target2025.com/wp-content/uploads/2011/06/061411_RPs275g3h56_TRGT2025.gif" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; float: right;" title="061411_RPs275g3h56_TRGT2025" width="135" /></a><br />
So let's first ask whether you understand what ETFs are. At first glance, they seem to be a good choice. They, at least on the surface offer exactly what index funds do and at times, a great deal more. They claim to be less expensive and more tax efficient that actively managed mutual funds and they are. Actively managed mutual funds, even as they have reduced their overall fees in order to placate those who worry that cost is an issue, still charge more than ETFs.<br />
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Actively managed mutual funds still dominate the 401(k) world and with good reason. Investors seem to understand, even after several years of concerted efforts by the investment community, that some risk is worth paying for. This is not always the case. The deduction of those fees against any returns you may have had illustrate why these funds are often criticized. Comparing them to an index fund, while often not necessarily fair, further shows that had you paid less in fees using an passively managed index fund you probably would have been a little bit closer to what you think of as profitable.<br />
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Passively managed funds such as index funds have passionate advocates. They believe that investing in the low-cost (because they rarely trade and do so only rebalance when the index changes) and in the case of the S&P 500 index, reinvest dividends (over 350 companies in the 500 index do) you have achieved the tax advantage, the fee advantage and because of that, a more profitable retirement dollar.<br />
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Both of the descriptions of the two most commonly used types of funds in a retirement account portray the investment possibilities facing most investors. It should be noted that not all 401(k) plans have index funds available to their participants, the option is growing. But also entering the fray is the exchange traded fund.<br />
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Now these investments will be tempting. They tout their tax efficiency suggesting that it is even better than an index fund offers. They advertise their transparency and ease of trading (they trade on an exchange just like a stock). And they never fail to tell you that these investment offer the world in a way that has never before been offered to 401(k) investors, a chance to invest in commodities, emerging markets and anything in-between. And because of this ease of maneuvering in and out on a whim, they claim to lower risk as well.<br />
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But do they do what they claim they will do? This is debatable. First, they are not index funds. They do not necessarily purchase all of the stocks in an index even as they suggest they might. Instead, many ETFs create their own indexes to follow and seek to invest in places where indexes have yet to trod. Mark P. Cussen, a financial planner for the military wrote recently about a little understood method employed by ETFs to get gains that seem better than the index they are suggesting they mimic. He wrote: "Most of these funds are usually leveraged by a factor of up to three, which can amplify the gains posted by the underlying vehicles and provide huge, quick profits for investors. Of course, leverage works both ways, and those who bet wrong can sustain big losses in a hurry." Leverage is another word for borrowing.<br />
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If there is an asset class, there is an ETF looking to exploit it. if you are hearing a lot about a certain class, such as precious metals, the temptation to join in the fray might be too hard to avoid. ETFs allow you to jump in "with the herd" and sell "with the herd". neither are necessarily a good idea and if you keep in mind, the low cost and tax efficiency of doing so are mostly wiped away. In order for ETFs to be both of those, you need to buy in large lots, offsetting the cost of the trade (commission) and you need to hold them for over a year. Small traders, which is the vast majority of us do neither - and won't if you buy them.<br />
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I mention "the herd". This mentality os what will drive you to consider this investment once it makes its debut in your plan. Instead, consider the vanilla index fund and what has become known as the tactical strategy. This employs a portion of your plan to just such whims while keeping the larger portion in the funds that will do the best with the least cost.<br />
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A tactical strategy might look something like this for young to middle aged investors: seventy percent of your assets in three to six index funds and thirty percent allocated to ETFs or even actively managed funds. Older investors might do the same but keep in mind that many major economic watchdog groups have warned that ETFs could be the next global financial troublemaker. And if that happens and happens quickly, the losses on that side of your portfolio close to retirement might find you less likely to retire when you want.<br />
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You will be tempted. And many of you will bite. But don't think that this investment can't bite back. It can and it might and unless you plan for such an occurance, the teethmarks it leaves in your plan might be long-term and scarring.</div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-77341948215908793422011-06-04T05:38:00.000-07:002011-06-04T05:38:34.230-07:00TDF: Still not Convinced about Target Date Funds<div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial initial; background-repeat: initial initial; font: normal normal normal 13px/19px Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.6em; padding-left: 0.6em; padding-right: 0.6em; padding-top: 0.6em;">I have a box and it is blue. By description you can imagine exactly what you need to understand that what I have, although key details about size and shape are left blank and the shade of blue is not fully described. But you get the idea that there is a container and the color is one of the primary ones evoked by light having a spectrum dominated by energy with a <a _mce_href="http://en.wikipedia.org/wiki/Wavelength" href="http://en.wikipedia.org/wiki/Wavelength" title="Wavelength">wavelength</a> of roughly 440–490 <a _mce_href="http://en.wikipedia.org/wiki/Nanometre" href="http://en.wikipedia.org/wiki/Nanometre" title="Nanometre">nm</a>.<br />
<a _mce_href="http://target2025.com/wp-content/uploads/2011/05/053111_RP09mmkgt5654_TRGT2025.jpeg" href="http://target2025.com/wp-content/uploads/2011/05/053111_RP09mmkgt5654_TRGT2025.jpeg"><img _mce_src="http://target2025.com/wp-content/uploads/2011/05/053111_RP09mmkgt5654_TRGT2025-229x300.jpg" alt="" class="alignleft size-medium wp-image-2356" height="300" src="http://target2025.com/wp-content/uploads/2011/05/053111_RP09mmkgt5654_TRGT2025-229x300.jpg" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; float: left;" title="053111_RP09mmkgt5654_TRGT2025" width="229" /></a><br />
Suppose I have a <a _mce_href="http://target2025.com" href="http://target2025.com/" target="_blank" title="Target2025">target date fund </a>and it suggests I will retire in 20-years. Much like the blue box, most of what you need to know about this mutual fund is essentially portrayed in the name. Unlike other <a _mce_href="http://bluecollardollar.com" href="http://bluecollardollar.com/" target="_blank" title="BlueCollarDollar.com on investing in mutual funds">mutual funds</a>, whose name seeks to tell you how the fund manager(s) will invest your hard-earned cash in a confusing jumble of confusing terms, target date funds convey a simple message of here and then. Here is the fund you want to get you to a then you need.<br />
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Unlike the blue box, there is far more at stake and because of that, a simple title for the investment is easy to understand but at the same time, so deeply layered and nuanced, that it makes the real investors wary and new investors complacent. Recently, Scott Holsople, president and CEO of Smart 401(k) wished that something as simple as a name could do it all for everyone. he wrote: "At Smart401k, we spend much of our time thinking about how to explain things in a manner that’s relatable to the average participant (i.e., someone who doesn’t live and breathe investing and its terminology)."<br />
<div><br />
</div><div>Don't be jealous Scott. I have yet to find a single redeeming quality in TDFs. Cobbled together and containing questionable funds, they are hoisted on the 401(k) public as the be-all-to-end-all investment, making not only the plan sponsor feel a fiduciarially warm and fuzzy but giving the plan participant the impression that they need do nothing more.<br />
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</div><div>Three things wrong with target date funds that folks choose to ignore.</div><div>1. The target is often wrong. If you are young, just starting out and auto-enrolled (which is how these things became popular and abundant in the first place), the target date you choose has little to do with your actual retirement date. It still hinges on the seemingly outdated 65 years old-and-done thinking. Which leads me to...</div><div><br />
</div><div>2. Everybody's target is different. If you are a blue-collar worker for example, the target might be accurate; but not so if you can work beyond. So the glide path, a nice word for "we don't know what we are doing and it has never been done before so use this imagery to explain it how we're going to get you from point A to point B", doesn't apply. Which leads me to...</div><div><br />
</div><div>3. What these fund managers do, none of whom will stay with the fund until it reaches retirement, none of whom invest in the fund and none of whom can explain exactly where the fund is relative to the benchmark (that doesn't really exist) is charge more than a similar portfolio of index funds or even a balanced fund and do so without a track record. Give us your underinvested, your newbies and your (by-choice) dumb investors and we will give them the way and the light, they seem to suggest. Suppose twenty years done the road you find yourself with far less than you assume. What then?</div><div></div><div><br />
</div><div>Only a few people have the nerve to speak out against these investment because they seem okay on the surface, they do get folks involved and the risks seem low. But they are going to disappoint more people than they help and I'd be willing to wager that in the next 10-years, folks will sour on the notion and realize that investing in the markets needs to be as simple and as low cost as possible and while TDFs seem simple, they are really just dumbed down versions of what could be something far more engaging. TDFs are an excuse for not educating yourself about where your money is going. Which in and of itself is a bit of a shocker.</div></div></div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-20676816429144466662011-05-30T07:03:00.000-07:002011-05-30T07:03:41.395-07:00Heard about Herds?<div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial initial; background-repeat: initial initial; font: normal normal normal 13px/19px Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.6em; padding-left: 0.6em; padding-right: 0.6em; padding-top: 0.6em;">It has been decades since <a _mce_href="http://target2025.com/financial-impact-factor-radio-with-meir-statman/" href="http://target2025.com/financial-impact-factor-radio-with-meir-statman/" target="_blank" title="behavioral economics">behavioral economics</a> took hold as a science of investor actions. Designed to study the irrational decisions that we all are apparently hard-wired to make, the field grew into a respectable and well-quoted discipline. Which is fine. We know we have incredibly limited potential to redesign ourselves, despite the pushing and prodding in one direction, the look-in-the-mirror study of our own foibles and the instructions on how to improve this very human lot in life. But we muster on. And this is why, even despite the improved access to our 401(k) plans does our retirement still suffer.<br />
<a _mce_href="http://target2025.com/wp-content/uploads/2011/05/052211_RP9gh66765_TRGT2025.jpeg" href="http://target2025.com/wp-content/uploads/2011/05/052211_RP9gh66765_TRGT2025.jpeg"><img _mce_src="http://target2025.com/wp-content/uploads/2011/05/052211_RP9gh66765_TRGT2025-150x150.jpg" alt="" class="alignright size-thumbnail wp-image-2321" height="150" src="http://target2025.com/wp-content/uploads/2011/05/052211_RP9gh66765_TRGT2025-150x150.jpg" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; float: right;" title="052211_RP9gh66765_TRGT2025" width="150" /></a><br />
Studies done quite recently suggested that most folks will simply accept the status quo if given a confusing situation. Investing is just such a case-study in chaos, less so for the experienced investor, but even for that group, a churning pool of information keeps them struggling to keep up. But the behavioralists insisted that auto-enrollment in a retirement plan would create great strides for the plan and even greater rewards for those who may have - and still do have the option of - opting out.<br />
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Auto-enrollment we have found out is a trip through the wardrobe. We may all have taken the first step. But what awaits us on the other side, in almost every instance, is our irrational mind. And in almost every instance as well, a less-than-wonderful 401(k) plan. But more on the plan later. Let's just focus on what we have done recently as we embrace our biases, follow our illusions and believe in the fallacies.<br />
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There have been several alarms ringing on Wall Street and those who invest in mutual funds have turned a deaf ear. Herd mentality, the primitive instinct to follow the herd because doubt in the face of danger can present death was considered a valuable possession. Somewhere along the line though, things changed.<br />
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In our wonderful modern brains, this instinct has evolved into a trait, or so say the behavioralists, the makes us run towards the danger because everyone else is. What once once a survival instinct is now a suicidal tendency, at least in the world of investing. (Look at it this way: It would be similar to seeing a crash on the highway and deciding that driving your car into the pile would be in everyone's best interest, including your own.) Evidence of this is beginning to crop up and our big "modern" brains are at fault.<br />
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There are three types of mutual funds or mutual fund investment strategies that have shown a tendency to attract these kinds of investors: emerging markets, commodities and a category I'd be willing to wager you didn't realized existed, floating rate funds. (Amy Or of Marketwatch.com describes them as "Unlike fixed-rate loans, floating-rate loans can capture rising interest rates and are deemed a good inflation hedge" and with some uncertainty about when if sooner-not-later, interest rates begin to rise, these funds will be able to capture the change in market conditions.<br />
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Recent herd-like inflows of over $14B suggest that the usually high load fees and the underperformance of late matter little. It is where, these investors believe they should be. But because, as so often is the case with herds like this, so many have heard the siren's call, the opportunity to make any more moves to the upside have been hampered. That means a lot of people will eventually follow the herd off the cliff, ost of whom bought at the top.<br />
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When they aren't betting on debt, they are looking at commodities. These funds, focused on such tangibles as oil, silver and gold will to most of us, seem to be destined to go higher. And if you bought into this sector recently, you have high hopes that it wasn't at the top. But silver suggested it was, as did oil, and the drop in prices found those same people scrambling to get out. Most bought in with expanded exposure in their supposedly well-balanced portfolios and are now paying the price for having believed that diversity was just another word for profit.<br />
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And emerging market investors are beginning to realize that perhaps they too have been failing to listen to the global heartbeat. Europe is not finished with its economic woes. Commodity prices may have fallen but they still remain uncomfortably high for countries looking to emerge and now, predictions of slowing growth at expanding powerhouses like China have begun to worry the savvy investor. You newbies are deeply embedded in the herd still.<br />
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You may have been auto-enrolled, but the walk through the wardrobe left you in the middle of the Serengeti. And you probably won't get the memo that you are in danger until it is too late. This thinking about getting you in, attempting to educate you, guide you, slip you into an ill-suited target date fund came by way of Thaler and Sunstein's book called <em>Nudge: Improving Decisions About Health, Wealth and Happiness. </em>In is not the same as knowing what to do or how to act when you arrive. The information tsunami hasn't lessened and may have even gained strength over the last several years and investors, particularly the neophytes, will still drown before they learn to swim.<br />
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How running with the herd once saved you only to become the complete opposite will remain a mystery. And getting people into these plans by using science to study our unpredictable-ness is still a good idea, even if it seems suspect. But once there, the status quo is good. But who says what the status quo is? You may never get a clear bead on the answer, Until you realize the herd is leaving the room.</div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-81461679023259820822011-05-20T07:03:00.000-07:002011-05-20T07:03:36.463-07:00Good news/Bad news<div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial initial; background-repeat: initial initial; font: normal normal normal 13px/19px Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.6em; padding-left: 0.6em; padding-right: 0.6em; padding-top: 0.6em;">While we have all been, on occasion, asked to choose between the good news and the bad news, when it comes to your 401(k), both sides of the question mean something. Today, I'd like to look at some of the good news, bad news that has been coming out of the world of the 401(k).<br />
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</strong><br />
<strong>Investments</strong><br />
<a _mce_href="http://target2025.com/wp-content/uploads/2011/05/051211_RP88hui78_TRGT2025.jpeg" href="http://target2025.com/wp-content/uploads/2011/05/051211_RP88hui78_TRGT2025.jpeg"><img _mce_src="http://target2025.com/wp-content/uploads/2011/05/051211_RP88hui78_TRGT2025-300x225.jpg" alt="" class="alignleft size-medium wp-image-2266" height="150" src="http://target2025.com/wp-content/uploads/2011/05/051211_RP88hui78_TRGT2025-300x225.jpg" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; float: left;" title="051211_RP88hui78_TRGT2025" width="200" /></a>Good news: People continue to contribute to their 401(k). A recent Investment Company Institute report found that only 2.4% of investors using this sort of plan did not contribute in 2010. This is considered a generally good statistic for two reasons: the resurgence of the company match may have prompted more people to begin to contribute more in 2010 than they did in 2009 (3.4% ceased contributing) and two, the stock market rewarded these folks for doing so. This means that account balances also increased.<br />
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Bad news: Those who did continue to invest actually pulled money from the equity side of the investment equation. The ICI was confused by the pattern, which typically dictates that when the stock market does well, investors tend to increase their holdings rather than withdraw. The shift they suggest may point to a lower risk tolerance which doesn't necessarily explain why there was an increase in international exposure.<br />
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</strong><br />
<strong>Risk</strong><br />
Good news: There is a much clearer understanding of the risks involved in the investment world. Although there are still a sizable number of senior investors (those at least 65-years-old) who are willing to take above average risks with their portfolios, most recognize the danger in doing so.<br />
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Bad news: too many younger folks are unwilling to assume risk via equity investments. While 10% of the 65-year-olds reported they take on above average risk, their counterparts in the 35-to-49 age group admitted that they do as well. Defining above average risk is often difficult to do. Related to a balance of investments, with popular sentiment suggesting a gradual decrease in more volatile investments (equities) to more conservative ones (bonds, fixed income), this group may be making these adjustments too soon in their investment lives. If, as popular sentiment suggests that we will work longer, a 35-to-49 age group could possibly be leaving a certain amount of aggressiveness untapped. If you are thinking that you will work until 70[years-old and beyond, a 35-year old should invest in much the same way as 25 year-old would have just ten-years ago.<br />
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<strong>Better 401(k) choices</strong><br />
Good news: There has been over the last several years, an acknowledgement of sorts from the plan sponsor world that better choices for their participants is directly correlated to the types funds offered. Fees dominated the conversations held by plan sponsors and administrators as those that used their plans turned their focus on how much each investment was costing them. Plan costs eat away at potential returns. So many plans reduced the number of funds offered and with those reductions, the types of funds offered. The shift to a larger selection of index funds and target date funds may have helped create a better investment environment for those using the plans.<br />
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Bad news: As fees were lowered amongst the plan's offering, the plan itself became more expensive. This change in how the fees are levied make both the newly low-cost funds offered simply appear as if this were a bait and switch. Fee disclosure will only increase in the coming years as the Department of Labor looks to better reporting of these costs. The trouble is you may not where to look and may be able to little about these costs. You can sue over poor investment choices. But unless you actually leave the company you work for, the 401(k) you have is what you are stuck with.<br />
<div _mce_style="text-align: center;" style="text-align: center;"><strong><a _mce_href="http://target2025.com/wp-content/uploads/2011/05/051211_RP95556555_TRGT2025.png" href="http://target2025.com/wp-content/uploads/2011/05/051211_RP95556555_TRGT2025.png"><img _mce_src="http://target2025.com/wp-content/uploads/2011/05/051211_RP95556555_TRGT2025.png" alt="" class="aligncenter size-full wp-image-2267" height="144" src="http://target2025.com/wp-content/uploads/2011/05/051211_RP95556555_TRGT2025.png" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; display: block; margin-left: auto; margin-right: auto;" title="051211_RP95556555_TRGT2025" width="320" /></a></strong></div><div _mce_style="text-align: left;" style="text-align: left;"><strong>Turnover</strong></div>Good news: The turnover rate in the mutual funds offered by your company's 401(k) has dropped somewhat over the years. This is reflective in the choices. Index funds have near zero turnover, rebalancing only when the index shifts. Target date funds tend to shift in a similar way but don't offer the investor anyway of knowing how much is being turned over in the funds within the funds.<br />
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Bad news: While turnover is often equated with higher fees, a certain amount of this activity is generally considered acceptable if the rate of return is increased as a result. Most investors will shift their money into a fund based on the size. And the larger the fund, the more cumbersome investing becomes and because of that, the lower the turnover.<br />
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</strong><br />
<strong>Target Date Funds</strong><br />
Good news: Target date funds have increased in plan usage from a scant $57 billion in 2000 to almost a trillion dollars invested in 2010. The good news here is limited to the success of the fund families marketing strategies and the required auto-enrollment of new hires. Add to that the financial debacle of 2007-2008 and numerous investors in 401(k)s simply saw the risk in these self-directed plans as too confusing. Turning to target date funds seemed on the surface to be the most logical conclusion for most.<br />
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Bad news: Target date funds still have some hurdles to jump through before they gain my seal of approval - no that they are necessarily currying my favor. They remain murky at best. Most target date funds, with the exclusion of those that comprise of index funds only, are a fund of funds. This suggests that a fund family, rather than close a poorly performing mutual fund, simply roll the fund into a target date fund. Because of this, there are still transparency issues. Add to that the suggested target date may not be your target, that no two target date funds are at the same point in investment holdings (risk) as a similarly dated cohort, that there is no fund manager who can offer conclusive evidence that this is the best method of rebalancing and lastly, that most users tend to set-it-and-forget-it.<br />
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</strong><br />
<strong>Fees</strong><br />
Good news: As I mentioned, they have dropped over the last several years. But most investors still make assumptions that fall squarely into the "if it is an index fund, then it must cost less". This lower cost is mostly true and is normally attributed to index funds, even though some smaller index funds that track the S&P 500 charge considerably more than their larger counterparts for the same investment. Even with that in mind, an investor can build not only a well-balanced portfolio using index funds alone, they will do so at a much lower cost than any other investment portfolio in their plan.<br />
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Bad news: Most target date funds act as if they can do what they do for less, they don't. Some target date funds have expenses and fees that are well north of 0.80%.<br />
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</strong><br />
<strong>Participation</strong><br />
Good news: more folks are using their options across more age groups and accessibilities. Most mutual funds are held inside 401(k)s by twice compared to those held outside. Add to that the growing number of average to lower income households entering this market for the first time using this sort of investment.<br />
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Bad news: Education still has a long way to go. Trusting, finding or using an advisor is still the purview of the more affluent investor. The average balances in these plans increased but it suggests that was a result of an increase in the stock market value rather than an increase in participation or contributions.</div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-84030611278543475772011-05-04T18:37:00.000-07:002011-05-04T18:37:00.321-07:00Mutual Funds and You: Not Always an Easy Relationship<span class="Apple-style-span" style="color: #111111; font-family: Arial, 'Helvetica Neue', Helvetica, sans-serif; font-size: 13px; line-height: 20px;"></span><br />
<div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Even if there wasn’t so much emphasis on the Baby Boomers with the threat that they will upset the whole of the investment apple cart by suddenly taking everything they have accumulated for retirement and flee the markets, <a href="http://target2025.com/?s=mutual+funds" style="color: #264888; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: underline;" target="_blank" title="mutual funds">mutual funds</a> would still be what they are. In fact, they will always be what you believe they they are.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;"><a href="http://target2025.com/wp-content/uploads/2011/05/050311_RP00994544_TRGT2025.jpeg" style="color: #264888; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: underline;"><img alt="" class="alignright size-medium wp-image-2228" height="132" src="http://target2025.com/wp-content/uploads/2011/05/050311_RP00994544_TRGT2025-300x199.jpg" style="border-bottom-style: none; border-color: initial; border-left-style: none; border-right-style: none; border-top-style: none; border-width: initial; float: right; margin-bottom: 1.538em; margin-left: 1.538em; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;" title="050311_RP00994544_TRGT2025" width="200" /></a>So what is the attraction? Convenience plays a huge role in why we continue to use this investment. These funds still play a major role in our retirement plans because of access via our 401(k) plans and Individual Retirement Accounts (IRA). The mainstay of these plans give the average investor, the one who knows they need the markets but are still unsure about the concept of investing, the potential of growing their retirement contributions.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Acting as a collective, mutual funds give these investors broad access to investments they would otherwise not have been able to build on their own. The confusion begins with which mutual fund suits our needs.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">In almost every 401(k) plan, even the ones deemed as not so good, the investor has access to index funds (tracking broad markets), target date funds (which target a retirement age or goal and invest using an aggressive to conservative approach) and actively managed mutual funds (those that employ a fund manager to find investments that seek to best the indexes or benchmarks and provide better growth). In a growing number of <a href="http://target2025.com/do-you-401k/" style="color: #264888; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: underline;" target="_blank" title="401k">401(k) plans</a>, access to ETFs (exchange traded funds that trade like a stock but are essentially index funds) and stocks (individual equity investments) have allowed investors to pursue different investment strategies based on their own assessment of risk.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">The ability to use these plans to allocate money towards future retirement goals on a pre-tax basis simply means that this investment will not go away anytime soon. The mutual fund market is considered mature by most standards. It has adjusted to investor concerns about fees (index funds and ETFs offer the lowest costs to investors but are often seen as a slower, or better, a vehicle with more steady growth), the ability to serve those retirement goals by creating built in diversity, and increased transparency. In doing so, they have recognized the threat that index funds and <a href="http://target2025.com/the-lure-of-etf-investing-why-exchange-traded-funds-misrepresent/" style="color: #264888; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px; text-decoration: underline;" target="_blank" title="etf">ETFs</a> can do much of the same without the cost.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Behavioral finance, a two decade old study of why we do what we do, has increased our own awareness of risk. This academic and economic examination of us has uncovered numerous biases, the embracing of fallacies and of course or tendency to harbor illusions. This look at the investor mind hasn’t changed what we do all that much. In part because looking at ourselves in the mirror, identifying why we still follow the herd, still have loss aversions, understanding why we still think the past is some sort of indication of the future and continue to delude ourselves with what our concept of reality is rather than what it actually is (think of a mime), is not as easy as they portray it to be.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">In other words we sell too late, buy too late, fail to understand that we believe what we see and hear, and attempt to translate those feelings into investment actions. Seasoned investors have a better grip on this inner investor; new investors bring most if not all of the problems investors want to avoid to every action they make.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Mutual funds offer a comfort zone of sorts. Even as we seek to embrace the simplest fallacy: that mutual fund managers know what they are doing because they are in charge of hundreds of millions of dollars. Mutual funds offer us a set-it-and-forget opportunity to participate in the activity of investing without bringing vast storehouses of knowledge about the markets or even ourselves to the experience.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">But do they produce as promised? Not always and not always enough of what we expect. Our anticipation of future growth – often based on what has happened – tends to be the first mistake we make. We look at the past performance, the stars a rating agency such as Morningstar might give a fund, the tenure of the fund manager, the turnover (how many times in a given year the fund trades its portfolio; the higher the turnover the higher the costs) and the fees against those returns and make decisions. And then we hope.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Should hope even enter into the equation? It does because of who we are. We have no idea what inflation will offer in the years ahead. Taxes will increase as Social Security benefits may decrease. Which leaves us with two options: invest more and hope for the best. This means that we are using a current self-sacrifice as the template for future returns. I have suggested this on numerous occassions: if you want the “current” lifestyle you lead to be the lifestyle you have in retirement you can either increase your contributions significantly (which impacts how much you have to live on now) or expect to live on less.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">So how do we invest using mutual funds? The quick and easy answer is use index funds, spread these investments out across as many varied sectors as your 401(k) offers and increase you contributions.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">But you will still look at actively managed mutual funds with a wanton eye. You can buy these as well but do so with great care not to cross-invest. In other words, owning an S&P 500 fund and a large-cap growth fund would give you the same category of investments and the same underlying investments. You might look to making your small cap and mid-cap investments in actively managed funds, where managers tend to be more nimble in volatile markets.</div><div style="margin-bottom: 1.538em; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0px; padding-left: 0px; padding-right: 0px; padding-top: 0px;">Yet, as in many things in life, there is a bottom line. In mutual funds, it involves education. You should learn what your plan offers and why. You should understand how long you have to invest and for what goals (even if they are far-off in the future and can’t be quantified let alone verbalized). And lastly, that lackluster contributions will most certainly provide you with lackluster retirement benefits. Mutual funds may be what you believe they are but not knowing can cost you.</div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-48703593061757918612011-04-23T05:52:00.000-07:002011-04-23T05:52:48.644-07:00Do You Know How to Invest?<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; font-size: 13px; line-height: 19px;">There is no easy answer to this question. But in the following three part series, we will take a look at one of the more successful investors to come along in the past century. A humble man prone to self-examination and reflection. Most investors never take the time to do what is necessary to achieve this sort of inner investor peacefulness. </span><br />
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<a _mce_href="http://target2025.com/wp-content/uploads/2011/04/042311_RP223444_TRGt2025.jpeg" href="http://target2025.com/wp-content/uploads/2011/04/042311_RP223444_TRGt2025.jpeg" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img _mce_src="http://target2025.com/wp-content/uploads/2011/04/042311_RP223444_TRGt2025-300x199.jpg" alt="" class="alignright size-medium wp-image-2191" height="132" src="http://target2025.com/wp-content/uploads/2011/04/042311_RP223444_TRGt2025-300x199.jpg" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; float: right;" title="042311_RP223444_TRGt2025" width="200" /></a><span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; font-size: 13px; line-height: 19px;">In part one of this review on one of the greatest investors, Bernard Baruch, titled "<a _mce_href="http://target2025.com/notes-on-investing-baruch-lessons-learned/" href="http://target2025.com/notes-on-investing-baruch-lessons-learned/" target="_blank" title="Notes on Lessons Learned about Investing: Bernard Baruch">Notes on Investing: Baruch and Lessons Learned</a>", we looked at what he has learned from his own mistakes, errors that we all make and of which numerous books have been written in anattempt to correct our own investor and totally human fallibilities on the subject. </span><br />
<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; font-size: 13px; line-height: 19px;"><br />
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<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; font-size: 13px; line-height: 19px;">In <a _mce_href="http://target2025.com/baurch-part-two-notes-on-investing/" href="http://target2025.com/baurch-part-two-notes-on-investing/">part two</a>, we looked at, among other things, the art of investing and getting a good night's sleep.</span><br />
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<span class="Apple-style-span" style="font-family: Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; font-size: 13px; line-height: 19px;">In <a href="http://target2025.com/notes-on-investing-baruch-and-lessons-learned-part-three/">part three of this series</a>, we take a look at Baruch, the behavioralist, predating the science and doing so by examining how people react to markets, how he responded to his own inner biases and why stepping back for a spell gives one new and better perspective. </span>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0tag:blogger.com,1999:blog-6299512634730168432.post-38919801553641200842011-04-14T06:10:00.000-07:002011-04-14T06:10:14.419-07:00The Plight of the Savvy Investor and the Goldilocks Mutual Fund<div style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial initial; background-repeat: initial initial; font: normal normal normal 13px/19px Georgia, 'Times New Roman', 'Bitstream Charter', Times, serif; margin-bottom: 0px; margin-left: 0px; margin-right: 0px; margin-top: 0px; padding-bottom: 0.6em; padding-left: 0.6em; padding-right: 0.6em; padding-top: 0.6em;">We are a fickle bunch. We think of ourselves as savvy <a _mce_href="http://target2025.com/?s=investments" href="http://target2025.com/?s=investments" target="_blank" title="invest">investors</a>, although there is a great deal of room for improvement among all investors to which degree of savviness. Yet we are in almost every instance our own worst enemy. Victoria Holt is quoted as saying: "Never regret. If it's good, it's wonderful. If it's bad, it's experience". Yet still, after several decades of behaviorists studying our actions in the marketplace like so many mice in a lab, we still do the same predictable things time and again.<br />
<a _mce_href="http://target2025.com/wp-content/uploads/2011/04/041111_RP200344_TRGT2025.jpeg" href="http://target2025.com/wp-content/uploads/2011/04/041111_RP200344_TRGT2025.jpeg"><img _mce_src="http://target2025.com/wp-content/uploads/2011/04/041111_RP200344_TRGT2025-282x300.jpg" alt="" class="alignleft size-medium wp-image-2128" height="200" src="http://target2025.com/wp-content/uploads/2011/04/041111_RP200344_TRGT2025-282x300.jpg" style="border-bottom-width: 0px; border-color: initial; border-left-width: 0px; border-right-width: 0px; border-style: initial; border-top-width: 0px; float: left;" title="041111_RP200344_TRGT2025" width="188" /></a><br />
And perhaps the first emotion we feel once we begin to second guess each of our "investment" decisions is regret. And if the recent selling of actively managed mutual funds by investors over the last year or so is any indication, regret for past decisions is in full swing.<br />
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Adding to the chatter that actively managed mutual funds and by default the managers who stand at the helm, is John Bogle, chanting the mantra he has carried since the late seventies. Why, he has asked, would anyone choose to look for more than what an <a _mce_href="http://target2025.com/mutual-fund-investing-chasing-average/" href="http://target2025.com/mutual-fund-investing-chasing-average/" target="_blank" title="index funds">index fund</a> can provide? And as we begin to acknowledge the pull and tug, feel the most susceptible to such cost savings as a lower fees, which is always good, index funds begin to come to the front of our thinking about which investment is best.<br />
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But once you begin to believe that getting mediocre returns in the equity markets is the "new" goal, the attempt at saving some money in terms of the fees charged by actively managed funds in exchange for the smaller returns that index funds offer becomes the overall focus. And if that is the sight path you choose, <a _mce_href="http://target2025.com/tipping-the-scales-index-funds-weigh-in/" href="http://target2025.com/tipping-the-scales-index-funds-weigh-in/" target="_blank" title="index funds">index funds</a> are definitely the right fund to use.<br />
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In a recent report in the NYTimes on the <a _mce_href="http://www.nytimes.com/2011/04/10/business/mutfund/10active.html?pagewanted=1&_r=2" href="http://www.nytimes.com/2011/04/10/business/mutfund/10active.html?pagewanted=1&_r=2" target="_blank" title="NYTimes">subject of this exodus</a> from highly regarded performers over decades to index funds in search of lower fees, one thing stands out in the numbers. This is simply a beast feeding upon itself.<br />
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Consider this: You own X amount of shares in an actively managed mutual fund and you sell. But rarely do investors act alone. They are signalled by some change in the wind, some report drilled over and over or perhaps, it is from the suggestion of a colleague. Suddenly, fear sets in and you begin to think that you have the wrong investments. The fees are too high, you think and then anything that resembles a stick snapping alarms you and your fellow investors and you run. And then you regret.<br />
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The selling prompts the redemption of shares, which when enough investors sell simultaneously, and enough shareholders accounts need to be made whole as they leave, markets move. And if the movement is great enough, the equities drop. And so do the indexes. So you sell at a loss only to buy shares in a fund you just, via the herd, lowered.<br />
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In many instances, the outflows are no reason to believe that the actively managed mutual fund world will implode. In fact, according to Brian Reid, the Investment Company Institute’s chief economist, 93% of the investment assets stayed right where they were as the remainder moved to other investments. Among those investments - more than just index funds reaped the benefit of this change in loyalty to actively managed funds - overseas funds gained as well as funds focused on commodities. Bond fund outflows also helped boost the index fund profile.<br />
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And what did this sell-off net the exiting investors? What were they looking for? Believe it or not, index funds that are actively managed. This surprising move has some folks, including myself, scratching our collective heads.<br />
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True, the fee structure of index funds is far cheaper that that of the actively managed fund (index funds average about .16% while actively managed funds average about .97% - with many load and closed end funds added into that average and increasing it as a result). But once you let a broker enter the mix, the fee structure changes, coming closer to the cost of the actively managed fund and at a lesser overall return.<br />
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Index funds because of the tax efficient structure belong in taxable accounts - as long as the capital gains tax remains historically low. Inside a tax deferred account such as a 401(k) or an IRA, the effect is lost. This is and should be the domain of the actively managed mutual fund. And while you should never lose sight of the role fees play in the long-term performance of your investments, believing that fees are the only driver in achieving steady returns is misplaced.<br />
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And while I have nothing against index funds, the growing number of funds that slice and dice the markets do not always lead to lower fees for investors. But talk about index funds enough, and investors won't notice nor take the time to compare one index to another.<br />
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</div></div>@PaulPetillohttp://www.blogger.com/profile/14377545844624900027noreply@blogger.com0