The financial world today – adjusting expectations and planning rules

Has investing changed in the last few years? A recent Morningstar post began with this statement:

BlackRock’s Larry Fink says be 100% in equities. PIMCO’s Bill Gross claims equities are dead. Vanguard’s Jack Bogle preaches stay the course with a balanced portfolio. To read the headlines, it seems that three of the best and most trusted names in finance are decidedly at odds with one another. In truth, their forecasts are far more similar than dissimilar. [from Should I Stay or Should I Go? – Don Phillips, 10/11/2012]

His point is that neither extreme, 100% stocks or 100% bonds, is rational. Instead, we have to realize that returns will be less for now and yet still invest well.

**Expect less: ** Interest rates are at all-time lows, making fixed income returns meager, and equity investments may depend directly or indirectly on renewed growth and employment, which is not rebounding significantly any time soon regardless of who our next President is.
**Diversify more:** The correlation among asset classes is closer than before, making diversification more challenging. As Feifei Li said in a recent Morningstar post, it is not a question of having all your eggs in one basket but of having too many eggs. This would mean adding market-neutral, commodities, and real estate, to a portfolio of just stocks, bonds and cash. Among other ideas, writing calls could even be a good strategy to create income so that you have a positive return in an otherwise flat market.
**Cut back withdrawals:** Where we used to say, as a rough rule, a 4% rate of distribution would allow the portfolio to grow to face future inflation, while any higher withdrawal rate would eat into principal quickly. Today, the rule may be a 3% rate, or we may need to use other ways to analyze the proper rate of withdrawal, such as the Withdrawal Efficiency Rate from a recent Morningstar post [see below]
**Tax planning: ** As we indicated in a recent post, taxes will have more impact so tax planning to achieve even a 3% rate of return is essential. With the changes coming in 2013, good planning could add to your returns over time. **See** [[http://sab-esq.com/2012/10/20/2012-year-end-tax-planning-2012-vs-2013-tax-strategies-requiring-action-now|Year-end-tax-planning-2012-vs-2013-tax-strategies-requiring-action-now]]

**References:**
**Should I Stay or Should I Go?** – Don Phillips, 10/11/2012
It seems that three of the best and most trusted names in finance are decidedly at odds with one another. In truth, their forecasts are far more similar than dissimilar.Eggs Are Not Enough: The Truth About Diversification – By Feifei Li | Posted: 10-22-12
**Eggs Are Not Enough:** The Truth About Diversification – By Feifei Li | Posted: 10-22-12
Diversification means not putting all your eggs in one basket. But do you own too many eggs?
**Retirement-Withdrawal Strategies Quantified** – David Blanchett, CFA, 10/19/2012
According to a new Morningstar metric, the best approach incorporates portfolio value and life expectancy.

The news may be too much, but there are financial matters to review, if you just set aside time

Many people react to the bombardment of news on the economy, the European debt issues, the presidential campaign and legislative gridlock by wanting to shut it all off! That is understandable, but not often the best solution

It is one matter to just not open investment statements; it is a wholly different matter to postpone addressing financial issues

So, while you may not want to review re-balancing of your investments to match your long-term allocation or hear about the dismal returns on bonds, there is more that you can still address

We have suggested a list at: finance health day your own financial planning focus

It is like a “mental health day” but for your personal finances.
After you look at the list, let me know what you think, what you decide to do,
and if we can help you or anyone you know accomplish what is needed now. Thank you,

Steven

Web-Based Financial Planning Tools for College Students and others

In advising a senior going to study abroad, I learned that he did not know how to obtain his own credit card, how to set up banking before and during his trip and how to manage the entire process. This was a surprise, as some many web sites seem loaded with information.

However, the bank sites tell you some but not all of what you need to do. Similarly, college sites may mention ATMs without connecting to Handbooks may suggest Parents may have no clear understanding of

No single place gives you a complete road map, let alone telling you how to connect all the resources to get your answer, so you have to turn the web into your own tools.

The first step is contacting the overseas college for local banks, currency exchanges and connecting to close by ATMs and banks. The next step is getting your own credit card or a additional cars on your parent’s account. Then you get to finding a US bank into which your parents can deposit or from which they can wire so you have funds in you bank at college.

The key is to link all the information that is on the web to create a plan for your study abroad, using the web sites to answer and obtain all you need

Summer of 2011 to do list: investing, estate plan, refinance, taxes and planning matters

For this summer, we have suggested financial matters for you to review:

1. Asset allocation and investments – taking all IRAs, 401(k)s and taxable accounts as a single portfolio, reviewing the allocation and checking to see if it is time to rebalance;
2. Interest rates, investing and inflation – rates are likely to stay low, inflation is likely to stay low as well (there is no wage component, in fact wages may be deflationary now, there is only commodity inflation), so that leaves looking at any investment that equals or beats the 10 year Treasury bond at a 3% yield: good municipal bonds, dividend paying stocks, or packaged stocks like Berkshire Hathaway or the Permanent Portfolio mutual fund;
3. Refinancing – rates are back down some, so that you can bring a 30 year loan down to a 4.5% 25 year loan, or 4.25% 20 year, or 3.75% 15 year fixed;
4. Home Equity Line of Credit – rates are still under 3% and no closing costs, so be sure to set one up so you have a fall back source of funds to cover the unexpected
5. Estate plan – reviewing your wills and trusts, and any letters to fiduciaries, to be certain that you account for such matters as the portable credit, which requires an election at the first death;
6. Tax planning – reviewing your information for 2011 against 2010 and checking your options to be you minimize your 2011 and 2012 taxes (e.g., max out 401(k), 402(b), ESPP plans, convert to Roth IRAs in low income years, etc.); and
7. In fact, you could do a Finance Health Day (you own financial planning focus) – please check out Finance health day….

Let me know if you have questions or comments, or if anyone you know wants to ask about any of this material. Also check out Time Saving Tips…

Coming soon…. credit card benefits with real value