Tag Archives: investments

The 6 Best Vanguard Funds to Own in a Bear Market

My Comments: Much of my retirement money is at Vanguard. At some point I’m going to decide we’ve hit bottom and move it back into Vanguard growth funds or ETFs.

But right now, if you have the courage of your convictions, here are five low cost funds that you can use. If you are still a few years away from retirement, all the more reason to try and avoid significant losses since I don’t think we’re at the bottom of the current correction.

by Steven Goldberg \ Kiplinger \ November 19, 2018

If you’ve built a solid portfolio of funds, the last thing you want to do is tear it apart and build a new one simply because the stock market is doing one of its periodic swan dives.

But that doesn’t mean you shouldn’t tinker around the edges in a market that acts like it wants to go down. You might cut, say, 5% of your stock allocation and put the proceeds into a low-risk bond fund.

If you think your investments need more rearranging, you might take your most volatile fund and replace it with a lower-risk offering.

Where to look for a replacement? Vanguard funds include a fistful of first-rate defensive offerings that, while they’ll still likely lose money in a bear market, they should still hold up better than most other funds.

Vanguard Wellesley Income (VWINX , $26.12) is a fund that even the most nervous investor will find easy to hold onto – no matter how badly the stock market behaves. Over the past three years, Wellesley, which is run by Wellington Management, has been a little more than half as volatile as Standard & Poor’s 500-stock index. Roughly 61% of the fund is in bonds, and the remainder is in blue-chip stocks.

John Keogh, the bond manager, sticks largely to issues rated single-A and above. Less than 20% is in Baa bonds, which are still investment-grade. Most of the bond portfolio is in corporates and governments, along with a smattering of asset-backed bonds. Keogh does own some long-term bonds. VWINX’s portfolio has a duration of 6.3 years, meaning that portion of the fund should fall 6.3 percentage points in price when rates tick up one percentage point.

Michael Reckmeyer, the chief stockpicker, buys mainly mega-caps. He hunts for stocks that pay relatively generous dividends and can keep raising those payouts. He’s careful to buy stocks only when they’re fairly cheap, which gives the fund a distinct value tilt. Its biggest sectors are health care (18.4% of stocks), financial services (14.5%) and consumer staples (13.3%), with JPMorgan Chase (JPM), Verizon (VZ) and Johnson & Johnson (JNJ) the top three holdings at the moment.

Despite its conservative nature, the fund has returned an annualized 8.8% over the past 10 years. That includes a loss of 1% so far this year. VWINX yields 3.4%.

Vanguard Wellington (VWELX, $41.62) is much more aggressive than Wellesley, but it’s still a relatively tame beast. With 65% of the fund in stocks and the remainder in bonds, it’s a classic balanced fund – with the same allocation between stocks and bonds that many investment advisors recommend for the majority of their clients. It’s about two-thirds as volatile as the Russell 1000 Value Index.

The bond portfolio is virtually a carbon copy of Wellesley’s, as well it should be given that John Keogh manages the bond portion of both funds. As with Wellesley, he sticks largely to single-A bonds and above with less than 20% in Baa-rated debt. The duration is 6.3 years, identical to Wellesley’s. The fund yields a little less, though, at 2.7%.

Edward Bousa, the equity manager, is slightly more aggressive than Wellesley’s Reckmeyer. He’s willing to buy growth stocks after they’ve been knocked down in price. For instance, he bought Alphabet (GOOGL) when its price was depressed toward the end of 2014, and it continues to be a top-10 holding.

But the fund still leans toward value. Bousa, like Reckmeyer, looks for solid dividend payers. As far as sectors, he currently likes financials (22.7% of stocks), health care (15.5%) and technology (12.1%).

Wellington is the better pick for most investors, except for those in the later years of retirement or others who may need to spend their money relatively soon. Over the past 10 years, the fund has returned an annualized 11.04%.

Vanguard Short-Term Corporate Bond ETF (VCSH, $77.74) is a low-risk index bond exchange-traded fund that offers investors a healthy yield of 3.6%.

The fund, which tracks the Barclays US 1-5 Year Corporate index, takes little credit risk. All its holdings are investment-grade bonds from the likes of Anheuser-Busch InBev (BUD), CVS Health (CVS) and Bank of America (BAC), although 40% are rated only Baa or below. Duration is just 2.7 years – almost a full percentage point less than the yield. That means VCSH should make money on a total return basis even if rates rise one percentage point.

A small risk: More than 40% of the fund’s assets are in financial-sector debt.

Also note that this is available as an Admiral class mutual fund (VSCSX).

Want safer still? Consider the index ETF’s near-clone, Vanguard Short-Term Investment-Grade Fund (VFSTX, $10.40).

Using the same benchmark, this fund is actively managed by Vanguard’s Samuel Martinez and Daniel Shaykevich. It’s a little safer than the ETF because it owns not only corporates, but some Treasuries. Also, only 21% of its assets are Baa or below, and it doesn’t have nearly as much in financials.

But VFSTX is a very similar fund. It yields a bit less at 3.27% and has a slightly shorter duration of 2.6 years. It is a bit more expensive, though, at 0.20% in fees.

Vanguard Global Minimum Volatility (VMVFX, $14.00) is a fascinating, if complicated, fund that could be just the ticket for investors who want to dial down risk.

Run in-house by Antonio Picca, it takes a quantitative approach to delivering lower risk-adjusted returns than its benchmark, the FTSE Global All Cap Index. It invests roughly half its assets in foreign stocks, and the other half in U.S. stocks. It hedges away all foreign currency risk.

The fund takes several steps designed to limit volatility. It tilts toward stocks with historically low volatility and stocks that have low correlations with one another. The manager keeps sector weights within five percentage points of their FTSE index weightings, but he overweights defensive sectors, such as consumer staples and health care, which together account for a quarter of assets.

The FTSE index lost 12.1% from June 2015 through February 2016, but the Vanguard fund lost just 4.6%, according to Morningstar.

If you buy this fund, remember: It will almost sure lag during bull markets. From January 2014 through July 2018, the fund captured 40% of the market’s declines but only 77% of its advance, Morningstar says.

Over the past three years, the fund has been about halfway between Wellington and Wellesley in terms of volatility. It has been less volatile than Wellington but more volatile than Wellesley. Since inception, the fund, which was launched in late 2013, has returned an annualized 10%.

Just keep in mind that VMVFX is relatively new and hasn’t been tested in a bear market, while Wellington and Wellesley have been.

Vanguard Limited-Term Tax-Exempt (VMLTX, $10.79) is a plain vanilla, short-term municipal bond fund. It yields 2.2% and its duration is 2.6 years, meaning it should just lose only a little bit should rates rise by one percentage point.

Run in-house by Adam Ferguson, the fund tracks Barclays 1-5 Year Municipal Bond Index. Ferguson and the rest of Vanguard’s fixed-income team make big-picture judgments, which they use to adjust the duration and credit quality of the fund. The vast majority of VLTMX’s bonds are single-A or above, with just about 11% below.

The trick to this fund is hiding in plain sight: Its low expense ratio. Ferguson doesn’t have to do anything fancy to beat most of his peers – he just has to avoiding making big bets that turn sour. So he doesn’t make big bets. Over the past 10 years, the fund has returned an annualized 2.0%, almost exactly equaling the index.

Buy the Admiral shares (VMLUX) if you can handle the minimum initial investment of $50,000. They charge just 0.09%.

Source URL: https://www.kiplinger.com/slideshow/investing/T041-S001-the-6-best-vanguard-funds-to-own-in-a-bear-market/index.html

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Public Pensions Could Become Retirement Crisis for Everyone

My Comments: Too many people are wondering where the money will come from to pay for their retirement. And too many people will not have enough money to live the way they want to. And too many people will not have the necessary resources to pay for health care in retirement.

All this is leading to a crisis in this country as the baby boomers continue to retire and live longer and longer. The pressure on the economy and on the mental health of struggling people will be immense.

At the risk of being called on the carpet for brazen self-promotion, click on the image on the right showing a train headed toward the mountains. It’s a link to my online course on retirement planning. There are a bunch of free videos for you to share with anyone trying to figure out what to do before they retire.

by Peter Reagan \ November 9, 2018

It’s become fairly common knowledge that public pensions are on the verge of either radical overhaul or extinction.

Worldwide, pensions are set to reach a shortfall of $400 trillion. This is a larger amount than 20 of the world’s largest economies, according to Sovereign Man.

It was even reported that Congress is planning for pension fund failure in the U.S. Not to mention, Philadelphia has considered tapping public utility payments to cover their shortfall.

Add it all up, and the situation doesn’t look good for public pension plan payees. Many police, fire, public education, and municipal personnel are (or will be) directly affected.

But even if you’re not drawing a public pension — the majority of us do not — don’t think you’re safe. You might think failure of a state public pension wouldn’t affect you. It’s a reasonable thought, and partly correct. That’s because it likely wouldn’t affect you directly.

But the indirect effects may prove to be a burden for anyone in or entering retirement. There are two primary reasons for this.

First, according to a recent Washington Examiner op-ed, almost half of Americans have no retirement savings to deal with these indirect effects (emphasis ours):

Despite the existence of IRAs and 401(k) plans to encourage retirement savings, almost half of Americans have no net assets at all, and little or no retirement savings. Many of them have no money to save and no retirement account to put it in.

And second are “hidden” consequences of failing pension programs at the state level, which may affect every person who pays taxes.

The Potential Ripple Effects of Failing Public Pensions

Martin Smith is a correspondent for PBS who has reported on America’s growing retirement crisis. Speaking to Richard Eisenberg, he revealed the imminent potential for cutting services or a federal bailout if state pensions fail:

“About half the states have pensions that are 70% funded or much worse. The states can’t borrow or sell bonds to China.” So, Smith adds, in four or five years, some of those states will likely have to either cut their services (the equivalent of a state bailout) or they will need a federal bailout.

Imagine if the police force or firefighters in your city suffered dramatic cutbacks to account for pension shortfalls? Or, if your taxes went up to account for a federal bailout of state pension programs?

Neither ripple effect is desirable for any person. But both could happen if pension shortfalls become too much of a burden at the state level.

Retirees from private and public sectors are looking for other options because of “dwindled pension funding” and potential reduction of Social Security benefits.

According to a PlanSponsor article, “employer-sponsored retirement plans” and IRAs look to be alternative options, among other savings ideas. But some still feel stuck in their current situation.

Eisenberg’s report, republished at MarketWatch, ends on a somber note from a teacher: “I have no savings. My pension is everything. Without that, I won’t survive.”

That’s a stark reminder to make sure we don’t put all of our nest-egg in one basket.

Start Building a Resilient Retirement Now

It’s important for you to start making your retirement as resilient as possible. This will give you the best chance to enjoy your “Golden Years.”

Over at The Hill, Olivia Mitchell offers some suggestions that may help. She recommends that you “understand that your pension and Social Security are not fully guaranteed.” Benefit cuts are always possible.

She continues by suggesting you “delay retirement as late as possible” because benefits can pay out higher at later retirement age. This also reduces the time you receive payouts, so your fund can last into your later years.

Finally after suggesting part-time work to supplement income (if possible, and if necessary), she suggests cutting spending now as much as possible.

If you don’t have any retirement savings yet, the best time to start is now. As time goes on, you can consider adding some stability to your portfolio by shifting a percentage of assets into precious metals like gold and silver.

But whatever you do, don’t wait. The ripple effects of public pension program failure aren’t going to wait for anyone.

Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver.

Source: Public Pensions Could Become Retirement Crisis for Everyone | Newsmax.com

The clear message in the United States’ shifting demographics

My Comments: Do you want to re-invent the present so it more closely resembles the past that you know and understand and were happy with? Good luck with that.

The present and the future is the only thing we can influence. Whether it’s over millennia or the next decade, the sooner you come to terms with ‘adapt or die’, the happier you are likely to be.

Someone this week asked if I was a racist. It was in response to my sharing a post about Trump’s mother being an immigrant welcomed to the US with no issues. I suggested it was because she was white. He than asked if I was a racist.

Perhaps I am. I’m also a white immigrant who became a US citizen because my father and mother thought our life in this country would be better than if we stayed in Europe. 

But to me, Trump’s threat to close the border with Mexico is because those folks are not white. Don’t tell me the government couldn’t find enough qualified people to properly process those folks in a timely way, consistent with US laws, instead of using tear gas in an attempt to change their minds. Fundamentally stupid and inconsistent with our long held values as an open society.

The MAGA crowd, which I’m guessing includes that woman in Mississippi who made comments about hangings, appear threatened by those who are genetically different and not white. I’m suggesting they adapt or die.

Sam Fulwood III \ Jun 25, 2018

Within our lifetime, the United States will be a majority minority country, no matter how loudly the MAGA crowd shouts.

As difficult as it might be for some recalcitrant Americans to believe or embrace — Trumpsters, listen up, this column is especially for you — the United States is in the midst of a profound and irreversible demographic shift. 

Two dramatic changes in the nation’s population are occurring simultaneously: we’re getting older, and more racially diverse, according to a U.S. Census Bureau tip sheet released last week. Census figures show that fewer than 17 percent of U.S. counties reported a decrease in median age from April 2010 to July 2017, with the majority of those counties clustered in the Midwest. Nationally, the median age rose to 38.0 years in 2017, up from 37.2 years in 2000.

“Baby boomers, and millennials alike, are responsible for this trend in increased aging,” Molly Cromwell, a demographer at the U.S. Census Bureau, said in a statement released with the report. “Boomers continue to age and are slowly outnumbering children as the birth rate has declined steadily over the last decade.”

As the nation grows older, it’s also becoming more racially and ethnically diverse.  “Nationally, the population of all race and ethnic groups, except for the non-Hispanic white alone group, grew between July 1, 2016, and July 1, 2017,” the Census statement said.

Specifically, the Census Bureau reported:

  • The Hispanic population increased 2.1 percent to 58.9 million.
  • The black or African-American population increased 1.2 percent to 47.4 million.
  • The Asian population increased 3.1 percent to 22.2 million.
  • The American Indian or Alaska Native population increased 1.3 percent to 6.8 million.
  • The Native Hawaiian or Other Pacific Islander population increased 2.1 percent to 1.6 million.
  • The population of those Two or More Races increased 2.9 percent to 8.7 million.
  • The white alone-or-in-combination population increased 0.5 percent to 257.4 million.
  • The non-Hispanic white alone population decreased .02 percent to 197.8 million.

Of course, none of these revelations are particularly earth-shaking. Keen demographers and social scientists have been tracking the so-called “browning of America,” for years.

But in the current political environment, it bears repeating over and over, if for no other reason than to remind more Americans of the inevitability of change. Soon — within the lifetimes of the vast majority of Americans alive today — the U.S. will no longer be a white-majority nation.

And that’s why this column is directed to Trump’s MAGA crowd, which seems hell-bent on returning the country to some idealized era of the 1950s or earlier, when white men were the unquestioned arbiters and beneficiaries of the nation’s politics, culture, and economy.

Indeed, the hateful atmosphere brought about by Trumpism and echoed in archly right-wing media has its roots in a vocal white nationalist movement, which seized on the president’s embrace of their racist rhetoric as permission to openly act on impulses that previously were tucked away from public view.  

“Clues in the president’s language and behaviour led the alt-right to hope that he might really be one of them, and critics to accuse him of inciting racial hatred,” The World Weekly, an international online news magazine, reported recently. “Mr. Trump’s flagship campaign promises were music to the ears of self-described ‘white advocates,’ whose numbers swelled under Barack Obama.”

For all their bluster and bravado, however, white nationalists are whistling past their own graveyards. The numbers and unrelenting facts of demography stare in the face of those who believe they can restore some non-existant glory of white supremacy.

Valerie Wilson, director of the Economic Policy Institute’s Program on Race, Ethnicity and the Economy (PREE), estimates that by the year 2043 — about 25 years from now — the U.S. will reach the tipping point when the country transitions to a majority-minority population. Among working-class Americans — made up of working adults without a college degree — she estimates the tipping point may arrive nearly a decade sooner, possibly by 2032,

In a 2016 PREE paper, Wilson observed the significance of these changes, and how important it will be to accept and embrace them, noting “the working class is increasingly people of color, raising working class living standards will require bridging racial and ethnic divides.”

What’s more, Wilson argues that there are policy challenges the nation must address to make the transition better for all Americans. “The best way to advance policies to raise living standards for working people is for diverse groups to recognize that they share more in common than not, and work together,” she wrote.

The sooner most Americans come to terms with this reality, the sooner the public will rally support and encourage politicians to deal with the changing demographics from a position of national strength, and not as the fearsome dilution of white superiority. One thing is certain: the changes coming to America aren’t going to suddenly shift into reverse, no matter how loudly Trump, his subservient congressional leaders, and white nationalists complain.

So, MAGA crowd, get with the future. It’s in your and the nation’s long-term, best interest to embrace the demise of white superiority in America.

Source: https://thinkprogress.org/demographics-adapt-or-die-6c72e4d13e02/

After midterm election, focus on the ‘healthy’ 30%-plus correction headed for stocks

My Comments: We’re now almost three weeks past the midterm results. And the markets have been mostly negative.

Now the discussion is about how far it will drop, and when, before the inevitable bottom and return to reality.

My frustration is that I’ve been expecting a severe drop now for over 3 years; it makes me sound like a broken record; and uncomfortably hesitant to get out of anything other than significant positions. That’s what I did earlier and all I got was criticism for missing the upside.

If you’re a millennial or far from retirement, you can more or less ignore what’s going on. But if you are close to retirement, are already retired, you better pay attention. It could be very painful.

by Barbara Kollmeyer \ November 6, 2018

Election Day is finally here, and investors should be ready, given that barely a stone has been left unturned with regards to potential outcomes.

While history shows midterms haven’t really carried much weight, at least in the immediate term, “given amount of controversy we have around this government, these elections for the first time could bring some dramatic movement in the financial markets,” says Naeem Aslam, chief market analyst at Think Markets U.K.

The most likely outcome appears to be that Republicans will keep the Senate and Dems will win the house, causing gridlock. That won’t upset markets too much given they’ve had plenty of experience with political infighting. A less likely possibility would usher in a blue wave—Dems win Senate and House—causing lots of headaches for POTUS. Behind door number 3, another not so likely outcome, Republican sweep both houses.

But those playbooks may not matter much, according to our call of the day from Joel Kruger, currency strategist at LMAX Exchange, who sees a hefty selloff coming no matter what the result.

“Ultimately…i think we need to defer to the longer-term cycle and where things look at this stage in the game now that the economy is getting off central-bank proponomics and has to stand on its own two feet. This leads me to believe whatever the outcome…the market will find a reason to be selling risk (selling stocks) to allow for what has been a long overdue correction,” says Kruger, in emailed comments.

And given the one-way direction for stocks since 2009, he says investors may just want to redefine the traditional thinking around bear markets.

“I think we need to throw out the 20% bear market thing and consider the stock market could easily drop +30% and would look like a healthy correction within a strong uptrend. That’s a pullback to 2015 high territory…not so long ago considering,” he says.

Such selling would see a resumption of October’s volatile action, says Kruger. Even with a 6% drop in the current quarter, and some pretty wild days last month, the S&P 500 is still up 2.4% year-to-date, so barely even a bloody nose where pullbacks are concerned.

He sees this larger pullback headed our way between now and the second half of 2019, giving investors time to think about hedging their risk—moving to cash, rotating into bonds, options action.

“Or [if you are locked in] just sit and know that it will happen and not to panic at hearing 30% as it is a lot less intense when taken in context of the entire move and this grand monetary policy experiment,” says Kruger

Continue reading HERE:

The Clear Message in the United States’ Shifting Demographics

My Comments: In addition to death and taxes, a third ‘truth’ is demographics. A reason for our current political troubles is that the historic white Christian majority believes it is under attack. And it is.

And many in that historically white majority want to live in the past. I’ve long learned we cannot live in the past. We can only live in the present and try to influence the future.

Make America Great Again is a valid argument if you are not trying to turn back the clock. But to MAGA, we must re-affirm the values that MAG and embrace them and include everyone in the process. Caucasian, Asian, African, Hispanic and whomever else wants to live and grow a family anywhere in our 50 states.

by Sam Fulwood \ June 25, 2018

As difficult as it might be for some recalcitrant Americans to believe or embrace — Trumpsters, listen up, this column is especially for you — the United States is in the midst of a profound and irreversible demographic shift.

Two dramatic changes in the nation’s population are occurring simultaneously: we’re getting older, and more racially diverse, according to a U.S. Census Bureau tip sheet released last week. Census figures show that fewer than 17 percent of U.S. counties reported a decrease in median age from April 2010 to July 2017, with the majority of those counties clustered in the Midwest. Nationally, the median age rose to 38.0 years in 2017, up from 37.2 years in 2000.

“Baby boomers, and millennials alike, are responsible for this trend in increased aging,” Molly Cromwell, a demographer at the U.S. Census Bureau, said in a statement released with the report. “Boomers continue to age and are slowly outnumbering children as the birth rate has declined steadily over the last decade.”

As the nation grows older, it’s also becoming more racially and ethnically diverse. “Nationally, the population of all race and ethnic groups, except for the non-Hispanic white alone group, grew between July 1, 2016, and July 1, 2017,” the Census statement said.

Specifically, the Census Bureau reported:
• The Hispanic population increased 2.1 percent to 58.9 million.
• The black or African-American population increased 1.2 percent to 47.4 million.
• The Asian population increased 3.1 percent to 22.2 million.
• The American Indian or Alaska Native population increased 1.3 percent to 6.8 million.
• The Native Hawaiian or Other Pacific Islander population increased 2.1 percent to 1.6 million.
• The population of those Two or More Races increased 2.9 percent to 8.7 million.
• The white alone-or-in-combination population increased 0.5 percent to 257.4 million.
• The non-Hispanic white alone population decreased .02 percent to 197.8 million.

Of course, none of these revelations are particularly earth-shaking. Keen demographers and social scientists have been tracking the so-called “browning of America,” for years.

But in the current political environment, it bears repeating over and over, if for no other reason than to remind more Americans of the inevitability of change. Soon — within the lifetimes of the vast majority of Americans alive today — the U.S. will no longer be a white-majority nation.

And that’s why this column is directed to Trump’s MAGA crowd, which seems hell-bent on returning the country to some idealized era of the 1950s or earlier, when white men were the unquestioned arbiters and beneficiaries of the nation’s politics, culture, and economy.

Indeed, the hateful atmosphere brought about by Trumpism and echoed in archly right-wing media has its roots in a vocal white nationalist movement, which seized on the president’s embrace of their racist rhetoric as permission to openly act on impulses that previously were tucked away from public view.

“Clues in the president’s language and behaviour led the alt-right to hope that he might really be one of them, and critics to accuse him of inciting racial hatred,” The World Weekly, an international online news magazine, reported recently. “Mr. Trump’s flagship campaign promises were music to the ears of self-described ‘white advocates,’ whose numbers swelled under Barack Obama.”

For all their bluster and bravado, however, white nationalists are whistling past their own graveyards. The numbers and unrelenting facts of demography stare in the face of those who believe they can restore some non-existant glory of white supremacy.

Valerie Wilson, director of the Economic Policy Institute’s Program on Race, Ethnicity and the Economy (PREE), estimates that by the year 2043 — about 25 years from now — the U.S. will reach the tipping point when the country transitions to a majority-minority population. Among working-class Americans — made up of working adults without a college degree — she estimates the tipping point may arrive nearly a decade sooner, possibly by 2032.

In a 2016 PREE paper, Wilson observed the significance of these changes, and how important it will be to accept and embrace them, noting “the working class is increasingly people of color, raising working class living standards will require bridging racial and ethnic divides.”

What’s more, Wilson argues that there are policy challenges the nation must address to make the transition better for all Americans. “The best way to advance policies to raise living standards for working people is for diverse groups to recognize that they share more in common than not, and work together,” she wrote.

The sooner most Americans come to terms with this reality, the sooner the public will rally support and encourage politicians to deal with the changing demographics from a position of national strength, and not as the fearsome dilution of white superiority. One thing is certain: the changes coming to America aren’t going to suddenly shift into reverse, no matter how loudly Trump, his subservient congressional leaders, and white nationalists complain.

So, MAGA crowd, get with the future. It’s in your and the nation’s long-term, best interest to embrace the demise of white superiority in America.

Source: https://thinkprogress.org/demographics-adapt-or-die-6c72e4d13e02/

Do You Know These Basic Financial Terms?

My Comments: The lack of financial literacy for most people is an existential risk when thinking about money and the role it plays in peoples everyday lives. And it becomes even greater when the idea of retirement surfaces and what has to be put in place long before that day arrives. Here’s a start…

by Danielle Directo-Meston \ September 18, 2017

Does the mere thought of calculating your cut of the dinner tab or logging into your bank account online send shivers down your spine? It turns out that money anxiety disorder is a thing, but you don’t need to be a Wall Street pro to know that being smart with your finances pays off. Think about it: There’s no reason the funds in your checking account should sit idly by, especially if you’re dreaming of saving up for a vacation as you’re clocking into the office every day. If you’re a finance newbie who wants to take control of your money, then getting to know some of the most basic financial terms is the best place to start.

To get more insight into the top money words to know—and ultimately learn how to make your money work for you—we turned to LearnVest founder and CEO Alexa von Tobel. “Just because you are learning the basics doesn’t mean you should feel intimidated to ask questions or talk about your finances,” she tells MyDomaine. In a 2016 survey, the financial planning website found that nearly half of Americans don’t know the balances of their partner’s investment accounts, while a third have no idea how much their significant other earns in a year, proving that money continues to be a sensitive topic even among people in intimate relationships. (In fact, the study also found that 68% of Americans would rather share their weight than their credit score with friends.)

“I know that talking about money can be difficult, but for your own financial well-being, it’s important to feel comfortable talking about it with your friends, family, and partners,” the certified financial planner explains. Not a math whiz? Don’t worry—you don’t need to be an expert at crunching numbers to tackle topics like retirement accounts, investing, and banking.

It’s time to stop being a money newbie—these are the nine basic financial terms everyone should know, straight from an expert.

Retirement Account Terms to Know

1. 401(k): A retirement account that you can only get through an employer, this type of fund pulls money directly from your paychecks, and some employers will “match” your contributions. “Traditional 401(k) plans grow tax-deferred, meaning that you’ll pay taxes when you take the money out, not when you put the money in,” says von Tobel.

2. Roth IRA: With this type of retirement account, “you pay taxes up-front at today’s tax rates,” explains von Tobel. “So while you don’t get any tax breaks today, you never have to pay taxes on your investment earnings.”

3. Traditional IRA: “[This] is set up so that your contribution each year is tax deductible (if you’re under a certain income limit), and you aren’t taxed on the income you make as it grows,” von Tobel says. “You pay those taxes when you withdraw it for retirement, which you’re required to start at age 70 and a half. Anyone with earned income can open a traditional IRA.”

Banking Terms to Know

4. Compound Interest: “When you’re investing or saving, this is the interest that you earn on the amount you deposit, plus any interest you’ve accumulated over time,” says von Tobel. “It will make your savings or debt grow at a faster rate than simple interest, which is calculated on the principal amount alone.” If you’re borrowing money, this interest is charged on the original amount you are loaned in addition to any interest that’s added to your outstanding balance over time. “Think of it as ‘interest on interest.'” she explains.

5. FICO Score: An acronym for the Fair Isaac Corporation, this number measures borrowers’ creditworthiness and calculates your credit score based on your payment history, length of your credit history, and the total amount of money owed. “FICO scores range from 300 to 850, and the higher the score, the better the terms you may receive on your next loan or credit card,” says von Tobel. “People with scores below 620 may have a harder time securing credit at a favorable interest rate.”

6. Net Worth: The difference between your assets and liabilities, this can be calculated by “adding up all the money or investments you have, including the current market value of your home and car, as well as the balances in any checking, savings, retirement, or other investment accounts,” says von Tobel. “Then subtract all your debt, including your mortgage balance, credit card balances, and any other loans or obligations. The resulting net worth number helps you take the pulse of your overall financial health.”

Investing Terms to Know

7. Asset Allocation: “[This is] the process by which you choose what proportion of your portfolio you’d like to dedicate to various asset classes, based on your goals, personal risk tolerance, and time horizon,” says von Tobel. The three major types of asset classes are stocks, bonds, and cash or cash alternatives (like certificates of deposit), “and each of these reacts differently to market cycles and economic conditions.” For example, investing in stocks may result in strong growth over the long-term, but they’re also subject to more volatility. “A common investment strategy is to diversify your portfolio across multiple asset classes in order to spread out risk while taking advantage of growth,” she adds.

8. Bonds: Usually referred to as fixed-income securities, this type of asset class tends to have slower growth but is usually perceived to be less risky. “Bonds are essentially debt investments—When you buy a bond, you lend money to an entity, typically the government or a corporation, for a specified period of time at a fixed interest rate (also called a coupon),” explains von Tobel. “You then receive periodic interest payments over time, and get back the loaned amount at the bond’s maturity date.”

9. Capital Gains: “This is the increase in the value of an asset or investment (like a stock or real estate) above its original purchase price,” says von Tobel. “The gain, however, is only on paper until the asset is sold. A capital loss, by contrast, is a decrease in the asset’s or investment’s value. You pay taxes on both short-term capital gains (a year or less) and long-term capital gains (more than a year) when you sell an investment.” It’s worth noting that a capital loss could also help reduce your taxes.

Forget the 4% Retirement Rule…

My Comments: With much of my time these days building a new business around retirement planning, the question of how long your money will last has huge implications.

The 4% rule evolved in years past using the assumption that it would keep you from running out of money before you died. That assumption is not longer valid, given the age to which many of us live, the increasing cost of health care, and the likelihood of a major market crash on the horizon.

So what to do? Whatever you decide, it’s a crap shoot. However, these thoughts from Dan Caplinger might be helpful.

by Dan Caplinger \ June 11, 2017

Whenever you’re striving toward a financial goal, it’s helpful to have a number in mind. That’s why the 4% retirement rule is so popular among retirement savers: It gives you a way of figuring out exactly how much money you should aim to save toward retirement. Yet there are several ways in which the 4% retirement rule falls short of working perfectly, and some investors feel more comfortable merely using the rule as a starting point and then looking to improve on it.

The appeal of the 4% retirement rule

People like the 4% rule because of its simplicity. To figure out how much you can afford to withdraw from your retirement savings, just multiply it by 4%. You can use the rule to reverse-engineer how much you need to save. If you expect to need $40,000 per year in retirement, then save $1 million, because 4% of $1 million is $40,000.

The 4% rule does have analytic origins, going back to research in the early 1990s that looked at the historical returns of various types of investments. The conclusion of the research was that with a balanced portfolio between stocks and bonds, you could start by taking 4% of your savings the first year, and then increasingly that amount by the rate of inflation every year after that. So as an example, if you saved $250,000 in your retirement account, then the first year, you’d withdraw $10,000. If inflation was 3%, then in year 2, you’d withdraw $10,300. Subsequent payments would grow with inflation, keeping your theoretical purchasing power constant. If you did that, according to the research, you would be able to make your money last at least 30 years into retirement.

Some problems with the 4% rule

The seeming simplicity of the 4% rule hides some flaws. The first is that it’s based entirely on backward-looking performance data. Admittedly, the analysis included some very tough market environments, including the Great Depression. However, there’s no guarantee that future markets might not be worse, and that could lead to the rule no longer working as intended. In particular, bad performance early in retirement has an especially adverse impact on the 4% rule, because the reduction in principal value increases the percentage of your entire portfolio that you withdraw each year. For instance, if you withdraw 4% the first year and then your portfolio loses 50% of its value, then the next year’s withdrawal under the rule will be around 8%.

In addition, there are reasons to believe that current market conditions differ from what have usually prevailed in periods in which the rule worked well. Most notably, interest rates are extremely low, and that has reduced the amount of income that the bond side of the investment portfolio can produce. This will therefore require sales of assets to finance the withdrawal amounts in retirement. Moreover, the risk of capital losses on bond investments is higher than normal because of the low rate environment.

On the flip side, the 4% rule is too conservative in certain circumstances. Because the rule is designed to deal with a worst-case scenario, it is usually far more cautious than it needs to be. That means you’ll have money left over at your death, and while that might be useful for your heirs, you might have missed out on a more secure retirement by not spending as much as you could have.

Can you improve on the 4% rule?

Researchers have looked at the question of how to get better results from the 4% rule. Some of the proposed changes include the following:

  • If you’re willing to allow for the potential of reduced withdrawals if the market performs badly, then it can dramatically extend how long a portfolio can last. Even if you only cut your withdrawal by 5% or 10%, it can nevertheless be enough to allow you to increase your withdrawal slightly without jeopardizing long-term viability.
  • If the market does exceedingly well early in retirement, then it can be viable to boost your withdrawal rate slightly.
  • Making personal adjustments for life expectancy can be useful. For instance, some retirees are living well into their late 90s, making a 30-year period too short and requiring a smaller withdrawal percentage. Yet for others, 30 years is longer than they have a legitimate right to expect, and so a larger percentage might make more sense. Just keep in mind that once you make a decision, it’s hard to go back and change it if it turns out you were too pessimistic in your assessment.

As a starting point, the 4% rule is a useful way to estimate how much you’ll need when you retire. By understanding its limitations, you can look at making refinements that will more accurately reflect your own personal retirement savings needs. That way, you’ll have a retirement strategy that will work best for you.

Source: https://www.fool.com/retirement/2017/06/11/forget-the-4-retirement-rule-heres-a-smarter-way-t.aspx