What To Do Now? (or....I'll Just Wait Until Next Year)

For both our retirement plan and individual clients we are getting a lot of the same type of questions: "What should I do now?", and "Can we talk next year...?". Obviously as we get closer to the holidays work can become even more hectic (not to mention that pesky holiday shopping). It is important to remember, though, that the market does not take this time off. Historically, December, and early January, has been a strong month for stocks (the so-called "Santa Claus" rally), so it may not be wise to ignore your portfolio.

After the last few months gut-wrenching losses, many clients have inquired about switching to cash "until this works itself out". Well, I'm not even sure what "this" is, let alone when it will "work itself out". As I've written before, we always recommend sticking to a well-defined investment strategy. Yes, there will be times when it will be challenging, but in the long-run I believe this is the best course of action.

And who knows, maybe Santa Claus will come early this year, and stick around a little longer.... we can all hope, and with solid investment advice you can be well-positioned if it happens.

A Time to Buy, and a Time to Sell…

The Book of Ecclesiastes elegantly speaks of life in terms of cycles. “A time to plant, a time to reap … a time of war, a time of peace…”. The stock market also moves in cycles. We have seen dramatic up moves, and gut-wrenching drops. The question I am getting is: are we at the bottom? Is it time to back up the truck and load up on stocks? The answer is … I don’t know. What I do believe, though, is that America is one of the preeminent economies in the world, and we will still be buying products from Kraft, Kellogg’s and Dell from retailers like WalMart, Amazon and BestBuy five years from now. Further, in 5 years, we will all probably look back and wish we had invested more with a Dow at under 9000.

If we are at, or near, the bottom, market history is very telling. Looking back at the last 3 bear markets, the subsequent 5 calendar years, after the bottom, have averaged a return of 14.5%. Well over the long-term (100 year) average market return of 9.6%. That additional 4.9% would earn an additional $9600 on a typical $25,000 retirement account just over those 5 years! (List of Financial Calculators.) So, while I can’t tell you we are at a bottom, I would point out another couplet from Ecclesiastes: “A time to gain, a time to lose…”. Many of us have already felt the pain of the losses, but let’s not miss out on the subsequent gains!

Investing in a Process vs. a Product

I am not the first to point out that when markets are in a free-fall, it often makes for a great buying opportunity (given the benefit of hindsight, and of course, the availability of "dry powder" to actually do the buying with.) A recent article in the November issue of Wealth Manager makes the observation that most investors tend to follow the emotions of fear and greed. They continue to buy what is going up, and sell out of what is going down. Precisely at the wrong time, though.

One way to overcome the dueling emotions of fear and greed is to have a disciplined investment process. This can be accomplished using a professional adviser, or having the time and ability to go it alone. Note, that many advisers are guilty of the same thing as individual investors, since they don't have a disciplined process, often they are just pushing a "product".

I have always maintained that I cannot see into the future when it comes to the direction of the market, but I do sleep well at night because I have a process. In my case, and with my firm it boils down to active asset allocation using low-cost investments, and making necessary adjustments as the market dictates. Investment products are difficult to judge, open up any issue of Money magazine, and they will invariably have an article pointing out the "Top Funds of Last Year" (or something similar). Numerous academic studies have shown the folly of expecting these will be the best funds to be in going forward. Again, that is merely going after a "product" and not a "process". Long-term success with investing comes with patience and discipline; both often missing in the midst of a bear market - when they are needed most!

The Presidential Election and the Stock Market

As the election comes to an end many investors are reconsidering their portfolio allocations for the coming months. Some investors are looking at the election as an opportunity to re-enter the market with money they have had on the sideline. I was recently asked if the election usually provides a buying opportunity.

You may be surprised to know that it doesn't really matter. Over the short-term the market tends to be driven by the emotions of fear and greed. When people are optimistic, they tend to buy into the market causing prices to rise. When people are pessimistic, they tend to sell out of the market causing prices to fall. Additionally, when people are uncertain they tend to stay where they are or sell, but investors rarely buy during periods of uncertainty.

Since the period preceding the election is usually one of uncertainty, throughout history the market has frequently declined leading up to Election Day. Conversely, after the election the market tends to experience a bounce once it's been determined who will be in charge over the next four years. However, when the initial enthusiasm fades investors once again focus on company fundamentals which ultimately determine the direction of the market.

The direction of the market has been the subject of a great deal of debate. A recent TD Ameritrade poll found most Americans remain pessimistic about the future of stocks.

• "Americans say they do not anticipate a stock market recovery in near future (within six months) and one in five people (20 percent) indicate they think it will be one year or longer before the stock market will be higher."

It's important to remember that over the long-term the market doesn't move on emotion it moves on company earnings. There are great companies growing their earnings in spite of the economy. If you are looking for long-term investments, you should focus on strong companies that will grow their earnings over the next 20-years, rather than who will win the White House. So don't fret over the day-to-day value of your 529 Accounts, 401(k) accounts, or other longer-term investments.

Are Your Investments Secure?

A question I have been getting lately is: With all the news about companies going out of business, and banks being taken over, how can I be sure my money is safe? What happens to my 401(k) if my company goes under? What happens if my mutual fund company goes out of business?

Unfortunately, these are very relevant questions in today's market environment. Let me cover the most common investment types, and the "safety" of each.

Bank Accounts: Bank and credit union accounts, including checking, savings, and certificates of deposit, are insured against loss by The Federal Deposit Insurance Corporation (FDIC). This government agency has insured $100,000 per account holder per bank since 1980. The recent “financial bailout” signed by President Bush, has temporarily increased the coverage amount to $250,000 to help reassure depositors that their assets are safe.

401(k): If your employer goes out of business, your 401k and other retirement accounts are protected by the Pension Guarantee Corporation. Your retirement assets are separate from your employer’s assets – they belong to you. They do not guarantee you will make money in your investments, only that the assets cannot be seized as a result of failure by a company.

Mutual Funds: Mutual funds are subject to market fluctuation and therefore aren't guaranteed against market loss. However, under the Investment Company Act of 1940, your fund assets are protected if the fund company was to go out of business. Each fund is set up as a separate corporate entity, with its own board of directors who are responsible for looking out for the best interests of the fund shareholders. So, if your fund company went out of business, your assets would remain intact and, with shareholder approval, the directors could hire a new manager to oversee the accounts.

There are numerous government agencies and regulations already in place to safeguard your investments from fraud and misappropriation. However, as we have painfully been aware of the last few days, market fluctuations are something that each individual must bear. I would note that this is a great time to reevaluate your investments and level of risk you are taking.

Should Employers Give Investment Advice?

With the recent market volatility, many employee’s are questioning their 401(k) statements and employers often find themselves in a quandary: They want to help their employees with their investments, but by offering investment advice, they open themselves to liability if the employee makes an investment that results in a financial loss.

The solution was provided by the Pension Protection Act of 2006. The PPA allows plan sponsors and fiduciaries to appoint qualified advisors to provide investment advice. As long as certain statutory requirements are met, sponsors are not liable for investment performance resulting from that advice.

The Department of Labor describes a plan sponsor's overarching role as follows: “The duty to act prudently is one of a fiduciary’s central responsibilities… It requires expertise in a variety of areas, such as investments. Lacking that expertise, a fiduciary will want to hire someone with that professional knowledge to carry out the investment and other functions.” (http://www.dol.gov/). More importantly, having a trusted adviser handling retirement plan issues means an employer can focus on what really counts – running their business!

Hidden Fees in 401(k)s

By offering a retirement plan, business owners have a legal responsibility to make prudent decisions regarding the plan’s management. These decisions include selecting investments, choosing options like brokerage accounts or loans, and picking the right service providers. Many of these decisions require an in-depth understanding of plan costs.

There’s the challenge. Retirement plans have so many fee types it is rare that a plan sponsor can easily calculate the true cost of their plan.

Fred Reish, arguably the leading retirement plan attorney in the country, recently provided a few reasons why it’s important to make the effort to understand what’s being paid.

• “The DoL has taken the position that fiduciaries have a duty to know and evaluate indirect payments. In performing that evaluation, fiduciaries need to consider whether the total amounts received, directly and indirectly, by their service providers are reasonable. Further, fiduciaries must evaluate whether the payments cause potential conflicts of interest and, if so, whether the plan and participants are protected from those conflicts.”

The article goes on to describe two of the most common hidden fees and potential conflicts the employer should be aware of.

Employers shouldn’t just evaluate fees when they set up the plan, they should also monitor fees and expenses throughout the life of the plan to be sure the costs continue to be reasonable as assets grow.

Should I roll my 401(k) into an annuity?

401(k) refers to a section of Internal Revenue code that allows businesses to offer tax deferred savings accounts to employees. The 401(k) compares to an Individual Retirement Account (IRA), which is a section of Internal Revenue code that allows individuals to establish tax deferred savings accounts for themselves. 401(k)s and IRAs are not investments but they hold investments like stocks, bonds, mutual funds, or insurance. When investors rollover a 401(k) account they roll it into an IRA and then they choose the investments they want to hold in it.

An annuity is a type of insurance contract that can be held in an IRA. It combines fixed or variable investments with various guarantees. There are basically three kinds of annuities. A fixed annuity offers a fixed rate of return for a predetermined period of time. A variable annuity invests in stock or bond subaccounts (like mutual funds) and rises or falls in value with the underlying investments. An equity-index annuity provides a minimum fixed rate of return with the opportunity for better returns if the stock market performs well.

Many investment professionals would probably tell you it’s not a good idea to put an annuity in your IRA. Since one of the main advantages of an annuity is that your money grows tax-deferred, it makes little sense to hold one in an account like an IRA, which is already tax-deferred. However, there are exceptions where features in an annuity might make it worth considering:

• If you're retired or very close to retiring and you feel you need more guaranteed income than social security will offer, an annuity can provide an income stream you can’t outlive. The insurance company will essentially create a personal pension for you by providing you a monthly check for life.
• Fixed annuities often provide a higher interest rate than a CD. So if you are considering a CD for your IRA, you might compare rates with a fixed annuity.
• Most variable annuities provide a guaranteed death benefit. So even if the annuity goes down, the death benefit can never go lower than the original amount invested (less any withdrawals). That is an advantage for your beneficiaries that no stock or mutual fund can provide.

Annuities are usually more expensive than other investments and often have surrender charges so they aren’t the best choice for every investor. Before you invest in anything it makes sense to analyze the features, costs, and what's right for your particular situation.