Three Ways to Skin the Asset Allocation Cat

December 02, 2019

Over the past several weeks, you’ve heard me talk a lot about investing and for good reason. Investing is one of the most important parts of any financial goal or wealth accumulation strategy. The problem, like with most things, is that there is no one perfect way to do it. You probably know the basics—diversify, re-balance, dollar-cost average—but did you realize that there are at least three forms of asset allocation? Knowing what they are, how they are different, and which one may be right for you could make you a better investor over time.

Strategic asset allocation

Strategic asset allocation is the one you are probably most familiar with and the one most often used by financial advisors and professionals. The objective of strategic asset allocation is to find an optimal portfolio that offers the highest potential return for any given level of risk. It usually starts with a risk tolerance assessment, followed by a recommendation of how you should split up your assets between stocks, bonds and cash.

Rather than being a typical buy-and-hold strategy, strategic asset allocation requires ongoing attention as certain asset classes perform differently at different times. As such, rebalancing is a key component of strategic asset allocation. Since rebalancing causes investors to sell out of asset classes that are outperforming in order to buy into asset classes that are underperforming, it forces the investor to buy low and sell high. For this reason, some might consider it a contrarian approach to investing.

Buying low and selling high is one potential advantage of strategic asset allocation. Another is reduced volatility. By keeping the ratio of stocks to bonds within a targeted range, potential returns are also expected to stay within a certain range. Investors can implement a strategic asset allocation strategy in a number of ways, including following the guidance of a financial advisor, using an online financial advisory service, or by investing in a target-date fund.

Tactical asset allocation

Ironically, what a lot of investors may think they are getting when they hire a financial professional is tactical asset allocation. The objective of tactical asset allocation is to improve portfolio returns by periodically changing the investment mix to reflect changes in the market. It may seem logical to move assets into fixed income when interest rates are high and away from fixed income when interest rates are low, but tactical asset allocation involves security selection and market timing—two things that are often considered taboo in the investment universe.

Tactical asset allocation can be as simple as sector rotation, such as moving assets away from the best performing sector to the worst performing sector, or as sophisticated as using charts and graphs to try and predict market movements. Style preference (growth v. value) can also be important when using a tactical asset allocation strategy. Investors should exercise caution when using a tactical asset allocation approach as market trends can sometimes last longer or shorter than expected.

Since the goal of tactical asset allocation is to try and increase performance by timing the market and moving money around, it would be appropriate for an investor with a high tolerance for risk, a low sensitivity to taxes, and an ability to devote time to developing and monitoring buy and sell indicators. Investors that wish to utilize a tactical asset allocation strategy should decide whether they will use actively-managed mutual funds, passively-managed index funds or ETFs, or individual securities. Investors may be able to implement this strategy with a financial advisor or on their own through a self-directed brokerage account.

Core/satellite asset allocation

If you are not sure which approach to take, why not take both? The objective of core/satellite asset allocation is to enhance performance by investing in two portfolios. The larger of the two (i.e., the core) typically represents 60-80% of the total portfolio and uses strategic asset allocation for determining its holdings. The remaining share (i.e., the satellite) uses tactical asset allocation to take advantage of market opportunities as they arise. For the core component, you may want to use low-cost index or exchange traded funds (ETFs) and rebalance periodically. For the satellite portion, you can use any combination of funds, individual securities, real estate (e.g. REIT), commodities, options, etc., based on where you see market opportunity.

The benefit of this approach is that it gives you a disciplined investment strategy via the core while still allowing you to “play” the market with the satellite portion. If you make some good investment decisions with the satellite, you enhance your return. If your investment instincts are not so great, you still have the core working for you.

The core/satellite approach may be appropriate for investors that want to test their knowledge of investing against the market by comparing the performance of the satellite to that of the core. It would also be appropriate for investors that want to get more involved in investing but not all at once. Because there is a tactical component, investors will need to consider how much time they can devote to managing the portfolio before taking this approach.

As you can see, there are several ways to build an investment portfolio. Choose the one that is right for you based on your objective and level of involvement. And don’t forget to get help when needed.

The 3 Most Important Accounts To Your Financial Foundation

February 15, 2018

Having total control over cash flow is a critical step toward optimal financial wellness, yet it proves to be more elusive than we’d like. Why is it that cash management seems to be so easy for some people, and yet so hard for others? Is it simply a matter of income—the more I have the less difficult it is to manage—or is it something more than that?

According to our research, 73% of employees say they have a handle on cash flow, but only 50% say they have an emergency fund. That means the other 50% are one unexpected event away from financial hardship. So how do we go from wishing nothing bad to happen to being totally confident no matter what life throws our way?

It starts by having a firm financial foundation. Here are the three most important financial accounts you will ever need:

Account #1: a checking account

It may seem odd to think of a checking account as one of the three most important accounts you will ever need, but the checking account is a fundamental building block in your financial foundation. Your checking account is where you can directly deposit your paycheck, and it should be the account used to pay all of your planned, regular monthly expenses (e.g., food, housing, utilities).

Which checking account is right for you? Check out these blog posts for ideas.

Account #2: a savings account

If you thought a checking account was a silly example of a critical account, then you’re probably thinking a savings account is even more silly—but hear me out. I agree, a savings account is a silly place to save money, but it is a FANTASTIC place to spend money. In other words, don’t treat it as a savings account; treat it as a spending account.

Your checking account is a great place for money you know you’re going to spend every month, but what about the money you know you’re going to spend three months from now; or six months from now; or nine months from now? (You get the picture.) Your savings account is the perfect place to put money aside that you know will get spent soon, just not necessarily this month. That’s why we like to refer to it as a Planned Spending Account, because it is money you’re planning to spend. (Yes, we are very creative.) Others refer to it as “lump sum” savings. Whatever you call it, it’s probably one of the most overlooked accounts, but it can be very powerful when it comes to managing cash flow over the course of a year.

Account #3: an emergency fund

Well, if you have a checking account for planned, regular monthly expenses, and a savings account for planned, irregular, nonmonthly expenses, then what do you think this third magical account would be used for? You got it: UNPLANNED expenses.

Most of us know we should have an emergency fund for unplanned expenses, but what exactly would qualify as an “unplanned” expense? That’s a good question, and the best I can answer is to suggest that an unplanned expense is any expense that we would typically NOT plan for. (I told you we were creative.)

For example, I do NOT plan to crash my car into a tree, but I know that if I do I’ll have to pay a deductible on my auto insurance. I do NOT plan for my children to get sick and have to stay home from school, but I know that if they do I may have to miss work or find a last-minute care taker. I do NOT, necessarily, plan to lose my job, but I know that if I do I’ll still have mouths to feed until I find work again.

It’s important not to confuse “urgent” with “unplanned.” Fixing the car when it breaks down can be urgent, but no matter how old or new your car is you should save for car repairs and maintenance. Losing income due to illness or injury can be urgent, but you should carry adequate disability insurance to protect against such risk. Visiting the emergency room can be urgent, but you should save for health insurance deductibles in a planned spending or health savings account (HSA).

Financial experts don’t always agree on exactly how much you should have in your emergency fund, which is why I often tell people it’s really just a matter of how big of an emergency you want to be prepared for. That said, here’s a calculator that might help you determine the right amount for you.

Where’s the best place to keep an emergency fund? Check out these blog posts for ideas.

When it comes to building a structure that can withstand the forces of nature, triangles are the strongest shape. Why should building a financial foundation be any different?

 

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Retirement Account Loan Strategies You May NOT Have Thought About

September 06, 2017

Taking a retirement plan loan may be considered taboo in some cultures, primarily because it can be detrimental to your retirement preparedness. That said, not all retirement plan loans are bad.

For instance, if you are carrying a balance on a high-interest credit card, taking a retirement plan loan may be a sensible way to pay off the debt faster while paying the interest to yourself. Or maybe you plan to use the money to help fund a child’s college tuition, or to pay for an unexpected medical bill. All of these could be seen as valid reasons for borrowing from your retirement account, but that doesn’t negate the fact that you may still be jeopardizing your future retirement goals.

If you are considering a loan, here are a few tips and strategies to make it less costly and more beneficial for you now, and in the future:

Before you submit your loan request

There are at least two things you should do before submitting your loan request.

  1. Model the loan to make sure it doesn’t put too much of a strain on your current cash flow. Most retirement plan providers offer loan modeling so that you can estimate how much will come out of each paycheck in loan payments. Compare this to your budget and adjust spending as needed.
  2. Run a retirement projection to see if you are on track to reach your retirement goals. If not, determine what changes you can make now to get on track.

Take advantage of tax breaks

Depending on the purpose of the loan, you may be eligible for tax breaks as well. Here’s how:

For medical expenses

Are you using the loan to help pay for medical expenses incurred while eligible for a health savings account (HSA)? If so, then consider depositing the proceeds of your loan—up to the annual contribution limit—into your HSA and then withdrawing the funds to pay for qualified medical expenses from there. That way you get the tax deduction on your contribution, and tax-free money to pay for your medical expense.

For college-related expenses

Are you using the loan to pay for tuition, fees, or other qualified educational expenses? If so, then you may be eligible to claim one of two educational tax credits.

If you’re not eligible for tax credits—either because your income is too high or you are paying for an unqualified expense like room & board—your state may offer income-tax deductions (or other benefits) for contributing to their 529 plan. In this case, consider depositing the loan into your state’s 529 plan, and then withdrawing the funds to pay for college-related expenses — there’s no requirement that the funds have to stay in the account for a certain amount of time. That way you get the state income tax deduction, or other benefits, associated with the plan.

Once the loan is paid off

By now you’ve probably adjusted your lifestyle to a lower paycheck. Once the loan is paid off, rather than increasing your current spending, consider one or more of the following strategies to help avoid future loans:

Stop using a credit card

Using a retirement plan loan may be a good way to pay off high-interest debt, but it would be even better to avoid high-interest debt in the first place. Sometimes it can’t be avoided, but when it can, it should.

Create/rebuild the emergency fund

Sometimes we need to take a loan because of unexpected events. Being prepared for the unexpected is part of a healthy financial plan. Now that you have a little extra in each paycheck, start setting that amount aside each month until you build up 3 to 6 months of expenses.

Contribute to a health savings account

As noted earlier, contributions to a health savings account (HSA) are deducted from income tax, and distributions are tax free when used to pay for qualified medical expenses. Best of all, unused funds remain in the account, and most plans allow you to invest the funds once they reach a certain threshold. For this reason, you may want to treat your HSA like it’s a supplemental retirement account.

Contribute more to your retirement plan

At a minimum, you should contribute up to your company match (if available), but if you can afford to save more you should. Not only will this offset any negative effect the loan may have had, but it will likely help you reach your retirement goals faster.

Start or add to a college savings account

If you or someone you love plans to attend college in the future, consider funding a college savings account. It may not pay for everything, but it should reduce the amount needed in student loans.

As a financial planner, I would prefer you save enough to avoid having to borrow in the first place, but if a retirement plan loan seems to be your best option, then learn how to get the most out of it. Maybe then it won’t be so taboo.

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Money Saving Tips I Learned As a Frequent Traveler

August 12, 2015

As a senior resident financial planner for Financial Finesse, my job requires me to travel from time to time. As you can imagine, there are several perks to business travel. For starters, you sometimes get to go to exotic places like Parker Dam, CA, Newcastle, WY, or Elko, NV and then there are the luxurious accommodations like the Budget Host Inn & Suites in Memphis, TN or the Rime Garden Inn & Suites in Birmingham, AL or a personal favorite of our planner team, the Hacienda Hotel in our very own El Segundo, CA. All kidding aside, it is fun to travel every once in a while, and you do pick up a travel tip or two along the way. Here are a few of my favorite tips to help the less-than-frequent travelers among you: Continue reading “Money Saving Tips I Learned As a Frequent Traveler”

3 Tips To Protect Yourself When A “Creditor” Calls

August 05, 2015

A few months ago, my wife received a call from someone claiming that we owed money from an unpaid medical bill. If you know anything about my wife, the idea that we owe anyone anything is troubling. Considering how many doctor bills, hospital bills, dental bills, and who-knows-what bills cross our table every year, it would not be inconceivable for us to have missed a payment. Fearing that perhaps one bill did go unpaid and the  possible threats of legal action and bad credit, my wife gave the caller our credit card information to satisfy the bill. Continue reading “3 Tips To Protect Yourself When A “Creditor” Calls”

The Hidden Costs Of Overlooked Benefits

July 29, 2015

August is an overlooked month. Every other month of the year has a holiday or is associated with an exciting beginning, but not August. Many of us try to sneak in one last summer weekend or some back to school shopping but other than that, August is usually a lull in the calendar. A great way to make August productive is to examine the employee benefits programs that you aren’t taking advantage of so that you know which options you do want to sign up for during open enrollment this fall. A few minutes now can help you be prepared to maximize your benefits and possibly save thousands of dollars instead of rushing through a decision or just doing what you did last year. Continue reading “The Hidden Costs Of Overlooked Benefits”

How My Tax Preparation Software Let Me Down

July 22, 2015

For the last seven years, I have used tax preparation software to help me file my federal and state income tax returns, and I’ve never had a problem…until now. You see, each year I’ve been entitled to tax refunds, and each year when the tax preparation software asks me if I want to have my tax refund directly deposited into my bank account, I would say yes, but this year was different. This year, instead of getting a tax refund from the state, I ended up owing the state more money, so instead of asking me if I wanted my tax refund directly deposited into my bank account the software asked me if I wanted to have my tax payment debited from my account.  Continue reading “How My Tax Preparation Software Let Me Down”

Managing Your Pension In A 401k World

July 15, 2015

Lately there’s been a lot of criticism of 401k plans in the news and some of it is very valid. A 401k that is poorly designed and/or poorly managed can leave people in a bad place when they want to retire, but traditional pensions aren’t a perfect solution either. Don’t get me wrong. If you have a pension that is a GREAT benefit to have. You just can’t assume that everything will work out as planned. Continue reading “Managing Your Pension In A 401k World”

Bigger Is Not Always Better

July 08, 2015

I recently took my son to a local family entertainment center to escape the heat and enjoy a little bowling, laser tag, and arcade action with his friends. After a few hours of running around, they all started to get thirsty so I walked up to the concession stand to purchase drinks. They offered drinks in three sizes: 16, 24, and 32 ounces. The 16 ounce drinks were $1.75 and the 32 ounce drinks were $3.25, making them a slightly better deal. Continue reading “Bigger Is Not Always Better”

How Are Financial Advisors Like Congress?

June 24, 2015

If you voted for your congressman then they’re great but the rest are bums and if you voted against him then he’s a crook like all the rest. The same feelings are often held about financial advisors. How can the industry have such a bad reputation if so many people think that they have the only good one? Continue reading “How Are Financial Advisors Like Congress?”

The “Hidden” Sales Charge

June 17, 2015

I received a call recently from an investor that was a little confused about differences in mutual fund share classes. It seems this individual opened an IRA with a financial advisor a few years ago and purchased an “A” share mutual fund. Then, just a few days ago, they received a letter from the custodian informing them that “B” shares would no longer be available for purchase. The investor had never heard of a “B” share and wasn’t quite sure what this meant, so they decided to call the Financial Helpline. Continue reading “The “Hidden” Sales Charge”

How to Invest While Getting a Tan

June 10, 2015

June signifies summer, a time when millions of Americans flock to frolic in the sand and soak up some sun. If only investing were as easy as a day at the beach…or is it? It can be if you follow these simple guidelines: Continue reading “How to Invest While Getting a Tan”

How Many Toys Is Enough?

June 03, 2015

My neighbor down the street is selling his camper, and so my wife walks in the house the other day and says, “Honey, did you see the camper for sale down the street?” Now I love to camp, and to be quite honest, I was stunned she even asked the question. First of all, we already have a boat, and second, she’s not really a big fan of camping. To me, camping is about “roughing” it, but for my wife, she likes to “pamp,” (which is a word my friend made up that describes people who want to be pampered when they camp—thus the name). Continue reading “How Many Toys Is Enough?”

Getting Rid Of Your Cell Phone? Wipe It Clean First

May 27, 2015

Cell phones have become so common in our world today that we forget how much sensitive information is contained on these innocuous devices. Such information in the wrong hands could give an unscrupulous person access to private information, including links and passwords to financial accounts and statements. I recently switched cell phone providers to reduce my cost and increase my coverage and reliability, but I was not prepared to make sure the data that had accumulated on my old phone was cleared out before passing it on to the next user. Continue reading “Getting Rid Of Your Cell Phone? Wipe It Clean First”

Should You Lease Or Buy Your Cell Phone?

May 20, 2015

Usually when someone is talking about leasing versus buying, they are talking about a car or real estate. However, have you ever stopped to consider that when it comes to choosing a cell phone provider, you might be making the exact same decision? You probably never thought of it this way, but when you sign a contract with any one of the major carriers, you are in essence leasing the phone. Continue reading “Should You Lease Or Buy Your Cell Phone?”

Always Read the Fine Print

May 13, 2015

Last month was my son David’s 15th birthday. For years, he has been asking for a cell phone, and now that he is a freshman in high school, has maintained good grades, and has shown at least some level of responsibility, his mother and I decided he was ready. I agreed to add David to our cell phone plan on one condition: that he buys his own phone. (Susan and I have found that the kids are more likely to take care of their devices when the cost to purchase it comes out of their own pocket.) Continue reading “Always Read the Fine Print”

Financial Planning For Any Weather

May 06, 2015

In some parts of the country, May means beautiful flowers and beautiful weather but for most of us, it also means checking the weather app on your phone constantly to have a clue of what’s going to happen. Will it be a mild spring day, rainy, or shorts and flip-flop weather? At least you can get a good guess from the weather app, but what about the unexpected events in your financial life? How do you prepare for life’s unexpected changes? Continue reading “Financial Planning For Any Weather”

How to Give the RIGHT Way

April 29, 2015

December is associated with giving gifts to loved ones, but often May and June are months where significant milestones like graduations and weddings occur. If you are making a gift of cash, there are a few questions you might want to ask yourself. How much is enough, how much is too much, and what’s the best way to give? Continue reading “How to Give the RIGHT Way”

Three Investment Terms You Should Know

April 22, 2015

Have you ever noticed how different words mean different things to different people? The other day I was talking with a helpline caller who was looking for a way to invest their retirement funds such that they couldn’t lose money and could draw an income from it in the future. When I mentioned the word “annuity,” they immediately had a negative reaction as they were lead to believe all annuities were bad, which seemed ironic considering that’s exactly what they just described they were looking for. When it comes to investment terminology, not understanding the meaning of a word can be a financial mistake. Here are three investment terms that are frequently used but often misunderstood: Continue reading “Three Investment Terms You Should Know”