5 Keys to Stress-Free Investing

#5:  Allocate and Diversify

Back during the tech bubble, we saw far too many portfolios invested exclusively in tech stocks.  Don’t over concentrate your portfolio in just a few sectors, or in just one asset class.  Trying to pick just one or two horses can leave you far behind the race to a comfortable retirement.

#4:  Rebalance

Too much of a good thing can actually be bad for you.  If your investment goals and comfort level dictates that you should have 50% in equities, then try and keep it at that level.  From 2003 to 2007, many investors let their equity allocation get way above what their target allocation started with.  Then along came the worst downturn we’ve seen in decades and the “market” did your rebalancing for you, which was not pleasant.  Rebalance and make sure your eggs stay in their proper baskets.

#3:  Keep Things in Perspective

The reason planners and advisors say you should only invest in equities if your timeframe is five years or longer is simple:  The stock market has produced a negative return over a one-year period many, many times.  It’s been negative over a two-year period plenty of times.  Even a negative return over three years is not uncommon.  However, it becomes rare to see the equity markets show negative returns over a rolling four-year period, and even more uncommon over a rolling five-year period.  Remember, it’s not about market timing, but time in the market.

#2:  Compare Apples to Apples

How your portfolio is invested across various asset classes will have an impact on how your portfolio performs.  In fact, this is much more important than your actual security selections.  If you don’t own much in equities, but the stock market skyrockets, you won’t benefit from it.  However, if the stock market drops, and you have mostly equities, then it shouldn’t be a surprise to see your portfolio decline.  Proper expectations are crucial to not being surprised or stressed during any type of market cycle.  Much like watching the same scary movie for the second time, if you know what to expect, you won’t be shaken.

#1:  Don’t Refresh, Stay Refreshed

What we are NOT talking about is hitting your computer’s refresh button over and over again to update stock quotes or account balances.  Many people sit in their office for 40 years doing their job and saving for retirement.  Then they sit at home during retirement and watch their savings. Our job as an Investment Advisor is to keep you diversified, keep you balanced, help put things in perspective, and help you understand how your portfolio should match your goals.  In other words, our goal is to try and keep you stress-free.  Your goal should be to look forward to, and enjoy, your retirement.

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The Daily Special

For those in retirement, or a few years from retirement, our advice to you is this, “beware of advice.” To be more specific, we are talking about generalized advice (no pun intended). Generalized advice is what you, and thousands of others get from magazines, blogs, cable shows and financial networks. Forget bonds, buy stocks, buy gold, sell commodities, use options, hold cash, own your age in bonds, buy and hold, day trade. Some, or even all of this advice could be found in a one-month magazine issue, or even throughout a one-day financial network broadcast. Generalized advice for investing is much like a waiter recommending the “daily special” to everyone that sits down at a table.

If you are planning to live off your retirement savings for 10, 20, or even 30 years, “winging it” is not the best investment plan. In an era where investors feel the grass is always greener somewhere else, many people tend to venture outside their simple goals and objectives. It seems we get pulled away from what we need, to what we “want” or what we feel we “deserve.” If the market has averaged 7% (after inflation) for 100 years, then this is what we should expect each year going forward, right? Of course not. Stock ownership in 1952 was only 4.2%. In 1980, 13%. In 1989, 32%. In 1998, 52%. So who are all these people that averaged 7% a year after inflation? Don’t be jealous of your neighbors, their grass has just about the same number of brown patches yours does.

So, what “generalized/specific” advice are we giving you?

First, be realistic. Expect, deserve, need, want, all culminate into one type of investment return, which is the one you actually get. If a safe return is 3 percent in short-term investment grade corporate bonds, and you’re trying to achieve 7%, you would have to increase your risk and expect more volatility. Also, if you are trying to obtain higher returns by investing in stocks versus bonds, then don’t be shocked if your principal declines if the stock market declines. As we have heard a million times, no one can predict the market; maybe it’s about time we all start believing it.

Second, plan your cash flow carefully. If you are withdrawing funds from your nest egg, make sure you have a proper allocation to income producing holdings. Consider duration and don’t chase yields. Invest in a way that gives you the best chance to take advantage of future rate cycles to counter inflation, especially in your core bond holdings. If you can support most, if not all of your withdrawal rate with yield, then you won’t feel like you have to take a “pay-cut” if your equity holdings take a hit. Allocate your retirement portfolio to minimize drawdowns, especially once you begin taking withdrawals. Also, having a proper allocation to equities for longer-term growth is prudent.  You just don’t want to end up in a nine-foot hole when you can only jump up eight feet.

Third, enjoy your retirement days. Not too many people on their death-bed have made, “should have day-traded more” their last words. Low volatility plus constant cash-flow equates to low stress and a high sleep tolerance.

Lastly, as we come full circle, filter your advice. You have your own individual needs, goals and tolerances. Let your realistic objectives guide the allocation of your investment portfolio and never forget the two most important factors for a successful retirement portfolio; Diversification and Discipline.  There will always be a “daily special” offered to the masses. Just don’t let your eyes trick you into taking on more than you can stomach.

(Repost from 06/12)

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A Few 2015 Social Security Changes

Bigger payments. The 1.7 percent cost-of-living adjustment is expected to result in the typical retiree getting about $22 more per month. This change will increase the average monthly benefit for retired workers in January 2015 from $1,306 before the cost-of-living adjustment to $1,328 after. The average benefit for retired couples who are both receiving benefits is projected to increase by $36 to $2,176 per month. Social Security payments are automatically adjusted each year to keep up with inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Previous cost-of-living adjustments have ranged from zero in 2010 and 2011 to 14.3 percent in 1980. The 1.7 percent increase retirees will receive in January is similar to the 1.5 percent adjustment for 2014 and 1.7 percent increase in 2013.

Higher tax cap. Most workers pay 6.2 percent of every paycheck into the Social Security system until their earnings exceed the tax cap. The maximum taxable earnings will increase next year from $117,000 in 2014 to $118,500 in 2015. About 10 million of the 168 million workers who pay into Social Security are expected to face higher taxes as a result of this change. People who earn more than the taxable maximum do not pay Social Security taxes on that amount or have those earnings factored into their future Social Security payments.

Larger earnings limits. Social Security beneficiaries who are under age 66 can earn as much as $15,720 in 2015, before $1 in benefits will be withheld for every $2 earned above the limit. Retirees who will turn 66 in 2015 and have signed up for Social Security can earn up to $41,880 before every $3 earned above the limit will result in one benefit dollar being withheld. However, once a retiree turns age 66 there is no limit on earnings and Social Security payments are recalculated to give the retiree credit for the withheld benefits.

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Fight Fire With …….

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” This is a quote by famed Fidelity investor Peter Lynch. The annualized performance of the S&P 500 over the last seven years is 6.7% (thru 7.30.14). This includes one of the sharpest downturns in the last century. However, for those that held strong throughout that downturn, patience paid off and Peter Lynch’s quote was once again validated.

At Windsor, we don’t try to “guess” the direction of the stock market. Warren Buffett has stated many times that he doesn’t know what the market will do next week, next month or even next year, but over the long-term it trends up. For our clients, risk management is achieved by developing and maintaining your proper allocation, as well as systematically rebalancing.

As the markets decide the timing and extent of any type of pullback, we recommend reading the post below entitled “Swimming Against the Tide.” Making sure the allocation of your portfolio matches your needs and risk tolerance is what separates a roaring forest fire from a controlled burn. Both can spawn new growth, however recovery comes quicker from the latter.

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Swimming Against the Tide

The equity markets are off to a shaky start in 2014 after the smooth upward climb for the U.S. equity indexes in 2013. Currently, the Dow, Nasdaq, and S&P 500 are negative so far this year, while other asset classes, such as bonds, have moved higher.

Since 1928, the S&P 500 normally experiences a five-percent correction three or four times every 12 months. A decline of ten percent is more rare, but still seen once each rolling 12-month period. A bear market, down 20% or more, is seen once every three or four years. These are averages, and any one year can deviate from the norm, as we saw in 2013.

The question many investors and retirees ask is what, if anything, can (or should) they do about the normal levels of volatility we see in the equity markets? The answer to this question all depends on risk tolerance. One of the definitions Meriam-Webster’s dictionary gives of “tolerance” is the ability to accept, experience, or survive something harmful or unpleasant. If an investor panics and sells after every 5 to 10% decline in the market, equities are probably not for them. If the average market volatility (2nd paragraph above) can be tolerated, then having equities in your asset allocation plan is prudent as long as it aligns with your desired level of risk. In a year like 2013, such a plan might have seemed useless as we saw the U.S. equity indexes outpace pretty much everything. However, and this is important, you should not develop an asset allocation plan based on an outlier year. If you did, then you would have held zero equities after 2008 and 100% equities after 2013.

Sticking with a diverse and properly allocated investment plan could lower the overall volatility and increase comfort during normal, and inevitable, stock market corrections. To ensure your comfort level (sleep tolerance as Windsor calls it) remains steady, consistently rebalancing to maintain proper allocation is critical. Certainly after corrections or abnormally large market gains, bringing your asset allocation back in line with your desired level of risk is a proactive response. This is in stark contrast to the extreme reactive response by many retail investors who get out of the market after it goes down and jump back in to equities after markets have gone higher.

We understand these strategies are hard to implement since you are going against the tide of recent performance. However, risk-based asset allocation and rebalancing are time-tested and proven ways to increase your comfort level and help you avoid mistakes that many investors make.

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Filter the Noise

Below are recent predictions regarding 2014’s stock market performance:

MacNeil Curry, Head of Global Technical Strategy at Bank of America Merrill Lynch, says investors should get ready for as much as a 20% correction in the markets this coming year.

Goldman Sachs equity strategists forecast the S&P 500 would reach 1900 by the end of 2014, an 8% increase from current levels. “However, we estimate a 67 percent probability of a 10 percent drawdown at some point in 2014,” Goldman analysts wrote.

Jeff Kleintop, LPL Financial’s chief market strategist, forecast a 10 to 15 percent gain in the S&P 500 for next year, based on his expectation that the economy will grow at 3 percent and earnings at 5 percent to 10 percent.

There are many different predictions and assumptions out there. Don’t bet your retirement on any one “opinion.” Stay diversified, stay disciplined, and stick to an investment plan that is based on your specific needs and objectives.

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Roadblock to Retirement

Every year, BlackRock surveys over one thousand active defined contribution participants about retirement and their workplace retirement savings plans. Sometimes the survey confirms assumptions we’ve made; other times, it surprises us.

Here is one finding from the survey that is quite surprising:

46% of participants who are NOT saving for retirement say it is because they do not know how much they will need.

It’s easy to get frustrated with the reasoning here. Clearly, saving something, even if it isn’t enough, is going to be better than saving nothing. But if you think about what these participants are really telling us, it becomes clear what the stumbling block is. What they are saying is, not knowing leads to inaction.

In fact, another survey finding, that 77% of participants would increase their savings if they know how much they needed to save, more or less confirms this. Knowledge, in this case, equals motivation.

It’s safe to assume that if you are reading this blog post, you are probably motivated already, or, you’ve been successful at getting past this roadblock. But here is something to consider. When it comes to how much we will need in retirement, none of us know. The best we can do is to narrow down the uncertainty as much as possible, be prepared for the unexpected, and most importantly, stick to your well thought out plan.

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