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Buy Apple Stock, or Diversify?

Diversification seems to be a buzzword that is thrown around by investment gurus way too often.  It is a feel good word that advisors use to sound intelligent and sophisticated.  That is fine and all, but most investment advisors and their clients do not even understand what true diversification in an investment portfolio really means.

What is Diversification?

Diversification is “A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.” 1

How do I know if I am fully diversified?

This is where the water gets a little muddy.  This question will bring different answers from different advisors.  Some people would tell you that you need between 5 and 10 individual stocks to be properly diversified.  If you have only 10 stocks you are taking on extreme risk that is not necessary for you to have.   Odds are those 10 stocks are all in a similar place in the market.  Thus all 10 of them will be moving in a similar direction when a crash in the market comes.

Diversification is more than just the number of stocks that you are invested in, although that is very important.  As a result of the funds that our firm, Preferred Retirement Options, recommends, clients are invested in about 12,000 individual stocks.  The most important part about that is that we are invested in every sub category of the market in every free country in the world.  Large companies, small companies, international companies, distressed companies, growth companies etc.  We are investing in different economies and different technology.   It would take an extinction level event for all of those stocks to lose their value.   From the portfolios I have seen, most investors that work with an advisor are invested in only large US stocks in the amount of 500 to 1000 total stocks and call that well diversified.

Why is Diversification so important in your investment portfolio?

Take a look at this chart created by Matson Money. 2

This is a pretty technical chart so let me explain.  This is real data from 1970-2016.   If you were to invest in the S&P 500 you would have gotten a  10.3% return with standard deviation of 17.11.   Sounds great right.  But if you add bonds/fixed income, international stocks, small stocks and value stocks, you end up with a 10.49% return and a standard deviation of 11.59.   That is a higher return with less risk and less volatility.   That is what diversification can do for your portfolio.

When you hear some investment guy throw out the word diversification, now you can have an understanding of what it is, and maybe even teach them a little something about it.  If you want true diversification that lowers your risk and increases expected return, then give us a call.

By Jimmy Hancock

References

1. “Diversification Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 25 June 2014. <http://www.investopedia.com/terms/d/diversification.asp>.

2. Matson Money. Separating Myths From Truths, The Story of Investing. N.p.: n.p., n.d. PPT.

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Life Insurance: Do You Need It?

Life insurance is a way to protect your loved ones financially if and when you pass away.

If any of the following are true in your current situation, then you should consider getting or increasing your life insurance coverage.

  • You are married and you spouse depends on your income
  • You have children or other family that is dependent on you for support
  • Your savings won’t be enough for your spouse to live on
  • You own a business
  • You have a personal loan, mortgage, or other debt for which another person would be responsible for after your death

The proceeds from life insurance can help your loved ones to continue on financially without having a huge burden in the case that you die.   Obviously funeral expenses are are another thing that must be paid for, and that usually costs at least $10,000.  Plus the huge benefit is that life insurance proceeds are not taxable.

Living without life insurance can be scary, is a risk that should not be taken.  One of the biggest paybacks for those who have life insurance is the peace of mind that comes along with knowing your loved ones will be protected and set financially in the case of your death.  Even if you have term insurance and don’t actually end up dying before the end of the term, the increased peace of mind is worth it.

Term vs Whole Life Insurance

Term coverage is life insurance for a specific number of years, and when it ends, you have to reapply or decide to go without.  Whole life is coverage guaranteed to pay out whenever you die as long as you keep paying the premium.   Term is much, much cheaper and more simple.  Whole life has many more options and side benefits.   For most people we suggest term coverage during the working years as you are building up your savings.  Then the goal should be to be “self insured” by the time you retire, by having a large amount in retirement savings that would pass on in the case you die.   But in some cases whole life is the better option.

 

I am going to go over 6 common myths that you might have heard about life insurance.

1. The coverage you get at work is enough.

Life insurance through your employer can be a big financial help, but usually doesn’t even come near the amount  of coverage you need.  It is also dependent upon your employment with that company which can never be guaranteed.  The coverage you get from work may be enough, but only if you’re single, in good financial standing, and have no dependents.  For most people, the term policy offered through their employer just won’t be enough to sustain their families’ needs.

2. Only the working spouse needs life insurance.

Life insurance on the breadwinner is there to fill in the gap left by the loss of a income, but that discounts all the valuable work a stay-at-home partner contributes to the family. How would you pay for child care, the cleaning, or even the time off of work for the grieving period, let alone the definite costs of the funeral, without a little financial help in the event of such a loss? It can be hard to monetize the many contributions of the non-breadwinner, but to overlook them would be a bad idea.

3. The value of your life insurance coverage should equal two years’ salary.

Everyone’s financial circumstances are different..  You might require more coverage than two years’ salary if you incur medical bills or other debts, have a young family, a mortgage to pay, or any number of life obligations to meet. If you don’t have any dependents, and you don’t have a mortgage, then two years’ salary may even be excessive.  A lot also depends on what gives you peace of mind regardless of your circumstances.

4. Single people without dependents don’t need to own life insurance.

While it’s true you might not have a family to provide for, odds are you’ll still have to cover the cost of your funeral, pay off debts, and maybe leave a little bit behind for your parents and or close family and friends.

5. You don’t need professional services to buy life insurance.

We do not charge a dime to get quotes or meet and go over your situation.   In the cases I have seen, most people who try to go online and get life insurance without an agent end up paying way more money then if they just contacted an agent.   We work with almost all life insurance companies to get the best price for our clients.  With the knowledge of and access to a myriad of different policies, riders, coverage amounts, prices, and benefits of different companies, a licensed agent can help you find exactly what you need for the right price.

6. Life Insurance is expensive

Compared to health insurance, life insurance is walk in the park.   Unlike health insurance, prices on life insurance have actually dropped over the last few years.  The price you pay is dependent on your age and health, but most people are surprised as to how affordable it can be.  For example, for healthy people under the age of 35 you can get $500,000 of term coverage for under $25 a month.

 

Whether you have life insurance or not, it would be a smart financial decision to talk to us about it and see if we can either get you covered, or get you quotes to see if we can save you money compared to your current policy.  What is there to lose?

By Jimmy Hancock



References

  1. Life Insurance. Digital image. Veldsteon.blog.hr. N.p., n.d. Web. 1 Aug. 2017.
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First Half of 2017 Market Recap

2017 is more than half over now, and a lot has happened.  In case you haven’t heard, international stocks are killing it.  The Matson Money International Fund is up almost 14% through the first half of the year.   The following is commentary from Matson Money on the 2nd quarter in the markets.

The 2nd quarter of 2017 saw a continued increase in broad equity markets, both at home and internationally. During this time period, U.S. stocks grew by 3.09% as represented by the S&P 500 index, and for a second consecutive  quarter, international stocks fared even better, with the MSCI EAFE index  returning 6.37% for the quarter. After lagging behind for much of the previous couple of years, Emerging Market stocks once again led the way over  developed markets for the 2nd consecutive quarter. The MSCI Emerging Markets Index saw a return of 6.38% for the quarter, and is now up over 18%  year to date.

Over the course of the last year, we’ve seen strong market returns, the  lowest unemployment numbers we’ve seen in recent history, and continued low interest rates and low inflation. By almost any normal metric the economy  is looking very healthy and has for quite some time. During extended time  periods of good economic data and favorable stock returns, investors can sometimes begin to feel euphoric – like things will stay good forever. In fact,  over the last 18 fiscal quarters, the S&P 500 had a positive return in 17 of them, with only one negative return in the 3rd quarter of 2015.

In times when markets are down and seem as if they are never coming back up, we stress  that it’s extremely important not to lose sight of one’s long term goals, not  to panic, and to use downside volatility as an opportunity to rebalance and buy  more equities. These same principles apply during bull markets as well. That  euphoric feeling that investors can feel when it seems like markets will go up  forever can lead to imprudent decisions in the same way fear can in a down  market. Investors tend to overestimate their aversity to risk in these market  conditions and take on greater exposure to equities than their true risk tolerance would dictate. In both scenarios, it is important to not get caught up  in recency bias – assuming that whatever is happening in the short term will persist into the long term. Short term trends are just that – short term.  Throughout the life of the stock market bull markets have been followed by bear markets and vice versa many times over.

It is an important distinction to understand the difference between academically proven ways in which  markets move as compared to short term trends. Over the long term, equities have outperformed risk free investments such as treasury bills, but this is not going to be true over every short time period. Similarly, small stocks and value stocks have outperformed large stocks and growth stocks respectively, but again, this isn’t necessarily true over the short term. In fact, looking back historically, sometimes investors have had to wait many years before these  various premiums have shown up, but the prudent investor who understood  that these premiums are pervasive in the long term and have ignored short  term trends have very often been rewarded for doing so. That is why it is so  important to own a diversified portfolio built specifically for your personal risk  tolerance, to stay prudent and to keep that portfolio through the ups and  downs of the market, and to rebalance when the opportunity presents itself.

In the end, choosing a wise financial strategy – and sticking to it – can have  tremendous impact on an investor’s long term financial health. Chasing  performance through buying and selling is a risky game. Historically speaking,  it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes  and the return of the market.

By Jimmy Hancock

References

  1. 2017 Happy New Year Sign. Digital image. Vectoropenstock.com. N.p., n.d. Web. 25 July 2017.
  2. Matson Money. “Account Statement.” Letter to James Hancock. 20 Apr. 2017. MS.
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4 Investment Accounts You Need to Have

What investment accounts are available for me?  What are the tax consequences of investing?  Planning your investments to build a retirement fund can be a dizzying prospect. The various questions, options, details, accounts, and amounts are enough to make anyone’s head spin. It is important to work with an investment coach that can understand your specific needs.

Below are a few basics and suggestions on some options available to most people.

1. Fulfill Your Company’s Match Program: If you work for an employer that has a retirement plan option, this is a must.  Most companies, even small companies, offer some sort of retirement account.  Smaller companies usually have simple IRA’s or SEP IRA’s, while larger companies usually have 401k’s.  There is a high likelihood that your company has a match program as part of their plan.  This means that for each contribution you make into your account, the company will match it up to a certain amount.  So match programs offer an instant 100% return on the money invested.   Before you invest anywhere else, make sure you are investing enough in your work retirement plan to get your full match.

Warning!  If you don’t plan on working for the company long term, make sure you check out the vesting schedule.  A lot of company retirement plans don’t give you full access to the employer contributions unless you work there for a 3 to 5 years.

2. IRA to the Max: An IRA is an individual retirement account that can be opened by anyone seeking to invest.  Investing in an IRA usually gives you more investment choices and flexibility than is offered in many 401k plans.   Also, you have the Roth option.  There has been a long standing battle between the Traditional IRA’s and the Roth IRA’s. When it comes to your retirement planning, your Roth IRA should win this battle in most cases. There are a few different reasons why you should make this move. Investing in a Roth allows you to pay taxes on your income now, and avoid the higher tax rate as it grows in your retirement.  The total taxes paid with a Roth IRA from opening of account to death and beyond are almost always less than with a Traditional IRA.

Who’s eligible?  Even if you have a retirement plan at work you are eligible to contribute to a Roth IRA.

Another thing to consider if you are married is opening a Roth IRA for your spouse.  Even if they are not working you can contribute to their Roth IRA and max it out as well.

3. Open Taxable (Non-Qualified) Accounts: If you have maxed out your company plan and an IRA for your and your spouse, congratulations, you are doing very well in the retirement planning side of things.  But what if you still want to put more money away?  There are still options.   You can still invest more money in a non-qualified account.  If you are married this would be a joint account, and for the singles it is a personal account. There are a few advantages and disadvantages of this type of account.  This is not a tax sheltered account, so there is no taxable advantage.

One big advantage.  There is no tax penalty or fee for taking the money out at any age for any reason.  For that reason a lot of people use this account as an emergency fund, or in any case where they want extra flexibility.

4. Education Planning:  If you have kids, you need to think about saving money for their future, especially their college expenses.  There are Education Savings Accounts, and other ways and means of doing this that are advantageous for tax purposes.

 
There is a lot of things to know, and I haven’t even gotten into life insurance and that side of the retirement planning.   Like I mentioned before, there is a reason that no one has created a perfect plan that fits everyone. Depending on your personal income, you might not be eligible for certain accounts, like a Roth IRA.  But, for most people, these four steps are a great place to start.

By Jimmy Hancock



College Savings Piggy Bank. Digital image. Flickr. N.p., n.d. Web. 27 June 2017.

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What Those Gold Advertisements Aren’t Telling You

We have all heard the advertisements on the radio and headlines that keep telling us that investors need to flee to safety and buy gold.  They will tell us that the stock market is going to crash worse than last time, and that investors need a hedge to inflation with gold.  They will say it with charisma and inflict fear upon us as investors.  Even I have found myself a little fearful at times.

I have put in the research, and gold as an investment does not make sense for most investors, especially long term investors.  Gold as an investment may give some assurance to the leery, older investor, but the numbers just don’t add up like you might think they do.

Show me the Data

The reason gold is not good as a long term investment is because the growth of the price is extremely low compared with stocks.   Check out this paragraph from article I found.

“Because of inflation, a dollar acquired in 1802 would have been worth just 5.2 cents at the end of 2011. A dollar put into Treasury bills at the same time would have grown to $282, or to $1,632 had it gone into long-term bonds. Held in gold, it would have grown to $4.50. True, that’s a gain even with inflation taken into account. But the same dollar put into a basket of stocks reflecting the broad market would have grown to an astounding $706,199.” 1

1 single dollar grows to almost a million dollars in stocks, but in gold it grows to $4.50.   That stat alone teaches us not only the weak gold price growth, but the extreme growth potential in stocks.

So what about more recently?  Let’s look at Gold’s return over the last 25  years

Over the last 25 years the real return(inflation adjusted) of gold was a measly 1.5%, and 4.1% before inflation adjustment.  2. Stocks as indicated by the S&P 500 over the last 25 years had a return of 9.62%. 3.  That is over 5.5% per year increase compared to gold.  Yes, that includes 2008 stock market crash.  If you understand the value of compounding, you know you can’t afford Gold’s return in a long term portfolio.

The current price of an ounce of Gold is $1281.80.  This is a far cry from where it was just a few years ago when it reached its peak above $1900 in 2011. 4.  If you jumped on that bandwagon, you have hopefully learned a valuable lesson.

Gold as a hedge against inflation

A lot of people that invest in Gold do it knowing about the low long term returns.  The reason they give is it is a hedge against inflation.   I understand this side and its merits, but have 2 minor push backs to that.  First of all, how can you compare the inflation rate, a very constant thing year after year, to the price of gold, which bounces around on extremes year to year.   Second of all, how are stocks not a better hedge against inflation?  If the CPI goes up due to inflation, stock prices also increase.  We saw that with the huge growth rate of stocks back in the 80’s when inflation was very high.

One Case for Gold

The only reason I would ever advise someone to buy gold, is if they believe that a catastrophic, life altering event is coming in the very near future.  If you think we are going to go back to hunters and gatherers and that capitalism will disappear, then I suggest you buy gold.

Final Say

Past performance is no guarantee of future results, but in my opinion gold is not a good hedge against inflation, and it is not a good long term investment.  Investing in Gold is better than keeping all of your money under your mattress, but this is a good, better, best argument. If you are scared of stocks it is most likely because you or someone you know has gone about investing in stocks completely wrong in the past.   To win financially for retirement, invest in a globally diversified portfolio filled with stocks and short term fixed income.

-By Jimmy Hancock



References

1. “Investing in Gold: Does It Stack Up? – Knowledge@Wharton.” KnowledgeWharton Investing in Gold Does It Stack Up Comments. Wharton School of the University of Pennsylvania, 22 May 2013. Web. 15 Apr. 2014. <https://knowledge.wharton.upenn.edu/article/investing-in-gold-does-it-stack-up/>.

2. Carlson, Ben. “A History of Gold Returns – A Wealth of Common Sense.” A Wealth of Common Sense. N.p., 21 July 2015. Web. 18 Aug. 2015. <http://awealthofcommonsense.com/a-history-of-gold-returns/>.

3. “S&P 500.” Wikipedia. Wikimedia Foundation, n.d. Web. 18 Aug. 2015. <https://en.wikipedia.org/wiki/S%26P_500>.

4. “Yahoo Finance – Business Finance, Stock Market, Quotes, News.” Yahoo Finance. N.p., 5 Jun. 2017. Web. 5 Jun. 2017. <http://finance.yahoo.com/>.

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Investing in Stocks Vs Real Estate

The comparison is often made between investing in Real Estate vs investing in the Stock Market.   There are many strong points to both arguments, but as an Investment Advisor, I am going to argue the side of why the stock market is a better long term investment.  Note, I am not inferring you should not buy a home, nor am I inferring that you should exclusively put all of your money in the stock market.  This argument is just in terms of where you should put extra money that you would like to grow for retirement or other purposes.

Here are 5 advantages of investing in stocks over investing in real estate.

1.Effort/Work

Whether you are flipping homes, renting properties, or developing land, there is a whole lot more hands on work and extra time as compared to ownership of stocks.  If you have an investment advisor, you could realistically spend absolutely no time “working” on your stock ownership and still get the growth of the market.   Lucky for you, stocks don’t have furnaces that break, or water pipes that leak.

2. Diversification

Diversification is a very important concept.  The old saying is don’t put all your eggs in one basket.  Diversification in Real Estate would involve buying homes, apartments, commercial property, and farm land etc., all in different areas of the country.   You would have to have quite a bit of money to be fully diversified.  With the stock market, if you are invested in a Matson Money Fund, you can start with one dollar and be invested in about 12,000 stocks throughout the world.

3. Liquidity

Liquidity is how easy it is for you to sell.   Stocks are extremely liquid, with most stocks being sold within seconds of offering them for sale.   With Real Estate, it can take weeks, months, or sometimes years to sell or rent out a property.

4. Costs

The cost of owning property could include all or most of the following; real estate agent fee, property taxes, maintenance, utilities, mortgage interest, and insurance.   The cost of owning stocks usually only includes an investment advisor fee, and mutual fund management fee.

5. Annual Return

From 1975 through 2015, a 40 year period, the S&P 500 (US Large Stocks) returned growth of 8.1% annually.  During the same exact period, the US Residential Real Estate prices returned growth of 4.8% annually.   You can see the difference that makes long term by looking at this basic chart. 1.

If you are looking for a way to get the biggest financial return for retirement, my opinion is that your best option is to put your money in stocks, via a diversified Roth IRA or 401k.

Feel free to comment with your thoughts.

By Jimmy Hancock

 



References

  1. Iskyan, Kim. “What Is the Historical Return of Real Estate vs Stock Investing?” TrueWealth Publishing, 31 Aug. 2016. Web. 12 May 2017.
  2. Kennon, Joshua. “Should You Invest in Real Estate or Stocks?” The Balance. N.p., 17 Oct. 2016. Web. 12 May 2017.

 

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Goldman Sachs down 5%…Buy or Sell?

If you heard that your favorite store just lowered all of their prices by 5%, you would obviously be excited and go there to buy things on sale.   But for some reason that mindset usually leaves people when it comes to stocks.  People are afraid to buy stocks that are “on sale”, but love buying stocks that just “raised their prices”.

Mark Matson, founder and CEO of Matson Money, just recently went on CNBC to discuss this topic, and a few other important investing principles.  You would think the people he is discussing this with would understand basic principles like buy low and sell high, but apparently not.

Check out the 2 minute video by clicking on this link.  http://markmatson.tv/fist-fight-on-cnbc/

By Jimmy Hancock

References

  1. Fist Fight on CNBC. Perf. Mark Matson. CNBC, 2 May 2017. Web. 3 May 2017.



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2017 1st Quarter Stock Market Recap

Yes, the stock market has been doing well, but just how well and what categories did the best?   As it turns out, a big theme for the first quarter was the big returns from diversifying internationally.  Matson Money’s International Fund was up 8.02% in just 3 months.

Below is commentary from Matson Money about the 1st Quarter in the market.

The 1st quarter of 2017 built upon a strong 4th quarter and continued to provide positive returns across broad markets. Many members of the media and so-called “experts” warned of a financial downturn resulting from Donald Trump being inaugurated as President, but it seems as if these predictions were unfounded, with stocks up worldwide since President Trump took the reins. U.S. stocks performed well in the first quarter, with large stocks leading the way up 6.07% as represented by the S&P 500. However, despite the warnings of some pundits that President Trump’s protectionist policies would sink international stocks, both developed and emerging market stocks saw an even greater lift than those domestically, with the MSCI EAFE Index index up 7.39% and the MSCI Emerging Markets Index up 11.49%.

 d
This overperformance by international equities as compared to domestic equities marked a contrast to what we have seen over the last few years, and can be a great lesson for investors. Leading up to 2017, the five-year period ending in 2016 saw the S&P 500 gain 98% while the EAFE was up only 40%. Naturally, many investors fell into the trap of thinking that this was the “new normal” and that it was prudent to invest in all U.S. stocks and ignore those abroad. The only thing that is “normal” about this performance disparity is that when one invests in different asset classes with the goal of diversification, they get just that – asset classes with dissimilar price movements, which is the earmark of diversification. This time period is one of many that can highlight why this kind of diversification is a good thing and is so important for investors. Without a crystal ball to tell an investor which of the asset classes will perform better over any short-term period, it can be extremely detrimental to be over-weighted in any one and take asset class specific downside risk or miss out on a boom in another. Consider the following example of varying five-year periods of U.S. equity (S&P) performance as compared with international (EAFE):
1971-1975 – EAFE outperformed the S&P by 48%
1979-1983 – S&P outperformed the EAFE by 60%
1984-1988 – EAFE outperformed the S&P by 257%
1989-1993 – S&P outperformed the EAFE by 85%
1995-1999 – S&P outperformed the EAFE by 166%
2002-2006 – EAFE outperformed the S&P by 70%
2012-2016 – S&P outperformed the EAFE by 58%

 d
When looking at this most recent period through the lens of history, it no longer appears to be an extraordinary shift in market paradigms; rather it can be viewed as just another of the many examples of U.S. and international stocks performing differently. What IS truly  extraordinary is that during this entire period (1971-2016), both asset classes had an average annualized return of 10% per year – these returns just occurred unpredictably at different times. It can be challenging to not get caught up in a current trend, but taking a more prudent, historical outlook can prove to be rewarding. For investors who chose to forsake diversification and chase what had recently been hot, they may have missed out on potentially sizable returns.

 d
In the end, choosing a wise financial strategy – and sticking to it – can have tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market.

By Jimmy Hancock

References

  1. Matson Money. “Account Statement.” Letter to James Hancock. 20 Apr. 2017. MS. N.p.
  2. Globe with International Flags. Digital image. Freeimageslive.co.uk. N.p., n.d. Web. 25 Apr. 2017.

 



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How I Beat Vanguard Index Funds

You have probably heard of an Index fund, but you might not have heard of an Institutional fund.  Index funds seem to be getting more and more popular as a means for investing with minimal fees, but institutional funds have been outperforming index funds, and I will show you how.

Index Funds

These type of mutual funds are not actively traded, and the only purpose of the fund is to keep the stocks in their fund that are listed in specific index.  For example, the S&P 500 is an index made up of the 500 largest publicly traded companies in America.  Thus a S&P 500 Index fund would hold those 500 stocks, and that is all.  When the list of 500 companies changes, they sell the companies that exited the list, and buy the companies that jumped into the list.

Institutional Funds

Institutional funds are similar to index funds, but go 1 step further.  These type of mutual funds dont worry about what is listed in indexes, but have specific criteria for evaluating each stock.  They put each of the publicly traded stocks throughout the entire world into different categories based on size, country, and other factors.  They then take those categories and weight them based on nobel prize winning studies like the 3 factor model and modern portfolio theory.   They then can be specifically weighted in a investors portfolio based on each investors risk preference, which is decided by the investor and the advisor together.

The Proof is in the Pudding

Lets compare index funds to the institutional funds offered through us, aka Matson Money.  We will look at real average annual returns over the last 16 years from 2000 through 2015 for a few different sectors of the market.   Note, all of the numbers shown are after subtracting of all mutual fund management fees.

Large Cap Value Funds:  

Vanguard Index Fund- 5.14%

Institutional Fund Used by Matson Money- 7.65%

International Large Value Funds:

Vanguard Index Fund – 3.08%

Institutional Fund Used by Matson Money- 5.03%

International Small Cap Funds:

Vanguard Index Fund – 6.61%

Institutional Fund Used by Matson Money- 8.38%

Micro Cap Funds:

Vanguard Index Fund – Not Offered

Institutional Fund Used by Matson Money– 9.02%

International Small Cap Value Funds:

Vanguard Index Fund- Not Offered

Institutional Fund Used by Matson Money- 9.91%          1. 

Seeing the data above, I would like to point out another other obvious advantage of institutional funds.  Institutional funds allow for everyday investors to get into sectors that you cannot get into with Index funds, like micro cap (very small companies), International Small Value, and Emerging markets Small and Value (Countries that are less established).  Returns in those categories have been huge going back 16 years as well, as you can see above.

Click here to Download our free Investor Awareness Guide

To get slightly more technical, I have included a few more important weaknesses of index funds as written by Dan Solin in a recent article.

1. Flexibility When to Buy and Sell Stocks

An index fund buys and sells stocks when they enter and leave the index. An institutional fund has the ability to reduce turnover and increase tax efficiency by establishing a range that permits it to hold a stock even if it drops out of the index.   2. 

2. Flexibility in Stock Selection

An institutional fund can establish a screen to exclude categories of stocks with historically poor returns, like initial public offering stocks. An index fund manager does not have this flexibility.  2. 

3. Use of Block Trading Techniques

There are sophisticated trading techniques a small cap, institutional fund manager can use that are not options for index fund managers. Because the market for these stocks is relatively small, and dumping a large block can affect the stock price, an institutional fund may be able to buy these stocks at a favorable price from a seller who has an urgent need to liquidate holdings. 2. 

If you want to beat Vanguard Index Funds, call us at 208-522-4961, email jimmy@proinvestmentcoach.com, or find out when we are doing our free investing class in your area by clicking on this link Upcoming Events

By Jimmy Hancock

Jimmy Hancock is an Investment Advisor Representative for Preferred Retirement Options, an RIA in Idaho.



References

1. Matson Money.  Investor Jeopardy Powerpoint. Mason, OH: Matson Money, 28 Mar. 2017. PPT.

2. Solin, Dan. “Solving the Mystery of Passive Asset Class Investing.” The Huffington Post. TheHuffingtonPost.com, 21 Jan. 2014. Web. 23 Jan. 2014. <http://www.huffingtonpost.com/dan-solin/solving-the-mystery-of-passive-asset_b_4627737.html>.

3. Vanguard Investments Logo. Digital image. En.wikipedia.org. N.p., n.d. Web. 28 Mar. 2017.

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How to Beat Taxes by Investing

It is tax time once again and no matter how much you hate taxes you should know about the tax advantages of IRA’s.  Contributions to IRA’s can help you in many different ways at tax time.  They can lower your taxable income dollar for dollar to reduce your tax burden, or even increase your refund.  I will compare Traditional IRA’s with Roth IRA’s to show you the benefits of each.  Everyone that is able should be putting money away into an IRA.  The contribution limit per year is $5500, or $6500 if you are over age 50.

Traditional IRA Summary- A Traditional IRA allows you to take the tax advantage in the year that you make contributions to the account.  This type of IRA is used by people who are looking for tax deductions.

Pro’s

  • – You get to write off your contributions you make each tax year from your Income.
  • – If you are not covered by a retirement plan at work, the income limit does not exist.  Meaning you can write off contributions no matter how much you make.
  • You don’t have to itemize deductions in order to get the deduction, it affects your AGI, (Adjusted Gross Income) not your net income.

Con’s

  • – When you take the money out in retirement, you pay the full taxes on not only the money you put in, but the growth as well. (Assuming there is growth)
  • – You are required to take the money out and pay taxes beginning at age 70 1/2, this is called a Required Minimum Distribution.
  • – If you have a retirement plan at your work, you cannot write off contributions if your Adjusted Gross Income is more than $118,000 for Married Filing Jointly. ($71,000 for Single Filers)

Roth IRA Summary- A Roth IRA allows you no advantage in the year of the contribution, but the money you take out in retirement or after death is completely tax free.   It is used by people with lower current tax rates and by those wanting tax free money in retirement or as an inheritance for their children/spouse.

Pro’s

  • – You get all of your money that you contributed plus all the growth of the account completely tax free after the age of 59 1/2.
  • – If you die, the money goes tax free to your beneficiaries.
  • – You have the option  of withdrawing money, up to the total of all your contributions made, tax and penalty free at any age or for any reason.  

Con’s

  • – Your contributions do not lower your Adjusted Gross Income in the year contributed.
  • – If you make more than $194,000 as married filing jointly($132,000 for single) you cannot contribute to a Roth IRA.

Things to Consider

  • – You can open as many Roth IRA’s and Traditional IRA’s as you want, but that may not be in your best interest.
  • – If your income is below $37,000 (Married Filing Jointly) then you probably qualify for the Retirement Savings Credit, which gives you up to 50% of your total contributions in the form of a tax credit on top of any other tax benefit you would already receive.  See last weeks blog for more info on this.  
  • – If you are married, you can contribute with the tax advantage up to $11,000 total, $5500 in both spouses accounts. 
  • – If you believe your current tax bracket is significantly higher than it will be when you take the money out, then you should probably consider a traditional IRA.

The most important part of the decision should be your goals and priorities.  A Roth IRA will give you more long term assurance of tax free wealth, while a traditional IRA will help you to dodge big tax bills in the short term.   If you need to open up an IRA or Roth IRA this tax season, get in contact with us and we can help you out with no upfront cost.  

By Jimmy Hancock

Reference

IRS. “Retirement Topics – IRA Contribution Limits.” Retirement Topics – IRA Contribution Limits. IRS, 18 Feb. 2014. Web. 03 Aug. 2014. <http://www.irs.gov/Retirement-Plans/Plan-Participant%2C-Employee/Retirement-Topics-IRA-Contribution-Limits>.

Boxing Gloves. Digital image. Misswoodenglish.wikispaces.com. N.p., n.d. Web. 14 Mar. 2017.