Don’t Buy 5 Star Mutual Funds

5 star funds“Say a mutual fund makes a “best buy” list or is highly rated. Should you buy it?

The latest round of research, which confirms decades of academic findings, suggests you should avoid top-rated funds. They rarely repeat their best years.

According to a new study by Baird Wealth Management Research, not only do mutual fund ratings not predict future performance, they may be reliable red lights that should warn you against buying a fund.

Baird analyst Aaron Reynolds asked the question “do fund ratings predict future performance?” Here’s what he found:

* For US stock funds, the research found that ratings were negatively predictive of future performance, e.g. a high rated fund will perform worse than a low rated fund.”

How do you explain these results? Often, when a stock fund manager has a good year, it’s due to chance. ” 1

Track Record Investing

This is called Track Record Investing.  This is one of the myths of investing that Mark Matson talks about all of the time.  5 star mutual funds are the funds that have a great track record over the past few years and that seem to get everything right.  But check out this chart that further proves that Track Record Investing gives you below market returns.  2.

Track Record Investing

 

 

 

 

 

 

 

 

 

 

So the “top 30” funds from 2004 to 2008 beat the market as a whole by about 6%.   So lets say you read a magazine or saw a headline that said to invest in one of these funds that “continually beats the market”.   You decide to do it.  2009 through 2013 come, and your fund gets beat by the market by 13% annually for 4 years.  That’s over 50% total growth that you missed out on.

This chart is just one of many scenarios of proof that Track Record Investing is detrimental to your long term retirement portfolio.   Don’t fall for the hot mutual fund headlines.

by Jimmy Hancock

References

1. Wasik, John. “Why You Shouldn’t Buy a Highly-Rated Mutual Fund.” Forbes. Forbes Magazine, 24 Mar. 2014. Web. 26 Mar. 2014. <http://www.forbes.com/sites/johnwasik/2014/03/24/why-you-shouldnt-buy-a-highly-rated-mutual-fund/>.

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

3 Things to Consider When Preparing Your Will

old manA death in the family is traumatic and stressful, and something which all affected must come to terms with in their own way and in their own time. Unfortunately, it’s also usually the time during which emotions are running at their highest when family members need to come together and agree. In this ‘perfect storm’ of emotion, disagreements can quickly escalate into fights and, depending on the relative wealth or emotional value of the items and people involved, court battles.

When working through estate planning, you might think that your family will behave well—and you might be right—but it’s best not to leave anything to chance. People don’t always react rationally when under duress, so NOLO recommends the following tips to help ensure that your will is spelled out to a T:

1. Pick a qualified executor
Tradition might say that the oldest child should be the executor, but they may simply not be suited to the job. Your executor should be someone who is honest, communicative, and above all, someone who you can trust implicitly to follow directives after your death.

Daily Finance also recommends someone with legal or financial background, as they have the background knowledge to understand and navigate the technicalities that may arise.

2. Try to avoid surprises
Over the last few years, whenever I would visit my grandmother, she would always give me some trinket before I left—a piece of jewelry, a picture that I had always loved, even cookware one time—and she also did it with other family members as well. She was very open with who would get what upon her death as well, so upon her death, there was no fighting or disagreement over her belongings; we were able to mourn and cherish her memory without questions of money or inheritance hanging over our heads.

NOLO recommends communicating certain things to family members/heirs so they don’t feel left out or overlooked if not specifically mentioned in the will. Maybe there’s a friend or someone with whom you worked, and while they may not be mentioned in the will, you’d still like them to have a memento. These things can be communicated, and as long as everyone is aware that this is YOUR wish, it can help avoid hurt feelings.

3. Keep estate-planning documents as up-to-date as possible
Battles between children and stepparents are almost a soap opera cliché nowadays, but it speaks to the importance of making sure that documents are current and speak to YOUR wishes upon your death. The goal of these types of documents is to create harmony; advanced planning for even relatively modest estates can go a long way toward easing possible resentment.

Openly communicating changes, according to NOLO, “…can head off suspicions that you didn’t take an active role in your estate planning and were so influenced by someone else that your decisions weren’t really your own.”

You can’t always preclude fights over items with sentimental value, but you can leave instructions and notes with those who may warrant them. Providing guidance helps guarantee not only that items will go to whom they should, but also add more sentimental value when you’re gone.

 

Authored by Financial Social Media

 

3 Questions on Diversification

Why is Diversification so important in your investment portfolio?  Before we get to that question there are other more simple questions we need to tackle.  What is Diversification?  How do I know if I am fully diversified?

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 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 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 correction in the market comes.

Diversification is more than just the number of stocks that you are invested in, although that is very important.   We invest our clients in close to 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.

Why is Diversification so important in your investment portfolio?

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

 

matson diversification

 

This is a pretty technical chart so let me explain.  This is real data from 1970-2013.   If you were to invest in the S&p 500 you would have gotten a  10.4% return with standard deviation of 16.94.   Sounds great right.  But if you add bonds/fixed income, international stocks, small stocks and value stocks, you end up with a 10.99% return and a standard deviation of 11.07.   That is a higher return with less risk and less volatility.   That is what diversification can do for your portfolio.

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.

5 Money Saving Strategies to Avoid

moneyWe’ve all done it. Spent more than we wanted to all in an effort to get a great deal. With all the offers floating around promising to help you save money, here are 5 to avoid:

 

1. Buying in bulk. While buying in bulk can be a cost-effective budgeting strategy, often consumers end up buying more than they need, and paying more for it in the process. If there is a product or service that you use on a routine basis that you can get at a good price, great. But just be careful not to spend more for extra items that don’t fit into your budget or may end up going to waste.

 

2. Only purchasing discounted items. While it may look like you’re getting a great deal on a discounted product or service, sometimes you really do get what you pay for. Trying to save money upfront can end up costing you more in the long run. You may end up having to repair a problem that arises, or replace an item that just didn’t last as long as it should have.

 

3. Spending more for higher quality. Spending more for quality is something that can cause you to rationalize an expensive purchase. But spending more doesn’t always mean getting more. Before deciding to spend more money on a product or service, do your research. Find out if you are in fact paying for higher quality, or if you’re just paying more.

 

4. Always using that coupon that comes in the mail. Coupons are a great way to save money, but not if they prompt you to make an unnecessary purchase. Often, retailers send out coupons so consumers go shopping when they otherwise wouldn’t have. You may find yourself spending twice as much as you planned, all because you couldn’t pass up a deal. And buying something you don’t need at a discount is still a waste of money.

 

5. Buying at a discount now thinking you’ll use it later. Retailers may promote gift cards that offer to double your money if you pay upfront. This can be a great strategy to save money, but only if you planned on shopping at that retailer in the first place. Otherwise, you may not end up using the card. The next time you purchase a gift card at a great price, make sure it’s at a retailer where you are planning to shop.

Instead of investing in money-saving strategies that could potentially backfire, use discounts appropriately. Look for promotions on things you actually need and planned on buying. And don’t get sucked into making additional, unnecessary purchases in the process. Also, do your research before making any purchases to ensure you pay for the right thing at the right price.

Authored by Financial Social Media

Market Timing: The Myth

Bear MarketSo what is market timing and are you losing returns because your money manager is doing it?  Or even worse, have you been caught doing it all on your own.

According to Investopedia, market timing is “The act of attempting to predict the future direction of the market, typically through the use of technical indicators or economic data. ” 1.

If you have ever watched any of the financial channels on TV, or been on a financial website like Yahoo Finance, they are constantly promoting Market Timing.   Every day I check Yahoo Finance there is some new trend that somebody has predicted in the market.  One day they say, this bull market is just getting started.   Then the next day they say, indicators say that market is in for a huge downturn.   Which one should we believe, or would our retirement portfolio be better off if we just avoided the market timers opinion?

Academics and Research

Listen to what Investopedia has to say further about market timing…

“Some investors, especially academics, believe it is impossible to time the market. Other investors, notably active traders, believe strongly in market timing. Thus, whether market timing is possible is really a matter of opinion. ” 1. 

I am going to go with the academics on this one.   I have the data to prove that market timing does not work.

CATEGORY 1984-2013 Annualized Return
S&P 500 Index 11.10%
Dalbar Average Investor – Equity Fund 3.69%
CPI (representing Inflation) 2.80%

*2.

As we see here in this little chart, if an investor would have just been invested in the S&P 500 for the last 30 years they would have gotten over an 11% return.   But what did the average equity investor get?   3.69%.  That is just over inflation.

Why?

So why did the average equity investor lose over 7% annual growth in their portfolio?  A part of that is due to costs, but the vast majority is because of market timing.  Investors seem to almost always be wrong when it comes to deciding when to be in the market and when to take their money out.

Lets take 2008-2009 as an example.   The end of 2008 the market is taking a nose dive and what does everyone tell you to do.  Get out of the market.  So you take your money out because of the fear that it will never come back.  Ultimately you are selling low.  Then on March 9, 2009 the bottom finally hits and the market begins to take huge jumps upwards.  But you are not invested so you get none of that growth.  When you decided to get back in you were buying high.  The market today is reaching new highs and is way past where it was before the crash in 2008.

The most simple thing to say in investing is buy low and sell high.  Obviously it is not that simple to actually do.  Market timing is detrimental to your long term retirement goals.

– By Jimmy Hancock

References

1.”Market Timing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 16 June 2014. <http://www.investopedia.com/terms/m/markettiming.asp>.

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

Bright Future for Small Businesses

up chartAccording to the U.S. Small Business Administration, small businesses represent more than 99 percent of all U.S. employers and have created 65 percent of new jobs in the past 17 years. It’s obvious how incredible their impact is on America’s economy. And it’s only getting bigger. Confidence in U.S. small businesses has climbed to its highest level in three years. The National Federation of Independent Business’s optimism index rose to 94.5%, the highest index since the recession began in December 2007. From employment to sales to the potential end of price cutting, small businesses are taking a stab at improving the outlook of America’s economy, and future is looking bright.

Before we review the encouraging numbers small businesses are currently posting, let’s check out some small business statistics and trends that highlight the true impact that small businesses have on our economy. The estimated 29.6 million small businesses in the United States:

● Employ just over half of the country’s private sector workforce
● Hire 40 percent of high tech workers, such as scientists, engineers and computer workers
● Include 52 percent home-based businesses and two percent franchises
● Represent 97.3 percent of all the exporters of goods
● Represent 99.7 percent of all employer firms
● Generate a majority of the innovations that come from United States companies

The benefits of small businesses in our economy are limitless. They can provide job opportunities, increase government revenue due to businesses taxes, and most importantly, they can stimulate our economy and possibly economies around the world. Small businesses are the engine that drives the American economy, and the number of small businesses tends to increase during rough financial and economic times. As you can see, this is definitely true in our current situation. The good news is that the hike in the small business optimism index will bring our economy great benefits and paybacks.

Employment rates in the small business sector are slowly increasing, with plans to add to payrolls rising 2 points to a net 5%. In a February survey, a net 15% of firms said they were having difficulties filling job openings. The sales outlook is looking good too. The net percent of small business owners projecting higher sales, adjusted for inflation, rose 1 point to 14 percent, the highest level since September 2007. Plans for capital investment are holding steady, and the percentage of those expecting credit conditions to ease is also staying the same. As far as price cutting goes, February’s report signaled the “end of a long period of price cutting,” which signals a potential future increase in price averages as supply adjustments restore pricing power.

While we are far from being where we were before the recession, it is encouraging to see that small businesses are stimulating our economy and helping us slowly dig our way out of the economic slump. It is also important to note that there are myriad factors that affect our economy, but the promising numbers on small businesses speak for themselves. Let’s hope this is a sneak peek at what lies in our economic future.

Authored by Financial Social Media (financialsocialmedia.com)

 

Keys to Maximizing Your Social Security Benefit

social securityYou have worked hard all of your life. You have raised a beautiful family that you are proud of, and you and your spouse are finally ready to enjoy your golden years together. And yes, you have also planned and saved for these future retirement years. Maybe you planned many years ago or maybe you planned just recently; but either way, you probably factored in the boost offered from your future Social Security benefits. Whatever the boost might be, wouldn’t you rather maximize those benefits if possible? If the answer is a resounding “YES”, then you want to learn about the various claiming strategies, and fully discuss them with your financial coach. The proper strategy can amplify your lifetime Social Security benefits significantly.

 
Benefits of waiting to Claim

An example of one strategy is waiting as long as possible to start claiming your Social Security benefits. The earliest age that a retiree can start claiming these benefits is 62 years old. However, did you know that once you reach your full retirement age (between 65 -67), your social security benefits increase by 8% each year plus inflation adjustments? Wow, the money claimed increase considerably just by waiting a little longer.

 
Other Benefits

Are there claiming strategies that can optimize your Social Security benefits even if you need to start collecting at an earlier age? The answer is “Yes”. Advantageous strategies can be applied to this situation as well when you know how to maneuver through the claiming process… you just need the proper expertise to guide you through the rules. Once you know these rules and know how to navigate confidently through the claiming process, you can apply a strategy that works in your favor, and maximizes this money.

 
Spousal Benefit

Some of these claiming strategies involve the idea of spousal benefits. Here, spousal benefits can be applied to a “Restricted Spousal” strategy as well as a “File and Suspend” strategy. According to Jim Blankenship, CFP, EA of Forbes Advisor Network, “File and Suspend allows for the lower wage earner to increase his or her benefits by adding the Spousal Benefit, while the higher wage earner continues to delay his or her benefit, adding the delay credits.” On the other hand, the Restricted Application for Spousal Benefits “provides one spouse or the other with the option of collecting a Spousal Benefit, while at the same time delaying his or her own retirement benefit.” All and all, any couple must carefully consider the particular rules pertaining to these strategies in order to determine the appropriate strategy that applies to their specific situation.

 
Conclusion

Overall, these claiming strategies can cushion your retirement years with thousands of dollars. If you are thinking about navigating through your Social Security claiming process alone, it might be very unrealistic because the rules behind these strategies can be complex and meticulous. Even the employees at the national and local Social Security offices cannot give any advice; therefore, it’s best to seek the help of a financial coach who has an in-depth knowledge of the best Social Security strategies for retirees. The world today is very different… life expectancy has increased, pensions have dwindled, medical costs have increased, and the economy remains uncertain. Especially now, maximizing your Social Security benefits is necessary because these are unfavorable conditions. So, make certain that you fully learn and understand the rules of each strategy before you chose. You can add thousands of dollars to your retirement funds just by applying the right Social Security claiming strategy for you.

 
Authored by Financial Social Media (financialsocialmedia.com) and Jimmy Hancock

 

References
Blankenship, Jim. “Are You Leaving Social Security Money on the Table.” Forbes. 26 November 2012. <http://www.forbes.com/sites/advisor/2012/11/26/are-you-leaving-social-security-money-on-the-table-you-might-be-if-you-dont-understand-and-use-this-one-rule/>
Roberts, Damon. “The Retirement Planning Edge: Maximizing Social Security.” Fox Business. 27 November 2012. <http://www.foxbusiness.com/industries/2012/11/27/retirement-planning-edge-maximizing-social-security/>

5 Life Insurance Myths Busted

Why you need a financial coachLife insurance may not sound all that exciting, but when you do stop to think about life insurance and you, it’s not uncommon to assume that since the concept of life insurance is simple enough, so too are the products. It’s also fairly easy to rationalize the things you really don’t understand about life insurance, and before you know it, you’re harboring potentially damaging life insurance myths.

In addition to your own edification, and frankly, for the safety of your loved ones’ financial futures, it’s important to understand exactly what life insurance is, what it does, and how — not to mention if — you should make a move either to purchase or upgrade your coverage. Read the myths below to see if you need to adjust your thinking when it comes to life insurance.

1. The coverage you get at work is enough.
While this may, in fact, be the case if you’re single, in good financial standing, have no dependents and aren’t worried about estate taxes, for most people, the term policy offered through their employer just won’t be enough to sustain their families’ needs. After all, your insurance payout must not only support your family financially, it must also pay off any debts, such as the mortgage or even the MasterCard, as well as settle up with Uncle Sam.

2. Only the working spouse needs life insurance.
This is a curious — and wildly inaccurate — belief, yet it somehow persists. Life insurance on the breadwinner is intended to fill in the gap left by the loss of a paycheck, but that discounts all the valuable work a stay-at-home partner contributes to the relationship. If you’re used to this arrangement, how would you pay for child care or the cleaning, or even manage the household without a little financial help in the event of such a loss? It can be easy to overlook the many contributions of the non-breadwinner, but to do so would be remiss.

3. The value of your life insurance coverage should equal two years’ salary.
Everyone’s financial circumstances are different, and so are their life insurance needs. 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 your lifestyle is more modest and you’re not financially responsible for anyone, on the other hand, then two years’ salary may even be excessive.

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 a few debts, and maybe leave a little bit behind for your parents. And as one MSNBC article on the topic suggests, using a life insurance policy to fund a gift to a favorite charity can be a wonderful legacy for a single person to leave behind.

5. You don’t need professional services to buy life insurance.
While this is, in fact true, as any consumer can go online and shop for, and even buy, term and permanent life policies, electing to go it on your own can be detrimental to your financial future. A professional life insurance agent advisor can help you identify the needs you have, what you must protect and how best to protect it. With the knowledge of a myriad of different policies, if you’re honest about your financial and life circumstances, a professional can not only help you determine how much coverage you need, but also help decide whether a term or permanent policy is right for you. They can even customize a plan to meet your unique needs.

Life insurance is an important product for most everybody to consider, but it helps if you have your facts straight. So whatever else you think you know about life insurance, you might consider running it past an agent or advisor.

Authored by Financial Social Media (financialsocialmedia.com)

Guide to a Baby Boomers Retirement

profileThe ripe age of 65 is no longer a valid number for those planning their retirement. As more and more baby boomers reach this age, demographers and researchers are skeptical as to just how long they will live. Not only does this uncertainty have effects on a national level, as to the cost of Medicare and Social Security for future generations, but it also has effects on a personal level, and the complications it causes for future retirees and their spending and saving plans. The juxtaposition between American medical advances and deteriorating health and lifestyles begs the question: live too long and risk running out of money; die young and you can’t take it with you. Let’s look at the facts and then discuss the possible solutions in this rising debate.

 

Medical Advances = Longer Life Expectancies
At least one member of a 65-year-old couple can expect to live for another 23 years, to age 88.
There is a 30 percent chance of living past 92.
The current life expectancy for an American at birth is 77.9 years—58 percent longer than in 1900, when the average life expectancy was 49 years.
From 2000 to 2007 the rate of death from heart disease, the leading cause of death, plunged 19 percent, while the rate for cancer, the second-leading cause of death, fell 5 percent.
95,000 fewer Americans died of heart disease in 2007 than in 2000, even as the population increased.
Adding 3.1 to 7.9 years to life expectancy by 2050 would add an estimated $3.2 trillion to $8.3 trillion to Medicare and Social Security outlays above current expectations.

That last fact paints a pretty good picture as to what will happen to the cost of Medicare and Social Security. As life expectancies rise, so does the federal tab for old-age benefits. Social security came into play in the 1930’s, when the life expectancy was 65.2 years. At that time, the government did not expect retirees to use Social Security. However, with life expectancies on the rise and many retirees spending more time in retirement than in the workforce, the federal budget for retirement benefits is swelling exponentially. Moreover, the explosion of rising life expectancies that we have been experiencing in America since 1950 may not continue at the same pace because of the obesity epidemic. Even as Americans live longer lives, they are expected to spend more years disabled and paying for expensive health care.

Deteriorating American Health & Lifestyles
The rate of obesity in the U.S. has risen 48 percent in 15 years, and by 2020, 45 percent of the population is expected to be obese.
Deaths from Alzheimer’s disease have increased, from 49,558 in 2000 to 74,632 in 2007.
Two-thirds of retirees underestimate the average life expectancy at their age, with 42 percent doing so by five years or more.

It is crucial to know, understand and plan according to your financial needs. There are steps that baby boomers can take to protect their portfolios from uncertainty. A Social Security check should only make up about a third of a retiree’s income and should be supplemented with contributions made to an Individual Retirement Account (IRA) and a 401(k) Also, by delaying Social Security payments until age 70—instead of 62 or 65—retirees can increase monthly payments and make the program a far more valuable income stream late in life.

Obviously, saving more, spending less, and working longer are ways in which you can protect your financial assets and future. Regardless of whether you can expect a long life or disability payments in your future, it is vital that you plan for your retirement.

Authored by Financial Social Media (financialsocialmedia.com)

First Quarter Market Returns

stock tickerIt is often hard to know what the market returns when all we see on TV or the internet is the minute to minute ticker.  As investors we need a broader view of how the market has done so we can know if we are getting market returns with our investments.  Matson Money does a great job of informing our clients on how the market has done as a whole, so that they can compare their returns to the worldwide market.

Here is an excerpt from the Matson Money quarter one statement. 

“Stock Market’s across the globe cooled off in the first quarter after some big gains in 2013.  The S&P 500 Index was able to hold earlier gains and ended the quarter up 1.8%, its fifth consecutive quarterly gain.  In addition, the Dow Jones Stoxx Index of 600 European companies also rose 1.8%, while the MSCI Emerging Markets Index surrendered earlier gains to end slightly down 0.37%.  Overall, the Dow Jones World Stock Index, excluding the U.S., inched up 0.2%.  Meanwhile, bonds started the year off on a positive note; the Barclays U.S. Aggregate Bond Index increased 1.84% in the first quarter.

As a result of last year’s stellar returns, investors and advisers will be flocking to invest in the top funds and latest market fads.  In addition, the financial industry will undoubtedly be host to hundreds of new funds/strategies.  However, all of these actions are not always a good road map for main street investors.  Between 1945 and 1965, annual portfolio turnover averaged a steady 17%, suggesting a fund held a stock for 6 years.  Fund managers now turn their portfolios over at an average rate of close to 90% annually; an average holding period of about one year.  If a six year holding period can be characterized as long-term investing, and if a one year period can be characterized as short-term speculation, the majority of mutual fund managers today are probably not investors – they are speculators and gamblers. ”

Summary

So there you have it.  Quarter 1 may not have been amazing, but long term investing is the way to avoid speculating and losing big by getting in or out at the wrong time.  Stay diversified and you will see much growth in the long term.

Reference

Matson Money. “Account Statement.” Letter to James Hancock. 1 Apr. 2014. MS. N.p.