Archive for February, 2014

Many investors across the country are moving their money and investments from stocks over to bonds. The question that many investors are asking right now is simply this; should I be doing the same?

It’s a good question.  For example, in the last week while the investors began moving their money from riskier stocks and emerging market currencies at such a high rate that the equity outflows in the United States have hit their highest levels on record while they move their money into less risky assets including bonds.

August of last year, when the stock market started a bull run off 12%, was the last time that bonds were more valuable than stocks. This follows four years of depressed bond yields and quantitative easing showing that, with the Feds recent decision to taper the bond buying program, the effects on the market are finally beginning to show.

The undeniable fact is that there were several prestigious and high-value bond funds that lost value in 2013. If investors begin to reallocate money from stocks to bonds however, that trend may well reverse itself.

In the last two weeks many of the biggest bond ETF’s (by market) have been steadily gaining value. It’s certainly been less exciting than last year’s bull market when everyone was tracking stocks but, as more investors began to seek out investments that are more stable, they’ve gained at least a few cents over the course of the last 14 days.

Of course there are always contrarians with counter arguments, and one of those arguments is that, with prices declining across the board, the massive selloff in the stock market is to blame. If you are a younger investor with a higher tolerance for risk, and you also believe that the United States economy is going to do well in 2014, a stock market selloff might be just the strong buying opportunity that you’re looking for.

Index Universe just held their 7th annual Inside ETF’s conference in Hollywood, Florida and the CIO of Vanguard, Mr. Tim Buckley, gave the keynote address. He focused on one thing in particular during his address and that was the fact that financial advisors are under pressure from all sides these days to make sure that their clients get the results and returns that they desire.

Mr. Buckley also focused on the fact that, even with many factors making their job much more difficult, those financial advisors who use the basic concepts and tenets of their industry can actually add approximately 3 percentage points to the annual returns of their clients, as opposed to advisors who don’t follow these tenets or investors who don’t use a financial advisor to begin with.

Buckley elaborated on some of the sources of pressure that financial advisors face in this post-financial crisis era, including the fact that clients are looking for not just returns but impressive returns at a time when a 30% plus run-up has been recently seen by stocks and investment-grade bonds continue to sputter. This puts a lot more competitive pressure on a financial advisor (and their firm) to outperform others in order to land the “next big client”. He also noted that what appears to be innovation in the industry, as they embrace new products, is  simply proliferation  of the same old products.

This new product driven focus, in his opinion, has taken away from the fact that the real answer to consistent returns lies with the financial advisor and their advice, not any particular product. Indeed, he noted that the value of a financial advisor is something that’s taken for granted by most investors and that the most successful advisors are the ones that always follow best investing practices.

What are those best practices? They include;

  • A financial advisor also being a “behavioral coach” and guiding their clients correctly so that they stay on the right investing path
  • Helping their clients to be tax efficient using prudent asset location as well as spending strategies that are “tax smart”
  • Making sure that their client’s investment cost remains low
  • Rebalancing the clients portfolio in a disciplined manner

In the end, Mr. Buckley thanked all of Vanguard’s financial advisors and financial advisors in general for the services that they provide to their clients, including the important conversations that they engage in with them.   He also applauded them for truly caring about the goals of their clients and wanting to help them  achieve those goals by making a difference in the way they invest.

2013 has come and gone and now that we’re in the new year many people think it’s too late to put money into their retirement accounts and get the tax savings that they can bring. The truth is however that contributions to several different kinds of retirement accounts for 2013 can be made right up until April 15, 2014 and, when you file an extension, even later.

For example, the IRA contribution limit for 2013 is $5500 and, if you’re over 50 years old, you can put in an extra $1000. This can be in a “regular” IRA or in a Roth IRA or if you want to you can split the funds between the two as long as your contributions don’t exceed $5500 or $6500 respectively.

If you don’t mind waiting through a ton of legal mumbo-jumbo, IRS publication 590 has a lot more details about what you can and can’t contribute to your IRA. It’s complex, to say the least, so talking to your accountant or another financial expert is probably a good idea. Additionally there are a number of  tax filing companies like TurboTax that have online programs and calculators that will help you to determine what is the best way to do taxes if you’re self-employed and maximize your deductions, contributions and tax savings.

In brief, here are the 3 kinds of retirement accounts  to which you can still make contributions for 2013 if you’re so inclined.

  1. Traditional IRA. The deadline for this one is either April 15 or whatever the actual day is (before then or after, if you have an  extension) that you actually file your taxes. Additionally, you can open an IRA account up until that time if you haven’t done so already.
  2. Roth IRA. The rules here are exactly the same.
  3. SEP IRA. This is a Simplified Employee Pension plan and can be used by someone who’s self-employed or has their own small business. You can contravene to this type of account up until the maximum extension time which is October 15.

So, as you can see, contributing to your IRA is definitely still possible to get your  tax credits for 2013. If you have any other questions about contributing to an IRA or retirement fund, or questions about personal finance and general, please let us know will get back to you ASAP with answers and options.

What’s Killing Returns? Citi says it’s this

In a newly published outlook the $290 billion Citi  Private Bank says that most investors are damaging their long-term returns because they are focusing on liquid assets far too much, those that can be cashed in quickly.

Serving clients with $25 million or more in assets, they believe that individual investors are looking to invest for many years should not be afraid to lock their money up for a longer amount of time and things like hedge and private equity funds, real estate and other asset classes that aren’t “liquid”.

“Have investors raised their risk tolerance too much while reducing their liquidity preference too little? The value of select less-liquid investments may be underestimated,” said the report, which was co-written by Global Chief Investment Strategist Steven Wieting and others.

It’s their opinion that these non-liquid investments have a higher potential for return, allow the investor greater control and also giving them the ability to participate in specific strategies that are unavailable in most public markets. It’s for that reason that they believe that non-liquid investments offer a premium and, for a balanced portfolio, add material value when used consistently.

They estimate that private equity and real estate will, in general, generate a 11.9% return annualized for investors over the next 10 years. While that’s slightly down from 2009, it’s still favorable when you compare it to the return for developed market corporate credit of 3.4% and developed market large-cap stocks of 6.7% over the same time period.

They go on to say that if the right manager is used the returns can be phenomenal, even with private equity firms that lock up investor funds for 10 years. Citi also said that even though hedge funds are less liquid, and usually lock up an investor’s capital for just the first year and afterwards offer quarterly redemption opportunities, they can still give very strong returns. They added that while credit hedge funds are a bit less attractive, European bond traders were still offering opportunities.

“Overall, we continue to see our clients underexposed to hedge funds relative to our 16 percent recommended allocation-a trend that we strongly feel needs to be addressed,” it said. “The current low-yield environment, with equity market rallies over the past few years, argues strongly for adding a source of uncorrelated returns to a diversified portfolio. Simply put, the easy money in the traditional markets is likely over.”

Citi also noted that less liquid residential and commercial mortgage-backed securities, as well as collateralized loan obligations, offered opportunities and that bonds are simply another way to exchange liquidity for potentially  higher returns.

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