If you will soon be taking income from your portfolio, you are understandably concerned about the risk of future inflation. One available tool to counter that risk is Treasury Inflation Protected Securities (TIPS), an inflation-indexed bond offered by the U.S. Treasury. No other U.S. government security offers the same advantage as TIPS. Their principal value increases without limit every six months in line with changes in the Consumer Price Index (CPI). The bond’s coupon rate of interest doesn’t change, but as the principal grows it causes the amount of interest paid to the investor to increase. When the security matures, the U.S. Treasury pays the original or adjusted principal, whichever is greater. [Read more...]
Studies of the human brain have shown that we actually have two brains. There’s the neocortex, where our higher thought processes take place. Below the neocortex is a primitive brain left over from our distant ancestors. This primitive brain doesn’t think. It reacts. All it cares about is survival. So when danger looms, the primitive brain shuts down the neocortex and enters fight-or-flight mode. This was a good survival strategy in the days when you had to run from saber toothed tigers. It’s still useful if you’re trying to avoid a car accident and have only seconds to react.
Dow Jones. NASDAQ. S&P 500. We hear these benchmarks reported round-the-clock on the financial news, which can seem like financial noise if you have no guidelines to help you understand them. The good news is that you can use a number of informative benchmark indexes to track the performance of your retirement plan investments.
For example, if you own stocks, you could follow the S&P 500, the Dow Jones Industrial Average and the NASDAQ 100. If you own mutual funds, there’s the Lipper Index and the Morgan Stanley Composite Index.
We couldn’t get along without these benchmarks, but it’s important to understand what they can and cannot do.
You Can’t Beat the Benchmarks
Like many investors, you probably hope to exceed the long-term returns of these indexes. This is not a reasonable expectation.
You incur what are called frictional costs when you add, subtract or redistribute assets in your portfolio. This includes trading costs, loads, commissions and capital gains taxes. You can even incur frictional costs while you’re standing still, in the form of management and account fees.
The S&P 500, like all benchmarks, has no frictional costs. It’s just a concept—an imaginary portfolio of stocks with no fees and no taxes. This is why it’s so difficult for you to outperform benchmark indexes. An index often fails to show the performance results of a real portfolio.
What Benchmarks Tell Us
Indexes are still an extremely valuable tool for investors to gauge the overall health of large public markets and make sense of the day’s financial news.
Einstein said that “the most powerful force in the universe is compound interest.” Small changes compound enormously over time. The lag between your portfolio and the index you’re following can tell you a lot about the frictional costs you’re paying every year. It’s important to understand these costs and to keep them as low as possible.
What’s the Right Benchmark For You?
Your portfolio is likely a mix of small-, mid- and large-cap stocks, bonds and so on. Once you thoroughly understand the contents of your portfolio you can shop for some good benchmarks.
As your portfolio grows and becomes more complex, it becomes less likely that you’ll find the perfect benchmark to use as a comparison. No matter what the composition of your portfolio, you should be able to find one or two appropriate indexes from among the thousands available. These tools should give you the framework you need to help you understand the market and achieve your investing goals.
A Trusted Ally
The primary focus for investors should always be on asset allocation and diversification, but benchmarks are also important. By adjusting your expectations regarding performance returns, you can effectively compare relative returns and fine-tune your portfolio strategy. Working with the tools that make the most sense for your situation will help you keep a close watch on your portfolio and on the costs you incur. Benchmarks can be a trusted ally along your path to investment success.
The chart below describes a few benchmark indexes.
Interest rates go up and interest rates go down—an inevitable part of the economy and financial landscape. What does it mean for your investments? Different types of investments respond to changes in interest rates in different ways. Specifically, there are significant differences in how equity and fixed-income investments (like bonds) respond to fluctuations in interest rates.
Investors can determine the right amount of risk by considering three key factors.
It is an uncomfortable time to be an investor. Chances are your portfolio value has declined since 2008 and the idea of investment risk, the risk that your investments may lose instead of gain in value, is very clear and personal.
On June 15th, World Elder Abuse Awareness Day, the Investor Protection Trust released results of an Elder Investment Fraud survey with some alarming results. According to the survey, 7.3 million older Americans—one out of every five citizens over the age of 65—already have been victimized in a financial swindle. The survey also revealed that many adult children are worried about their elderly parents’ ability to handle their own finances.
Take a look at some key findings of this survey:
Look around at the electronics, appliances and other items you use every day. Some of the biggest companies in the world operate both in and out of the U.S. stock market and represent a large portion of the global economy. An increasing interdependency of the world’s financial systems has presented more opportunities for investors. There may be benefits to consider when looking at international investment opportunities. My strategy for portfolios is typically to include a percentage of international funds, mostly in developed countries, but occasionally a smattering in emerging markets.
Weigh the advantages and disadvantages for each individual retirement account option.
Traditional IRAs and Roth IRAs both offer outstanding retirement and estate planning opportunities to most people who qualify. But there are significant differences between these two options, and you need to carefully compare their characteristics. I typically advise clients to select the Roth IRA option, when all other considerations are equal, because it has significant tax benefits.
Whether it was on the business news or in your personal research, you’ve probably heard about exchange-traded funds (ETFs). For many investors, ETFs offer a flexible and low-cost way to diversify investments and I use them in my clients’ portfolios when appropriate.