Earlier this year, I added my investment portfolio to the group of reports I publish on Consumerism Commentary on a regular basis. Every three months, I share my investment balances and performances. I include Quicken’s calculation of the year-to-date average annual rate of return for an idea of how each investment is performing this year.
I add to my investments periodically, depending on the investment type.
I invest in my 401(k) every two weeks when I receive a paycheck. Out of the investments listed below, I only add to four investments, in equal amount: Large Cap Value, International Equity, Large Cap Growth, and Commercial Real Estate. My employer matches up to 4% of my salary. Half of the match is invested in company stock and half is invested to match my allocation rules.
At the beginning of each month, I invest $1,000 in the Vanguard Total Stock Market Index Fund (VTSMX) at Vanguard. This automatic investment usually receives the fund price on the last day of the month, but the funds are not deducted from my linked bank account until the first day of the following month.
Those are my only automatic investments. I also invest in an IRA once a year after completing my tax return.
Here are my investment account balances and performance numbers as of September 30. [click to continue…]
Happy Independence Day to anyone celebrating today! I’m celebrating by spending time with friends later and sharing my investment portfolio with readers now.
Last month, I began sharing my investment portfolio more in-depth than I have in the past. This is part of a renewed effort to make myself more familiar with the investments I have chosen and to develop a better overall investing strategy for multiple targets and time horizons. This will also help with determining the proper asset allocation for my investments.
The last time I rebalanced was when my 401(k) was basically my only investment. At that time, I configured my account to automatically rebalance my portfolio every quarter. Now, with investments scattered in IRAs at two different companies and non-retirement investments in the mix as well, it has been more difficult to determine what I should be doing with my investments.
First, according to Quicken, here is my overall asset allocation for my investment account only. [click to continue…]
A recent question-and-answer article from Money Magazine illustrates the problem with timing the market. While making money in the stock market is as “simple” as buying low and selling high, emotional reactions to the market often prevent that from being a feasible strategy. The question comes from an individual close to retirement, Heidi. She lost several thousand dollars of value in her 401(k) and reacted by selling her equities and keeping the cash in her retirement account.
By the time you lose a good portion of your investment — Heidi doesn’t specify the percentage of loss she experienced — it’s too late. It’s common and expected to sell in a panic, scared to lose more value. A market downturn and quarterly statement after quarterly statement with decreasing bottom lines turn someone who thought they were immune to market swings, a risk taken to increase the chance of higher returns, into a conservative investor. And the reaction comes at the long time.
Invariably, people now scared of the stock market will wait for “positive signs” before diving back into the pool. One such positive sign is a sustained market rebound. But once again, if you wait and react to the positive rebound, you’ve missed the chance to earn the best returns — the kind that drive the statistics that claim the stock market retuns 8% over the very long term. If you are not in the stock market when the market rebounds, and wait until the rest of the world starts buying stocks again, you won’t experience the increase that makes the stock market famous.
With this in mind, it’s better not to try to time the market and react to short-term market conditions. Stay invested, but maintain (and rebalance) an asset allocation that makes sense for your future financial needs. If you need your money to last another three decades, even if you’re starting retiremement and expect to live longer, you may need the boost that the stock market can provide over those 30 years, but it doesn’t hurt to keep a portion of your portfolio — what you will need in the first ten years of retirement, for example — in something less risky.
I’m not a financial adviser, and these thoughts are just based on my observations.
The trouble with market timing, Walter Updegrave, Money Magazine, May 7, 2009.
Last year, hundreds of hedge funds, special mutual funds generally open to wealthy investors which specialize in alternative investments like derivatives, shut down due to the economic crisis. Three of the ten largest hedge funds to close were funds that invested exclusively or almost exclusively in Bernard Madoff’s Ponzi scheme, leaving investors with nothing. While I mention that hedge funds are investment vehicles for the rich and famous, it’s worthwhile to note that you don’t have to be rich to be affected by this. 971 employees in Connecticut, for example, are feeling the same pain wealthy clients like Steven Spielberg and Jeffrey Katzenberg feel because their pension funds were pooled together and invested, much like one wealthy client, in Madoff’s funds.
The lack of diversification played a roll for individual losses. But how much is the fault of the investors? Presumably, the firemen in Fairfield are not given any choices for their pension fund. Also, hedge funds promise or at least imply diversification; this is how investors “hedge” their bets. An investor in a hedge fund would then assume that although the money is held in one and managed by one individual, that individual is sufficiently providing the diversification they promised.
In the case of the feeder funds, the hedge funds invested almost exclusively with Bernie Madoff. This extra middle layer passed the responsibility of diversification on to Madoff, who was never sufficiently clear about his “investments.” Of course, we now know that there was no “investment” and thus no diversification.
How well are your investments diversified? Is it enough for a investors who has weighed risk against potential reward to diversify among stock investments, like large-cap, small-cap, international, etc.? Do you rely on one mutual fund, like an index fund or a target retirement date fund to handle your diversification? Are you diversified into precious metals, and are you satisfied with using exchange traded funds or do you own gold or silver in physical form?
Typical investors can at least trust that a mutual fund in their portfolio does not lie on the prospectus. But when you invest in a hedge fund that is supposedly diversified, how diversified is it?
Three of the largest hedge funds to fail last year, Fairfield Sentry (managed by Fairfield Greenwich Group), Rye Investment Management (managed by Tremont Group Holdings), and Kingate Global Fund (managed by Kingate Management), were Madoff feeder funds, designed to provide access for “smaller” wealthy investors to the exclusive Bernard Madoff. Investors trusted their financial advisers who suggested the invest in these hedge funds. Thse advisers trusted the hedge fund managers who in turn trusted Bernard Madoff, one person, to provide sufficient diversification within his secret “investment” scheme. Or perhaps “trust” isn’t an issue when reputation and the promise of sustainable, high returns is involved.
A Look at the Hedge Funds That Closed, New York Times, March 19, 2009
I don’t want to belittle the condition of the economy currently. Someone who is close to retirement may have just lost a significant portion of their intended source of income if invested solely in stocks. If you listen to the media and politicians, you might get the impression that the American public is “freaking out” about their money right now and experiencing the downstream effects of high anxiety.
The Today Show’s Dr. Gail Saltz, a psychiatrist, recently appeared on this show and claimed that stress due to money has increased “hundredfold.” The video clip also describes people’s current attitudes as a “state of panic” and “intense fear.”
Dr. Saltz admits that “watching the media constantly is a terrible idea, like being stuck with needles.” That’s a great comment to hear on a popular television show. She also says that more people now will be seeking professional help for their anxiety due to the economic downturn.
I haven’t seen much evidence of panic in my daily interactions, other than what I hear on the radio from politicians. Long term prospects are likely to still be good. I can imagine that panic might set in when someone has their entire portfolio investments tied up in companies that failed or someone set to retire and rely on investment income, but that should serve as a reminder to have an asset allocation appropriate for your needs and reduce exposure to risky investments like stocks when you are relying on the money being available.
Are you panicking or anxious about money right now? Is your financial situation affecting other aspects of your life? Also, do you think the media are accurately portraying people’s attitudes? Share your thoughts, anonymously if you like.
If you want to watch the Today Show clip, it’s available inside this article. RSS readers, please view this article on Consumerism Commentary to view the video. [click to continue…]
The New York Post presented an article about David Shorr, a shareholder of Lehman Brothers, who lost $6 million as the company filed for bankruptcy. David spent many years as an employee of Lehman Brothers, building up compensation in the form of stocks which are now worthless.
“What the hell was he thinking?” asked Shorr, who placed much of the blame on the hard-charging executive who has been one of the country’s highest-paid CEOs. When asked if he had any hopes of recovering his nest egg, Shorr just shook his head and waved his hand. “It’s gone,” he said with a sigh.
David Schorr is now a wealth adviser at Morgan Stanley. As a wealth adviser, you would think that he were familiar with the concept of diversification. While the CEO of Lehman Brothers may not have guided the company through the financial mess, as an investor, David has a responsibility to his future self to maintain an asset allocation that isn’t exposed to any one company.
It’s a lesson that many former Enron shareholders may have learned.
Diversification isn’t a guarantee; for example, if American International Group (AIG) had been allowed to fail, the global markets could have tanked, destroying even better-diversified accounts. But diversification limits your exposure to any one company, so it is less likely to lose your entire life savings due to a singular event.
In my 401(k), my employer matches a portion of my contributions, and a portion of that match is in the form of company stock. Every once in a while, I sell that stock and rebalance the allocation among mutual funds to limit my exposure to my company’s performance. Since my salary and benefits are also tied to my company, the less company stock I rely on, the better.
I will admit that I haven’t limited my company stock as much as I should. The last time I diversified out of company stock was over a year ago when the stock was at its highest point; its value, like that of other financial companies but to a smaller extent, has dropped since then.
I Lost $6M Overnight!, Braden Keil, New York Post, September 16, 2008
It’s very tempting to quickly peek at your investments to see if they’ve gone up or down in the past twenty-four hours. The same technology that makes our lives so much easier, computer software, can drive us insane. It takes almost no effort to log into my company’s 401(k) website. When I’m at home, Quicken is only one Quick Launch icon away. At any given time, morning or night, it can take me less than 30 seconds to determine whether my tune for the day is The Gold Diggers’ Song (We’re In the Money) or Stormy Weather.
This is not necessarily a good thing. While I can usually control myself, I’ve occasionally pulled the trigger and rebalanced my 401(k) asset allocation when I shouldn’t have. These days I pay less attention to detail but I haven’t solidified my asset allocation strategy.
Susan Byrne recently shared with Money Magazine the best investment advice she ever received. Susan, the founder, chairman and chief investment officer of Westwood Management, learned while she was managing other people’s money but doing a poor job with her own assets, to keep her hands off her 401(k) except for once a year.
It’s often best to keep your eyes and hands off. Stick to your asset allocation strategy and rebalance the portfolio annually, automatically if possible.
Perhaps this is true for more than just investments, but I’m often tempted to touch things I can see. I’ve stopped looking at my investments daily, but the next step is to determine an asset allocation and stick with it. Are you tempted to change your strategy, particularly when you see your balance declining from day to day?
The smartest advice I ever got, Money Magazine
About the author: The following is a guest article written by Kevin from No Debt Plan. He writes to help readers eliminate debt, learn how to budget and save, and move themselves towards financial freedom.
The first investment we made in one of our Roth IRAs was in a Vanguard Target Retirement fund. Generally target date retirement funds make good investments; if you are just starting to save for retirement it’s a great investment. Flexo recently shared his reservations about these investments, but today I’ll give you four reasons why we like them.
- It’s an easy start.
- Low investment needed to start.
- You get instant diversification.
- The fund automatically rebalances based on your age.
Let’s look at these individually.
An easy start. You need only one account (Roth IRA, Traditional IRA, taxable investment account, etc.). You invest in one fund. That’s pretty easy to get going and removes a bunch of hurdles.
Low investment needed to start. With any target retirement fund, the only start up cost you have is your minimum investment and then associated expense fees. We opened our Roth IRA with Vanguard because they are known for having low expense fees, and the minimum investments are only $3,000. Once you invest your first $3,000, you can add as little as $100 to your account after that. The kicker is you only need the one fund to get started, which leads us to…
Instant Diversification. The reason you only need one fund starting out, is a target retirement fund gives you a great deal of diversification right off the bat. Let’s take a look at Vanguard’s Target Retirement 2050 Fund (VFIFX) that we are currently invested in:
- 71.61% Vanguard Total Stock Market
- 10.09% Vanguard Total Bond Market
- 9.97% Vanguard European Stock Index
- 4.39% Vanguard Pacific Stock Index
- 3.62% Vanguard Emerging Markets Index
- 0.16% Vanguard Total Stock Market ETF
With one fund, you’re invested in 5 other major investments. Starting out you probably want a large amount of US and International stock exposure. Even if you just wanted these two things you would need two funds to get that diversification. Two funds means two minimum investments. Add additional funds and you add additional minimum investments. Not so with the target retirement fund. One minimum investment and you suddenly have instant diversification.
Automatic Rebalancing. Rebalancing is the act of sitting down once per year and adjusting your portfolio toward your target asset allocation. Let’s say you hold two funds because you want a 50% US stock exposure and 50% International stock exposure. During the last year, it is unlikely the funds have gained and lost exactly the same. So you end the year and US stocks have been up more than International stocks. Your current portfolio weight is 53% US and 47% International.
Doesn’t sound like a big deal, right? Just 3%. Well, over time that gap can get larger and larger until one day you find yourself with a 75/25 allocation — way out of whack.
With a target retirement fund, you don’t have to worry about rebalancing. If 100% of your portfolio was in the fund (not a recommendation, just an example), the fund will rebalance for you every year. As time marches on you will get closer and closer to the target date for the fund. As you get closer, the fund adjusts the portfolio for you to be more conservative.
Let’s compare two of Vanguard’s funds, the Target Retirement 2010 (VTENX) and Target Retirement 2050, to make the point clear. We expect the 2010 fund to have fewer stocks and more bonds/income generating investments than the 2050 portfolio listed above. The 2010 investments include:
- 44.08% Vanguard Total Stock Market Index
- 40.28% Vanguard Total Bond Market Index
- 6.18% Vanguard European Stock Index
- 4.43% Vanguard Inflation-Protected Securities
- 2.69% Vanguard Pacific Stock Index
- 2.27% Vanguard Emerging Markets Stock Index
- 0.05% Vanguard Total Stock Market ETF
The 2010 fund is 55.27% stocks and 44.73% non-stock investments. The 2050 fund is 89.91% stocks and 10.09% bonds. An obviously difference. Over time, the 2050 fund will start to look more and more like the 2010 fund.
What are you waiting for? For all of you new investors out there, I honestly think a Vanguard Target Retirement Fund is one of the best initial investments you could make.
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