How can I protect my 401(k) from the European Debt Crisis?

25 04 2012

Jon Castle, CFP, ChFC

What a question, huh?  This question seems to be on the minds of many investors these days.

Most economists are predicting that the European zone will suffer a period of slower than usual growth – or even short periods of shallow recession – as they try to work their way out of the debt crisis that they are currently in. Since we are, in reality, a global economy, this means that markets both here and abroad will likely be volatile and moderately stagnant for the next several years. It may well feel like we take 3 steps forward in the market, only to be followed by 2 steps backwards – for a while.

Morgan Stanley did a wonderful study called “The Aftermath of Secular Bear Markets” in which the authors of the study tracked the 19 major bear markets over the last century (only 4 were in the US). All major bear market corrections (defined as a market drop of 47% or greater) were followed by a rebound rally, (2009) then a mid-cycle correction (2010 & possibly 2011), followed by a period of 5-6 years of volatile, sideways behavior, before a new bull market started. So, based upon that historical precedent – we are about 2 years into the sideways part. (if you Google this study, you can read about it directly. Here is a link to see it visually:  Trading Range.  Note that the chart on this link was published in 2009, so the “we are here” mark is has moved 3 years to the right .  It was right on as far as predicting the mid-cycle correction(s) in 2010 and 2011.

The sideways part (the trading range of 5.6 years, on average) is the period of time where the economy heals itself, and goverments try to “unscrew” what went awry in the first place.  This is where we are now.  Likely you see daily evidence of this natural process – Democrats and Republicans squabbling over policy but not really changing anything, the Fed printing money, banks hoarding cash and trying to get their books in order, finger-pointing, governmental gridlocks, and daily predictions of great bull markets or terrible bear markets. While difficult to live through – this is actually part of the NATURAL healing process of a free-market economy. Once you realize where you are in the cycle, then it becomes much easier and far less confusing to stay the course.

So – to answer thequestion – the secret to being a successful 401(k) or other retirement plan investor in which you have to save money over time, and have, say,  10 or 12 or more years to retirement, would be:

1)  Build your portfolio to a risk tolerance that even if the market drops 20 or 30%, you will NOT freak out and will NOT stop investing.  That means you may have to have 30%, 50%, or even 70% of your money in the “safer” investments like government bond funds, or even cash.  A good rule of thumb is – whatever percent of your portfolio you have in the stock market – that is the percent that it will go down when the market corrects. So – if the market drops 20% (which it does every 3 years) – and 50% of your money is in stock funds – then your portfolio will drop by about 10%. (50% of 20% is 10%.)  If you can hang through a drop like that – but no more – and keep investing, then that’s your risk tolerance threshold (limit).  If your personal limit is more like 20%, you can build your portfolio more aggressively – like 70% stock funds, or maybe even a little bit more.  With 10 or 12 years to retirement, you’ve got plenty of time to make it up, so you can afford to be more aggressive.

2) KEEP INVESTING.  When the market goes down – and your portfolio goes down – but you keep investing – you are buying up shares of the funds ON SALE.  If you see a sale at a store – you wouldn’t throw away everything you bought previously, would you?  Then why do people do this with stocks or mutual funds?  If they are on sale – buy more!! Keep buying over time – during that volatile period that I mentioned above – and when the steady bull markets DO come back (they will – we just don’t know when) then you will likely be extremely pleased with your investments.

This blog post is not personal investment, financial, or tax advice.  Please consult your financial professional for personal, specific information.  Indexes mentioned are a general barometer of the stock or bond market they represent.  You cannot invest directly in an index.  Past performance is no guarantee of future results.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment adviser. http://www.WealthGuards.com

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So I’ve Been Saving…Now What?

4 04 2011

 Michael Carignan, CFP®, CRPC®

Have you ever wondered how to get a clear picture of all of your current financial resources and how much retirement savings you need to provide your vision of retirement, taking into account your potential health or market risks?  This is just one of many questions people ask when thinking about personal retirement planning.  If you find your self in this boat, there are a number of solutions for you.  First, with some time, research and diligence, spreadsheets and of-the-shelf software, you can creat your own retirement plan.  However, it is likely that if you are asking these questions, you probably don’t have one of those key ingredients to success, or you would already know the answer.  A more comforting solution may be to get some professional help.  WebMD can help you diagnose some medical conditions, but most people feel better having a trained medical professional give them their expert opinion and recommend a treatment if warranted.  In a similar fashion, finding the right financial professional to help you can be a key step in the right direction on your path to financial success.

Just like finding the right doctor is important, (you don’t want to go see your dermatologist if you have a cough) finding the right kind of financial professional can be equally important.  There are many financial professionals out there; selecting the right one may be the most important factor in ensuring you have a favorable planning experience.  There are some questions you need to ask when looking for a professional to help you construct a retirement plan.  The first question should be, “are they qualified to provide the answers I’m looking for?”  One good resource in this search is www.letsmakeaplan.org where you can search for a local Certified Financial Planner™.

Most people are more comfortable dealing with a doctor that has the same philosophy on treatment and they personally like.  By “same philosophy on treatment,” I mean do they recommend a diet and exercise regimen or a or do they push a diet pill to help lose weight?  If you and your doctor disagree on the basic philosophy of medical treatment, you probably will have disappointing results, since you won’t follow his or her advice.  In the same way, it is very important to look for a financial professional that has the same general philosophy that you do when it comes to investing and money management.  If you believe that it’s possible to outsmart the financial markets and pick the best performing mutual fund or stock next year, then you need to find a broker who believes that as well.  If you believe that investing involves taking some prudent risks and adhering to a long term plan with a scientifically designed portfolio, you likely should  find a different advisor.  Neither philosophy is necessarily wrong, but making sure you select a financial professional that has the same philosophy as you have is of paramount importance to a successful planning relationship.

Some additional specific questions you should ask are:

    • Do you prefer fee based or commission based compensation for your advisor?
    • Do they have experience with other clients like you?
    • Can they advise you on all aspects of your financial life or will you need several advisors to get the answers you need?
    • What is the charge for the plan?  In most cases, you get what you pay for; if it’s free there is going to be a sales agenda you might not know about right away.
    • What is included in the service they provide?
    • Will they be able to help you implement planning suggestions?  If so, is it a requirement of the planning process?  Be careful of the solutions that can only be done through them.
    • Do they make “suitable” recommendations or are they a “fiduciary”?  (For more information on the difference click here)

Finding a professional that you can understand and trust is critical when choosing to have a retirement plan constructed for you and your family.  You are unlikely to follow the advice, good or bad, if you do not trust the person providing the advice.  Once you find your ideal fit of personality and capabilities, be ready and willing to provide answers to all of their questions, since a retirement plan is only as good as the information you provide.  Don’t hesitate to ask them probing questions and provide honest answers if they ask you some difficult questions.  When dealing with the money you have worked so hard to accumulate, stumbling into retirement without a carefully crafted plan can be a dangerous prospect at best. Once your retirement plan is complete, then it becomes time to “work your plan” if you have a few more years, or “live your plan” if you are already retired.

The earlier you start planning for retirement the better, becasue finding yourself in retirement and unsure if you’ll be able to live it how you’d like is a scary proposition.  It has been my experience that those who are most successful in retirement have taken the time to get the advice that helps them sleep well at night and knowing they have done everything they could to create the retirement they wanted for them and their family.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP(R), CERTIFIED FINANCIAL PLANNER(tm) and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.

Investment advisory services offered by Paragon Wealth Strategies LLC, a registered investment advisor.





Will there be a herd mentality to “sell bonds” causing bond funds to suffer more than balanced funds?

21 01 2011

As with any financial market or product there is the possibility that investors will “sell bonds” as a herd, but there are a few things to consider.

First thing to think about is – what are balanced funds?  Many “balanced” funds are made up of a few different bond and equity funds, the blend depending on their ultimate goal and risk.  Others invest directly in stocks and bonds to create their portfolio.  What that means is that while they do hold some bonds in their portfolio, they also own equities, and since these asset classes don’t typically move together, balanced fund portfolios will most likely suffer less than a bond-only fund if there were a hard bond sell-off.

In the event of a bond sell-off, it can be helpful to picture where in the market the moeny that is currently in bonds would be reinvested.  Is it likely the “herd” is moving into cash, into equities, or into another asset class?  If you believe that the money from the bonds is moving to equities, then balanced funds will almost certainly perform better in this situation.

Additionally, it is important to consider what kind of bonds are suffering the sell-off.   The behavior of municipal bonds, for example,  is very different than the behavior of high yield bonds; the behavior of long term bonds is generally very different than that of short term bonds.  It is similar to trying to discern if stocks will suffer- without knowing if you are talking about emerging markets, developed foreign markets,  or US stocks. Each will behave differently under different interest rates, currency valuations, and economic conditions.

As with equities, you need to have a firm understanding of why you are holding any particular bond investment.  If you are looking for extreme safety of principal,  then most investors would hold short duration, high quality bonds; but but at the expense of a competitive yield.  If you are looking for a higher yield in bonds, in the current market environment you are going to have to take some additional risk to your principal to get it.  Whether that risk is best taken by holding a longer term bond (more interest rate sensitivity), or a lower quality bond (higher risk of default), typically seems to be an individual preference.

The ultimate answer for most investors is to find a mix of assets that you are comfortable with and stick with them.  If there is one thing the markets have proven time and time again, it’s that the patient, well diversified, properly allocated investor will typically fare better over the long run than the investor who is constantly making changes to his investments based on daily news and the “hot pick.”

Information in this article does not constitute a recommendation or solicitation for any product mentioned.  Mutual funds may only be sold by prospectus.  Past performance is no guarantee of future performance.  Consult your financial advisor for specific recommendations.