All Things Financial Planning Blog


When to Rollover Your 401(k)

The financial industry wants to make sure you are fully aware you left something behind at your old employer. That retirement account that is “just sitting” there needs to be moved over to an IRA for you to invest in someone else’s mutual funds or investment products.

Generally speaking, it makes sense to rollover your 401(k), 403(b), or other retirement account to an IRA when you retire, or for any other reason are allowed to move your funds. The reasons to rollover a retirement account include:

  • Control. You no longer have to live with the changes your investments that are dictated by your employer.
  • Diversification. Most retirement accounts lack in their ability to diversify over all asset classes an investor may want. By rolling over your account, you can access the world of investment products. It used to be said that some (though definitely not all) retirement plans may provide institutional level pricing for investments that otherwise would require an investor have a significant amount to buy into a particular fund (hundreds of thousands of dollars, if not millions).

While that still may be true if you are concerned with having access to certain investment managers, most low-cost index funds today are available at reasonable minimum investment amounts.

However, there may be reasons to not rollover all or part of your account. They include:

  • You need access to the money before age 59½. IRA accounts are subject to a 10% early withdrawal penalty before age 59½ whereas your retirement account may allow access without penalty as early as age 55.
  • Have a significant amount of money in company stock that has appreciated above your purchases. There may be tax benefits to not rolling over company stock, if it has appreciated greatly and if you own a lot of it.
  • Possibly better creditor protection. A 401(k) is protected from lawsuit, while state laws can vary on the protections provided to IRA accounts.
  • If you expect to do a Roth Conversion with after-tax IRA accounts. If you have been accumulating after-tax IRA money, and plan to convert those funds in the future, it may be in your benefit to do so prior to rolling over a retirement plan.

Clearly every individual’s decision to rollover a retirement plan requires a review of their personal circumstances, so be sure to discuss your rollover potential with your financial and tax advisors before assuming a rollover is the best move for you.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, M


Defining Diversification

In the top few responses most people give when you ask what they know about investing, “it’s important to be diversified” is right up there with “buy low, sell high”. Both statements are true and very important components of investing. My concern is that we hear and say these things so often, we lose sight of what they actually mean. defines Diversification as “a risk management technique that mixes a wide variety of investments within a portfolio.” True, but what the heck does that mean? Can it be any mix of investments? What does it really hope to accomplish? Is my portfolio diverse?

Today my goal is not to sell you on a particular investment strategy or convince you that there is any one way to properly diversify. My hope is to provide some key educational points to enhance your understanding of this important rule of thumb.

As the last several years have shown, investing in the stock market can be a volatile experience. If you invest in stock in one or even a small handful of companies, the value of your portfolio can shift wildly, often it seems for no logical reason. The primary purpose to diversify your investments is to decrease these and other risks.

How does one increase a portfolio’s diversity? Let’s look at a portfolio strictly invested in stocks. The simple answer is to buy a higher number of stocks. The better answer is to buy a higher number of different kinds of stocks. Suppose you own General Motors. Buying Ford might technically make you more diverse, but only slightly so. You still own just two companies, both large, US automakers. Instead, you should look at a vast array of companies differing in size, location and type.

This means expanding your portfolio to large and small companies of all types (often called sectors) all across the globe, avoiding the urge to own more companies in the U.S. than in other parts of the world. U.S. companies make up just 40-50% of global market share. By focusing solely on the U.S., you cut off the opportunity to better diversify and participate in the opportunity for growth in more than 50% of the world’s companies.

I want to stress that none of this is a blueprint for any type of investment strategy. It is simply an effort to help you understand what diversification means. How much diversification, in what areas, and the blend or allocation of different types of assets is a decision that should be made with careful thought and, in most cases, professional advice based on your goals and ability to tolerate risk.

As you approach your personal financial planning and goals, it’s important to obtain at least a basic grasp on the essentials in order to make the most educated decisions possible. There are lots of trusted professionals there to help, but knowledge is always a worthwhile investment.

Chip Workman, CFP®, MBA
Lead Advisor
The Asset Advisory Group
Cincinnati, OH


Don’t Put All Your Apples in One Basket

Despite its recent declines, Apple stock is still up 543 percent since the market low of March 9, 2009. Even if you bought Apple last year, you still made a hefty 40 percent return. There is no denying that Apple has been a fantastic investment. Maybe you didn’t purchase any Apple stock, so you think you missed out on a great opportunity. But whether you bought the stock or not, unbeknownst to you, you may actually own much more of that famous fruit than you think. Be careful, too many bites of Apple could make your financial stomach (portfolio) hurt if the stock continues to slide.

Watch Your Weight

Most investors use mutual funds to diversify and gain exposure to well known indexes such as the S&P 500 or NASDAQ. Nearly all large cap funds boast having Apple as one of their top 10 holdings. It is true that these indexes offer the opportunity for diversification because of their broad based holdings, but because these indexes are market-cap weighted, their exposure (and your risk) to Apple grows every time Apple stock rises. Indexes are created in one of three ways: price weighted, market-cap weighted, or equal weighted. A price weighted index (i.e. Dow Jones Industrial Average) is heavily influenced by the highest priced stock in the index; a market-cap weighted index is heavily influenced by the largest company in that index; and an equal weighted index is adjusted periodically so that each component has an equal weight.

Many mutual funds and Exchange Traded Funds (ETF) that track the S&P 500 or NASDAQ have seen their exposure to Apple grow over time because most are market-cap weighted. For example, the Fidelity Contrafund (FCNTX) has seen its exposure to Apple grow from 6.9 percent in 2011 to 9.4 percent in 2012; the SPDR S&P 500 (SPY) went from having 2.7 percent of its assets in Apple to 4.4 percent in 2012; and PowerShares NASDAQ (QQQ) has nearly 18 percent of its assets in Apple, up from 15 percent in 2011. If you think you have sufficiently diversified by owning these large cap funds and have a few shares of Apple on the side, you may have too many Apples in your proverbial basket.

Don’t Follow the Herd

Investors and actively managed mutual fund managers alike are known to follow the herd. Fund managers that do not have Apple stock in their top 10 holdings saw their judgment questioned by the fund’s shareholders, similar to when Warren Buffett was questioned by shareholders as to why he would not buy stocks in the 1990s; Buffett was later vindicated for having avoided the bubble. During the dot-com era, it seemed everyone was investing in internet stocks. It wasn’t uncommon to hear everyday investors at cocktail parties brag about their investments in Cisco, Lucent, AOL, and other venerable companies that subsequently lost tremendous value when the market collapsed. The people who lost the most in their retirement and investment accounts were those who became overly concentrated in a single sector or stock and failed to diversify out of those positions. They only realized after the fact that they were overexposed to technology stocks. Fast forward a few years, and these same individuals migrated to the next hottest investment – real estate. Many wrongly assumed that real estate would never lose value. After that came the gold craze, and most recently the Apple sensation. What’s next? Facebook?

Use the 5% Rule

While it’s a great feeling to see one of your stock picks skyrocket like Apple has, the reality is that not all of your stocks will be future winners. I always recommend that clients keep no more than 5 percent of their total portfolio in individual stocks because, while individual stocks can have tremendous growth potential, one bad stock can ruin your entire portfolio, especially if that one stock is a large part of your portfolio. No one expected such giant companies like Enron, Fannie Mae, General Motors, Lehman Brothers, AIG, Circuit City, Global Crossing, WorldCom, UAL Corp (parent of United Airlines), AOL, Lucent, etc. to either go bankrupt or completely wipe out their shareholders, but they did, and many people lost their entire life savings. Do not let yourself become overly exposed to one stock or sector of the market.

I am not attempting to predict the future price of Apple or advising against owning individual stocks altogether. I am simply reminding investors of the clear, but sometimes not-so-easy decision to review your portfolio periodically. Make sure you are not overly exposed to any segment of the market, and that you’re not taking on more risk than you can handle.

Ara OghoorianAra Oghoorian, CFP®, CFA
Founder and President
ACap Asset Management
Los Angeles, CA


Is Real Estate a Good Investment Today?

With market volatility and real estate prices where they are today, many are wondering, “Should I invest in real estate?”

Real estate can add dimension and diversification to a portfolio. It can provide an asset that should grow with inflation as the costs of materials increase; it can also provide an income stream that also overtime increases with inflation as a wages and the population grow. And, of course, when it comes to land we all know they aren’t making any more of it!

Before jumping in with two feet, keep in mind the following:

  • Prices can and may still drop. We’re at a point in many places in the county where prices are in line with historical averages. Keep in mind that “in line” doesn’t mean cheap. Prices may be turning the corner in some markets, but still haven’t in all. The key to a successful real estate investment is not necessarily the right property, but getting it at the right price.
  • Rents can and may drop. Lower prices mean investors can make a profit by purchasing properties and offering lower rent to high quality renters. It may be deceptive to look at what a renter is paying today, as they may be able to shop around for something better tomorrow. 
  • There can be plenty of costs. Repairs, replacement, advertising, and lost rent can be large costs that need to be considered.
  • Don’t assume you’ll get a happy renter. Another cost is that of having to deal with never satisfied or otherwise time consuming renters.

And finally, make sure you’ve got plenty of cash. You should increase your regular emergency fund by about six to twelve months of expenses to cover things like vacancy, major replacements, etc.

A more efficient way for many to invest in real estate is by adding a real estate mutual fund to your portfolio that invests in Real Estate Investment Trusts (REITs). These publicly traded investments allow investors to receive many of the characteristics of real estate investing, without the headaches.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


5 Common Retirement Planning Mistakes (and How to Fix Them)

The timing could not have been worse. The largest generation of retirees in our nation’s history is entering their retirement years during the worst economic downturn since the Great Depression. Not only have baby boomers witnessed their retirement accounts shrink by as much as 50% during 2008, they also have to deal with anemic yields on bonds and CD’s, a decimated real estate market, and record high unemployment rate. Coupled with a significant increase in life expectancy thanks to modern medicine, retirees certainly have their work cut out for them.

Fortunately, it is never too late to start the retirement planning process. But retirees need to avoid many of the common mistakes because the acceptable margin of error is much smaller than ever. Here are 5 of the most common mistakes made by retirees, and how to fix them.

  1. Having a Plan with Outdated Assumptions. While most people who are near retirement age have a sense of how much assets they have accumulated, how much they will need to spend in retirement, and how long their money might last, most of people fail to have those numbers checked against different market conditions. As long as the world economy continues to struggle, one needs to challenge the conventional wisdom regarding expected annual rate of return, inflation rate, GDP growth, etc, because any one of these macroeconomic factors can easily derail a carefully crafted retirement plan. Therefore, potential retirees should consider updating their plans using a variety of market returns assumptions (both good and bad), rate of inflation (both benign and extreme), and other macro factors. If your numbers come up short, it’s time to consult a professional.
  2. Retiring Too Soon. Working even a few years beyond what you’ve planned can pay a surprisingly large bonus in retirement security. Social Security defines age 66 as the typical retirement age for most people, but about half of all Americans don’t wait that long. You can avoid the early-filing benefit reductions imposed by Social Security by working until your full retirement age (as defined by IRS). At the same time, you can keep contributing to your retirement-savings plan, building additional balances that can be put to work in the market. Every additional year of working income is a year in which you’re not supporting yourself by drawing down retirement balances. The upshot is that staying on the job a few additional years can boost your income in retirement by one-third or more.
  3. Underestimating Health Care Cost. Even for those on Medicare, health care costs can erode spending power and economic security for most retirees. Out-of-pocket expenses for people in retirement have jumped 50 percent since 2002–and that doesn’t include the possibility of needing long-term care insurance. Health care costs pose one of the most serious risks to retirement security, so it’s important to understand how to plan for this major expense, navigate the system and manage your spending. There are many public and private resources available to help you plan. Do not wait until retirement to seek advice.
  4. Not Diversifying Your Portfolio. It is not uncommon for a retiree who has worked at the same company for many years to accumulate a large amount of that company’s stock in his or her portfolio. Some retirees choose not to diversify because they feel that they “know their company the best”, and others simply neglect to do so. From a diversification and risk management perspective, a retiree’s investment portfolio should hold no more than 5% ~ 10% of any one particular stock, so that ones portfolio can be protected should an investment goes awry.
  5. Putting the Kids College Before Your Retirement. As I’ve told many of my clients, “there is always college aid for your kids. But there is no retirement aid for you other than yourself”. A retiree should never jeopardize his or her own retirement by either withdrawing, or borrowing from their retirement accounts to help fund their children’s college education (or home purchase, wedding, car, etc). Instead, they should focus on building and protecting their nest egg to last them through their golden years.

It is never too late to start planning for your retirement. If you find the task of mapping out your financial life for the next thirty years overwhelming, it might be time to lean on professionals to get a second opinion.

By Andrew Chou, CFP®
Special to FPA


Is Your 401(k) the Best Place to Invest?

You’ve been contributing diligently to your 401(k), paying down debt, and are starting to wonder if there is something else you could be doing to maximize your investing for the long haul.

Many individuals start to engage in the planning process once they reach a point where they are starting to save beyond the minimum amount of the match in their company retirement plan. Below are a few suggestions for those that may be considering what the next step may be to take their investment plan to the next level:

Build up an emergency reserve. If you are set with an emergency reserve that covers 6 to 12 months of expenses, skip this step and move onto the next.

Having emergency cash savings at your local bank allows you to take on the risk of investing for the long-run, knowing that short-term cash needs are covered.

Contribute to your workplace retirement plan up to the company match. Even if you aren’t particularly a fan of your company’s 401(k), 403(b), or other workplace plan, if there is a match it is generally the best place to save. Albert Einstein is claimed to have called compound interest the greatest invention in history… though he may have changed his mind if he lived to see 401(k) matching contributions! So, make sure to contribute up to the match.

Review what types of IRAs you may be able to contribute to. After hitting the match, it makes sense for most to consider their options. Not everyone realizes it, but even if you have a workplace plan you can still contribute to an IRA; the only question is what kind of IRA is best for you. And if you have a spouse, you can contribute to theirs as well.

The benefits to opening an IRA are greater control and diversification, as well as clarity on the fees you are paying. Opening a Roth IRA also starts a 5 year clock to which you must have had the account open to avoid penalties, though you still have to wait until age 59½ just like other IRA accounts.

In a few situations, the best option for you may be to save more to your 401(k). Talk to a planner about your particulars to find out where to save.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI

Leave a comment

Dealing With This Crazy Market Volatility: 30 Years of Advice With Just 3 Mantras!

Since April 29 of this year, we’ve been in a downward spiral in the stock market that has caused a lot of investors to ask why in the world they deal with all this crazy volatility? Over the last decade it seems like every time you make some gains in the market, you end up giving them all back. Even though we haven’t officially hit the bear market status (-20%) as of this writing, it again poses the question as to whether you should be buying or selling right now. In my 30 years experience dealing with crazy volatility, there are three things that you need to be aware of. First, it starts with the true diversification of your different investments and how they’re mixed together. Second is to have some sort of mechanism that allows you to decide when to buy and when to sell. Finally it’s about understanding yourself and seeing the type of person you are when it comes to your emotional and intellectual decision-making in life.

If we start with diversification, then it’s key to understand your choices. One of my favorite books is written by a gentleman named Mebane Faber, The Ivy Portfolio. It’s a book that talks about how the Ivy League institutions invest their substantial assets to generate returns that will hopefully last in perpetuity. The five core groups that he does analysis on are stocks, bonds, international stocks, real estate and commodities. Of course, there are literally hundreds of different asset classes that exist today as seen by the recent rise in ETF’s (exchange traded funds) that have become a major component of the volume of the stock exchanges. Not long ago there were less than 20 of these index types of funds that can trade during the day just like stocks do. Now, there’s something close to 2000 exchange traded securities that are being traded in the markets, all driven by a particular type of asset class. You shouldn’t be overwhelmed by the massive number of choices, so come up with some combination of 5 to 10 of these major asset classes and do some homework on which ones you feel are the most critical to your investment objectives. Just promise me you’ll use at least 5 or 10 totally different asset classes.

The essence of Faber’s book is that over long periods of time these asset classes tend to perform similarly. It’s just a matter of doing some rebalancing to make sure that no one asset class gets too big to take down the others. I was recently reading an analysis and a publication entitled the “Horsesmouth” written by Craig L. Israelsen Ph.D. that confirms this same sentiment. It looked at multiple asset classes over the last 41 years using 17 rolling 25 year periods. In essence it shows that the internal rates of return on the seven asset classes that he used (cash, bonds, large US stocks, small US stocks, non-US stocks, real estate investment trusts and commodities) showed higher returns as you use more asset classes. By using too many asset classes, you can end up with what is termed “deworsification.” In some of the research that we’ve done we’ve also found that when we reduce our asset classes to less than 10, the long-term back testing works better. One of the most prominent index mutual fund families in the country, Vanguard, along with its founder John Bogle has been promoting the strategy for many years.

The second way to deal with volatility is to have some discipline mechanism to decide when you want to buy and when you want to sell. The Ivy Portfolio also talks about using 200 day moving averages as a tool to consider using as well if you want to be sensitive to the longer-term trends in the market. The experts call this technical analysis (nothing to do with technology stocks) which is simply looking at the average price of the security over some period of time (i.e. 200 days) and just use the charts to determine your decisions. That’s opposed to what we call fundamental analysis which focuses more of its efforts on the more mainstream aspects of a company like the management, the earnings, the market share or the industry they are in. I’ve mentioned this in the past in my March article when we were starting to deal with some of this volatility earlier in the year at that time our technical indicators were positive. Subsequent to that blog, our indicators moved rapidly down in May of this year and caused us to reduce our exposure to stocks. So the message here is that you can’t read an article on technical analysis and know what to do unless it’s very current. You have to have some up-to-date software or publications that keep you disciplined to monitor your current investments. I believe the world has changed in my 30 years of experience and a buy hold and hope strategy doesn’t work as well as a technical analysis tool that helps get you out of the way in this new internationally interconnected world.

As I mentioned above, the founder of Vanguard, Mr. Bogle, isn’t a fan of trying to time the market. I will admit that I am fond of technical analysis as it helps me manage risk in volatile times. I find it is extremely helpful in protecting client’s assets, especially those who are at or approaching retirement with their need for capital preservation being much higher.

The final and most important component to dealing with the crazy volatility is to know thyself. We all have our own ways of making decisions as nature versus nurture. We don’t know whether the genes are going to make a decision or whether the environment we grew up in will dictate what we do and how we react to the world. It’s hard to figure out whether the left brain or right brain is calling the shots on our decisions. I will say that when times are not volatile then intellect will prevail when times are consistent, solid and expected. When were in the middle of a volatility firestorm like we’ve seen over this past summer, then our nature is to go back to our deepest roots where it’s fight or flight. It’s even harder when the markets are reacting to political rhetoric in the US, companies afraid to hire, consumers afraid to spend, tension in the Middle East, currency wars, Asian countries trying to control inflation as well as sovereign banking irregularities in Europe. There will always be problems in the world and with are more connected media and communications, it becomes more frequent, critical and destructive as we try and use our intellect over our emotions. That means you should subscribe to a diversification model and maybe even some technical analysis to get out of the way when the truck is coming.

My 30 years in the business has shown me three type of people, those who have disciplines and abide by those different disciplines in good and bad times, those who are in denial and simply ignore the situation and wait for it to go away and the majority seem to be looking for some direction and leadership during the tough times. All three of these strategies can work; you just have to know which one of these most closely resembles you. If you’re broadly diversified, then you can wait it out when it comes to volatility. If you use disciplines that allow you to ride the storm and don’t go against your instincts, you’ll be okay. If you’re looking for leadership and direction then find someone that you can trust to help walk you through the rocky times. I just happen to be very lucky because I understand the markets by living through them and seeing emotional mistakes making it harder for people to be successful. It also didn’t hurt that I married a psychologist!

Stock investing involves risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
The fast price swings of commodities will result in significant volatility in an investor’s holdings.
Investing in Real Estate Investment Trusts (REITs) involves special risks such as potential illiquidity and may not be suitable for all investors.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
No strategy assures success or protects against loss.

Dave Caruso, CFP®
Certified Financial Planner™
Coastal Capital Group
Danvers, MA