Please share your view of convertible bonds as an asset class for folks entering retirement.

Convertible bonds are a unique asset class in that they have features of both stocks and bonds. They are often referred to as “hybrid” securities. This, along with their typically sub-par credit rating, is why they do not fit into our bond portfolio.

We prefer to keep the stock and bond components of our portfolios separate. Our bond portfolio is designed to buoy the allocation in times of stock market stress. The potential for convertible bonds to act like stocks does not jive with this logic. If convertibles – due to their hybrid nature – were showing stock-like tendencies when stocks were declining, your portfolio would have much less downside protection. As we have seen in the recent past, it is extremely important that investors maintain some level of protection in their portfolio. We do not believe convertible bonds are the solution. Read More…

At Merriman, we often help our clients plan for more than just retirement. One topic that commonly comes up is saving for college. My colleague, Lowell Lombardini Parker, wrote about the various college savings options in an earlier post, and this three-part series will focus specifically on the 529 plans highlighted in his article. Part I will review 529 plan basics; Part II will evaluate Washington’s 529 prepaid tuition plan, known as the GET; and Part III will take a look at the best 529 savings plan we know – the West Virginia Smart529 Select. Read More…

At work on a Monday someone will ask “what did you do this weekend?”  My answer is usually “I golfed,” and their response is usually “in the rain?”

Putting aside my addiction to improving my golf handicap, the desire to surround myself with the beauty of nature provides me a calming perspective.  Often when I am in the fairway, I stop to look at the beauty that surrounds me.  Not in a passive sort of way, but to really take it all in. On some courses there are breathtaking views of The Puget Sound, gorgeous colors of foliage and wildlife.  Just last weekend, we encountered two deer walking across the fairway.  Visual reminders like the deer stick with me when I am making environmental choices.

In going about our daily lives – working, eating, commuting, and taking care of our home – we have an impact on our surroundings.  If you take a moment to pause and appreciate the beauty around you, you may be motivated to make small changes in your own life to decrease your carbon footprint and keep the beauty that is in nature.

Why do I golf in the rain?  Well, we live in Seattle. All this beautiful nature often happens in rain. In the elusive sun, clouds, or in the rain, the Pacific Northwest landscape is visually magnificent.

This Sunday is Earth Day, and I challenge you to celebrate this magnificence with a hike, walk, gardening, or a round of golf – any activity that will take you outside to enjoy the beauty of nature, even if it’s raining.

Recently, my daughter’s preschool put on an emergency preparedness seminar. Preparing for a disaster of some kind has been in the back of my mind for a while, but I hadn’t really given it my full attention until I was listening to the Red Cross representative walk us through possible scenarios and realized how entirely unprepared my family is.

Just last week, local news stations shared a warning from the U.S. Geological Survey: There is an 84% chance of a 6.5 magnitude earthquake in Seattle in the next 50 years. Our office is certainly prepared for an event like this — we have trained floor wardens, supply kits in the office and plans for running operations in the event of a disaster — but at home, I’m not nearly so prepared. Read More…

Behavioral finance is a fascinating field to me. It’s the study of how our emotions and judgment can affect decision making with regard to investments. In the time I have spent advising people on their investments, I have witnessed the power fear and greed can have over logic and reason. The good news is that the more we understand where our intuitions and biases come from the better chance we have at making good investment decisions.

Studies continue to find that investors earn lower returns than the funds in which they invested. Dalbar, a market research firm, issued their 2011 report showing investors achieved a mere 41.9% of the S&P 500‘s performance over the twenty years ending December 31, 2010. In other words, investors managed to leave a staggering 58.1% on the table. What could possibly explain missing out on these returns? It is largely due to investor behavior.

The goal of investing is to buy low and sell high – that’s a given – but our emotions, intuitions, and bias frequently work against us. Most investors did not begin buying technology related stocks in the early 90’s when prices were still reasonable; the vast majority bought in the late 90’s at astronomical prices, just before the “tech bubble” burst. Similarly, it was incredibly difficult to keep many investors positive about the prospects of the future during the first quarter of 2009 – the market bottomed on March 20, 2009 from the “housing bubble”- just before the markets began a climb to double in less than 2 years.

I recently read a wonderful new book written by Larry Swedroe & RC Balban, called “Investment Mistakes Even Smart Investors Make, And How To Avoid Them,” and I think it’s worth adding to your reading list.

I won’t re-write their book for you here, but Swedroe and Balban have done a great job of compiling a list of the most common mistakes and what you can do to avoid making them. This book will help you better understand why our investment strategies work, even though they can sometimes seem counterintuitive.

If you are not a client of ours and are considering hiring an advisor, this book may help you understand the mistakes a disciplined investment strategy can help you avoid.

By studying history and behavior, we can learn to avoid the same mistakes in the future. We can also understand why the disciplined investment decisions are sometimes the most uncomfortable. If we do our job well, you’ll be encouraged to stand by them anyway, knowing that discipline will pay off in the long-run.

As we closed out 2011, we added a couple of really great new hires to the Merriman team. Aries Lazaro came on board this past December as our new Assistant Controller as we bid adieu to Sandy Chudler, his predecessor who retired in February 2012. We wish Sandy many great ventures in her new life of leisure and we are truly excited to welcome Aries aboard!

Aries has five years of great experience as an Audit Supervisor for Clothier and Head. Although he enjoyed and valued his experience there, Aries was looking for a new opportunity to utilize his skills in a more expansive business capacity.

Born in Seattle, Aries grew up in the area and his parents still live in the house where he was raised. He graduated from Issaquah High School, then ventured north to Bellingham to attend Western Washington University where he earned his Bachelor’s degree in Accounting. Most of Aries family is in the Philippines, and he and his wife Mary have made several trips to visit. Aries and Mary are also new parents to their four month old daughter, Caroline. Here are a few fun, random facts about Aries that he was willing (well, some he was a little reluctant!) to share:

• Aries is a big sports fan and an active hiker, loves camping and anything he can do in the great outdoors.
• He once pitched a no-hitter while in sixth grade little league baseball!
• Aries and Mary love to travel. Besides the Philippines, they have visited Italy, Spain and France. With the addition of little Caroline, he is wondering when they will travel again…
• For the first week of his life, his name was Troy, but his dad decided the name just did not fit, so they changed it to his astronomical sign, Aries.
• Aries frequently got himself in trouble as a child by cutting his own hair. His mom would give him a haircut, and he wouldn’t like it, so he’d sneak out to the back yard with a pair of scissors and have at it. Needless to say, his mom wasn’t too thrilled. He has since realized that a professional salon is a much better choice. J

We are very excited to have Aries joining our fantastic finance team at Merriman!

High school seniors are now in the process of getting acceptance letters to colleges.

When the thick envelope comes, there will be well-deserved joy, possibly followed by the dismaying thought on how to actually pay for those four expensive years.

Hopefully, parents will have done some advanced planning and saving for this major event. There are various strategies which can substantially ease the financial burden of higher education, some of which should be started many years before high school.

Background

Before we discuss strategies, let’s review some key terms, as they say in school.

There are two major financial aid forms which could be completed. The first is FAFSA, the Free Application for Federal Student Aid. This has to be submitted to be considered for any federal financial aid. It can be completed as early as January of the child’s senior year in high school. FAFSA assumes that 5.64% of parental assets can be used to fund annual college expenses, while the assessed rate on the children’s assets is a much higher 20%.

Read More…

Being self-employed has many advantages compared to being an employee of a firm. However, retirement planning isn’t quite as easy as signing up for the company 401(k) plan like many of your friends do. That said, with some guidance from a qualified professional, you too have many excellent options. Below are a few choices to consider when planning for your retirement. I’ve focused on the options for those who are self-employed and do not have any employees, but the SEP and Simple options below are also available to those with employees.

Simple IRA

A Simple IRA is one option for self-employed individuals. The Simple IRA contribution limit is made up of two parts: employee salary reduction contributions and employer contributions. The employee contribution is limited to $11,500 for 2012. If you are over age 50, you can also make a catch-up contribution of $2,500 for 2012. And, since you are also the employer, you can then make an elective employer match of 3% of net self-employment earnings. You can deduct contributions up until the due date of your tax return, but you need to have the plan set up by October 1st of that tax year unless you are a new business. Read More…

For individuals nearing retirement, one of the first things to consider is: How much money will I be able to withdraw from my portfolio on an annual basis? This is a very important issue and ideally should be determined before entering into retirement.

Whether you use spreadsheets, receipts in shoe boxes or a computer program to track your expenses, it is important to know how much you spend to support your lifestyle. Before considering how much equity you will need in your portfolio during retirement, you should track your expenses for a few years to give you a firm idea of your outflows.

There are a number of software solutions available to help, including Quicken, Microsoft Money and Mint.com. While I don’t recommend any particular software, I do think you should find and use one that suits your needs. Here’s why:

1. You can easily view expenses broken down by category. Until you actually measure the monthly expenses in an accurate and systematic way, you may only have a vague idea of how much is being spent in each category.
2. With financial software, it is much easier to prepare your tax return. This is especially true if you itemize. All of the good personal finance software options have preloaded categories that are set up to capture deductible items. Once entered, you can produce individual category reports.
3. With the aid of software, you always have access to a current balance on your credit card and personal checking accounts. This data can also be downloaded into the software, making catching errors or fraud very easy.
4. The personal financial software can make it easier to pay bills on time and keep track of your automatic payments. Since it is possible to automate some of your monthly bills to be charged to a credit card or auto-debit from your checking account, the software helps you track all the different payment transactions in one central location.
5. It allows for a smoother transition in the event you become incapacitated. Your spouse, partner or other family member will have a much easier time assuming bill paying responsibilities if you are using expense software.

Personal expense tracking software will help give you accurate, reliable information about how much money you are likely to need in retirement. This will help you determine if your monthly expenses can be supported by your current portfolio and if any changes need to be made – either to your expenses or your portfolio. Remember, if you can track it, you can manage it.

The best way to begin retirement planning is to start early. The sooner you know if your annual requirements are out of sync with what a balanced portfolio can produce, the more options you will have to correct the situation.

At 61 years old, what is the best way to transition from an all stock portfolio to a 60% stock 40% bond portfolio?

This is a difficult question to answer without knowing your specific set of circumstances. To narrow the scope I will assume the following: 1) you will retire at 65, 2) you will take a 4% annual distribution from the portfolio upon retirement, and 3) you are using a globally-diversified portfolio like the one we outline in The Ultimate Buy-and-Hold Strategy.

Regarding the third assumption, it is extremely important to understand that different portfolios have different risk characteristics. A 60% stock 40% bond (60/40) portfolio allocated to the S&P 500 and high-yield junk bonds is entirely different and much riskier than the one discussed in the aforementioned article.

That said, I would make the switch immediately. With four years until retirement you cannot afford to subject the entirety of your portfolio to the risks associated with stocks.

For perspective, consider that the financial crisis cut the average stock portfolio value in half. Taking distributions from an all-stock portfolio during such a time period has disastrous consequences on the longevity of your assets. This is why, as investors near retirement (the distribution phase of a portfolio), they should – as you’ve indicated – consider adding a preservation component (bonds) to their portfolio.

If the goal is to achieve a 60/40 allocation by retirement, many people will initiate the transition process around the time they reach age 50. This longer time frame for transition allows the use of ordinary cash flows and rebalancing opportunities to make it a cost-effective and natural process. Your situation calls for a less subtle shift. Nonetheless, it is a shift in the right direction and, as mentioned above, I would proceed.