I recently received a question from a client of mine about an article that referenced rebalancing a portfolio at the same time each year. In theory, an annual rebalance is not a bad way to go. However, there’s quite a bit more to how we manage the rebalancing process than that.
For Merriman clients, we:
- Avoid unnecessary transaction costs by using cash inflows and outflows as a tool to rebalance a portfolio back to its target allocation. Cash inflows are used to buy underweight asset classes and cash outflows are used to sell overweight asset classes.
- Allow assets that are performing well to continue to perform – a documented trend called momentum – by placing tolerance bands around our allocations. This also helps avoid excessive rebalancing transaction costs.
- Favor rebalancing tax-deferred accounts in December to coincide with mutual fund distributions and Required Minimum Distributions (RMDs), again reducing transaction costs.
- Help defer taxes by rebalancing taxable accounts in January, when appropriate.
Market performance can also have an impact on the need for rebalancing. If returns are flat for a few years, there is less need for rebalancing. In volatile times, more.
In addition there will be one-off cases such as:
- Tax loss harvesting. If there is a significant downturn in the markets (think 2008), we can use that as an opportunity to harvest losses to be used against future gains. We did this for our clients in 2008 and it is paying dividends today.
- Introduction or deletion of an asset class can also provide an opportunity to rebalance your portfolio.
Rebalancing your portfolio is an integral step in maintaining a well-balanced portfolio and reducing its risk. But to do it once a year at the same time every year may not be the best solution for you. Depending on your situation, a more customized rebalancing approach may save you significant money in transaction costs and taxes in the long run. As always, check with your advisor to find out what’s right for you.
There is practically universal opinion that interest rates will rise in the future, and that bond portfolios will suffer painful losses when this happens. At Merriman, we think the financial news media has blown this story way out of proportion, with inflammatory headlines designed to capture attention. Narratives include “the coming bloodbath for bond holders” and “the imminent bursting of the 30-year bond bubble.”
Our Chief Investment Officer, Dennis Tilley, recently wrote an article detailing three reasons why we’re not worried about rising interest rates. Here’s a quick summary:
1. The Experts and Consensus Are Often Wrong
History provides countless examples of when experts and/or a super-consensus have been wrong about the future of stock and bond movements. This is why we don’t use market predictions to manage client portfolios.
2. A Portfolio Duration of Four to Five Years Is Optimal
The sweet spot duration for Merriman investors holding bonds is in the maturity range of four to five years. This intermediate duration provides a nice compromise of offering overall portfolio stability, market crisis/deflation/recession protection, a long-term real return above inflation and – perhaps most importantly – the ability to quickly adapt to a rising-rate environment. With this duration, we believe our clients don’t have to worry about rising interest rates. The article provides more detail and charts illustrating this point.
3. Rising Rates Signal an Improving Economy
Finally, rising interest rates are likely to coincide with an economy that is improving, which is generally good for stocks. Yes, temporarily, bonds will lose value due to rising yields. However, we expect only single digit losses from our bond portfolio, not the “bloodbath” that some pundits seem to think will happen.
Read the full article here to get more insight.
Seattle is still reeling with excitement from the Seahawks winning the Super Bowl! Over 700,000 Seattleites celebrated downtown to welcome the champs coming home. No matter where your team allegiance lies, it’s easy to spot the strengths of the Seahawks both on and off the field. These lessons can be applied to multiple areas of life, including your finances.
Here are 12 things everyone can learn from the Seahawks:
1) It’s never too late: Russell Wilson was a third round draft pick but that didn’t determine his performance. No matter when you start saving and investing, there is always opportunity ahead of you.
2) Diversification is key: Every player on a team has a specific job to do, just as every investment in your portfolio has a unique purpose. It’s hard to win with a team full of quarterbacks! Design your portfolio with broad diversification to cover all types of positions.
3) Defense wins championships: There is a saying that “offense wins games and defense wins championships.” Many times it’s the team’s offense that gets all the praise and glory, but without a strong defense to hold back the competition, all of the points scored are for nothing. It’s easy to get caught up in short term performance chasing of stocks, but make sure to manage downside risk with bonds so that your returns won’t disappear in a down market.
4) Find a coach: Every team needs a coach to lead them to victory. Having a financial advisor will keep you on track toward achieving your goals.
5) Don’t compare your strategy to others: Every team has a different approach on how to win games. Your friends and family have their own ideas about investment that may be different from yours, and that’s okay. Stick with the plan you make with your financial advisor – it is unique to you.
6) Break expectations: Seahawks fullback Derrek Coleman is deaf. No one expected him to be able to play in the NFL but he didn’t let other people’s beliefs hold him back. Commit to success and don’t let others get in the way of what you want to accomplish.
7) Take a look back: Teams spend countless hours watching game footage to learn from their mistakes. Look back at historical investments to learn all you can about performance volatility throughout various market conditions.
8) Go all in: The Seahawks have an “All In” sign that they hit on their way to a workout. Often we don’t want to commit to a plan unless we know for sure it will work out…but a plan can’t work unless you commit. Go all in.
9) Never give up: Even when it looks like a team has lost, there is always a chance for a comeback late in the game. Sometimes when a portfolio is down, we are tempted to switch strategies or abandon hope. If you give up too early, you might miss the winning finish.
10) Have fun: Football is tough work but it is also a lot of fun. Always make time for the activities you enjoy with the people you love. As we say here at Merriman – Invest Wisely, Live Fully.
11) Give back: In the midst of practice, games, media interviews, and sponsor appearances, Russell Wilson still makes time to visit the patients at Seattle Children’s Hospital. Appreciate the gifts you have in your life and share them with others.
12) Identify your 12s: Seattle’s fans are known as the 12th man. Even though the fans aren’t on the field, they play an important role in the game. Find fans who will support you through all your wins and losses, and recognize their contribution to your success.
When you hear the term “umbrella insurance,” your first thought might be, “What do umbrellas have to do with insurance? Is this just another product the insurance industry is trying to sell me?” Actually, umbrella insurance has nothing to do with conventional umbrellas.
Umbrella insurance is “extra insurance,” like an umbrella is extra protection against the rain, even though you have a raincoat on. Think of your regular car and homeowners insurance as the raincoat, and the umbrella insurance as the “umbrella” you carry for torrential downpours. (more…)
With the recent tornado in Oklahoma we are reminded of the importance of charitable giving. In fact, since the tornado, over $15 million has been donated to the American Red Cross. According to the Giving USA Foundation, individuals gave over $217 billion dollars to charitable causes in 2011, a 3.9% increase over 2010. As charitable giving increases, I want to make sure you know not only how to maximize your charitable contributions from a tax standpoint (see my post about using the donor advised fund), but also that you are informed about the effectiveness of the charities you choose.
There are a couple resources available now to help understand how effective a charity is with the money you donate. Charity Navigator has been around since 2001 and now assesses over 6,000 charities. Its goal is to provide one overall rating based on two areas of effectiveness: 1) their financial health and 2) their transparency and accountability. For example, the American Red Cross, a popular one at this moment, shows a total score at 59.64 out of 70 as of fiscal year end in June of 2011.
Another website, CharityWatch.org, also rates different charities’ effectiveness. While they rate only 600 or so of the largest charities, they tend to dig much deeper into the inner workings of the organization than Charity Navigator. They study the individual finances of every charity to give a clear picture on what the money is actually being used for. Instead of taking the information at given at face value, they try to determine if the donors’ objectives are actually being met. Because their analysis is more in-depth, Charity Watch charges $50/year for access to their Charity Rating Guide, which provides financial data and a rating from “A+” to “F” for each charity.
We all want to make sure the money we give generously is used effectively. Whether you’re giving funds to aid with large natural disasters or donating to your local food bank, donations are needed and greatly appreciated. Now, in addition to maximizing the tax effectiveness of your charitable donations through donor advised funds, these tools can help you choose organizations that will help your dollar have maximum impact.
I recently had the pleasure of sitting down with a client’s daughter. She’s in her twenties, just finished up her nursing degree six months ago and is working the night shift at a local hospital. She is living with a couple of roommates and is finally in a position to save some money after being a very broke college student. She now faces the question posed by many young people who are starting their first “real” jobs.
Michelle (as we will call her) wanted to know what to do with the money she’s now able to save. She had no idea where to start getting her finances in order. To get her started on the right track, I suggested she focus on a few key areas.
Live within your means
She’s already years ahead of many twenty-somethings in that she is living on less money than she earns. She wasn’t sure how much money she would be able to save on a monthly basis so I suggested she set up a rough budget. I didn’t encourage her to be terribly rigid with the budget but to use it to get a sense of where she is spending her money so she’s aware of her spending habits. This will help her decide what she wants to spend money on and what is less important to her.
Create an emergency fund
While she enjoys her job and has no plans to quit anytime soon, you never know what life will throw your way. So I recommended she save three to six months of income and have it very liquid (money market, for example), which will enable her to have a safety net in place.
Understand your insurance policies
Michelle wasn’t sure exactly what her benefits were at work. She knew she had medical but wasn’t sure of the deductible. She also didn’t know if she had dental or vision coverage. As a young woman in her twenties, the likelihood of an expensive surgery or illness is very low, but injuries can still happen.
She also had no idea whether her employer provided disability insurance. I recommended she read through her employee materials again as things are typically a blur when starting a new job. I also encouraged her to ask the HR department about any questions she may still have after reading the policy information.
I checked to make sure she has car and renter’s insurance and that the policies are up to date. When you’re just getting started financially, you don’t want to find out after an accident that your $10,000 car is only covered up to $5,000, or regret not having renter’s insurance after your upstairs neighbors leaves a faucet on, flooding your apartment and ruining your new laptop, couch and clothing.
Pay off your debt
This is typically the ball and chain around many people’s ankles when they first start their careers. I recommended that Michelle pay off the money she owes by attacking the debt with the highest interest rates first. She has about $10,000 in student loans and another $1,500 in credit card debt. The credit card debt has a much higher interest rate than the student loans, so she’ll pay the minimum on the student loans until she pays off the credit cards. Then she’ll pay down the student loans. A good way for her to keep debt in check moving forward is to use primarily cash for all purchases or to use a credit card and pay it off monthly.
I also recommended she compare her local credit union fees and programs to that of her bank. She’ll likely save money on ATM transactions, credit card interest and loans in the future by using a credit union.
Identify short-term and long-term goals
Michelle’s short-term goals include a trip with college friends to Hawaii later in the year. Her longer-term goals include retirement and buying a house. It was important to identify these goals so she can budget for the trip and start down the road to home ownership and retirement. While retirement is probably 40 to 50 years off for Michelle, she will not have to save nearly as much towards her future as friends who start saving in their thirties. She’s fortunate to have a 401k plan and the hospital provides her with some matching as well. The matching is basically free money to her so she would be wise to take advantage of it. By contributing to her 401k plan, she’ll pay less in taxes and benefit from the employer match, which is a win-win. She may not be able to add as much as she’d like to her retirement plan right now, but she can always increase that after building up her emergency fund and paying off debt.
Michelle is well on her way to a successful future just by addressing her finances at such a young age. She’ll have a good handle on her spending habits, her debt level and goals.
My final piece of advice, which Michelle has already followed, is to talk to your parents’ financial advisor. The advisor may not be in a position to take you on as a client, but they should be happy to meet with you and get you headed in the right direction.