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5. Investment Planning

To Build Wealth You Need to get Returns that will Meet your Goals

by Fern Alix LaRocca

in 5. Investment Planning, Investments

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To build wealth you need to get the real return that you need to meet your goals. If you have done a capital needs analysis to figure out what rate of return you will need on your money to meet your future income goals, you may be panicking right now because you aren’t getting the returns you need because of the economic downturn, or maybe you panicked and sold positions and have large losses and feel like you will never get ahead. Let me address both.
All of us have learned that you must invest for the long term. Long term is now longer than 5 years. There will always be short term (3 years or less) swings in the market down and up and I am asking you to ignore that. I want you to focus on the return you need to meet your goals. Coming up short? Well you have a couple of options.
First is to change your contribution level.  Add more money gradually over time to make up the shortfall. This may mean more monthly contributions to savings or retirement plans or it may mean just putting all of your bonus or extra savings into equities to meet your goal.
Second is – change the timing. Let’s say you are coming up short including additional money contributed. Let’s say your goal was to stop working entirely at 65. You may have to change that to 67 or you may have to work part-time for a couple of years after 65 to make up the short fall. That’s really not that hard when you look at the big picture.
Third is- Change the goal. Let’s say you wanted to stop working to be able to live on 70% of your salary now. If you change your goal to 60%, you may still be able to stop working in the year that you set your original time goal.
So don’t freak out that you may have to work the rest of your life because you are only getting 4% return on your investments. Think long term, think about your options above, run the numbers and you will find that you all have a lot of great options available to still meet your goals.
Investing to meet your goals is wise. Investing to beat the markets is foolish. Don’t gamble with your hard earned money. Just like saving for your future, you need to keep investing for your future,  no matter what the markets are doing.

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Fee-Based Advisors Use ETFs to Build Wealth

by Fern Alix LaRocca

in 5. Investment Planning, Investments

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Here is a great article on the rationale for why fee-based advisors use ETFs (Exchange Traded Funds) to build wealth for their clients. I started in the business using load mutual funds in the eighties and then low-load and then no-load. Just in the last five years, ETFs have exploded. You still have to watch your trading costs though. I highly recommend them and also no load index mutual funds for everyone’s portfolio to keep costs down and get good diversification.

Advisers, Moving to Fee-Based Models, Turn to ETFS

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Building Wealth 30 Minutes at a Time with Christine Benz

by Fern Alix LaRocca

in 4. Identify Goals, 5. Investment Planning

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You know I am not a big fan of personal finance journalists, but I have high regards for the work of Christine Benz. Christine is Morningstar’s Director of personal finance and senior columnist for Morningstar.com. She gets it about the financial planning process and it’s role in building wealth for people. This interview is packed with valuable information to help you with your portfolio no matter how small or large.

Build Wealth

Christine wrote the book, 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances

Agenda:
• Learn how to break down the financial planning process into manageable steps
• Tips to develop a portfolio you can live with through the long term
• How to make the best choices in a bad retirement or 401k plan
• Special tools and resources revealed to help you stay on track with your financial goals.


Women and Money-You Weren’t Born to Shop; How Your Money Personality affects Your Bank Account

by Fern Alix LaRocca

in 4. Identify Goals, Financial Goals, Investments

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Here is an interview with Cathy Curtis CFP of Curtis Financial Planning in Oakland, CA. Cathy is a fellow NAPFA member, and fee-only financial advisor who specializes in helping women with their finances.

WomenandMoney051910

80% of American women will find themselves the sole keepers of their personal finances at some point during their lives, however, most of those women feel financially insecure, despite controlling more wealth, having more education and being more involved in financial decisions.

What you will learn from this audio file:

• How your money personality affects your money behavior

• 3 simple money truths that every woman needs to know

• How comprehensive financial planning helps women.

Cathy Curtis CFP also tells you where to get her free 10 Simple Money Truths eBook.

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Do-It-Yourself Financial Plan Step#5 Investing

by Fern Alix LaRocca

in 5. Investment Planning, Investments

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Investing is the 5th step of 7 in a do it yourself financial plan. Most people don’t understand that to build wealth you have to invest. A combination of saving and investing is important to your successful do it yourself financial plan. By doing both, you automatically lower your risk, increase your potential return and save on taxes.

Many people are frustrated by the fact that they can never get ahead just by saving their money. They are correct. Everyone should invest and not keep all of their money in cash and cash equivalents for these 2 reasons:

1. Taxes. Every dollar earned or every dividend distribution you receive is taxed at some tax rate. If your cash is not getting enough return to replace the loss from taxation, then you are not making money but losing it. Every dollar that you own must replace the loss from taxation in order to grow.

2. Inflation. The CPI (Consumer Price Index) gives us an overall idea of how much goods and services go up every year. For instance, if you put $1.00 in your piggybank in 1980, it would have had to increase to $2.66 (or 5.58% average annual return) in 2008 to be able to buy the same amount of goods and services that it could in 1980. You can find the current inflation rate at the Bureau of Labor Statistics website.

Inflation and taxes are very scary to those on a fixed income. People can get the illusion that they are taking very little risk as they receive a known amount each month. The reality is that they are receiving a guaranteed loss since each year it will purchase a lesser amount of goods and services. This is why everyone needs some funds that are invested for growth. We need the opportunity to keep up with taxes and inflation even if loss of principal is a potential or else we are assured of a loss. Having a mix of some money in a safe account and some invested for long term growth can help investors feel comfortable with risk while being able to keep up with taxes and inflation. -Fern Alix LaRocca CFP® Wealth Coach

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Target Date Funds-Why Invest in Them?

by Fern Alix LaRocca

in 6. Retirement Planning, Investments

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I am not a big fan of target date funds. But my colleague, Roger Wohlner,  has done a great job of discussing them here:

Fidelity is one of the largest providers of 401(k) plans and like many fund company platforms it is common for their plan sponsor clients to offer several or all of Fidelity’s Target Date funds known as the Fidelity Freedom funds. These funds have target dates from 2005 every five years out to 2050 with an even shorter-term Retirement Income fund. The premise behind these and other Target Date funds is that a plan participant will choose a fund with a date close to when he or she might retire, invest their contributions and let the fund manager do the rest. The funds typically lighten up on equity investments as the target date draws nearer, at some point they go to a “glide path” into retirement typically at the target year. This means the fund at that point is geared to the typical life expectancy of someone retiring in that year, the allocation allows the fund shareholder to “glide” into retirement.

There has been much controversy as to whether Target Date funds work as advertised. My purpose in writing this post is not to comment on these issues one way or the other. Rather I want to take a look at how the Fidelity Freedom Funds actually invest shareholder’s money.

The Freedom Funds like many Target Date funds are funds of funds. Each Freedom Fund has its own mutual fund ticker symbol. Unlike many mutual funds which make direct investments into individual stocks or bonds, the Freedom Funds invest in a variety of Fidelity mutual funds. Which funds and the percentage held of each fund will vary by Freedom Fund. I made a list of their underlying holdings using Morningstar’s Advisor Workstation. I then used the Fi360 Toolkit to rate these funds based on their 11 point criteria:

• Fund inception date (at least three years)
• Manager Tenure (min. 2 years)
• Minimum fund size
• 2 measures relating to fund investment style and asset composition
• Expense ratio
• 2 measurements of risk-adjusted return
• Trailing 1,3,5 year returns

All funds are rated relative to other funds in their peer group.

In looking at the 26 Fidelity mutual funds that I found as holdings of the various Freedom Funds I found the following for the ranking period ending 12/31/09:

• Three of the funds received the highest ranking of 0. This means no deficiencies, they passed all criteria.
• An additional four funds earned a score ranging from 1-25 indicating that they passed most of the criteria. This would indicate that these funds rank in the top 25% of all funds in their peer group with enough data to be ranked.
• Four funds had scores ranging from 26-50 indicating that they did not pass in a couple of areas but these funds overall rank in the top half of their respective peer groups based upon the ranking criteria.
• Five of the funds had a ranking in the 51-74 range indicating that they were deficient in several of the criteria and overall place in the lower half of their peers with enough history to be ranked.
• One fund had a score of 87 meaning that it was deficient in most areas and ranked in the bottom 13% of its peers. A ranking in this range indicates that strong consideration should be given to replacing such a fund.
• Nine of the funds did not have enough history to be ranked. These funds are all Fidelity Series funds. This appears to be a new group of funds that Fidelity has designed for use in their Freedom Funds. The funds all have anywhere from a month’s worth of history out to about a year. They would flunk the inception date test for the amount of time the fund has been around. These may ultimately prove to be good funds over time, but as an advisor I am generally loath to invest client money in new, untested funds unless there is a compelling reason to do so.
• Noticeably absent from the underlying funds within the Freedom Funds are any of Fidelity’s low cost core index funds covering areas such as the S&P 500; total domestic stock market; international equities; or their total bond market index fund. These are by and large solid, low cost holdings. Also absent are several top Fidelity funds such as Contra, Low-Priced Stock, and others.

In their defense of the 11 numbered Freedom Funds, 10 earned a score of 0 for the most recent ranking period and the other one earned a top quartile score of 20. Keep in mind; however, these rankings are within the target date peer groups via Morningstar. All of these groupings have a small number of funds and there is not a lot of history in some cases. A really good or really bad quarter or two can skew a target fund’s relative ranking. Additionally the peer groupings have changed and been revamped at least twice in the past several years.

Should you invest in these funds? As a plan participant you need to understand the fund’s investment philosophy, the glide path concept, and the fund’s underlying investments. Remember just because a particular fund has a target date closest to when you might retire, you can go with a closer date fund if you want to be a little less aggressive or a longer-dated fund if you want to be a bit more aggressive.

Plan sponsors it is incumbent upon you to monitor the Target Date funds in your plan as closely as you would review any plan investment choice. In the case of a Fidelity plan you may or may not be limited to the Freedom Funds.

Again I am not saying the Freedom funds are good or bad. Clearly they did well relative to their peers in 2009. Participants and Sponsors need to understand these funds and what they can and cannot offer.

Posted by Roger Wohlner, CFP®

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Get High Interest on Your Cash

by Fern Alix LaRocca

in 1. Cash & Credit, Investments

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Cash is king right now. With people losing their jobs and the markets in negative territory, everyone is loading up on cash and I think that is the right thing to do. If the roof leaks, or the car needs repair, you will not have to use a credit card to pay for it, you can use your cash. But what if your cash is only getting- like mine-1-2%?
Yikes! As I have said before, cash needs to keep up with taxes and inflation or else you are guaranteed to lose money. Why? ? Because your cash will lose its ability to pay for items like bread, gas, etc. that keep going up in price.

After reviewing www.bankrate.com, I realized that I wasn’t doing any worse than the national average on my cash which is 1-3% depending on how you have spread out the maturities. So what else can I do? Peer-to-peer lending websites such as the ones below are gaining in popularity as a place to put short term cash at work. Let’s be clear-this is extra cash that you hold -not emergency cash savings.

They work in two ways- either direct person to person lending or a pool of lenders buying into a pool of borrowers. In the past 20 months, Lending Club investors have earned an average annual return of 9.05% according to their website. Please read the prospectus for detailed information about the process, risk, and fees before purchasing.

I know many Financial Advisors who have used VirginMoneyUS to help families and friends provide loans for college education, or to start businesses.

If you are concerned about the low rates on your cash, think about putting a small portion into one of these online social networks that connect borrowers with lenders. I think it is going to be the wave of the future as credit and capital become hard to get.

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401K Today for Your Best Tomorrow

by Fern Alix LaRocca

in 5. Investment Planning, 6. Retirement Planning

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Make the most of what you have to make the most of your tomorrow. 

Your 401K contributions are your first investment dollars. Those dollars will grow more faster than any other investment because of the tax advantages that we discuss in detail here. Take advantage of the opportunity to contribute and put the maximum amount that you are allowed in the plan. Your future depends on it.

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7 Investment Tips From One of the Richest Men in the World

by Fern Alix LaRocca

in Financial Goals, Investments

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I am a big fan of Warren Buffett- but not always. Sometimes it seems like his investment tips are out of touch and just when I want to think of him as an old bag who isn’t investing with the times- he pulls out a one two punch and shows everyone how it’s done right.

Besides, he has an annual shareholder report that makes me laugh every time, and yes, I am a shareholder. But it doesn’t matter if you have invested in Berkshire Hathaway or not, here are some of the best investing tips everyone should live buy:

1. Understand what you own. Some people take this too literally. Mr. Buffett didn’t have a clue about technology until he met Mr. Gates and now he is a big tech fan. Word to the wise- when you don’t know, partner with someone who does.

2. Don’t buy when everyone else is buying. So difficult to do but very rewarding when done.

3. Buy when everyone else is selling. This crash was the latest big opportunity to buy more. Did you?

4. Buy value. He doesn’t ever buy on the hunch that a company is going to grow. He buys stock in companies that already have a lot of value but aren’t priced high to reflect that value.

5. Stay liquid. If you have all your chips in, you can’t make anymore bets, and you can’t take advantage of opportunities as they come up. Keep cash available to invest.

6. Don’t get swayed by the next “potential” Apple. Growth and fame does not mean profit.

7. Be a long term player. Even though you may experience lower returns than the overall market, if you believe in your positions and stick it out you will find consistent positive returns over a longer period.

Investing tips to put on your wall every time you want to buy or sell.

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Here’s How You Can Benefit In This Crisis

by Fern Alix LaRocca

in Financial Goals, Investments

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Despite the government’s efforts and the billions already spent, the crisis clearly remains a long way from being resolved. Here are 3 tips on what you can do:

  • Time to think past frustration, fear and/ or anger and get educated about possibilities. Your greatest worry in the unknown.
  • Time to look at all the options. Rarely is a situation so black and white that workable options don’t exist. (If you know me well, you know that I have to look through an entrie store before I buy anything. LOL!)
  • Time to review risk tolerance and plan for the next phase of your investments. Can market opportunities overshadow risk for you?

The key to success is a clear understanding of your needs, knowing what to expect, and being prepared. You need to where you stand and what you can do now and into the future. My strategy conversation is an opportunity to understand your concerns and help you move forward from where you are to where you want to be.

Many of you have reviewed my audio file where I talk about my one-on-one Coaching Program to help you look at your options in all areas. Most of you haven’t worked with a Coach virtually so I want to let you the benefits of working with me in this manner. In the past, I had employees and a 1200 sqaure foot office space in downtown San Mateo with clients all over the Bay Area and in some other states. Now I work out of a home office with an iphone and professional headset. I work with clients all over the world- most of whom I have never met and we all love it. The benefits to you are:

  • Clients are set up to learn/listen/participate in a session, and there is almost a (healthy) expectation that something terrific will be created, presenced or discovered during the session itself. In other words, wisdom and action plans can be created, instead of just information being transferred.
  • Clients feel more confident in sharing personal stories that they wouldn’t in person. Because of the freedom to share personal or meaningful things, clients tend to act more quickly and get results faster. We are there to work together and hear/be with each other without the distractions/diversions of clothing, uncomfortable chairs, stress of driving to the office, opinions about another hair style, etc.
  • Clients can reach a goal, make a change, prove what they learned, or fix a problem in a session, not just after it. This approach helps the client to learn more deeply and to assimilate the information/skills completely because they are using it, not just learning/understanding it. Big difference. When focusing on desired results, clients learn the information/skills 2-10 times faster/better/deeper (as compared to theoretical learning).
  • Clients who have different learning styles are accomodated quickly. Coaching sessions can be recorded for future review for auditory learners, personalized checklists, and worksheets, and outlines are available for visual learners and kinesthetic learners can take notes.

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