As I’ve mentioned before, asset allocation is essential for both investment returns and your peace of mind and I’ll explain how it relates to your finances. Asset Allocation is the process of dividing an investment portfolio among different asset categories, like stocks, bonds, and cash.
Using different asset categories is important because historically the returns of each category have not moved up and down at the same time. So, by investing in more than one category, you’ll reduce the risk of losing money in any one type of market.
So how do you decide how much money to devote to each asset type?
- Get an idea of your risk tolerance – How much risk can you handle? Do you have time to let your money grow and discipline to leave it alone through market downturns?
- Figure out if you need income from your investments or cash on hand for large expenses – Use this risk tolerance assessment to help you get started.
- Choose an asset allocation – Once you decide how much risk you’re comfortable with, you’re ready to choose an asset allocation. Use this asset allocation key as an example of a portfolio that would be appropriate for your risk tolerance.
Greece is in trouble. The European Union recently agreed on a $146 billion bailout for the county to keep it from defaulting on its government debt. The 16 countries that share the euro currency agreed there was no other option but to rescue Greece from defaulting to keep the euro out of trouble. Other countries like Portugal and Spain are debt strapped as well.
How did Greece get into this mess? The short answer is years of unrestrained spending, cheap lending, and failure to implement financial reforms. The country held on to government programs that it couldn't afford, like a pension program that allowed workers to retire on a lifetime pension equivalent to 80% of their final salary. Also, tax evasion had become commonplace. The country had been hiding the severity of its mounting debt problems until the new Prime Minister was faced with a crop of government debt coming due and was forced to come clean.
Greece's national debt was reported at $415 billion. That's 115% of GDP. The Greek government initiated austerity measures that cut spending and government benefits, but current debts still remain. Investors feared a default that would threaten other eurozone countries.
The IMF, the world's lender of last resort, negotiated a nearly $1 trillion global emergency rescue package of standby funds and loan guarantees that could be tapped by eurozone governments in peril. This should help calm investors bring confidence back to the euro.
Is the United States far behind? Stop by next week and you will find out.
Yes, it is.
I covered asset allocation last week, so I want to cover diversification as it pertains to equity investments only.
If we look at equity investments over a long time horizon, we see that generally, if we invest in higher risk categories, we will see a higher return. Small cap and mid cap stocks outperform large cap. International stocks also outperform large cap. We also need to look at the variable of value vs. growth for these categories. There is a lot of information and choices. I suggest that you go to our website and see some of the returns that you can achieve and the risk associated with those returns.
Let's bring this topic to our main focus, which is retirement. I generally recommend three things to everyone who is planning for retirement and, really, aren't we all doing that?
1. Do your homework. Work at numbers that you can realistically achieve and put a plan together to get there. Homework is very important.
2. Diversify. History tells us that a well thought out investment plan that diversifies your investments will weather the storm better that just chasing returns, and finally
3. Save, save, save. Social Security is not enough and even company pensions may not get you there. Nothing will help you more than a savings plan that will help you when you reach that magic date. Next week, we will discuss what if retirement comes unexpectedly. Thanks for reading.
Here is part 2 in our series on investing for retirement. Today's topic is: How much money do I need to retire? The simple answer is generally more than you think. Lots of factors come into play here: spending habits, lifestyle, investment strategy, health, age of retirement and even your stress level. Let's look at some numbers first.
If you start setting aside $1000 per year, or about $19 per week when you are 25 and let's say you can achieve a return of 8% per year, which is achievable using historic stock market returns. If you continue this until you reach age 65, you will have almost $300,000.00. A lot of money! Get started. If you invest $3000 for ten years, age 25 to 35, and stop investing at 35, you will have approximately $367,000 at age 65, using the same 8% return level! The key here is to start early and put aside as much as you reasonably can in those early years.
I understand there will be other factors, like saving for college, health coverage and even mortgage payments. Start with something. And another key-review your progress annually. I always suggest more aggressive investing when you are younger and then get a little more conservative as you age. Compounding pays off.
I will further discuss this topic of How much will I need? in future programs Get started, do some homework, and thanks for reading.
It's the end of the year. 2009 is almost over. Let's celebrate for a lot of reasons. Let's also turn the page on the calendar and look into our crystal ball and see what 2010 will bring.
Here are a few thoughts, or predictions, if you will:
1) The stock market will continue to show positive numbers, not the dramatic increases we saw for 2009, but positive numbers. Historic gains for the Dow Jones are now in the 9% range. Don't look for anything that strong but wouldn't we be happy with 6%.
2) The economy will slowly move forward, again not dramatic movement but we could see GDP growth in the 2½% range. If we head into a slight, double-dip recession, we could see smaller growth but I don't see any numbers stronger than the 2 ½ %.
3) Housing...let's go to number four as there won't be much in housing to cheer about. The housing industry has too much supply out there to see any stabilization yet.
4) Interest rates...a little upward pressure in the third quarter but not a lot of movement. Low interest rates are a function of the weak economy. The Fed is committed to getting the economy going and therefore, low interest rates.
5) Unemployment. Can it get any worse? Probably not. We should see some improvement to the 9% range by September.
In a word or two, a slow recovery but at least it's a recovery. Happy New Year.
Let's take a look at the first half of 2009. The second quarter brought a stock market rally that allowed several major indexes to return to positive territory for the year. At the end of June, the S&P was up 3% and the Nasdaq was up 16%. International and emerging markets performed exceptionally well. The EAFE was up 8% and the Emerging markets index was up 36%. Treasury rates did not change much on the short end of the yield curve during the first six months of 2009. The 1-year was just under 0.4% at the start of the year and ended the second quarter just under 0.5%. Longer treasuries, for example the 10 year, have jumped significantly. At the beginning of the year the 10-year stood at 2.25%. At the end of June, it was up to 3.5%. Mortgage rates tend to price off of the 10-year treasury.
At the end of the second quarter, nearly half of Americans believed the economy had stabilized; however, only 1 in 8 believed a recovery had started. A CNN poll reported the most important issue on Americans' minds after the economy was health care, followed by the federal deficit, and the war in Iraq.
Though the government is quickly approving stimulus spending, consumers are doing the opposite. The personal savings rate hit a more than 15 year high in the second quarter, at 6.9%. That's a big change from the zero to 1% savings rate of 2005 through 2008. Economists are debating whether this rise in personal savings is a freak occurrence due to increased stimulus and personal debt reduction, or if consumers are changing their long-term behavior. If the latter is true, we could be in line for a slower and more gradual climb out of this recession.
If we look at the economic tea leaves for the remainder of 2009, here's what economists are generally predicting:
The worst is over! The economy is transitioning from a steep recession to recovery. Let's hope they are right on this one. Here's a break down of their projections:
- Jobs - Unemployment, currently in the 9% range, will creep up to double digits in the 10+ range. There appeared to be a leveling off of initial claims in May, which suggests that yes, people are still losing jobs, but at a slower rate than earlier this year.
- Interest rates - Possibly bad news for homeowners. Even though the Fed is committed to keeping rates low, it looks like they are going up before year end. It certainly appears that they could be up by 1% or 100 basis points.
- Home sales - the free-fall in home prices has stopped, but sales will remain slow.
- Economic growth - The economy shrunk at an annual rate of 5.7% in the first quarter of 2009. Projections are that this is the worst quarterly drop for the year. We should start to see some growth by the fourth quarter.
- The stock market - No matter how we measure the equity markets, they are all up significantly since their March 9 bottom. This is definitely a leading economic indicator.
Good news? Definitely some. We could use some, especially if you are one of the unemployed.
In this tough economy, it can be difficult to maintain a positive outlook, but there are still a lot of positive things happening. So, this week I'm going to give you the top ten things I'm thankful for.
Number 10 - A life in the stock market. It's been up about 20% over the last four weeks. Let's hope it continues. Its success is critical for confidence in our economy and certainly for all of our retirement plans.
Number 9 - Honesty and Integrity. With all the dishonesty that we've seen on Wall Street, let's appreciate the honesty and integrity that we deal with on a daily basis.
Number 8 - Coworkers. I appreciate the people I work with; do the same.
Number 7 - Medical people - Doctors, nurses and support staff. They are there when we need them; let's appreciate them.
Number 6 - Our military both past and present. Their lives are on the line, let's be thankful for their service.
Number 5 - Your health - Nothing is more important. Without it life can be miserable; appreciate good health.
Number 4 - Our country - Freedom is a blessing none of us appreciates enough. We can go to bed without worrying about foreign attacks; not everyone is that fortunate.
Number 3 - Public servants - Police, firemen and yes even government workers.
Number 2 - Your job - Today it's more important than ever. Appreciate it and be thankful. View your job with a renewed commitment.
Number 1 - Friends and family - What can I say? It all starts and ends here.
I'm thankful for your readership!
Curious about the future implications of today's market turmoil? Let's take a look at the stock market meltdown we've been experiencing over the last nine months and put it into perspective over the long term.
From December 1972 through December 2008, there have been 6 downturns of the S&P 500 characterized by at least a 15% decline. All six of these market lows saw a dramatic recovery within three years. The average low was -32% (from peak to trough based on monthly returns) and the average three year recovery was 72.4%. We don't know if this market has finally bottomed out, but history suggests that the subsequent upswing will probably be large. Don't make the mistake of waiting for the market to recover its losses before getting your money back in. The market may recover moderately this year, but 2010 and 2011 will be crucial for long-term investors.
Because this market downturn has been more severe than any in recent memory, many people are making comparisons to the Great Depression. You should know that we are nowhere near the economic meltdown of the 1930s and more importantly, we are not expected to approach those numbers.
The number one issue for the consumer today is faith in the economy; consumer confidence is currently at an all time low. As a consumer, you can help by slowly returning to your previous spending habits, as much as possible, and believe that the economy will recover.