Asset Allocation

Did you know that asset allocation is the most important thing when managing a portfolio?

It is however, not what makes headlines. Often you can pour through the financial press and read about what companies are good buys, what the hottest mutual funds are, or what stocks are good for a bad economy.

What does not make the headlines very often on CNBC or Bloomberg is asset allocation- which is a professional management system that was developed by a few University of Chicago professors. They studied years and years of market data and found out the following:

Your mix between all the asset classes is what drives 92% of your portfolios performance...yes, 92%!

What drives 4% is picking Stock A over Stock B, and then just like any other study there was a 4% variance.

The mix of asset classes ( meaning what percent you should have in Large Cap vs. Mid or Small Cap) is dependent on three things:

1) Your risk tolerance- are you aggressive, moderate,etc.

2) Your tax status

3) Your time frame

So, your asset allocation is going to be different then your neighbors, friends, co- workers etc. bc these 3 factors differ for everyone.

What is your asset allocation, are you using this in your portfolios?

401(k) loan, good or bad idea?

Your 401(k) allows you to take loans up to a certain percent of your account value. Typically the loan has to be repaid over a 5 year period through payroll deductions at an interest rate set by the 401(k) plan ( usually around 6%).

Often I have clients tell me that they don't view these loans as "bad" bc they are paying themselves back the 6% into their accounts. This is true, however, things to consider when you are repaying back your own money:

1) Since the loan is being paid back with AFTER TAX money through your payroll deductions, you end up paying tax twice to Uncle Same; once on the loan repayments, then again when you take out the money out as income during retirment
Ex: Your 401(k) is $100,000 and you take a loan of $20,000 @6% ( your 401k is now worth $80,000). You pay it back with after tax payroll deductions each paycheck. So you eventually have the $100k plus some interest back in your 401(k), but in later years that $20,000 that you already paid taxes on you will pay taxes on again when you take withdrawals after 59 1/2 as 100% of the account is taxable

I don't like to pay taxes twice on my money, do you?
2) Opportunity cost- if you take $20,000 out you miss the opportunity for it to grow
3) Most people don't notice this in the fine print, but....If you leave your company while your 401(k) loan is still outstanding, you are forced to pay off the loan, and if you are under 59 1/2 you will be forced to pay a 10% penalty and ordinary income taxes ( average 15% lets say )= 25% penalty..ouch!

So if you can avoid it, 401(k) loan not the best idea...

Do a check in

Often times, I sit down with my clients who have been investing for a while...they are in their forties and fifties and have money in various IRA's, mutual funds, stocks and 401(k)'s, but they often neglect their accounts ( which is good for me I guess because they coming looking for my help) often never rebalancing or changing their risk tolerance as they get closer to withdrawal time.

Would you buy a rental house, rent it out and then never do any maintenance on the house like changing the air filters, new paint, mow the lawn etc?? Of course not, so you can't do that with your investments either. You should at least twice a year sit down and do an evaluation- of everything...your savings rate, how your investments are doing compared to their benchmarks and other investments in their peer groups etc.

If you don't have the time, knowledge, energy, desire etc. to have the discipline to do this, then hey guess what..there are people out thereyou can hire to do it for you...people like me, financial advisors....ask your friends for some referrals, check out a seminar, or look to your employer for guidance...it can be well worth it in the long run.

Are you smart enough to time the market?

When the market is down, I often have my clients asking me- "should we get out of the market? should I put everything in cash and bonds and less in stocks?" As simple and as frustrating as an answer that it is, the simple solution is "No, stay the course".

I can't time the market- I have no idea when it is going to peak, and no idea when it is going to bottom. Sooo...if you have time on your side, you need to stay invested! The market goes up and down and to get the ups of the market, you have to stay in it to get the ups...if you wait until the economy is stable, the elections are over blah blah blah then guess what, you're going to miss the rebound.

You always here that the market will return between 8-10% over time, well the Dalbar Study showed that from 1985 to 2004 the average mutual fund investor gained 3.7% while the s&P500 returned 11.9%...why?? Because, investors were only investing in "hot performaning funds" when the market was up, and when it was down they sold- hence why market timing doesn't work. If you have good asset allocation in place, are dollar cost averaging and rebalancing your portfolio, you will be okay- trust me.