Amazing Portfolio in 2014? It’s Time To Fire Your Advisor.

bear-trapYour portfolio had an amazing 2014, after an incredible 2013. Your portfolio went up another astounding 18 percent, and now you have decided to thank your investment advisor with an expensive bottle of wine and a Cuban cigar.

Here’s a better idea—give him the old pink slip. That’s right. The boot.  Fire your advisor.

You need to get rid of him—or her—and you need to do it quickly.  If your portfolio went up 18 percent last year, your advisor did not focus on the one thing that most retirees articulate as their greatest concern: downside protection. If this financial expert managed your money properly, using non-correlated, diversified assets to ensure stability and focusing on risk as well as upside potential, then it was mathematically improbable to generate such an outstanding return.

Good financial advisors, that act as fiduciaries, know that you must have a portfolio strategy that contains non-correlated, diversified assets, ensuring that everything doesn’t go up and—more importantly—that everything doesn’t go down. The U.S. stock market has been on fire.  But looking across all the various asset classes, your benchmark return should be on slow simmer.

History has taught us that at the beginning of any 12-month period, stocks have as good a chance of gaining 44 percent as they do of losing 25 percent. What’s the chance that your financial advisor can tell you with certainty where the market will be in 12 months? It’s about as good as your palm reader’s.

So if you had sky-high returns last year, your advisor was guessing. And I’m guessing you didn’t hire that person to make guesses, meaning he or she ignored your need to have downside protection. This advisor wasn’t looking out for you.

Financial advisors (of which I am one) do not have a crystal ball that tells them exactly when the market will go up or down, and we never know exactly when to jump in or out. It takes hard work and close attention to the markets.  And a disciplined, formula based process to making portfolio decisions is the only way to remove human emotions.

Sure, the S&P 500 Index had a good 2014. As a matter of fact, we have had six years of bullish momentum without even a smidgen of correction.  And if you had all or most of your money invested in the U.S. stock market, you—as an investor—have made back some of the losses of the last secular bear market.

What if stocks had a bad year? What then?

20 IRA Mistakes to Avoid




1) Waiting Until the 11th Hour to Contribute

Investors have until their tax-filing deadline–usually April 15–to make an IRA contribution if they want it to count for the year prior. Perhaps not surprisingly, many investors take it down to the wire, according to a study from Vanguard, squeaking in their contributions right before the deadline rather than investing when they’re first eligible (Jan. 1 of the year before). Those last-minute IRA contributions have less time to compound–even if it’s only 15 months at a time–and that can add up to some serious money over time. Investors who don’t have the full contribution amount at the start of the year are better off initiating an auto-investment plan with their IRAs, investing fixed installments per month until they hit the limit.

2) Assuming Roth Contributions Are Always Best
Investors have heard so much about the virtues of Roth IRAs–tax-free compounding and withdrawals, no mandatory withdrawals in retirement–that they might assume that funding a Roth instead of a Traditional IRA is always the right answer. It’s not. For investors who can deduct their Traditional IRA contribution on their taxes–their income must fall below the limits outlined here–and who haven’t yet save much for retirement, a Traditional deductible IRA may, in fact, be the better answer. That’s because their in-retirement tax rate is apt to be lower than it is when they make the contribution, so the tax break is more valuable to them now.

3) Thinking of It As an Either/Or Decision
Deciding whether to contribute to a Roth or Traditional IRA depends on your tax bracket today versus where it will be in retirement. If you have no idea, it’s reasonable to split the difference: Invest half of your contribution in a Traditional IRA (deductible now, taxable in retirement) and steer the other half to a Roth (aftertax dollars in, tax-free on the way out).

4) Making a Nondeductible IRA Contribution for the Long Haul

If you earn too much to contribute to a Roth IRA, you also earn too much to make a Traditional IRA contribution that’s deductible on your tax return. The only option open to taxpayers at all income levels is a Traditional nondeductible IRA. While investing in such an account and leaving it there might make sense in a few instances, investors subject themselves to two big drawbacks: required minimum distributions and ordinary income tax on withdrawals. The main virtue of a Traditional nondeductible IRA, in my view, is as a conduit to a Roth IRA via the “backdoor Roth IRA maneuver.” The investor simply makes a contribution to a nondeductible IRA and then converts those monies to a Roth shortly thereafter. (No income limits apply to conversions.)

5) Assuming a Backdoor Roth IRA Will Be Tax-Free
The backdoor Roth IRA should be a tax-free maneuver in many instances. After all, the investor has contributed money that has already been taxed, and if the conversion is executed promptly (and the money is left in cash until it is), those assets won’t have generated any investment earnings, either. For investors with substantial Traditional IRA assets that have never been taxed, however, the maneuver may, in fact, be partially–even mostly–taxable, as outlined here.

6) Assuming a Backdoor Roth IRA Is Off-Limits Due to Substantial Traditional IRA Assets
Investors with substantial Traditional IRA assets that have never been taxed shouldn’t automatically rule out the backdoor IRA idea, however. If they have the opportunity to roll their IRA into their employer’s 401(k), they can effectively remove those 401(k) assets from the calculation used to determine whether their backdoor IRA is taxable.

7) Not Contributing Later in Life
True, investors can’t make Traditional IRA contributions post-age 70 1/2. They can, however, make Roth contributions, assuming they or their spouse have enough earned income (from working, not from Social Security or their portfolios) to cover the amount of their contribution. Making Roth IRA contributions later in life can be particularly attractive for investors who don’t expect to need the money in their own retirements but instead plan to pass it on to their heirs, who in turn will be able to take tax-free withdrawals.

8) Not Gifting With IRAs
Speaking of earned income, as long as a kid in your life has some, making a Roth contribution on his or her behalf (up to the amount of the child’s income) is a great way to kick-start a lifetime of investing. Per the IRS’ guidelines, it doesn’t matter whether the child actually puts his or her own money into the IRA (there are, after all, movie tickets and Starbucks beverages to be purchased). What matters is that the child’s income was equal to or greater than the amount that went into the account.

9) Forgetting About Spousal Contributions
Couples with a non-earning spouse may tend to short-shrift retirement planning for the one who’s not earning a paycheck. That’s a missed opportunity. As long as the earning spouse has enough earned income to cover the total amount contributed for the two of them, the couple can make IRA contributions for both individuals each calendar year. Maxing out both spouses’ IRA contributions is, in fact, going to be preferable to maxing out contributions to the earning partner’s company retirement plan if it’s subpar.

10) Delaying Contributions Because of Short-Term Considerations
Investors–especially younger ones–might put off making IRA contributions, assuming they’ll be tying their money up until retirement. Not necessarily. Roth IRA contributions are especially liquid and can be withdrawn at any time and for any reason without taxes or penalty, and investors may also withdraw their IRA money without taxes and/or penalty under very specific circumstances, outlined here. While it’s not ideal to raid an IRA prematurely, doing so is better than not contributing in the first place.

11) Running Afoul of the 5-Year Rule
The ability to take tax-free withdrawals in retirement is the key advantage of having a Roth IRA. But even investors who are age 59 1/2 have to satisfy what’s called the five-year rule, meaning that the assets must be in the Roth for at least five years before they begin withdrawing them. That’s straightforward enough, but things get more complicated if your money is in a Roth because you converted Traditional IRA assets. This article describes the five-year rule in detail.

12) Thinking of an IRA As ‘Mad Money’
Many investors begin saving in their 401(k)s and start to amass sizable sums there before they turn to an IRA. Thus, it might be tempting to think of the IRA as “mad money,” suitable for investing in niche investments such an ETF that is set up to capitalize on falling energy prices or Brazilian inflation-protected securities. Don’t fall into that trap. While an IRA can indeed be a good way to capture asset classes that aren’t offered in a company retirement plan, ongoing contributions to the account, plus investment appreciation, mean that an IRA can grow into a nice chunk of change over time. Thus, it makes sense to populate it with core investment types from the start, such as diversified stock, bond, and balanced funds, rather than dabbling in narrow investment types that don’t add up to a cohesive whole.

13) Doubling Up on Tax Shelters
In addition to avoiding niche investments for an IRA, it also makes sense to avoid any investment type that offers tax-sheltering features itself. That’s because you’re usually paying some kind of a toll for those tax-saving features, but you don’t need them because the money is inside of an IRA. Municipal bonds are the perfect example of what not to put in an IRA; their yields are usually lower than taxable bonds’ because that income isn’t subject to federal–and in some cases, state–income taxes. Master limited partnerships are also generally a good fit for a taxable account, not inside of an IRA.

14) Not Paying Enough Attention to Asset Location
Because an IRA gives you some form of a tax break, depending on whether you choose a Traditional or Roth IRA, it’s valuable to make sure you’re taking full advantage of it. Higher-yielding securities such as high-yield bonds and REITs, the income from which is taxed at investors’ ordinary income tax rates, are a perfect fit for a Traditional IRA, in that those tax-deferred distributions take good advantage of what a Traditional IRA has to offer. Meanwhile, stocks, which have the best long-run appreciation potential, are a good fit for a Roth IRA , which offers tax-free withdrawals. This article details the basics of “asset location.”

15) Triggering a Tax Bill on an IRA Rollover
A rollover from a 401(k) to an IRA–or from one IRA to another–isn’t complicated, and it should be a tax-free event. However, it’s possible to trigger a tax bill and an early withdrawal penalty if you take money out of the 401(k), with the intent to do a rollover, and the money doesn’t make it into the new IRA within 60 days. This article discusses how to ensure that rollovers are simple and tax-free.

16) Not Being Strategic About Required Minimum Distributions
Required minimum distributions from Traditional IRAs, which start post-age 70 1/2, are the bane of many affluent retirees’ existences, triggering tax bills they’d rather not pay. But such investors can, at a minimum, take advantage of RMD season to get their portfolios back into line, selling highly appreciated shares to meet the RMDs and reducing their portfolios’ risk levels at the same time. This article discusses how to tie RMDs in with year-end portfolio maintenance.

17) Not Reinvesting Unneeded RMDs
In a related vein, retired investors might worry that those distributions will take them over their planned spending rate from their portfolios. (Required minimum distributions start well below 4% but escalate well above 6% for investors who are in their 80s.) The workaround? Invest in a Roth IRA if you have earned income or–more likely–in tax-efficient assets inside of a taxable account. This video provides tips on how to invest RMDs you don’t need.

18) Not Taking Advantage of Qualified Charitable Distributions
RMD-subject investors also miss an opportunity if they make deductible charitable contributions rather than directing their RMDs (or a portion of them) directly to charity. That’s because a qualified charitable distribution–telling your financial provider to send a portion of your RMD to the charity of your choice–reduces adjusted gross income, and that tends to have a more beneficial tax effect than taking the deduction. The hitch is that Congress typically only renews the provision that allows qualified charitable distributions at the very end of the year, so interested investors have to delay their distributions until then.

19) Not Paying Enough Attention to Beneficiary Designations
Beneficiary designations supersede expensive, carefully drawn-up estate plans, but many investors scratch them out with barely a thought, or make them once but don’t revisit them ever again. IRA expert Ed Slott discusses considerations to bear in mind when deciding who should inherit your IRA in this video.

20) Not Seeking Advice on an Inherited IRA
Inheriting an IRA can be a wonderful thing, but it’s not as simple as it sounds. The inheritor will have different options for what to do with the assets depending on his or relationship to the deceased, and can inadvertently trigger a big tax bill by tapping the IRA assets without exploring all of the options. This video includes tips for inherited IRAs, as does this article.

By Christine Benz

Monthly Portfolio Update and Forecast


Please view below our monthly update from Jason Wenk, Chief Investment Strategist at FormulaFolio Investments.

We are starting the year off well and will be actively watching the markets as the year progresses.  If you have any questions about your accounts, or would like to learn more about our strategies, contact the office today!

Remember it wasn’t raining when Noah built the ark!

Take the time now to build the best portfolio for YOU.

When underperforming the S&P 500 is a good thing

pie chartCopyright Investment News

Matching the index last year would have involved too much risk

As financial advisers roll through annual client reviews, many will face the task of having to explain how their portfolio strategies so badly lagged the 13.7% gain by the S&P 500 Index last year.

Fact is, a truly diversified investment portfolio should have returned less than 5% in 2014. It was that kind of year. Any adviser who generated returns close to the S&P was taking on way too much risk, and should probably be fired.

Blame the ever-expanding financial media or the increased awareness among investors, but there is no getting around the reality that clients have become programmed to dwell on the performance of a few high-profile benchmarks.

“Sure, the S&P 500 had a good 2014, and if you had all or most of your money invested in [that index], you did, too,” said Ed Butowsky, managing partner at Chapwood Capital Investment Management. “But what were you doing with most of your money in a single index?”

Most years, a globally diversified portfolio that spans multiple asset classes can hold its own relative to something like the S&P. But when a year like 2014 happens and the S&P essentially laps the field, financial advisers who have done their job might suddenly feel as if they have to make excuses for doing the right thing.

“Periods like 2014 are why people think they should just go buy the index,” said David Schneider, founder of Schneider Wealth Strategies.

“Investors tend to fixate on the S&P because it’s the most famous index out there, and when it outperforms everything, it just makes the case for passive investing for all the wrong reasons,” he added. “People think they can just get rid of foreign stocks.”

While long-dated U.S. Treasuries emerged as a surprise outperformer last year with a 27.4% gain, most risk assets around the world didn’t even show up for the game.

Developed markets, as represented by the MSCI EAFE Index, fell 4.9% last year, and the MSCI Emerging Markets Index fell 2.2%.


Midsize companies, as tracked by the Russell Midcap Index, generated a 13.2% gain last year and almost kept pace with the larger companies that make up the S&P 500. But the 4.9% gain by the Russell 2000 small-cap index shows that smaller companies were not really participating.

With everything packaged into a diversified portfolio, it would have been near impossible to generate anything eye-popping last year.

Applying allocations based on Morningstar Inc.‘s five main target risk indexes, ranging from conservative to aggressive, the best performance last year would have been 5.23%, which includes a 1.51% decline during the second half of the year.

To get that full-year return would have required a 91% allocation to stocks, divided between 59% in U.S. stocks and 32% in foreign stocks.

That portfolio, Morningstar’s most aggressive, also included 4% in domestic bonds, 1% in foreign bonds and 4% in commodities, as an inflation hedge.

On the other end of the spectrum, the most conservative Morningstar portfolio had just an 18% allocation to stocks, including 13% domestic and 5% foreign. The 61% fixed-income weighting had 50.5% in domestic bonds and 10.5% in foreign bonds. The 10.5% inflation hedge included 2% in commodities and 8.5% in Treasury inflation-protected securities.


That portfolio gained just 3.38% last year but fell 0.73% during the second half of the year.

“History has taught us that at the beginning of any 12-month period, stocks have as good a chance of gaining 44% as they do of losing 25%,” Mr. Butowsky said.

The onus is always on advisers to turn years like 2014 into teachable moments with clients, and a lot of advisers are doing exactly that.

Thomas Balcom, founder of 1650 Wealth Management, took a proactive approach in December by addressing the issue in his holiday greeting card message, which focused on “not putting all your eggs in one basket.”

“My clients were definitely surprised they weren’t up as much as the S&P, because everyone uses the S&P as their personal benchmark,” he said. “But we had things like commodity exposure and international stocks that were both down last year, and that doesn’t help when clients see the S&P reaching record highs.”

Veteran advisers recognize 2014 as a truly unique year for the global financial markets.

In 2013, for example, when the S&P gained 32.4%, developed international stocks gained 22.8%. But domestically, the S&P was outpaced by both mid- and small-cap indexes, meaning a diversified portfolio was riding on more than just the S&P’s positive numbers.

Prior to 2013, the S&P had outperformed international developed- and emerging-market stocks on only three other occasions since 2000. Domestically, the S&P has outperformed midcap and small-cap stocks only one other time since 2000, in 2011, with a 2.1% gain.

“It’s tough dealing with clients, because the S&P is the benchmark you can turn on the TV and hear about, and everybody wants to know why they aren’t experiencing the same returns as the S&P,” said Michael Baker, a partner at Vertex Capital Advisors.

“The S&P 500 really just represents one asset class — large-cap stocks,” he added. “And most investors only have about 15% allocated to large-cap stocks.”

By:  Jeff Benjamin