New IRA Rules That May Cost You

a11e0_ostrich-burying-headAs though retirement accounts were not complicated enough, two recent court rulings threw monkey wrenches into the works. All IRA owners will want to know about these new IRA rules before planning their estate or transferring money between IRAs.

One rule came out of tax court: IRA owners are limited to one 60-day rollover between IRAs in a 12-month period across all of their IRA accounts. The rule went into effect on Jan. 1, 2015.

The Supreme Court handed down the second rule from on high. Spendthrift heirs take heed: Inherited IRAs are not retirement accounts. That means that inherited IRAs are treated like all other inherited assets and it’s open season for creditors.

Once-per-year transfers

In January 2014, Alvan and Elisa Bobrow made an appearance in the U.S. Tax Court to plead their case regarding a string of 60-day rollovers among their IRA accounts. With the 60-day rollover, or once-per-year transfer, a check is cut directly to the account owner with the understanding that the funds must be back in an IRA within 60 days or the funds will become subject to taxes and penalties. Before the 2014 decision, the understanding was that one transfer could be done in a 12-month period for each IRA owned.

You can see how this could be tempting, under the right circumstances.

People would basically use this — not commonly, but occasionally — as basically a form of personal loans, like you could sort of borrow money from your IRA without tax consequences by sequencing together a bunch of 60-day rollovers and actually get a pretty long use of the money.

Death of a loophole

That’s what the Bobrows tried to do, but one of the rollovers didn’t quite make the 60-day deadline. They went to tax court anyway to plead the case.

The conclusion of the tax court was that not only had (they) clearly just botched one of the rollovers on timing, but the tax court’s interpretation was that this shouldn’t just apply to one IRA at a time, this should apply in the aggregate across all of the IRAs.

So the Bobrows ruined it for everyone. Now all IRA owners are limited to doing one of these 60-day transfers annually, no matter how many IRAs they happen to own.

But once a year — that’s not the calendar year. The rule is it’s a fiscal year; in other words, 12 months or 365 days. So, if you did one today, you couldn’t do another one until next July 23 or whatever today is.

Be sure to note

In November 2014, the IRS published a notice clarifying how the new rule works for those who have multiple IRAs. No matter how many IRAs a person may own — a SEP IRA, a SIMPLE IRA, five Roth IRAs and three traditional IRAs — they will get one once-per-year IRA rollover every 365 days.

It’s important to note that the rule doesn’t apply to trustee-to-trustee transfers, the type of transfer that is done between brokerages. If a check is involved, it will be made payable to the brokerage or bank, for benefit of the client’s account, but the client won’t access the funds. “You can do those all day long. You can do 15 a day if you wanted,” Slott says.

Inherited IRAs

Since the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the status of inherited IRAs with regard to creditors has been as clear as swamp mud. The Supreme Court’s decision this year clarified matters.

In this 2005 law, limits were stated. Basically, any ‘real’ retirement plan — employer qualified retirement plan, or QRP — was fully exempt, plus SEPs, SIMPLEs and 403(b) plans.

Generally, owners of workplace retirement plans enjoy federal protection from creditors, and states determine if a person’s IRA is creditor-protected.

But what happens if you bequeath your IRA to your kid? No one was really sure if inherited IRAs counted as retirement plans or piles of money. The question ended up in front of the Supreme Court in 2014. The court decided that inherited IRAs are piles of money, not retirement accounts.

An exception to the rule

There is one exception: the spousal rollover. When spouses inherit an IRA, they can take the account and use it as their own retirement account.

Some are arguing this could be construed as an illegal transfer or conveyance. My personal feeling is that this argument fills up a lot of seminars on the subject, but it is a stretch to assume or predict that the IRS, or any bankruptcy court, could easily challenge a spouse who took over his or her deceased partner’s retirement plan and treated it as their own.

In other words, a spousal rollover could be challenged by creditors, but the law seems to favor spouses.

Protecting spendthrift heirs

There are some ways to protect heirs from themselves: for instance, by leaving assets to a trust. Leaving an IRA to a trust is more complicated than leaving regular money.

Another option skips the hassle and uncertainty of leaving an IRA to a trust: Take the money out of the IRA and buy life insurance.

You could leave the IRA to a trust, but that’s complicated because the IRA has distribution rules. So it gets complicated to throw that into a trust; life insurance is a much easier asset to go to a trust. Spend down some of your IRA, put the rest in a life insurance policy. Leave that to a trust for the kids.

That way, the kids will end up with tax-free money with no distribution rules attached. Plus the money would be creditor-protected.

Contact a professional advisor that will protect you and you money from these new rules.  The government is waiting for you to make a mistake.

 

2014 Market Recap

Trust Dale CFGPlease watch the video below from FormulaFolios Chief Investment Strategist, Jason Wenk.  If you have any questions about your specific investment accounts or would like to learn more about how we utilize FormulaFolios give us a call.

 

Regards,

Phil Calandra

Dear Santa, Please Make The Stock Market Go Up Forever…

Santa at NYSEThe infamous Santa Claus Rally may be in question this year after the first half of December.  Please read and watch below as Formula Folios Chief Investment Strategist, Jason Wenk, gives a recap of the current market gifts.

It was a rather tough week for the stock market, with Friday closing with a 315 point drop in the Dow and a 33 point drop in the S&P 500.

Ouch! Bad week for Stock Investors.

 

The other big news is that the 2 year uptrend in the S&P 500 now appears to be changing. For better or worse, we do not know just yet.

In today’s market update video I show this trend, draw in some key points, and illustrate where I think some of the next moves may take us. More to come in the next few weeks.]

As always, if you have questions, comments, or observations you’d like to share; feel welcome to use the Comment area below this post. If you know others who might benefit from this post, please help spread the word by using the Facebook, Twitter, or LinkedIn buttons below too!

Happy Holidays!

www.calandrafinancialgroup.com

http://www.trustdale.com/partners/atlanta/financial-insurance/financial-planning

Be Financially Successful

Blue Financial AdviceYou have questions and concerns.  Everyone does when it comes to their financial future.  Perhaps today you will take action.  If you choose to, follow this outline.

The cornerstone to great financial results is a great financial plan.

There are many financial advisors that offer financial plans, but most are just complicated compilations of charts, graphs, and data…all really just designed to sell high commission products.

It’s no wonder many people who’ve explored financial planning have a sour taste in their mouths.  Be financially successful.  Create financially successful plan that are:  Low Cost, Objective, Flexible, and Customized.

Step 1:  Focus on  You & Your Goals

Start by first analyzing your current financial situation. Your current assets, liabilities, savings or spending habits; and most importantly, what your financial goals are.  Why are you investing?  What is important about money to you?

Step 2:  Portfolio Analysis

Using professional third-party analytics from Morningstar analyze your portfolio to determine what realistic risk you are taking and return you are currently getting.

Step 3:  Stress Test

With today’s technology run a 1,000 scenario stress test that gives you an accurate best case, worst case, and average case scenario of what might happen should you continue doing just as you are right now.

Step 4:  Optimization

If you learn through this stress test and planning process that you are not currently positioned for success, optimize your investment allocation to show you what steps are needed in order to reach your goals, with the minimum in risk and cost.

Step 5:  Action Steps

Once you’ve worked to determine the best planning scenario for your goals, draft a simple “Financial Implementation Plan” document that tells you precisely what needs to be done to get your plan in action and start realizing the benefits.

If you need assistance with this type of planning, we can help.  Our results driven planning process is 100% satisfaction guaranteed.  You pay nothing upfront.  Once our process is complete and you are completely satisfied, you pay only $600.  Upon completion, if you are not 100% satisfied with our entire process, pay nothing.  That is an irresistible offer for someone who is serious about their money and who wants a second opinion on the path they are currently on.

Protect Your Sensitive Financial Information

Flat Phil-revised for webNow more than ever, you must be protecting your financial information!  In October, hackers accessed the personal information of over 83 million JP Morgan Chase customers. Fortunately, the hackers weren’t able to access financial information or gain access to client accounts. However, they were able to access the names, phone numbers, addresses, and email addresses of any current or past customer who logged into Chase.com, JPMorganOnline, Chase Mobile or JPMorgan Mobile. [i],[ii] This unprecedented cyber-attack on a major American financial company naturally raises questions about the state of security in the financial services industry.

While there are a lot of questions still being answered, there is some good news to take away from this incident:[iii]

  •  No money was taken from client accounts and it doesn’t appear that financial databases were accessed at all. No fraudulent transactions have yet occurred using client information.
  • S. law enforcement and intelligence services are working closely with financial institutions to glean information and prevent future attacks.
  • This serious attack is a wake-up call for the whole industry that a coordinated hacking attack, possibly with the tacit support of foreign governments, can have a major impact on financial institutions. This realization will likely result in some major changes to security protocols at financial institutions.

Financial data theft is a major problem that can affect anyone. Though statistics on this type of data breach are scarce, it’s safe to say that millions of Americans are at risk. Fortunately, there are many ways that you can protect yourself from identity theft and fraud. Most of these actions are common sense, but they’re worth passing along to your loved ones:

  1.  Be wary of emails or social media messages asking you to log into a financial account. Your bank, mortgage company, investment account, or the IRS will never request personal information by email. Never click on links embedded in those emails; instead, always log into your accounts by manually typing the web address into your browser.
  2. Never give out personal information in response to a phone call from someone claiming to represent the IRS or a financial institution. If you get a suspicious phone call, hang up and call the organization directly for more information.
  3. Protect your sensitive information by collecting mail promptly and shredding documents containing account numbers, credit card numbers, or your Social Security number.
  4. Never use the same PIN or password for multiple accounts or websites. Doing so increases the risk that a single attack could compromise your identity or result in fraud.
  5. Monitor your financial and credit card statements carefully to identify suspicious activity. If you find fraudulent transactions, report them to the relevant institution immediately to reduce your financial liability.
  6. Check your credit report each year at each of the three reporting agencies. You can check your report for free at AnnualCreditReport.com. If you find fraudulent accounts or activity that you don’t recognize, immediately file a report with all three agencies and place a security freeze on your account to prevent more accounts from being opened.

We take security very seriously and are committed to protecting our clients’ personal information in the following ways:

  • We partner with major financial institutions that use industry-recommended encryption to protect your data;
  • We never share any personal or financial information without your explicit knowledge and consent;
  • We regularly participate in audits of our internal procedures to help ensure that we are always following industry best practices;
  • We regularly update our knowledge and attend specialized training about security.

If you’re worried about protecting your sensitive financial information and how you may have been affected by a data breach or have questions about protecting your sensitive personal information, please give our office a call. We are happy to be a reassuring source of information and assistance.

[i] http://www.nytimes.com/2014/10/04/your-money/jpmorgan-chase-hack-ways-to-protect-yourself.html

[ii] https://www.chase.com/services/customer-notice-faq

[iii] http://www.nytimes.com/2014/10/04/your-money/jpmorgan-chase-hack-ways-to-protect-yourself.html

Market Update – The market is like a ride at the fair.

Stock Market  RollercoasterWelcome to October and the most volatile time of year for the stock market (historically)!

The market swings this week have been the most volatile in the past 17 years.  As of this post the Dow Jones is poised to give back all of its year to date gains.  The S&P 500 is looking at its 200-day moving average, which we haven’t been near in recent years.  That may prove to be a technically important juncture.  Now is not the time to panic, as a solid plan and mechanical, rules-based decision process will once again prevail.

In short, the uptrend is partially broken, so there’s a few things we’ll be watching very closely. All is not lost, however, as there’s still a 50/50 likelihood the market can resume its positive ways.

The video below is from the Calandra Financial – FormualFolios Chief Investment Strategist, Jason Wenk.  Please view this video for his current synopsis.

Please contact the office if we can be of assistance or answer any further concerns.

Regards,

 

Phil C.

How has the Recent Market Drop Impacted FormulaFolios?

formulafolios

An excellent perspective from FormulaFolios Chief Investment Strategist.
This week’s market drop may have caught your attention, if you would like to learn more about how this investment process could benefit you, contact Calandra Financial Group…

Here at FormulaFolios we’re having a great year of firm growth. As a result, we have many new clients that are getting their first experience with our investment philosophy.

Any time you’re doing something new with your portfolio, it’s perfectly natural to pay special attention, and even feel a little bit anxious. Especially if the first month is less than you expected. For many of our new clients, this might be exactly how you feel. And it’s okay, we completely understand!

The Past 6 Years Have Been Great

The past few years have been very good to investors, with many growth oriented asset classes up more than 100%. There has been minimal volatility too, with the largest drawdowns in US Stocks mostly less than 5%. This has probably gotten a lot of us to forget what a real correction feels like – as it is fairly normal for US Stocks to have intra-year drawdowns greater than 10%.

The past 30 days have been interesting. Stocks have mostly been flat to slightly down, with every few percent rally seeming to be followed by a few percent drawdown. Bonds have also been down, real estate down a lot, as well as non-US stocks. In a nutshell, every major asset class is either flat, slightly down, or down a few percent.

As this relates to FormulaFolios, we believe in following non-emotional formulas to help us make sound investment decisions. Part of our formulaic process is using well defined asset allocation for each client. This ensures we properly spread risk amongst many asset classes, while emphasizing the asset classes our models calculate to be the most desirable for current market conditions.

It’s a sound philosophy that has served us well for many years. But, it’s not without flaws and certainly doesn’t mean we’ll avoid all short term market downturns.

Case in point would be the last 30 days.

There’s More to the Market than Just the Dow and S&P 500

Below is a chart that shows my (Jason Wenk – FormulaFolios Chief Investment Strategist) SEP IRA. This is invested in what we call an MM80 portfolio.  The MM80 invests 80% for growth and 20% for income (hence the 80), and uses Multiple Managers (hence the MM) in the allocation. Since I’m 20+ years from retirement and have a moderately aggressive personal risk tolerance, I feel it’s appropriate for my financial goals.

FFI vs the markets

Along with the last 30 days of performance for my personal investment account, I’ve also mapped the results of quite a few major investment asset classes. This helps us see visually how my account compares to the general volatility of financial markets.

For those not familiar with all the market proxies in my chart, this might help a little:

– Orange represents Small Cap US Stocks

– Yellow represents the Total Bond Market

– Green represents International Stocks

– Light Blue represents Commodities

– Dark Blue represents Real Estate

– Pink represents the S&P 500 (Large Cap US Stocks)

When we look at how all these market proxies have done over the past 30 days, we realize that our portfolios are doing just fine. We’re behind just Large Cap US Stocks and the Total Bond Market, but equal or better than all other major asset classes. Since my particular account is down just less than 2%, I’m not worried at all.

Avoid the Big Drops, Ride Through the Small Ones

FormulaFolios are designed to help us avoid “The Big” losses, not necessarily the small ones. A 2% decline isn’t fun, but it’s a far cry from losing 10%, 20%, or more. As investors, we always need to do our best to remain emotionally strong, in spite of the natural fears we experience when it comes to seeing the value of our money go down (even if just a small percentage).

This patience is really important to investor’s long term success because more often than not, small losses are recovered easily by patient investors. In just the past 12 months, for example, the S&P 500 has dropped 2% or more 9 times (including twice in the past 30 days). Over that 12 month time period the S&P 500 is up approximately 12%, and has reached a new all time high 8 times after these 2% or greater declines.

When our models see major market risk on the horizon they’re designed to move to safer asset classes. It’s not always a perfect science, and no investment model can guarantee against experiencing some risk. At this time the models are cautious about the future, with many parts already moving to more defensive asset classes. Overall though, a few percent correction after years of booming markets, is perfectly natural and nothing to panic about.

Hopefully this post helps all our clients and friends, and especially helps those that are new to our firm feel confident and comfortable with your decision.

Best Regards,

Jason Wenk
Chief Investment Strategist
FormulaFolio Investments, LLC

Protecting Your Retirement Nest Egg

fortune_logo

This article will be featured in an upcoming issue of Fortune Magazine!

As we cruise into the second half of the second decade of the new millennium, American investors in or approaching retirement, find themselves in a pickle. The real threat of future inflation and a faulty economy with a bubble in the markets, will make it increasingly difficult for this generation to live out their freedom years with peace of mind.

In working with clients, the question that should be on everyone’s mind and should be asked of all financial advisors, is “what are you doing to protect my money”. Why are the so called financial professionals telling clients to “hang in there”… “buy this hot fund or that hot fund”. How quickly we forget. We are only a handful of years past the financial crisis that sank markets by nearly 50%. The Great Recession and crisis is behind us, but the slow abnormal economy is lingering. But the stock market, oh no, that is all good. The individual investor has come roaring back and is making money again. Beware! Is the market going to go up forever? Is volatility going to remain low and confidence high forever? NO! The easy money policy of the Fed and the massive quantitative easing programs have put equity prices on a rocket. And the average retiree is falling for the Wall Street lure with no regard to potential consequences.

4 Ideas to Grow and Protect Your Nest Egg

  1. Make steady performance your goal. The goal to investing for retirement should be steady, long-term growth with minimal disruption to a smooth existence. The process of the professional money manager is vastly different than the individual investor when pursuing this goal. The professional automatically makes smart decisions by using a mechanical, rules based approach. The professional know, through experience, that emotion must be avoided.
  1. Use active management and true diversification. It has been proven, time and again, that asset allocation creates investing performance. True diversification does not mean owning 20-25 different mutual funds. It is also not owning 15 stocks instead of 3. Successful diversification is created with a focus on asset class management. Simply, use your mechanical, rules based approach to be in strong asset classes, while avoiding weak asset classes. Active management implies a rebalance when necessary and the avoidance of the “just hang in there” buy and hold mantra. Strive to be active with minimal trading, by managing the asset class mix. The asset class mix should be developed using multiple world-class, institutional style money managers.
  1. Keep it simple. It seems that over the decades the Wall Street Gang has intentionally made the investing landscape more difficult. Retirement investing and accumulation of wealth are simple. It is just not easy. There is a difference. Building a solid investment strategy, at any age, needs to be simple. In a properly built portfolio, with a goal of steady performance, that is truly diversified, need only have 10-20 holdings. Adding more funds, or stocks, or ETFs does not necessarily improve performance and it is certainly not simple. If you keep it simple you will be able to answer two simple questions at any time: 1). What do I have? And 2). How am I doing? In fact, we all live in the technology age and you can implement several automated tools to give you 24/7 information about your financial life. 
  1. Keep costs low (fair). As consumers, we all want good value. I hate being overcharged for anything. But, I also appreciate and want the highest quality, for the fairest price I can find in the marketplace. No matter if you utilize the services of a professional advisor or you do it yourself, you must keep an eye on cost. Competition is fierce and in many instances, the absolute lowest cost may not be the best value. Keep costs fair and expect high value.

So, how well are you doing in these key areas? I know it’s a very forward question, but the truth is many investors are not doing well at all. Sure, the market is roaring and everyone feels elated and excited when they open their account statement. Be careful here.

One tool that we use in our practice is the revolutionary monitoring software, called AssetLock. You probably have not heard of it, as only a select few independent advisory firms across the country have licenses to use it. AssetLock is a proprietary monitoring system that places a floor under your account values and moves higher as your account reaches every new high level. For example, you don’t want, nor can you, afford to lose more the 10% in your IRA. Establish your AssetLock Value 10% below your deposit amount. As the account grows, the value goes up, just like the account value. Thus, protecting gains each and every day. This is not a stop loss or hedging strategy. It is a stop losing strategy, a tool that keeps you emotionally strong by allowing you the peace of mind that a major downward move in the market will not wipe out years of gains.

Get serious about growing and protecting your assets. You worked hard and earned the money, now look for smart ways to keep it.

Diversification…Lesson #2

Iformulafoliosn my last blog post I wrote about diversification and how most individual investors and retail financial advisors and stockbrokers get it WRONG!  I apologize if I upset some of you.   And to the advisors that follow me, you should be ashamed of your “strip mall” firm or Wall Street master that has made you their puppet. (If you missed my previous post, please click here)

Let’s continue your lesson on diversification and asset allocation.  Diversification is a common investing idea people like to say makes sense but few actually practice. Many financial advisors, working for the big Wall Street firms, also claim to provide diversification, but do not. That is a shame; because it is a powerful investing tool and you, the investor, deserve it.

What is true diversification? Let’s first explore what it is not:

  • It is NOT owning a broad ETF or two as a “base” for your portfolio.
  • It is NOT owning seven different mutual funds that track sectors of the stock market.
  • It is NOT holding stocks and letting cash dividends build up before buying more.
  • It is NOT owning 15-20 stocks as opposed to three.

Why do these common practices fail the “diversification” test? It fails because real diversification is owning thousands of stocks, not dozens or even a hundred. Furthermore, true diversification is owning thousands of positions even in non-stock investments, such as fixed income and real estate. Simply, it’s owning the whole market, like an index fund does, and owning the correct mix of asset classes. Studies have proven that 91% of investment performance comes from proper asset allocation. Not from choosing Apple or Microsoft or Home Depot or Lowes. The data also proves that a mechanical, rules-based process of asset class selection outperforms emotional, fundamental “gambling”.

So, why bother? Well, first and foremost, diversification greatly reduces the risk of a single company going under. If you own a lot of one company, probably the company at which you work or a single firm you admire because of its products or its charismatic CEO, well, YOU are taking on quite a lot of risk. Companies do fail. CEOs are often overvalued investors, who buy into the myth of their power over the market. Things do go wrong, and it can quickly take your retirement down. But diversification also protects you from yourself. Sorry to call your ego out here, but human nature crashes many retirement dreams. If you own 5,000 companies in a broad ETF, allocating to a pre-determined asset class, it won’t matter if 10 companies fail or even if 100 fail. The successes of some other group within that asset class will more than compensate.

Likewise, you shouldn’t own two pages of mutual funds on the assumption that a variety of managers will protect you from problems, or the next market correction. I recently was reviewing a portfolio from a well know advisory firm. The big brokerage firm you see in every local strip mall, between Little Caesar’s Pizza and the Nail Salon. The statement was easy to read and showed a list of over 25 mutual funds. The problem: when the funds selected are all trying to beat the same benchmark, you haven’t diversified at all. That portfolio overlap and redundancy is an express route to major retirement failure. In addition, the client was paying their high shopping center rent via hidden fees and a cookie cutter approach to investment management.

Owning all those mutual funds and then spritzing in one or two ETFs isn’t the answer either. Buying an index fund or index style ETF with a small slice of your portfolio is just lipstick on a pig. It may make you feel better about the big risk and big fees you are paying.

True Diversification

So, what is it? It is about owning whole markets (classes) through broad index funds or ETFs. And it’s owning the proper mix of those funds across multiple asset classes, including stocks, fixed income, real estate, foreign investments and commodities. It is rebalancing dutifully among those funds as the markets gyrate up and down with opportunities to sell high and buy low. That way, you stay diversified even as changes in the market distort your original portfolio allocations.

It’s really simple, perhaps 10 or 12 index funds across six or eight asset classes. That is top-notch diversification and, ultimately, better performance.  If you would like more information on how we build client portfolios and protect them with AssetLock, call our office today. 678-218-5925.

So You Think You Have a Diversified Portfolio? Think Again…

pie chartIn meeting with folks every week, I can state with quite certainty that few individual investors truly understand what it means to have a diversified portfolio. Most believe that owning 20-50 stocks, or a few mutual funds, means that they are diversified. But they are dead wrong. “Dead” because without being properly diversified, in extreme market situations, a portfolio can permanently lose capital and never recover. This problem will only reveal itself when the market experiences increased volatility and is in the grasp of a bear market cycle.  (So, you feel pretty diversified right now because the market is flying high.)

Those who owned a “diversified” portfolio of technology stocks in early 2000 when the Nasdaq reach 5000, have never recovered. Neither have those who held a “diversified” portfolio of financial stocks going into 2008.

Proper diversification is about managing risk — making sure that when the markets are down, you lose as little as possible, and when they are up, that you recover and capture your fair share of returns. Being well diversified is the “only free lunch” in finance because using methods from proven and scientific knowledge about investing, you can dramatically lower risk without suffering a reduction in returns … and it really is free!

Just like following a prized recipe, the ingredients of diversification are simple to acquire, but rarely followed. Here are three tests to make sure you have a truly diversified portfolio.

Asset Classes. A well-diversified portfolio is not about US stocks — it includes at least six asset classes. You should have at least 5% of your portfolio—but no more than 30% — in all six core asset classes: U.S. and foreign developed countries (Europe, Japan, Asia), emerging-market countries (Brazil, Russia, India China) bonds, real estate and commodities.

Like each instrument in a symphony orchestra, each one of these asset classes plays a valuable role in different economic circumstances. US Treasury bonds protect against economic meltdowns like the one experienced in 2008, but they lose value from inflation and slow down overall portfolio growth. Real estate hedges against inflation, provides a steady income stream, and can appreciate like stocks, but it is not immune to economic cycles. How much to invest in each asset class differs depending upon your stage in life — but everyone should have all six. A retiree seeking income, may have 80% of his portfolio in bonds, but also own global equities as an inflation hedge.

The term asset class is widely misunderstood. Industries and sectors are not asset classes. Economic sectors (technology, utilities, financials, basic materials, or consumer durables) are not asset classes. Nor are the industries within a sector. The software, communication equipment and computer hardware industries are within the technology sector. For U.S. investors, foreign countries are not asset classes.

Number of Securities. Within each asset class, diversified means you must own hundreds of stocks or bonds to reap the returns of that asset class. You do not want any individual company or country (besides the U.S.) to have an impact on your portfolio. A typical MarketRiders portfolio includes over 6000 stocks and 3000 bonds.

For example, if you want exposure to emerging markets, owning 20 stocks from a few different countries won’t do it. Owning a China fund like iShares FTSE China 25 Index Fund (FXI) is not enough diversification. But Vanguard’s Emerging Markets ETF (VWO) allows you to own over 900 companies in 28 countries, giving you fantastic diversified exposure. You are riding entire economies of many countries without worrying about getting hurt by an individual business within them. Sure, you’ll miss the joyride you get owning an Apple (AAPL), but you will also miss the dread when a company like Citibank (C) loses 80% of it’s value.

Funds, Not Stocks. It is nearly impossible to be well diversified owning individual stocks. Trading costs and the software required to own the necessary number of stocks required are beyond the reach of individual investors. So you must own funds.

Actively managed mutual funds have wide discretion in how they can invest. Most funds can invest 10%-25% outside of their “advertised” charter. You could invest in a Foreign Developed country fund and find that a large percentage of your investment is in the U.S. You can’t manage your allocation when your managers don’t have to stick to their charter. It would be like having your guitar player suddenly decide to start playing a flute.

Owning ETFs gives you razor-sharp precision in your allocations. If you own, for example, the iShares Small Cap US Stock ETF (IJR) you won’t find foreign stocks in that holding. And ETFs are dirt cheap — our portfolios are built solely with ETFs and have an average expense ratio of .2% which is an average of 80% less than a mutual fund portfolio. Cheap and precise … how do you beat that?

Look under the hood of your portfolio. Do you own over 10,000 securities? Are your funds overlapping, giving you double or triple ownership in the same stocks? Is your money spread all over the world, in all sectors, all industries, and in all kinds of debt? If not, you are missing that free lunch, and during the market correction and next recession, you will feel it way more than those of us who have taken true diversification to heart.

If you are serious about your money, we are serious about helping you reach your goals.  Please contact our office NOW and allow us to help you get truly diversified.  If you have any doubt, give us a shout!

Regards,

Phil Calandra