Over the past few weeks we listed the components for creating a strategy; now is the time to actually write one. The purpose is to keep us on track to build wealth and attain our financial goals and dreams.
It can be as simple or complex as you need it to be. It's YOUR road map.
You may revise it as life moves along.
Below, is an example I found on the Internet. It is very simple and will give you an idea of how to construct yours. Start simply, you may always add to it, and most importantly, PUT IT IN WRITING. It will be your guide to the future. Without a map, who knows where you may land!
If you need some help, feel free to send me an email.
Be $ Smart - Review the previous steps to create your own investment strategy to build wealth and ensure a financially secure future.
Sample Investment Strategy
OBJECTIVE:
Save $1,000,000 for retirement, adjusted for inflation.
CONSTRAINTS:
30 year horizon.
Moderate tolerance for market volatility and loss, no tolerance for nontraditional risk.
Current portfolio value, $50,000.
Monthly net income of $4,000, monthly expenses of $3,000.
Consider the effect of taxes on returns.
SAVING OR SPENDING TARGET:
Willing to contribute $5,000 in the first year.
Intention to raise the contribution by $500 per year to a maximum of $10,000 annually.
ASSET ALLOCATION TARGET:
70% allocated to diversified stock funds, 30% allocated to diversified bond funds.
Allocation to foreign investments as appropriate.
REBALANCING METHODOLOGY:
Rebalance annually.
MONITORING AND EVALUATION:
Periodically evaluate current portfolio value relative to savings target, return expectations, and long-term objective.
Adjust as needed.
Friday, February 26, 2016
Creating an Investment Strategy - Part 2
Last week we took the initial steps in developing an investment strategy. Did you write them down? Putting things in writing (goals, promises, commitments) adds a dimension, a connection to the universe that helps propel you forward.
As you build your strategy here are some steps to follow:
1. State your investment goals and objectives clearly.
(some goals might be retirement, new home, kids education, second home, world travel, build wealth.)
2. Determine your time horizon.
(next year, in five years, 10 years? Time helps gauge the amount of risk.)
For multiple goals you may have multiple time frames.
3. Describe your return expectations.
(low risk = low return, high risk brings higher potential for both gain/loss.)
4. Detail the level of risk you are willing to take.
(I call this the "sleep factor" - how much money must I keep absolutely safe in order to sleep at night. Set that money aside in safe investments: CD's, U.S. Treasuries, stable value funds, and invest the rest accordingly.)
5. Assess your liquidity needs.
(how much cash must you be able to get at any given time.)
This keeps you from selling investments at the wrong time.
6. Decide who will monitor your portfolio?
(you, a broker, a money manager?)
7. Include a schedule for rebalancing your asset allocation ( mixture of stocks, bonds, cash, alternatives) - quarterly, annually?
Each component will grow at a different rate; rebalancing brings them back to your original proportions.
Be $ Smart - follow the steps, write them down, create your strategy, build your wealth.
Next time we will view a sample investment strategy.
As you build your strategy here are some steps to follow:
1. State your investment goals and objectives clearly.
(some goals might be retirement, new home, kids education, second home, world travel, build wealth.)
2. Determine your time horizon.
(next year, in five years, 10 years? Time helps gauge the amount of risk.)
For multiple goals you may have multiple time frames.
3. Describe your return expectations.
(low risk = low return, high risk brings higher potential for both gain/loss.)
4. Detail the level of risk you are willing to take.
(I call this the "sleep factor" - how much money must I keep absolutely safe in order to sleep at night. Set that money aside in safe investments: CD's, U.S. Treasuries, stable value funds, and invest the rest accordingly.)
5. Assess your liquidity needs.
(how much cash must you be able to get at any given time.)
This keeps you from selling investments at the wrong time.
6. Decide who will monitor your portfolio?
(you, a broker, a money manager?)
7. Include a schedule for rebalancing your asset allocation ( mixture of stocks, bonds, cash, alternatives) - quarterly, annually?
Each component will grow at a different rate; rebalancing brings them back to your original proportions.
Be $ Smart - follow the steps, write them down, create your strategy, build your wealth.
Next time we will view a sample investment strategy.
Creating an Investment Strategy - Part 1
When I wrote about market volatility last week, I mentioned "sticking with your investment strategy". Most folks never heard of an investment strategy and many financial advisers have neglected to develop one with their clients.
Let's review what is involved in building that strategy.
An Investment Strategy is your written statement that lists measurable goals and hopefully, shows repeatable results:
1. You must be able to assess and state your tolerance for risk (how much money you are willing to lose for potential gain?).
2. Determine your rules for buying and selling (both stocks and bonds).
Will it be decided by a certain percentage up or down? Will it be a target price? Having a rule removes emotion and allows you to act decisively.
3. Make provision for transaction costs( both commissions and fees).
Will you pay a fee for AUM (assets under management - anywhere from 1% to 2.75%) or will you pay straight commission for each buy/sell transaction? Or will you use a wrap fee that includes all?
4. Decide your preference for passive index funds (which may minimize taxes) or actively managed funds.
Passive funds pick a benchmark and rarely change the holdings whereas an actively managed fund has a manager or team who buys and sells at their discretion towards a stated objective.
5. Choose a Benchmark for comparison and measurement.
In order to measure the performance of your portfolio you must have something to measure it against. You may choose the S&P 500, the top 500 U.S. companies, the Dow Jones Industrial Average, the top 30 domestic companies or some other way to compare and measure how well or poorly your portfolio is performing.
Be $ Smart - with a written Investment Strategy you create the playbook to manage volatile markets.
Let me know if you need help writing your Investment Strategy. I'd be happy to offer guidance. Part 2 next week.
Let's review what is involved in building that strategy.
An Investment Strategy is your written statement that lists measurable goals and hopefully, shows repeatable results:
1. You must be able to assess and state your tolerance for risk (how much money you are willing to lose for potential gain?).
2. Determine your rules for buying and selling (both stocks and bonds).
Will it be decided by a certain percentage up or down? Will it be a target price? Having a rule removes emotion and allows you to act decisively.
3. Make provision for transaction costs( both commissions and fees).
Will you pay a fee for AUM (assets under management - anywhere from 1% to 2.75%) or will you pay straight commission for each buy/sell transaction? Or will you use a wrap fee that includes all?
4. Decide your preference for passive index funds (which may minimize taxes) or actively managed funds.
Passive funds pick a benchmark and rarely change the holdings whereas an actively managed fund has a manager or team who buys and sells at their discretion towards a stated objective.
5. Choose a Benchmark for comparison and measurement.
In order to measure the performance of your portfolio you must have something to measure it against. You may choose the S&P 500, the top 500 U.S. companies, the Dow Jones Industrial Average, the top 30 domestic companies or some other way to compare and measure how well or poorly your portfolio is performing.
Be $ Smart - with a written Investment Strategy you create the playbook to manage volatile markets.
Let me know if you need help writing your Investment Strategy. I'd be happy to offer guidance. Part 2 next week.
Monday, January 25, 2016
Riding the Roller Coaster
I have never been a fan of roller coasters; I consider them torture. Yet my older son can spend an entire day riding them - the higher, twistier, upside-down/inside-out, the better! But even he is not enjoying the volatile ride the markets have been taking these past few weeks and months.
Some folks view roller coasters as frightening.
Some find them exhilarating. How do you react to market volatility?
I will assume you have some money invested in the stock/bond/commodity markets. Maybe you have a 401k through work, an IRA or a 529 plan that holds a variety of funds.
Hold on tight, close your eyes, go for the ride!
1. DO NOT, repeat Do Not watch the TV constantly monitoring the daily market moves. We all know TV sensationalizes events.
2. Do Not check your accounts hourly, daily or weekly. This breeds dread, confusion and despair. Reviewing quarterly reports will suffice.
3. Take advantage of the opportunity to buy low if this is part of your investment strategy to increase certain positions. Yes, stocks may go a bit lower but they are way down from frothy highs. Remember "buy low, sell high".
4. Reassess your risk tolerance. Have you been anxious, upset and losing sleep these past few weeks? Perhaps you thought you could handle more risk. Or maybe you are closer to retirement or buying a house and feel the need to be more protective of your money. Give yourself some time before reallocating.
5. Hopefully you have an investment strategy, If so, stick with it. If not, now is not the time to implement one.
A good investment strategy will help you ride out the peaks and valleys of the market and provide guidance in achieving your financial goals.
In times like these it is helpful to remember, in order to generate the type of long-term returns that create wealth, you must accept a certain amount of risk. With that risk comes volatility. The key is not to take steps to avoid the risk altogether, but to manage the risk where possible.
Be $ Smart - Imagine the market as a living, breathing organism. It cannot inhale or exhale indefinitely. Have a plan to take advantage of market moves.
Some folks view roller coasters as frightening.
Some find them exhilarating. How do you react to market volatility?
I will assume you have some money invested in the stock/bond/commodity markets. Maybe you have a 401k through work, an IRA or a 529 plan that holds a variety of funds.
Hold on tight, close your eyes, go for the ride!
1. DO NOT, repeat Do Not watch the TV constantly monitoring the daily market moves. We all know TV sensationalizes events.
2. Do Not check your accounts hourly, daily or weekly. This breeds dread, confusion and despair. Reviewing quarterly reports will suffice.
3. Take advantage of the opportunity to buy low if this is part of your investment strategy to increase certain positions. Yes, stocks may go a bit lower but they are way down from frothy highs. Remember "buy low, sell high".
4. Reassess your risk tolerance. Have you been anxious, upset and losing sleep these past few weeks? Perhaps you thought you could handle more risk. Or maybe you are closer to retirement or buying a house and feel the need to be more protective of your money. Give yourself some time before reallocating.
5. Hopefully you have an investment strategy, If so, stick with it. If not, now is not the time to implement one.
A good investment strategy will help you ride out the peaks and valleys of the market and provide guidance in achieving your financial goals.
In times like these it is helpful to remember, in order to generate the type of long-term returns that create wealth, you must accept a certain amount of risk. With that risk comes volatility. The key is not to take steps to avoid the risk altogether, but to manage the risk where possible.
Be $ Smart - Imagine the market as a living, breathing organism. It cannot inhale or exhale indefinitely. Have a plan to take advantage of market moves.
Thursday, January 21, 2016
With the New Year Comes a New Set of Numbers
Every January brings updates from the IRS and Social Security. It helps to know those numbers relative to your cash flow and tax situation. I'll mention a few for you to consider:
Social Security cost of living increase for 2016............$0
The government deemed there was no inflation in 2015, so no increase in monthly payouts.
Kiddie tax amount (children under 19 and dependent full time students under .............................................$1,050
This pertains to investment income not earned income.
Social Security earning base.......................$118,000
You must earn over $118,000 before your employer stops deducting SS taxes.
Social Security earnings limit......................$15,720
Maximum earned income under Normal Retirement Age 66.
Annual Gift Exclusion...............................$14,000
You may gift $14,000 to any number of individuals and not pay a gift tax.
401(k), SEP, TSA maximum contribution...............$18,000
Catch up for those over 50...........................$1,000
Make sure you contact HR to increase your contribution to reach the max. Contributions may lower your taxable income for the year.
Contribution limit for IRA's........................$5,500
Catch up for those over 50 .........................$1,000
If you turn 50 any time during 2016, you may contribute $6,500 max.
If you can't contribute the maximum, contribute something!
Health Savings Account contribution:
Single.....................................................$3,350
Family.....................................................$6,750
Catch up for those over 50 .........................$1,000
Since you are not required to spend down an HSA at the end of each year, this is a good way to grow retirement savings.
These are just a few numbers that may have meaning for you. Consult your tax person to determine which apply to you and to learn additional tax ways reduce your tax bill.
Be $ Smart - Take advantage of all opportunities to save on taxes, especially those that grow tax-deferred.
Social Security cost of living increase for 2016............$0
The government deemed there was no inflation in 2015, so no increase in monthly payouts.
Kiddie tax amount (children under 19 and dependent full time students under .............................................$1,050
This pertains to investment income not earned income.
Social Security earning base.......................$118,000
You must earn over $118,000 before your employer stops deducting SS taxes.
Social Security earnings limit......................$15,720
Maximum earned income under Normal Retirement Age 66.
Annual Gift Exclusion...............................$14,000
You may gift $14,000 to any number of individuals and not pay a gift tax.
401(k), SEP, TSA maximum contribution...............$18,000
Catch up for those over 50...........................$1,000
Make sure you contact HR to increase your contribution to reach the max. Contributions may lower your taxable income for the year.
Contribution limit for IRA's........................$5,500
Catch up for those over 50 .........................$1,000
If you turn 50 any time during 2016, you may contribute $6,500 max.
If you can't contribute the maximum, contribute something!
Health Savings Account contribution:
Single.....................................................$3,350
Family.....................................................$6,750
Catch up for those over 50 .........................$1,000
Since you are not required to spend down an HSA at the end of each year, this is a good way to grow retirement savings.
These are just a few numbers that may have meaning for you. Consult your tax person to determine which apply to you and to learn additional tax ways reduce your tax bill.
Be $ Smart - Take advantage of all opportunities to save on taxes, especially those that grow tax-deferred.
Be Aware of the Kiddie Tax
Did you know that account earnings for minors - children under 18 - may have tax consequences known as the Kiddie Tax? (Full time students up to age 24 may qualify.)
In 1986 the IRS passed the Kiddie Tax to prevent adults from stashing money in their children's accounts to take advantage of the lower tax rate applied to children's earnings.
Children's unearned income - dividends, interest and capital gains - under $1050 (for 2016) is tax free. The next $1050 of unearned income pays a very low rate but any unearned income over $2100 gets taxed at the parents' rate!
The rule applies to taxable investment income not to earned income from a job. Owning stocks that don't pay dividends or tax-exempt municipal bonds, avoids this issue.
If you plan to fund an education account for a niece, nephew, grandchild or friend, a 529 plan will grow tax-deferred and money distributed tax-free for higher education. Funding an UGMA (unified gift to minors account) has the potential of producing taxable income. Plan to have a conversation with the youngster's parents beforehand to determine which account would be suitable.
Be $ Smart - Consult your tax adviser to learn if your child's accounts may be subject to the Kiddie Tax.
In 1986 the IRS passed the Kiddie Tax to prevent adults from stashing money in their children's accounts to take advantage of the lower tax rate applied to children's earnings.
Children's unearned income - dividends, interest and capital gains - under $1050 (for 2016) is tax free. The next $1050 of unearned income pays a very low rate but any unearned income over $2100 gets taxed at the parents' rate!
The rule applies to taxable investment income not to earned income from a job. Owning stocks that don't pay dividends or tax-exempt municipal bonds, avoids this issue.
If you plan to fund an education account for a niece, nephew, grandchild or friend, a 529 plan will grow tax-deferred and money distributed tax-free for higher education. Funding an UGMA (unified gift to minors account) has the potential of producing taxable income. Plan to have a conversation with the youngster's parents beforehand to determine which account would be suitable.
Be $ Smart - Consult your tax adviser to learn if your child's accounts may be subject to the Kiddie Tax.
Thursday, December 24, 2015
Give Wisely
'Tis the season for giving. I'm sure your mailbox is brimming with catalogs and donation requests. In addition to Black Friday and Cyber Monday we now have Giving Tuesday. Americans have been known for their generosity thus creating the opportunity for fraud.
Here are a few tips to help you give wisely:
- Have a "giving strategy" the same way you have a spending plan and a saving plan. Calculate how much you'd like to spend in charitable giving annually and stick to that number. This way you won't be tempted by every appealing pitch that comes your way.
- Give intentionally - Know what causes are dear to your heart - the poor, the homeless, ill children, abandoned pets, the rain forest, human rights, etc. Give with your heart to support what rings true.
My favorite is Habitat for Humanity, "give a hand not a handout", requiring sweat equity and offering an interest free mortgage.
- Vet the charity - Go online to see how much money actually goes to the stated mission and how much is spent on fund raising and administration.
Use online sites like Give.org, Charitynavigator.org or Charitywatch.org to;
1. confirm their 503(c) status,
2. review executive compensation, and
3. obtain financial records
This information will determine if those charities are worthy of your hard earned dollars.
- Personal fulfillment - Realize how giving makes you feel and acknowledge your ability to make a difference. Don't give out of obligation.
Years ago I had a very wealthy client who lived off her family trust. She diligently gave 10% annually to several charities "because that was what was expected". She had no idea what these charities supported!
I encouraged her to reevaluate her giving. She was an aspiring artist and chose to create a scholarship at a local art school. She gained tremendous satisfaction in supporting a struggling art student.
Be $ Smart - use your head to give with your heart.
Here are a few tips to help you give wisely:
- Have a "giving strategy" the same way you have a spending plan and a saving plan. Calculate how much you'd like to spend in charitable giving annually and stick to that number. This way you won't be tempted by every appealing pitch that comes your way.
- Give intentionally - Know what causes are dear to your heart - the poor, the homeless, ill children, abandoned pets, the rain forest, human rights, etc. Give with your heart to support what rings true.
My favorite is Habitat for Humanity, "give a hand not a handout", requiring sweat equity and offering an interest free mortgage.
- Vet the charity - Go online to see how much money actually goes to the stated mission and how much is spent on fund raising and administration.
Use online sites like Give.org, Charitynavigator.org or Charitywatch.org to;
1. confirm their 503(c) status,
2. review executive compensation, and
3. obtain financial records
This information will determine if those charities are worthy of your hard earned dollars.
- Personal fulfillment - Realize how giving makes you feel and acknowledge your ability to make a difference. Don't give out of obligation.
Years ago I had a very wealthy client who lived off her family trust. She diligently gave 10% annually to several charities "because that was what was expected". She had no idea what these charities supported!
I encouraged her to reevaluate her giving. She was an aspiring artist and chose to create a scholarship at a local art school. She gained tremendous satisfaction in supporting a struggling art student.
Be $ Smart - use your head to give with your heart.
Subscribe to:
Posts (Atom)