2012 08 Smart Money Insights Newsletter
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2012 08 Smart Money Insights Newsletter

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In this month's edition of the Smart Money Insights Newsletter prepared by Boston-area Clear View Wealth Advisors and Steve Stanganelli, CFP(R), we provide investing tips for 529 College Savings ...

In this month's edition of the Smart Money Insights Newsletter prepared by Boston-area Clear View Wealth Advisors and Steve Stanganelli, CFP(R), we provide investing tips for 529 College Savings Plans, discuss Social Security and Stretch IRA Strategies for Retirement and offer insights into asset allocation and inflation data.

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2012 08 Smart Money Insights Newsletter Document Transcript

  • 1. Smart Money InsightsAugust 2012 Vol. No. 1 Investment Updates more conservative as your child nears college age. ButFind the Right Stock/Bond Mix for its important to conduct due diligence on an age- based plan beforehand. And if your 529 plans age-College Savings based options are dramatically out of whack with industry averages, thats a red flag to look for another 529 plan, create your own age-appropriate portfolio When it comes to selecting specific investments for a using individual funds, or supplement the age-based college portfolio, asset allocation is every bit as crucial, plan with individual stock, bond, or cash holdings. if not more so, than it is for retirement savers. Retirees can delay retirement or work part-time longer if their Government bonds and Treasury bills are guaranteed retirement portfolios come up short. Most young by the full faith and credit of the U.S. government as people, on the other hand, want to go to college right to the timely payment of principal and interest, while after high school, making the target date for a college stocks are not guaranteed and have been more volatile fund much more specific. (The target date is the than bonds. Diversification does not eliminate the risk approximate date when investors plan to start of experiencing investment losses. 529 plans are tax- withdrawing their money for college.) As it takes most deferred college savings vehicles. Any unqualified students only four to five years to get through college, distribution of earnings will be subject to ordinary a college funds drop in value during high school or income tax and subject to a 10% federal penalty tax. early college years can be catastrophic. The principal value of such funds is not guaranteed at any time, including at the target date. A healthy share of the assets flowing into 529 plans is now directed toward age-based options. Much like target-date mutual funds, age-based options contain a mix of stocks, bonds, and cash, and grow progressively Personal Note from Steve Stanganelli My Core Values and value having a reliable Let’s make a plan together to second opinion or need help improve your bottom line. I strive to run my practice and my getting on track, then I look life on the core principles best forward to being a part of your summed up in Don Miguel Ruizs team. The Four Agreements: I want to help you make sense of Be Impeccable with Your Word your money. Dont Take Anything Personally Steve Stanganelli, MSF, CFP® Dont Make Assumptions Please call me and we can set up Fee Only Planner & Tax Coach Always Do Your Best a time for a no pressure chat to steve@clearviewwealthadvisors.com explore the ways that we may be 978-388-0020 If you are like me and appreciate able to work together. www.ClearViewWealthAdvisors.com this approach to life and business
  • 2. Clear View Wealth Advisors LLC Investment Updates August 2012 2 ensure a profitable outcome and investing in securitiesKeeping It Real always involves risk of loss. The rates used in the analysis and their corresponding compound annual growth rates are the consumer price index for: all urban consumers (CPI-U) (3.1%), medical care (5.4%), and college tuition and fees (7.4%). Inflation has averaged 3.1% over the last 30 years. This might not seem like much, but this reported figure only tracks total goods and services purchased by the typical consumer. This is a good measure for the economy at large, but it may not be representative for individuals whose lifestyles and buying habits differ from the typical consumer. Goal-based investors may experience higher inflation. People who need to focus on savings for college or medical care may be left short, as the cost for such items often tends to rise at a faster rate than the average cost of living. Those investors might not be able to keep pace with rising costs if they do not take their real inflation rate into account when planning their investment goals. The image illustrates the effect of three types of inflation on an investment of $1,000 in stocks and bonds: overall U.S. inflation, medical-care inflation, and college inflation. After 30 years, inflation has considerably reduced the wealth of the original investment. For example, the $1,000 invested in stocks and bonds only grew to $9,198 and $9,325, respectively, after adjusting for U.S. inflation. Alas, even more bad news for a family with children or a baby boomer nearing retirement. Further, of the two asset classes considered, bonds provided more growth after inflation, which is unusual. Investors wishing to keep pace with inflation would typically consider a larger allocation to stocks or explore other investments that protect against inflation. However, due to the two major crises and associated stock market declines experienced during the “lost decade,” stocks performed more weakly than bonds. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than bonds. Holding a portfolio of securities for the long term does not
  • 3. Clear View Wealth Advisors LLC Investment Updates August 2012 3 any capital gains distributions. International bonds areMixed Income not guaranteed. International investments involve special risks such as fluctuations in currency, foreign taxation, economic and political risks, and differences in accounting and financial standards. Fixed-income performance reversals are common: It is extremely difficult to predict which category of bonds will be the best or worst performer in any given year. The performance of any fixed-income investment can have drastic periodic changes. Investors could potentially diminish their returns by attempting to follow last year’s winner. Furthermore, investors who have an asset allocation policy consisting of different asset classes such as stocks and bonds may still not be diversified. Therefore, branching out within each asset class may further lessen overall portfolio risk. Diversified bond funds might alleviate portfolio volatility: The image illustrates the performance of various fixed-income instruments in relation to one another from 2002 to 2011. The data shows it is impossible to predict the winners for any given year. For example, high-yield corporate bonds were the worst performers in 2007 and 2008, but rose to become the best-performing investment in 2009 and 2010. While aggregate bonds have never been the top performer in any of the years examined, their performance has remained fairly consistent, with minimal swings when compared with other categories such as long-term and international bonds. It can be beneficial to hold a fund that is diversified across several types of bonds. This might reduce portfolio risk while allowing for more consistent performance over time. Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. Diversification does not eliminate the risk of experiencing investment losses. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest. With corporate bonds, an investor is a creditor of the corporation and the bond is subject to default risk. High-yield corporate bonds exhibit significantly more risk of default than investment grade corporate bonds. Municipal bonds may be subject to the alternative minimum tax (AMT) and state and local taxes, and federal taxes would apply to
  • 4. Clear View Wealth Advisors LLC Investment Updates August 2012 4Retirement Income Sources Concerns about shortfalls in traditional retirement income sources like Social Security and pension plans have caused people to expect to rely more heavily on personal savings to fund their retirement. The graph illustrates that while only 50% of current retirees utilize their personal savings for retirement income, 65% of current workers anticipate personal savings to play a role during retirement. Further, 73% of workers expect to receive retirement income from an employer- sponsored retirement savings plan, while only 51% of those already retired actually receive income from such a source. It may be a good idea to plan for a diminished reliance on Social Security or a pension plan. Whatever extra funds you save by taking this more conservative view will make retirement all the more enjoyable. in your IRA, be sure they are transferred properly.Stretching an IRA When you pass on, providing certain conditions are met, each beneficiary who elects to go with a stretch strategy will have a range of options to choose from—depending upon your age at death (and Many retirees depend on their individual retirement whether or not you have begun to take required accounts to fund living expenses during their golden minimum distributions from the IRA) and whether a years. However, there are retirees who find themselves spousal or non-spousal beneficiary is involved. If you in the enviable position of having no need to withdraw happen to be named a beneficiary and choose to from their IRAs. If you are fortunate enough to be in implement a stretch strategy, be sure you know what this camp, or if you are fairly confident that you will comes next. In some cases you may be able to keep the have plenty of money left in your account when you assets growing on a tax-deferred basis while in other leave this world (even after taking required cases distributions will need to be taken soon. Because distributions), you will want to make sure you preserve of the many rules, it is highly advisable that you speak as much of your IRA assets as possible for future with a financial advisor or tax professional when it generations. You can accomplish this by implementing comes to stretch strategies. a stretch strategy. The first step in setting up a stretch IRA strategy is to simply name one or more beneficiaries. If you are married, your spouse can serve as your primary beneficiary while your children or even grandchildren can serve as your secondary beneficiaries. You can also name others as beneficiaries, such as family members or friends. You worked hard to accumulate the funds
  • 5. Clear View Wealth Advisors LLC Investment Updates August 2012 5 Time Horizon: Time horizon is the length of timeThe Asset Allocation Puzzle your portfolio will remain invested before withdrawals need to be taken. If your average investment horizon is fairly short, you will most likely want a more conservative portfolio—a portfolio with returns that do not fluctuate too much. If your investment time Possessing a considerable amount of knowledge about horizon is longer, you can most likely invest more stocks, bonds, and cash is only a small part of the aggressively. investment planning process. Many investors are under the false notion that the greatest determinant of Risk Tolerance: Everyone has a different emotional portfolio performance is the specific investment reaction to sudden changes in their portfolio value. choices that they make. In reality, the biggest decision Some people have trouble sleeping at night because you will make is how much to allocate to different they are too busy worrying about how their portfolio is investment categories. Asset allocation is all about performing. Other investors are unfazed by finding the mix of investments that is right for your fluctuations in the market and can endure the situation. Goals, time horizon, and risk tolerance are uncertainty associated with more risky investments. some of the key factors that should be taken into consideration when allocating assets. As you can see, the asset allocation decision is not an easy one and it may be best to work with an Goals: Determining what asset allocation is investment advisor who can piece together a plan that appropriate depends largely on the goals you seek to is right for you. achieve. Are you saving for retirement, college education for your children, or a vacation home? Each goal must be considered in creating the appropriate asset mix. ©2012 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or the content providers; (3) is not warranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. "Morningstar" and the Morningstar logo are registered trademarks of Morningstar, Inc. Morningstar Market Commentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder. Steve Stanganelli, MSF, CFP® Clear View Wealth Advisors LLC steve@clearviewwealthadvisors.com Tel:978-388-0020 Fee Only Planner & Tax Coach 12 Amidon Avenue www.ClearViewWealthAdvisors.com Amesbury, Massachusetts 01913