How Often Does My Portfolio Need to be Reviewed?

Posted by dfederman on Jul 28, 2011 in Investor Education | Comments Off

You should have your portfolio reviewed if your life circumstances have changed. For example, have you had an increase or decrease in income or expenses? Has your health or marital status changed? Have your goals and objectives changed? How about your attitude toward risk? If any of these things have changed you need to review your asset allocation. If you were told that your allocation was “fine” six months ago, most likely you are still fine. However, in today’s uncertain market and economic environment,  it’s quite possible to have a much different attitude toward risk, or a different job situation, creating a legitimate need to review your portfolio.

If your attitude toward risk has changed, do not feel compelled to take action just for the sake of taking action. Be careful not to make investment decisions out of fear of what will happen. For example, if you’re selling now out of fear that prices will fall, you could be proven wrong, meaning that you will feel compelled to jump back in after prices have risen. Or worse, you may not ever get back in. And there will be tax consequences to consider. As far-fetched as it sounds, we have spoken to quite a few people who sold everything in 2008-2009 and are still 100% in cash, stricken by “paralysis of analysis.” Generally speaking, the gut-reaction emotional response is the worst financial decision. If you cannot handle volatility, consider working with an objective independent investment adviser who does not mix emotions with financial decisions.

To have your portfolio reviewed, contact Ariba at www.aribaasset.com or toll-free at 1-800-808-7488.

Emerging Market Investments

Posted by dfederman on Jul 27, 2011 in Investor Education | Comments Off

Key Points

Characteristics of Emerging Markets

Asia: Profile of an Emerging Market

Emerging Market Capitalization

Lessons From Asia

Risks and Rewards of Emerging Market Investments

Points to Remember

The rapid development of the emerging stock markets, both in terms of size and activities, is one of the most exciting stories in today’s financial markets. These relatively untapped markets promise potentially high long-term investment returns and opportunities to further diversify an investment portfolio.¹

Annual foreign direct investment in emerging markets totaled an estimated $478 billion in 2009, up from $7.5 billion in 1980, according to the United Nations Conference on Trade and Development. Most of this investment has gone to markets in Asia and Latin America, regions that have had rapid economic development over the past decade. In turn, this influx of investment capital has further fueled economic growth in these countries.

Characteristics of Emerging Markets

Emerging markets are those of lesser-developed countries, which are beginning to experience rapid economic growth and liberalization. Examples of emerging market countries include China, India, and Mexico. Generally, these countries are described by a growing population experiencing a substantial increase in living standards and income, rapid economic growth, and a relatively stable currency.

Often, emerging market countries impose strict limits on foreign investment in an attempt to limit foreign ownership of domestic companies. Investors may be prohibited from owning more than a fraction of any one company, and they may also be restricted from repatriating profits from investing activities.

Asia: Profile of an Emerging Market

The potential rewards — and risks — of emerging market investing can be readily seen from the experiences of investors in Asia from late 1997 to 1999.

A major collapse in emerging markets began with Asia in July 1997, when the Thai government was forced to dramatically devalue its currency, the baht, after failing to defend it in the face of a very large currency account deficit, foreign debt, and a government budget shortfall. The result ricocheted throughout Asia as currencies in the Philippines, Malaysia, and Indonesia came under attack from speculators. Meanwhile, financial panic would seep into emerging markets throughout the world, from Latin America to Russia, as financial difficulties surfaced in those nations as well. Despite measures including a “rescue package” directed at Thailand by the International Monetary Fund (IMF), and promises of dramatic economic reform from Indonesia’s government, investor confidence failed to return to most emerging markets until 1999. That’s when signs of economic recovery began to appear in some of the troubled emerging markets, while others were boosted by deals with the IMF to help improve financial and economic conditions.

Lessons From Asia

After the Asia crisis, many investors now realize there’s no “free lunch” on Wall Street — the high return of emerging markets investing comes with high risk, and many factors can trigger trouble. For example, the Thai baht’s collapse began with lack of regulation among Thailand’s real estate companies, causing a host of financial problems for that nation’s government. The banks of both South Korea and Indonesia were practicing unsound lending practices. And in Brazil, a growing federal budget triggered doubts by potential investors that the nation could ever repay its debts.

It’s especially important to note that the fortunes of one nation can increasingly affect those of another, as trading ties become tighter between most nations. As one nation devalues its currency, others may be forced to do so in order to keep their exports competitive, as some nations did when Thailand devalued the baht.

When Asia’s troubled economies cut their oil purchases, energy-producing nations such as Russia and Ecuador also suffered from falling petroleum revenue. Currency risk can present another risk factor for emerging market investors. As the currency exchange rate fluctuates, so does the value of your investment in U.S. dollar terms. Fortunately, many emerging countries have their local currencies pegged to the dollar, which can result in a relatively constant exchange rate.

Risks and Rewards of Emerging Market Investments

Emerging markets can be volatile; therefore, they are considered appropriate only for long-term investors with an investment time frame of 10 or more years.

With such high risk potential, why invest in emerging markets, which are the underlying support for any country’s financial market? One possibility is that emerging economies have the potential to achieve high levels of economic growth. In 2010, for example, emerging economies cumulatively grew approximately 7% while developed economies grew approximately 2%, according to the International Monetary Fund. Consider also that emerging stock markets alone represent only 13% of the capitalization of the world’s equity markets.²

Along with high potential returns, emerging markets also offer potential diversification benefits. Because these markets may not to move in tandem with those of developed countries, they may be rising while other markets are falling. Hence, they may help reduce the overall risk of a portfolio.

Based on these factors, long-term investors may want to consider allocating between 3% and 10% of their stock portfolio to emerging markets, depending on their investment goals and tolerance for risk.³

How to Invest in Emerging Markets

Be aware that emerging markets in general tend to be volatile, sometimes even when no serious problem presents itself in a specific market. Investors in emerging markets are therefore advised to potentially reduce risk through diversification among many different markets, and to maintain a long-term view.

Probably the best way an individual can efficiently invest in emerging markets is through a mutual fund. Emerging market funds concentrate on investments in these markets around the world or in a specific country or region. Some global and international funds may also hold a small percentage of their portfolio in emerging markets.

Also keep in mind that some funds that invest in stocks of emerging market companies may also invest in bonds issued in that country. In general, these funds may contain a greater mix of different types of securities than a domestic fund.

Mutual funds offer the advantage of diversification and professional management. Because emerging market investment management may require extensive and expensive on-site company research, annual fund management expenses associated with these investments may be higher than for other types of mutual funds.

Points to Remember

1. Emerging market investments can offer higher potential returns to long-term investors.
2. Allocating 3% to 10% of your stock portfolio to emerging markets may help add a degree of diversification.³
3. Emerging market investments entail higher political and liquidity risks than domestic investments and, as such, may be more volatile.
4. Currency risks also affect emerging market investments. If the value of the dollar declines against the currency of the emerging market country, your return will be lower. The currencies of some emerging market countries are pegged to the dollar and usually do not fluctuate wildly.
5. Risk can be reduced by holding emerging market investments among different countries and regions of the world.

¹Investors in international securities are sometimes subject to somewhat higher taxation and higher currency risk, as well as less liquidity, compared with investors in domestic securities. Past performance does not guarantee future results.

²Source: S&P Global Broad Market Index, December 31, 2010.

³These allocations are presented only as examples and are not intended as investment advice. Please consult a financial advisor if you have questions about these examples and how they relate to your own financial situation. The investor profile is hypothetical.

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© 2011 McGraw-Hill Financial Communications. All rights reserved.

July 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

What is the Best Method of Taking My Required Minimum Distributions?

Posted by dfederman on Jul 19, 2011 in Investor Education | Comments Off

When deciding on the method of withdrawing your Required Minimum Distributions (RMDs) from an IRA, ask yourself, “Do I need to spend this money today or is this just an administrative hassle for me?” If you KNOW you need to spend the money soon, and if you have no cash reserves set aside, you may want to take it all out at the beginning of the year rather than subject these funds to the risks of the financial markets. Alternatively, you can set up a “systematic withdrawal plan” to withdraw an equal amount each month. Neither strategy is “the right way.” The most important thing is to be consistent. If the RMDs are simply an administrative hassle, the same strategies apply. However, instead of making distributions to a checking or savings account, you may be moving the funds from a Traditional IRA to a brokerage account (and/or subsequently into a Roth IRA) in which the funds will be reinvested in a diversified portfolio.

Typically the brokerage firm that holds your IRA will calculate the amount you need to withdraw. If you are curious to estimate your own RMD, here is an RMD calculator.

Please consult with your tax advisor to determine the most appropriate distribution strategy for tax planning purposes.

For a free review of your personal financial situation, including a portfolio review, contact Ariba at 1-800-808-7488.

What Happens to My Retirement Assets in the Event of a Divorce?

Posted by dfederman on Jul 18, 2011 in Investor Education | Comments Off

Federal law requires that participants in employer-sponsored retirement plans designate their spouse as their beneficiary unless the spouse waives this right in writing. Assuming that you and your spouse adhered to this practice, a document known as a Qualified Domestic Relations Order (QDRO), which is part of a divorce settlement, specifies how retirement assets are divided.

A QDRO specifies the amount or portion of a plan participant’s benefits that are paid to a spouse, former spouse, child, or other party. A QDRO typically governs assets within a retirement plan such as a pension, profit-sharing plan, or a tax-sheltered annuity. Benefits paid to a former spouse typically are considered income for tax purposes. If you contributed to your retirement plan, a prorated share of your investment is used to determine the taxable amount.

Former spouses on the receiving end of a lump-sum distribution mandated by a QDRO may be able to roll over the money tax free to a traditional individual retirement account or to another qualified retirement plan. Following such a transfer, assets within the plan are subject to rules that would normally apply to the retirement plan. If you transfer assets within a traditional IRA to your spouse as part of a divorce decree, the transfer is not considered taxable and the assets are treated as your former spouse’s IRA.

Procedural Issues

QDROs are governed by rules established by the U.S. Department of Labor. In most instances, a judge must formally issue a judgment or approve a settlement agreement before it is considered a QDRO. The fact that you and your soon-to-be-former spouse have signed an agreement is not adequate for a QDRO to take effect. Also, following an order issued by a judge, the administrator of the retirement plan affected by the QDRO must determine whether the court order qualifies as a QDRO according to the rules of the labor department.

Note that retirement assets are part of a broader financial picture that may include your home, taxable investments, personal property, and other assets. It is not mandated that your spouse receive a portion of your retirement assets in the event of a divorce. You and your spouse may negotiate another type of arrangement that permits you to retain your retirement assets while granting other assets to your spouse. In addition, a prenuptial agreement, depending on its provisions, could potentially limit your spouse’s rights to your assets.

You may want to consult a divorce lawyer and your financial advisor to determine whether federal laws relating to retirement accounts apply to your situation.

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© 2011 McGraw-Hill Financial Communications. All rights reserved.

July 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP^®, a local member of FPA.

Things to Consider When Answering the Question: “I am getting worried. . .should I sell?”

Posted by dfederman on Jul 15, 2011 in Investor Education | Comments Off

Personal Financial Circumstances – Do you have adequate cash reserves? Are you still working? Do you depend on your investments for income?
Asset Allocation - If you’re entirely invested in stocks or real estate, with little or no cash reserves, you are exposed to market risk and may not have the liquidity you need. Consider adjusting your asset allocation.
Stock Market - The stock market moves fast. As an example, between June 1st and 23rd, 2011, the Dow Jones Industrial Average fell 5.5%, then rebounded 4.5% in the last week; most of the move occurring in 4 consecutive trading days. Stocks are supposed to be long-term in nature. Today’s news story of the day should not have an impact on your investment decisions for a 10+ year time horizon.
Behavior - Investor Behavior (not investment returns) is the #1 Most Important factor in lifetime investment outcomes. . .It is human nature to want to sell when fearful and want to buy when “greedy.” If properly diversified, it is better to stay the course, avoid big bets, maintain proper allocation according to your personal needs, goals, and risk tolerance, and rebalance as needed.