Joe's Thoughts

I had said I would post on rebalancing and I realized I didn’t write about having a balanced portfolio for savings. I know what you are thinking “portfolio” ha, I can barely save, never mind have a portfolio. Well if you have a job, and that job offers you a 401K, then you should be putting at least 2% of your income into it. There is a good likelihood your employer matches up to 3%, so you should be putting at least 3% away then. Why give away 3% of your pay every year? Because that’s what you are doing if you aren’t getting that employer match.

When you save in a tax deferred account, the government gives you at least 15% tax break toward that saving. Whether it’s in an IRA or 401K. If you are married and both making average US salaries, then you get 25% toward that saving. So for every $100 you put in, you only have a $75 reduction in your take home pay or a $25 reduction in your taxes due if an IRA. Your taxable income is reduced by every dollar you put into your IRA or 401K. Also the employer match is tax deferred too. (meaning you don’t pay taxes on it until you use it)

OK, lecture over, how to have a balanced portfolio. A balanced portfolio has money into a diverse set of funds. That means funds like US stocks, foreign stocks, US bonds, foreign bonds, Real Estate, etc. And don’t forget you’ll want to have some in cash, money markets, CDs, standard savings. Eventually those should start paying some kind of interest.

This is when the decision gets made about how much you are willing to risk, how conservative an investor you are, etc. If I were 40 years old, I’d have my retirement money invested like this:

40% US Stocks
20% Foreign Stocks
10% US bonds
10% Foreign bonds
10% Real Estate
7% CDs
3% Bank savings account

If I were younger, I’d have even more in stocks.

So what makes that “balanced?” It is balanced because the funds all cover different areas of risk/reward in the investment arena. US stocks and foreign stocks will not track gains and losses the same. They are for different companies, different economies, and thus protect a little against each other’s losses. Same with the bonds those are considered “fixed income” although they have gains and losses as the interest rates change. Real estate is again a different area completely from other investments. Finally having some longer term cash that’s got a guaranteed value is good planning. Having some ready cash you can just use is important for “a rainy day.”

Remember in 2009 the stock market crash caused short-term losses of approximately 50%, thus you need to have the tolerance to wait out the recovery. If you did, you would have seen a 5% gain year over year even with that 50% loss. So think of your reaction to seeing your savings dissolve like that, you need to hold steady, or better yet keep putting money in even if it loses value for a while. If that kind of loss will unnerve you and you think you might withdraw the funds from the stocks during a severe downturn, then seriously consider a much smaller allocation to stocks, more in bonds and real estate.

Everyone is different, my numbers won’t be your numbers, but you may make yours higher in stock, or much lower. There is no right answer except don’t invest in only one type of fund.

Truly the next post will be on rebalancing your portfolio.

As I said in my post about stocks the other day, you want to buy low and sell high. What that means is take a look at something else, not what the market is doing right now. Do not sell your stock positions. Either in the greater market or in your 401K. Unless you are retired and living off this money now, you can ride this trough out and the market will come back.

I have also said buy now, sell later. Well now is a buyer’s market, while it might still go lower, it’s about 5% lower than it was a week ago. That’s a bargain. So continue investing your 401K into the stock market and hang in there.

On February 1, 2009 the S&P 500 closed at about 735, today it closed at 1,943. Thus $100 invested back in 2009 would be worth just shy of $265.

Of course you’d have to hit the absolute bottom of the market to have gotten that, but investing all along the way from 735 to today, you’d have averaged about 1,350 so that’s a gain still of an average of 50% across time. Or about 5.25% year over year.

It’s a bit freaky to deal with the stock market when it starts to go bear (down), but over all, it does work. And when it is going into a bull (up) market, it’s so much fun to watch those huge gains.

So, once again I say, sit back, relax, enjoy the ride. And if you have money to add to your portfolio, now is the time to toss it into stocks. It may not be the bottom, but it’s a trough of sorts.

My next post will discuss what rebalancing your portfolio means and how to be clear what its purpose is.

Today the stock market took a fairly substantial drop in value all around the world markets. When I was reading comments by people about this event, I was taken by how so many were completely struck by the “disaster” of it all.

That made me think, people basically don’t understand what the markets mean in their world of 401K and other potential investing. Rather, they see this as one more strike against them in their ability to retire with any level of comfort. So I thought I’d write down some of my experiences over the past 30ish years with finances.

First off, I’ll start today with the stock markets. There is not one market, rather there are many markets. They exist in all the advanced countries and all of them control the sale of equities in public companies. Those equities or stocks more or less reflect the overall value of a company. Its ability to make money and its potential for growth. More or less. “Panics” like today offset that to an extent.

Given today’s drop in value of about 2% overall, one might think the stock market is a bad investment. However, over time, the stock market has an upward trend in value across decades. Buy low, sell high, as the saying goes, could simply be translated into buy today, sell later. Because at some point later, the stock will be worth more. At least in aggregate. By that I mean, buy what is called an index fund. One that tracks the overall market. So when the “Dow Jones Industrial Average” goes up, your “stocks” go up. Same with the S&P 500.

So what does that mean. It means in your 401K, buy general stocks in the US and Global funds. Those funds will go up over time. The longer you have before needing those funds, the more likely you will see the typical 6-7% increase in value year over year. Even when you take the devastating drop in 2009 into account, 10 years from 2005 to 2015 gives us about a 5% gain, year over year on average. Considering interest rates are less than 1/2% that’s pretty darn good.

So the idea isn’t to try and time the stock market, rather the idea is to get into the market, continue buying in it, and letting the stock run for the long term. That’s easy to do if you are 25, almost impossible if you are 75, but still a good goal in between.

If nothing else, don’t panic, the markets will recover, indeed the Asian markets are up already (It’s Tuesday morning in Asia). So be calm, buy now if you can as the markets have been down for quite a while, but do not sell if you don’t have to. The markets will go back up.

More to come. Hope you enjoyed.