Money Smarts for the Real World

August 6, 2011


Managing the Situation

This week has been a rough one for the stock market.  With emotions running high and the 24-7 news cycle whipping up a frenzy, things can seem out of control.  Truth be told, there is much that is not within your control at the moment -- except to decide to steady yourself and focus your efforts.  This week, instead of fretting over what your investments did or didn't do; or worse, pulling out of the market entirely and selling into a low, vow to control what you can.  Familiarize yourself with what you own, why you own it, and what it is costing you to own it.  Finally, what is your plan going forward?  These are the things you can control, and they can make a world of difference to your investment returns.

mantrain Seize Control

 Years ago, when I commuted by train to New York City, I remember feeling powerless and frustrated by delays.  I would feel my blood boil if there was the threat that I would be late.  Once I accepted the fact that I was not in control of whether the train would arrive on time, and took responsibility for what I could change -- my commute became downright productive.  I left myself more time to get to the station; I took an earlier train so that even if it ran late, I would still be on time; and finally, I always kept work or reading material at the ready to utilize the time spent commuting in a productive way.  Investing is a lot like the train ride.  It may be unpredictable and you may get anxious, so what can you do to make the most of this experience, instead of allowing yourself to be swept up in frustration? Plenty; but to be effective you can't get emotional and you can't panic. Take this time to assess what you have been doing, and whether or not your strategy needs adjusting. Here's a step-by-step plan to empower you in these unsettling times:


  1. What do you own? It is surprising how many people have tens or hundreds of thousand dollars invested, and yet they are not sure what they own, or what their portfolio is designed to do. Looking at your asset allocation (how your investments are spread out in the investment arena) is quite important. In fact, Ibbotson Associates, a leading authority on asset allocation, found that 92% of investment returns are determined by the types of assets owned.  Market timing (buying high and selling low) accounted for just 6% of returns, and individual security selection accounted for a mere 2% of returns. Meet with your financial professional and discuss how your portfolio is invested not just between the broad categories, like stocks, bonds, and cash, but more specifically in what types of securities. For example, stocks (ownership in a company) can be grouped by capitalization (size), as in large, medium, and small.  Stocks can also be classified by style:  growth stocks are those that are expected to grow quickly; value stocks are thought to sell for less than they are worth (a "marked down" item, so to speak).  Stocks can also be domestic (US), foreign, global, or from emerging parts of the world economy.  Bonds (a loan) also fall into many categories, and can be issued by the US Government (or other governments), corporations or state and local municipalities.  Alternative type investments, such as real estate, oil, or gold also can play a limited role in a portfolio and act as a hedge. Make sure the mutual funds owned in all portfolios contain different types of securities, or you run the risk of weighting your portfolio too heavily in one area; a market correction in that area would affect your investment results twice as hard. If you are not working with a professional, now may be a good time to consider working with a fee-only advisor, such as our sister company, ATI Investment Consulting, Inc. because this analysis takes time and needs to be done thoroughly to consider and minimize investment risks. Also, your situation may have changed since you constructed your portfolio. Make sure your asset allocation strategy considers:
  • Your time frame/goals;
  • All investments in all accounts;
  • Investment overlap in individual stocks owned and in mutual funds;
  • Different asset classes (stocks, bonds, etc.), different market capitalizations (large, mid and small companies), different investment styles (growth, value) and different markets (US, foreign, emerging);
  • Where the investments are owned (in a taxable brokerage account, or in a tax-deferred retirement account) because investing without being aware of potential taxes can result in "giving back" your returns in the way of taxes; and
  • If the risks assumed are worth the potential reward. 

Click here to read more. 


Finding Financial Strength:

4 Reasons to Reexamine Your Traditional IRAs


If you're like most people, you probably set up a traditional IRA (as opposed to a Roth IRA) years ago and you may have continued to make contributions on a regular basis. Depending on your personal situation, the money going into the account may have been fully tax-deductible, only partially deductible, or not deductible at all. But regardless of any tax break you got on your contributions, you haven't had to pay tax on any investment income or capital gains generated inside the account.


You may also have used the same or a different IRA to receive rollovers from a 401(k) or another employer-sponsored retirement plan after you switched jobs. If it's done correctly, such transfers aren't taxable. With a traditional IRA, your only tax obligation comes when you take money out.

Often, IRAs get little scrutiny over the years. You may have left yours alone as you focus on more immediate financial priorities. Yet there are several reasons why it pays to look again at your IRA.

  1. Investment allocations may need to be adjusted. Your retirement accounts undoubtedly suffered during the stock market decline of a few years ago, and depending on how the money is invested, the account balance may or may not have since regained lost ground. If you haven't already revisited your investment allocations, now would be a good time. Do the assets in the account-normally mutual funds or individual stocks and bonds-support your long-term financial goals? Does the investment mix feel comfortable in terms of the financial risk it entails? Do you need to rebalance, trimming allocations that have grown too large and adding to those that fall short of the ideal percentage in your portfolio?
  2. Beneficiary designations could be out of date. When you set up your IRA, you had to indicate who would receive the account assets if you died. But your financial circumstances may have changed since then. A divorce would have obvious implications, and retirement plan assets are often a part of the financial settlement when a marriage breaks up. Other family changes, however, can be easy to overlook. You and your spouse may decide to divide the account among your children, and if they're minors, the beneficiary designation would be different than if they've already reached the age of adulthood in your state. The important thing to remember is that you're not bound by your original choices, but it's important to know what your beneficiary form says. Click here to read more.  




$mart Question

I am older and single, with no children and no plans to marry.  All of my investments are in either my IRA or my company-sponsored retirement plan, which have beneficiaries assigned to them.  Do I need a will?



Having the lion's share of your assets in retirement accounts with beneficiaries named (hopefully, contingent beneficiaries, too) assures that these assets will pass cleanly to the intended heirs.  However, I am sure you have a bank account.  You do not mention whether you own any real estate, either.  You are also assuming that you will not have additional monies and items to pass on or donate at the time of your death. A will can direct how the items are to be distributed. Personally, even if I had no next of kin, I would rather donate to a charity I support than give money to the government.


You don't mention if you have a health care proxy set up, which would be very important to you since you have no spouse.   If something debilitating happens to you and you are unable to make medical decisions for yourself, you will need someone competent to make your wishes known.  Likewise, a durable power of attorney (which enables someone to act on your behalf regarding business matters should you become mentally incapacitated) is a must have, as well.  Remember, each institution (bank, etc.) will require their own paperwork filed to assign the durable power of attorney to your account(s).  My advice would be to get all three of these legal documents in place, and inform a trusted family member or friend who should be contacted in the event of your death.  Having all your information compiled and organized will make handling your care and your estate much easier.


In This Issue
Seize Control
Finding Financial Strength
$mart Question
$mart Move
 $mart Move:

Tightening the Belt


Not sure what's in store for the markets, the economy, or your job security? You're not alone. Now would be the time to add to your emergency fund, just to give yourself more breathing room and more peace of mind.  Here are some other ways to make your budget lean:

  • Buy only what you need (instead of what you want, which can damage your ability to put aside cash when you really need it, like if the car needs repairing). Put off any new big purchases that aren't absolutely necessary.
  • Invest your money in maintaining what you have instead of buying new, whenever it is more economical to do so (sometimes buying new is worth the added expense).
  • Get creative.   Can you make do with what you have? If you cleaned out the basement, garage or closets, will you find items that you would have run to the store to buy?
  • Look at those fixed expenses. I said it before and I'll say it again: When you reduce a monthly bill, like the cell phone, cable, etc., you are saving that times 12 for the year.
  • Shop smartly. Shaving just $20 at the grocery store per week (either by buying less, shopping the circular sales, or using coupons) is $80 that can go towards something you need.

A few small changes can make your world more controlled - in spite of the circumstances swirling around. Don't forget to share your money saving tips with me, and I'll post them in $mart Moves (dina@realsmartica.com).
















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