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The Wealth Chronicle
Issue: #  1 JANUARY 2009
Dear Investor,
 
Welcome to the first issue of The Wealth Chronicle, a free monthly newsletter written by Marc Bautis of Bautis Financial, LLC.  The objective of each newsletter is to present informative articles discussing the topics of wealth management, investment analysis, and personal finance.  If you have any questions or comments about any of the articles, please send them to me.  I also maintain a blog containing more frequently updated information at
http://www.bautisfinancial.com/blog.
 
This edition of the newsletter discusses Target Date Funds, a passive way of investing during the accumulation phase of your retirement, and Green Investing, an industry that has not only gained social and political focus, but is potentially a good way to make money investing.
 
If you think the articles in this newsletter are informative and useful, please forward it to a friend or colleague.  If you no longer wish to receive the newsletter you can unsubscribe by clicking the unsubscribe link at the bottom of the page.  If you would like to discuss your personal financial situation, I would be happy to offer a free no-obligation consultation.
Target Date Funds
Hitting your Retirement Bulls-Eye
Overview 

Target Date Funds are a type of Mutual Fund used to employ a BautisFinancial Logostrategy of simplifying long term investing.  A lot of fund companies now offer a type of Mutual Fund with a target date in 5-10 year increments based on the year you plan on retiring.

Examples of Target Date Funds include the Fidelity Freedom Fund 2015, Fidelity Freedom Fund 2020, Vanguard Total Retirement Fund 2015 Fund and the T.Rowe Price Retirement 2015 Fund.

You choose the fund with the year closest to which you want to retire and voila, you are  done planning for retirement.  For example if you are currently 40 years old in 2008 and you plan on retiring when you are 62, you would look for a Year 2030 Target Fund.  The concept of the fund strategy is also simple.  Over time as you approach your retirement your asset allocation most likely should switch from higher return/higher risk equities to less risky income generating securities.  The fund manager handling the target fund manipulates this by modifying the different types of assets the fund invests in.

Illustration: The following is a simple illustration of a Target 2040 Fund and shows how in the current year the fund is primarily invested in stocks, however over time as the fund approaches its target date the allocations in stock go down, while the funds bond and cash holdings rise

 

2008

2018

2028

2038

Stocks

70

55

40

30

Bonds

20

30

40

50

Cash

10

15

20

20

 

The number of target funds has grown very quickly in the past couple of years.  Some companies are actually coming out with different flavors of Target Funds for the same target date.  For instance the Target Date 2040 Aggressive fund, or Target Date 2040 Conservative Fund.  This somewhat defeats the purpose as now you have to make a decision in which fund to invest in.

With any investing strategy there are pros and cons to its adoption.  We will take a look at some of them here.

Pros:

  • Set it and forget it.  How much simpler can investing get.  All you are tasked with is making one decision (Which year you plan to retire).  The fund rebalances automatically to ensure your assets are properly allocated and that risk levels are in check.

Cons:

  • Growth in target funds the past five years has been enormous.  The growth has come in both the number of dollars people are investing in them and the number of target funds offered by fund families.  To break away from the pack some funds have increased their holdings in riskier investments (stocks over bonds, foreign stocks, ...)  This may not be right for your personal situation
  • Target Date funds do not consider the unique situation of the individual.  Planning should be done on a holistic approach, age is just one input into the planning process. Some of the other factors include your risk profile, when you plan on taking distributions, your individual tax situation, and plans for your money.  A target fund will not take into account if you are planning on taking a big distribution your first year of retirement to travel the world.
  • Fees - Because a Target Fund is really a portfolio of mutual funds, you are paying the managers expense of running the target fund on top of the actual fees of the mutual funds themselves.  This can sometimes make them a high fee investment.  
  • Diversification - Often target funds are used incorrectly.  Some investors just add the target fund to their portfolio as if it was another mutual fund.  You may also become heavily weighted in a particular investment as some of the funds inside a target fund may include the same holdings. 
  • Most companies include their own Mutual Funds as components of their Target Funds.  Not every company does a great job across the board. One fund company may have stellar small cap funds, but its large cap funds consistently lag their competitors. You will have to decide whether that drawback will be too much of a drag on the fund's performance.
  • No Consistency - Different fund families have different investments in the same retirement year.  The following table shows widely different allocations between cash, stock, and bonds for an investor expecting to retire in 2015:

Cash

Stocks

Bonds

Other

Fidelity Freedom 2015 Fund

10.14%

58.79%

30.43%

0.64%

T. Rowe Price Retirement 2015 Fund

11.05%

66.52%

21.91%

0.52%

Vanguard Target Retirement 2015 Fund

1.45%

47.96%

50.36%

0.23%

 

 

The list of cons above is a long one, but for some people Target Date Funds are a sensible investment.  If you do decide to use one, here are some things you should consider when picking which one to go with:

  • Do not get caught up on every holding the fund has.  What is critical is to ensure that the main asset classes are covered so that you are properly diversified?
  • Check the fees to ensure that they are minimal.  To find the true expenses of a Target Fund consult the fund's prospectus.  You may find conflicting information on different websites depending on whether or not they add in the parent fees
  • How has the fund performed in the past?
  • Use it as your only/main investment.  Do not add a Target Date Fund to an already existing portfolio.  It defeats the purpose of employing this strategy.
Green Investing
Making Money while Saving the Planet
What is Green Investing
Green Investing can be defined as investing in companies seeking to generate energy from alternative energy sources, including solar power, wind, biofuels, and fuel cell technologies.   It can also include those companies devoted to developing more resource-efficient industrial processes that help conserve Wind Powerenergy usage and reduce harmful environmental emissions as well as those companies engaged in more speculative renewable energy sources, such as wave power and geothermal energy.
.
Everywhere you turn today there is information staring at us regarding the need to take a part in saving the earth from environmental disaster.  We are asked to reduce our carbon footprint and use more environmental friendly energy sources.   A lot of focus around the 2008 Olympics centered around the lack of air quality in Beijing.  A big part of Obama's campaign focused on the need to pursue alternative energy sources.    Even T. Boone Pickens, an oilman, came out with a plan on how to wean ourselves off of our addiction to oil. 

As an individual or business there are different ways to get involved in this revolution.  Some examples of involvement include installing solar panels on your house or business, taking public transportation to work, or even cutting down on the paper you use daily. 

This article is about how we can involve ourselves externally and potentially make money by investing in companies that promote Clean or Alternative Energy. 

Why should I Participate
The long-term trends in this industry are positive.  In 2007 the CleanTech Venture Organization published a comprehensive report on the Clean energy industry.  The reported noted that the amount of energy produced from alternative, renewable sources was expected to grow at an exponential rate for the next decade.  They predicted the usage of energy produced by wind to go from $17 billion today to $60 billion by 2016.  Solar power is expected to increase from $15 billion to $70 billion and biofuels from $20 billion to $80 billion in that same time period.
 
Five factors driving the growth of clean, renewable energy are: 
  1. The rising cost of today's leading sources of energy (oil).  Even though the price of oil has retracted recently, a lot of fixed-cost investment has been made in clean energy and there is little incentive to discontinue production even with the retracted price of oil.
  2. There is an increased political and public attention placed on the "environmental costs" when determining the total cost of a particular energy type.
  3. The overall increase in global demand for energy is placing a strain on traditional energy sources.  A lot of this demand is coming from countries outside the United States such as China and India.
  4. The public growing awareness of climate change.  A lot of this awareness started with Al Gore and An Inconvenient Truth, but Obama has made alternative energy a big part of his presidential campaign.  There are countries in Europe who are a lot futher along in utilizing alternative energy than the United States is.
  5. Investment by governments, large corporations and venture capitalists into clean energy technologies.
What are the Risks Involved
Making money with "clean" companies is no sure thing.  The following are a couple of risks that are associated with this industry: 
  1. The Green Energy sector is extremely volatile and should only be invested by someone who has a strong appetite for risk. 
  2. There is a lot of hype for the Clean Energy industry; however prospects for physical growth in an industry do not always translate into profits for investors.  The airline industry is a good example of this. 
  3. Some of the new clean technologies may wind up being impractical or may encounter unexpected problems making them unusable.
How to Invest
Instead of investing in one of two individual companies in this industry, I recommend diversifying and investing in a Clean Energy Mutual Fund or ETF. 
Example ETF - Van Eck Global Alternative Energy ETF (GEX).  This ETF is more heavily invested in wind power than some of the other funds, and has more exposure to European companies than other mutual funds and ETF's.
An example Clean Energy mutual fund that trades on NASDAQ is Guinness Atkinson Alternative Energy Fund (GAAEX). 

Green Investing is potentially one of the few growth opportunities in this economy.  "Green" companies were not spared in the recent battering of the economy which means a lot of them are being sold now at discount prices.  Keep in mind though that this is an extremely risky industry with lots of swoons both up and down and may not be suitable as an investment for everyone.
Sincerely,
Marc Bautis
Wealth Manager
tel: 201-221-6895
fax: 201-754-9760
Disclaimer:The information contained in this newsletter is for information purposes only and may not be suitable for your specific financial situation.  You should consult a financial advisor before making any investment decisions relating to the information contained in this newsletter

In This Issue
Target Date Funds
Green Investing
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About Marc

Marc Bautis is a Wealth Manager specializing in working with retirees and those nearing retirement who want to protect their principal and ensure their money lasts.  He is proud to deliver independent advice, always in his clients best interest.

Marc is a graduate of Seton Hall University and currently lives in Hasbrouck Heights.  He is a Bergen County native having attended high school in Lyndhurst. 
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