What to do when the market corrects: Remain patient, invest cash, harvest losses

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The investment roller coaster is in motion, but hopefully it’s not making anyone nauseous or nervous. This is a natural part of the market cycle, so please remain patient, focus on your long-term goals, and stay the course with your investment allocation.  This is not the time to shift investment dollars to cash.

If you happen to have excess cash on hand, however, this is a very good time to invest it. Likewise, if you happen to have investments in taxable accounts that are in the red, you should think about harvesting those losses for tax purposes. If you are harvesting losses, remember to stay invested in the market and maintain an appropriate asset allocation. Please let me know if I can be of assistance in either scenario.

Remember: Avoid the urge to shift your investment dollars to cash. People who sell out of the market at a low point will invariably re-enter the market at a much higher level. It is a losing endeavor. If this market is making you rethink your cash reserve target, your risk tolerance, or your asset allocation, please contact me so we can discuss your situation personally.

Clients with PIMCO or Vanguard products, here’s a quick update:

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PIMCO – Expect choppy waters in the near-term as investors shift to other bond funds in the wake of the departure of PIMCO co-founder Bill Gross.  If you don’t want to stick with PIMCO during this turbulence, contact me quickly so that I can recommend appropriate changes to your portfolio.

Vanguard – Great news on the Vanguard front:  Their brokerage accounts can now hold Vanguard mutual funds.  Before this change, Vanguard clients who owned Vanguard mutual funds and non-Vanguard mutual funds (or stocks, ETFs, etc) would have had a mutual fund account for Vanguard funds and a brokerage account for other fund families, stocks, ETFs, etc.  Now (finally!), Vanguard clients can consolidate both accounts to their brokerage account.  Three cheers for an improvement that will simplify life for many. Read more

Robo-Advisors & The Investment Manager Search

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At Clarus, we offer specific investment advice for those who want professional guidance and are at ease with implementing rebalancing instructions.  However, we recognize that some people reach a point where they are more comfortable delegating than implementing the investment changes each year.  When that time comes, a thoughtful, deliberate review of investment managers, including “Robo-Advisors,” is in order.

Robo-Advisors are online investment management firms which provide portfolio management at a fraction of the cost of the typical investment manager.  For clients who are looking to delegate their portfolio management, robo-advisors such as Wealthfront or Betterment should be considered alongside the traditional investment management firms.

In order to determine the best investment management firm for your needs, we start by considering what is most important to you as we compare the following: Read more

Ally Bank’s Early Withdrawal Penalty

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Ally Bank will change its early withdrawal penalty effective December 7, 2013.  CDs purchased or renewed on or after that date will have the new schedule.

I have recommended Ally Bank’s 5-year CD product for several years.  With a 60 day withdrawal penalty, it was a great place to park emergency funds.  For a very small cost, investors could access their cash early – whether it be for spending needs or for a higher-rate product.  It may still be a decent place for some of your cash, but the withdrawal penalty on the 5-year CD is increasing to 150 days’ loss of interest from 60 days.  The 4-year CD will increase to 120 days’ loss of interest and the 3-year CD will increase to 90 days’ loss of interest.

Please be aware of these changes and evaluate CD rates and withdrawal penalties carefully.

Year-end Financial Planning Strategies

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Most “Fiscal Cliff” financial strategies for year-end reviews are just common-sense financial planning strategies.  Financial crises seem to be the norm, and the possibility of rising taxes will be real for many years to come.  With that in mind, here are some timeless financial suggestions that should be reviewed annually:

  • Tax-advantaged Accounts: Maximize contributions to traditional and Roth 401(k)s, IRAs, and 529 college savings plans.
  • Tax-efficient Rebalancing: Use tax-advantaged accounts to rebalance an asset allocation or to sell appreciated positions. Use index funds and index ETFs, which have high potential for tax efficiency.
  • Asset Location:  Tax-efficient investments belong in taxable accounts and tax-inefficient investments belong in tax-advantaged accounts.
  • Tax Loss Harvesting:  Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, and then buy back the same securities at least 31 days later.  Contact Clarus for details.
  • Roth Conversion: Convert money from a traditional IRA to a Roth IRA if doing so is expected to produce better long-term tax results for you and your beneficiaries. Distributions from a Roth IRA can be tax-free but the conversion will increase your adjusted gross income in the year you convert.
  • Required Minimum Distributions:  Take your RMD from your IRA or 401k plan (or other employer-sponsored retired plan) if you have reached age 70 1/2.  Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn.  If you turned age 70 1/2 in 2012, you may be able to delay the required distribution to 2013, but if you do, you will have to take a double distribution in 2013—the amount required for 2012 plus the amount required for 2013. Think twice before delaying your distribution—bunching income into 2013 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels.
  • Flex Spending Accounts:  Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year.
  • W-4 Withholding:  Increase your withholding if you are facing a penalty for underpayment of federal estimated tax.  Doing so may reduce or eliminate the penalty.
  • Give Gifts: Use gift and estate tax exemptions while current tax laws remain favorable.

The Dog Days of Summer

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Well, this market brings new meaning to the phrase “Dog Days of Summer.”  Despite the market, please be patient and stay the course with your investment allocation.  This is not the time to shift investment dollars to cash/emergency funds.

For all clients, I recommend you have an investment “bucket” and a ready cash/emergency reserve “bucket.”  For most people that are more than three years from retirement, their ready cash/emergency reserve equals about a year of living expenses.  For most people that are within a few years of retirement, and for those that are retired, the ready cash/emergency reserve should be closer to three years of living expense needs that are not met by Social Security, pensions, etc.  The large cash reserve for retirees and near-retirees allows you to withstand market turbulence.

Please avoid the urge to shift your investment dollars to your emergency reserve bucket.  People who sell out of the market at a low point will invariably re-enter the market at a much higher level.  It is a losing endeavor.  If this market is making you rethink your risk tolerance and asset allocation, please contact me so we can discuss your situation personally.

Happy New Year! Now Ignore the Noise.

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Read Morgan House’s article on tuning out the daily market news.   Stick with your low-cost diversified portfolio, review periodically, and in the meantime – enjoy life!

Vanguard Reduces Minimums for Admiral Shares

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Great news for those of you with Vanguard mutual funds.  Vanguard is drastically cutting the minimums for Admiral Shares in many of its funds this month.  The switch from Investor to Admiral shares will happen automatically but may not happen overnight. Here’s a link to the Morningstar article:

http://news.morningstar.com/articlenet/article.aspx?id=354589