SHOW NOTES: 2018-02-15 Money in Motion

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Last Week’s Question of the Week: According to the Tax Policy Center think tank, what percentage of tax filers in 2016 owed no individual income tax or had negative taxable income? ANSWER: 44.3% of tax filers owed no individual income tax.

HOST: Your topic today looks at the different kinds of investments that people might have in their portfolio. Especially with the recent swings of the market, what should people know and understand about different investment options and their allocations when retirement is finally in focus?

KLAAS FINANCIAL: Yes, this is a very important. Many people have no idea of what types of investment products, or investment accounts or vehicles that they are really invested in. It is important to have clarity about this. We are really focusing on risk as we get closer to retirement.

  1. Individual Stocks – Stocks are more volatile than other investments, but have historically delivered the highest returns. But how much is too much in your retirement accounts?
  2. Mutual Funds
  3. An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. Interesting fact about ETFs, according to research firm ETFGI, as of July 2017, there were 5,024 ETFs trading globally, with 1,756 based in the U.S.
  4. Target/Lifestyle Funds
  5. Alternatives- Real Estate, Precious Metals, Gold, Cryptocurrencies
  6. Annuities

HOST: So, as I approach retirement, should I hold more bonds and cash than stocks?

KLAAS FINANCIAL: As always, it depends. Once we determine when is the best time to retire, we really want to make sure that we don’t get this part wrong.

  1. We all want to enjoy a comfortable, financially secure retirement. But saving for the future isn’t enough; you need to develop an ideal asset allocation strategy so that your investments allow you to achieve your long-term goals.
  2. This means ensuring that your portfolio should probably contain a healthy mix of stocks, bonds, and even some cash.
  3. Bonds, which are a less risky, income-producing investment that typically offer higher returns than cash but lower returns than stocks.
  4. Cash, which is generally a risk-free investment but offers little in the way of returns, especially in today’s interest rate environment.
  5. Your strategy will depend on a number of factors, including your anticipated retirement length and tolerance for risk.

HOST: So, how SHOULD my asset allocation change as I approach retirement?

KLAAS FINANCIAL: Really, it is about your tolerance for risk.

  • Most pre-retirees are advised to start shifting their assets into safer investments, like bonds, but, if you happen to have a higher-than-average appetite for risk, you might maintain a more stock-heavy portfolio.
  • The same holds true if you have a solid backup plan for generating retirement income, such as a pension or perhaps a side business you plan to focus on once you leave your full-time career behind. This way, if your investments take a hit early on in retirement, you can leave them in place to recover and sustain yourself with the income your venture produces.
  • Another factor that will influence your pre-retirement asset allocation strategy is the extent to which you need to keep accumulating wealth. If, for example, you’re 60 years old and have already amassed enough savings to meet your long-term needs, then you might shift heavily away from stocks. After all, there’s no point in putting your portfolio at risk if you don’t need more money than you currently have.

HOST: So how much do I need to keep in stocks in my portfolio?

KLAAS FINANCIAL: Really, it is about your tolerance for risk.

  1. It depends, but here is one train of thought. Assuming you’re still looking to grow your savings over the next five to 10 years, and you have an average appetite for risk, you can take your age, subtract it from 110, and use that number to determine how much of your portfolio ought to remain in stocks. For example, if you’re 60 years old, it means that 50% of your assets should be invested in stocks. You might split the other 50% between bonds (40%) and cash (10%), or whatever other percentages best meet your needs.
  2. There is no single correct stock-bonds ratio that’s right for all people, but we would suggest that it needs to provide for enough long-term growth (especially for a possible long retirement), while also affording at least some downside protection. Normally we would see people limit stock holdings to 40-60% of their portfolio. and can be tweaked as necessary to accommodate your personal circumstances. But it’s a reasonable starting point for determining how to allocate your assets.

HOST: Some people ask why should they even keep bonds in their portfolio these days with the low returns they are seeing?

KLAAS FINANCIAL: Yes, that is a common question we hear these days. The most important reason to continue to hold bonds is that, rising rates or no, bonds still fulfill what for long-term investors is their most important function: They act as a barricade against the volatility of the stock market.

  1. In general, bonds tend to do well when stocks do poorly. In 2008, for example, when the Standard & Poor’s 500 index dropped 37%, the Bloomberg Barclays U.S. Aggregate Bond Index gained 5.2%.
  2. Of course, bonds can also go through periods where they suffer losses. When 10-year Treasury yields surged by more than one and a half percentage points in early 1994, for example, the broad bond market lost roughly 6% over the course of a little more than three months, and long-term Treasuries lost nearly twice that amount.
  3. But as long as you hold a diversified portfolio of bonds that includes both government and investment-grade corporate issues with a broad range of maturities, the potential bond losses aren’t likely to be anything close to the downdrafts of 50% or more that stock investors have had to endure in past bear markets.
  4. There is no such thing as a one-size-fits-all approach to asset allocation. That’s why you’ll need to consider your retirement timeline, risk tolerance, and goals when establishing your personal strategy.
  5. Finally, make sure to adjust that strategy once retirement begins. Your portfolio should never be something you set and forget, and the more you keep tabs on it, the better your investments are likely to serve you in the long run.

HOST: You use three words on this show quite a bit: simplify, consolidate, and diversify.

KLAAS FINANCIAL: Yes, we do! This is very important and we really do encourage our listeners to follow these steps.

  1. Begin to simplify your investment holdings.
  2. Begin to consolidate IRA’s, old 401k’s.
  3. Diversify them with an appropriate asset allocation.

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Catch C.J. Klaas and Maleeah Cuevas on Money in Motion every Thursday on Madison's 1310 WIBA from 8:05-8:35am.