rebalancing

8 Ways Retirees Can Spring Clean Their Finances

Tim Lemke — Wed, 28 Mar 2018 09:00:07 +0000

So you've finally made the jump out of the working world and into blissful retirement. Congratulations! If you've been careful in your financial planning, you should have plenty of money to sustain yourself for a long time and have a happy post-work life. But even the most well-off retirees could benefit from re-examining their financial situation.

Here are a few ways retirees can get their finances spic and span this spring.

1. Check your spending

After you've spent a large portion of your life amassing a large retirement fund, you may feel like your days of watching every dollar are over. But it's still important to make sure your expenses aren't higher than what your savings can afford. Now that you are home instead of heading to the office every day, you may be spending more on utilities. You may have unreimbursed expenses relating to caring for your grandchildren. That African safari trip may have cost you more than expected.

If you have an annuity or are making regular withdrawals in retirement, it's important to avoid spending more than those payments. Otherwise, you may find yourself lacking in funds down the road. You may be fortunate to live for many more years, but you don't want to go broke along the way. (See also: 6 Ways You Can Cut Costs Right Before You Retire)

2. Meet with a financial adviser

Even retirees who have plenty of money and a good financial plan can benefit from a checkup with an adviser. A good financial planner can help you assess whether your retirement savings are still on track to last and if there are any necessary tweaks. An adviser can also help walk you through any changes to tax laws and explain any changes to the investment landscape. Once you retire, don't just put your head in the sand and assume your money will last as long as you do. A periodic financial check-in with an expert can be hugely valuable to anyone seeking the best retirement possible. (See also: 3 Reasons to Be Picky When Hiring a Financial Planner)

3. Assess your withdrawals

Once you reach age 70 ½, you may be required to make minimum withdrawals from your retirement accounts. The ultimate size of these withdrawals — and whether you decide to start withdrawing sooner — will determine how much you have to live on, and how much you'll have left in your accounts. If you are taking withdrawals already, take some time to determine whether the amount taken out each month is sufficient or too much. (See also: 3 Financial Penalties Every Retiree Should Avoid)

4. Re-examine your will

You remember filling out a will many years ago, but do you remember what it says? Do you still agree with the directives regarding who gets your assets when you pass? These aren't pleasant things to think about, but your family will appreciate it if your wishes are made clear. It may even make sense to discuss this with your children and other family members so there are no surprises or acrimony later. (See also: 6 Times You Need to Update Your Will)

5. Rebalance your portfolio

If you are retired, your investment portfolio should be geared more toward preserving income than growing it. It's OK to own some stocks, but it makes sense to also mix in some bonds, cash, and other more conservative investments. You may think your portfolio is optimized for retirement, but there's a chance it may have gotten out of balance. This is especially true over the last few years when stocks have performed very well.

Everyone, not just retirees, is encouraged to rebalance their portfolios every year. If you haven't taken a hard look at your investments in a while, take the time to see if some smart buying and selling will get you back on the right track. (See also: 7 Reasons to Invest in Stocks Past Age 50)

6. Do a deep dive into your charitable giving

You may finally be in a position to be generous with your money. But are you being smart and strategic about how you are giving to charity?

Charitable donations are not only a wonderful thing to do, they can help you financially by saving you on taxes. If you itemize tax deductions, charitable donations can reduce your tax bill. Donating shares of stock to a charity can help you avoid capital gains taxes. If you are considering donating to charity, come up with a smart plan to support the causes you love as part of a broader tax savings strategy. (See also: 5 Ways Giving to Charity Is Good for You)

7. Assess your health insurance situation

Older Americans can benefit from Medicare, but you may not be eligible if you retire early. And even if you do get Medicare, that doesn't cover every medical expense. Most retirees find that they need to purchase a Medicare supplement plan, as well as additional insurance for eyeglasses, hearing aids, dental work, and other health needs. You'll also need to consider whether long-term care insurance is right for you. Don't assume you are properly insured just because you are eligible for Medicare. (See also: How to Make Sense of the Different Parts of Medicare)

8. Hit the gym and eat better

Exercising may not seem like a financial decision, but in many ways it is. Getting and staying healthy will not only help you enjoy retirement more, but it could help reduce medical bills that may not be covered by insurance. Work to lose weight, lower your blood pressure, and make better lifestyle choices. You may find yourself not only healthier, but wealthier too. (See also: 7 Smart Ways to Invest in Your Health)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Ways to Profit Off Your Cabin Fever

Tim Lemke — Fri, 09 Feb 2018 10:00:05 +0000

Winter can be the pits. The weather's cold, and getting outside can be tough. You've got cabin fever, and you can't wait for spring.

But perhaps you can use the time stuck inside to your advantage. Now may be the time to get a handle on your finances and perhaps even make a little extra money while you're cooped up.

Consider these ways to improve your finances during the long, cold winter.

1. Optimize your investments

You may have spent much of the last year simply watching your investments do their thing, and thankfully they've probably done well. Every portfolio is due for a review now and again, so consider taking a look at your investments to ensure you're set up for maximum returns.

This may mean rebalancing your stocks and mutual funds so you aren't disproportionately invested in one area. It may mean selling some investments that have underperformed, or doing the same for stocks that may be due for a sharp fall. Making some good choices now could allow you to enjoy another year of worry-free investing. (See also: How an Exit Strategy Can Make You a Better Investor)

2. Get your taxes in order

Your tax returns will be due in mid-April. It's always wise to avoid waiting until the last second to file, and you should consider using this winter time to research the best ways to avoid paying too much at tax time.

Perhaps there are tax credits and deductions you never knew you could take advantage of. Maybe you have time to make IRA contributions or make other moves to reduce your tax liability. Or maybe you need time to dig up those receipts from charities you donated to in 2017. Doing taxes may not seem like fun, but it can be interesting, especially if you do the work to maximize your savings. (See also: 7 Surprising Tax Deductions You Might Miss)

3. Put together a pitch for a raise

Now may be the time of year when you can focus on advancing your career. Maybe you've been seeking a raise or promotion for a while, but haven't had the time to build your case. With a little time on your hands, now you may have the ability to develop a solid pitch to your supervisor. This may mean collecting examples of goals you've achieved, or ways in which you've helped the company. It may mean collecting data on salaries and how yours compares to the industry average. Take the time to find the right tone, make the right arguments, and go for it. (See also: 5 Times You Should Demand a Raise)

4. Look for a new job

What if you don't want a promotion or raise, because you can't stand your job to begin with? What if you feel like the only way to make more money is to switch companies or careers? Well, use the winter months to look for a new one. If you're stuck inside, take the time to update your resume, get active on LinkedIn, and reach out to your online network.

There are many employers that post new jobs at the start of the year, because they may have received the budget approval to hire. The caveat to this is that many people look for new jobs as part of their New Year's resolutions, so you may face some stiff competition. But if you want a new job and know what you're looking for, take advantage of the time to search for a new career in a thoughtful and deliberate way. (See also: 8 Signs You Should Quit Your Job)

5. Develop a side hustle

Perhaps a raise or a new job isn't yet in the cards. That's OK, you can still boost your income by finding other ways to make money on the side. Maybe now is the time to develop that pottery hobby into something revenue producing. Perhaps all this time inside the house will lead you to start a profitable blog or podcast. Whatever it is, you have the ability to make some extra cash just by leveraging your current talents. And who knows? Maybe the side hustle can eventually become your main hustle. (See also: 14 Best Side Jobs For Fast Cash)

6. Create budgets

Why not use the start of a new year to get smarter about spending less money than you earn? Now is the time to take a look at your spending and develop real limits on what you're buying and how much you are paying.

Ideally, you should have numerous budgets for things like eating out, entertainment, housing costs, automotive expenses, and even gifts. These budgets should be attainable but allow you to save money at the end of each month. Sticking to budgets can be hard, but even if you lose discipline during the year, you may succeed in reducing expenses in some areas and making progress in reducing debt or boosting your savings. (See also: Build Your First Budget in 5 Easy Steps)

7. Review your insurance policies

Oh yeah, everyone loves looking at insurance policies in their spare time. Exciting stuff, huh? It's true that this does not seem like fun, but a periodic review of your policies related to auto insurance, homeowners insurance, health insurance, and life insurance — as well as the rates you are paying — is a good financial move.

During this process, you may find that you are underinsured and placing yourself at risk, or that you are paying too much for insurance for someone in your situation. If you do a little rate shopping, you may find you can save significant money by switching providers. (See also: 7 Times to Update Your Homeowners Insurance)

8. Put on a sweater

When you're inside during the winter, you'll be tempted to crank that thermostat for maximum comfort. Consider instead keeping the house temperature lower and simply wearing more layers. While you may feel like you need the thermostat set to 72, you could probably get used to having it below 68.

Last year, my family's main heater broke during a snowstorm, and our house temperature fell into the 50s. Guess what? We threw on some extra sweatshirts, cuddled under some more blankets, and survived fine. Every few degrees of temperature on the thermostat could add up to hundreds of degrees — and dollars — annually, so dial it back and save. (See also: 5 Big Winter Expenses That Could Freeze Your Budget)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Signs You're a "Helicopter Investor" (And How to Stop)

Tim Lemke — Fri, 01 Dec 2017 10:00:06 +0000

We're all familiar with the term "helicopter parent" in reference to the mom or dad that hovers over every aspect of their child's life. Do you have a similar approach to investing? Do you obsess over every detail of your portfolio? Are you constantly checking in, even when it's clear your stocks are handling things pretty well on their own?

If so, you may be a "helicopter investor," and it may be costing you money as well as your peace of mind. Watch out for these warning signs. (See also: 11 Investment Mistakes We All Make)

1. You check your portfolio every day

How often do you log in to see your investment account? Are you checking in every day, or even multiple times a day? Monitoring your investments is important, but there's no real need to check in on them that frequently. Most people can get away with looking at things once a week, and could probably go months without a check-in as long as they are paying attention to broader market movements.

Checking your investments frequently might tempt you to fiddle with them. You might sell or buy stocks based on emotion. You'll get angry when investments go down slightly, and irrationally happy when they go up.

Consider setting a personal policy of checking your investments once a week (or even less) at a certain time, and have a plan for what you want to accomplish when you do. (See also: 5 Essentials for Building a Profitable Portfolio)

2. You watch a lot of financial news programs

Any smart investor should follow the news and be aware of market trends, but tuning in constantly to CNBC or another financial channel is completely unnecessary. If you want to tune in once to see where the market closes, fine. But you never want to find yourself watching for hours a day, reacting to every stock tip and piece of advice from a talking head.

Proper retirement investing requires time and patience. Watching too much financial news can lead you to think that every business event is more significant than it actually is. Unless you are a day trader or professionally manage a fund, you can do without the information overload. (See also: Want Your Investments to Do Better? Stop Watching the News)

3. You subscribe to too many financial publications

There are many great financial publications out there that can help you hone your investing prowess, but many of them also have similar content. Subscribing to one or two publications is useful, but subscribing to a half dozen or more or is overkill. This is especially true today, when there is a lot of solid advice available online for free.

Consider subscribing to one or two well-respected financial news sources to stay on top of the latest trends and market performance. Chances are, you'll make out just fine.

4. You have alerts on your phone

Smartphone apps have certainly made it easier to track and trade investments. I draw the line, however, in setting up alerts to tell you about the activity of specific investments. The average investor does not need to know, for example, that Amazon's stock just hit $180 per share, or that the market fell 1 percent on the day.

Ideally, your investments are working behind the scenes to make you money while you live your life. Turn off any notifications that would encourage you to check your investments more often than necessary. In fact, consider getting rid of the smartphone investing apps altogether.

5. You panic when investments decline

Guess what? Sometimes your investments lose money. They are not guaranteed to go up day after day. If this bothers you, and you find yourself buying and selling stocks while in the midst of emotional meltdowns, you may be a helicopter investor.

No one wants to see stocks decline, but if you are invested in the long term, you should be able to overcome a blip in the market. And any money you need within a few years shouldn't be tied up in the markets anyway.

If you're getting emotional every time you see stocks go down, do yourself a favor and back away from your computer screen. Breathe. Go do something else. Your portfolio will be fine, and you won't have to deal with the shame of making a bad situation worse by reacting in the moment.

6. You obsess over rebalancing

It's always a good idea to check your portfolio to make sure it's not out of whack. You don't want to wake up one morning and find that you're 85 percent invested in volatile tech stocks, for example. A properly balanced portfolio will be well-diversified and will match your risk tolerance.

However, most portfolios don't need to be rebalanced all that often. Remember that every time you rebalance, you are likely to incur transaction fees for every trade, and there may be tax implications as well. There's a cost to rebalancing too frequently. Once a year or once every six months for a rebalancing check-in should usually do the trick.

7. You're constantly going after the hottest thing

So you heard some buzz about Bitcoin, and now you want in. You saw Facebook's shares rise 5 percent in a week, so you jump. You're paying such close attention to your investments and the market that you're going after short-term hits rather than maintaining a long-term, disciplined approach.

Going after the hot thing often results in you buying high and selling low, which is the opposite of the ideal investing approach. It's fine to be generally aware of what's hot in the markets, but don't be like the cat going after the shiny toy.

8. Transaction fees and taxes are cutting into your gains

Buying and selling stocks has gotten cheaper in recent years, but most discount brokerages will still charge you at least $4.95 for every trade. So if you are constantly checking your portfolio and constantly buying and selling, this can add up. Consider that if you buy 10 shares of a stock at $50 a share, you've automatically given away 1 percent of your investment. If you are buying and selling smaller lots, that's an even higher percentage.

Additionally, selling stocks can come with tax implications if you are trading in a taxable brokerage account. If you sell a stock soon after buying it, you may pay a short-term capital gains rate, which can be as high as 39.6 percent.

Buying and selling stocks can be enjoyable, but if you do it too frequently, there's a cost involved. Hovering over your portfolio and constantly looking to trade can actually make a dent in your earnings over time. (See also: 4 Sneaky Investment Fees to Watch For)

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Think Outside the Index When You Rebalance Your Investment Portfolio

Tim Lemke — Mon, 20 Nov 2017 09:30:10 +0000

As the year winds down, it's common for investors to examine their portfolios and consider some rebalancing. This means looking at your investments to make sure you're not over-invested or underinvested in certain areas.

Many investors will simply buy shares of a mutual fund that mirrors the performance of the S&P 500. You can do well with this simple approach, but you will lack exposure to many smaller or midsize companies, and will be heavily invested in some industries (such as technology) but not others.

Here are some sectors and asset classes that you can invest in to make your portfolio truly diverse.

1. Utilities

They aren't the sexiest investments, but this sector contains many great dividend stocks that can boost your income while offering the stability your portfolio might need. Consider that during the market tumble between 2007 and 2009, the S&P 500 lost about half its value, while the Dow Jones Utility Average index lost about one third.

Right now, utilities make up around 3 percent of the S&P 500, so many investors don't have much exposure. Consider mixing in some utilities by investing in mutual funds like the Vanguard Index Utilities Fund [VUIAX] or ETFs such as the iShares Global Infrastructure ETF [IGF].

2. Materials

This is another underappreciated sector that deserves more love from investors. What are "materials" in stock market lingo? This refers to companies that discover and process raw materials. Think of steel manufacturers, mining companies, or chemical producers. The materials sector also makes up about 3 percent of the S&P 500, but has outperformed the broader stock market over the last year. Materials also outperformed the S&P 500 during the Great Recession.

Well-performing materials mutual funds include Vanguard Materials Index Fund [VMIAX] and the Fidelity Select Materials Portfolio [FSDPX].

3. Telecommunications services

This sector includes companies such as Verizon, AT&T, and T-Mobile. Companies like these have not been the best performers in recent years, but they can bring stability to your portfolio and offer a very healthy dividend yield. Investors might earn an annual dividend of 5 percent or more with these stocks, which is helpful income during this time of low interest rates. Older investors who are willing to sacrifice growth for income and stability may want to take a hard look at telecom services, which currently make up about 2 percent of companies in the S&P 500.

4. Energy

This sector comprised more than 10 percent of the S&P 500 as recently as three years ago, but that's down to about 6 percent now. That's a shame, because the sector includes some very strong companies including ExxonMobil and Chevron. It's been a very volatile few years for the energy sector due to the tumble in oil prices, but there are bargains to be had, and the world is not going to cease demanding energy, especially from developing countries. Investing in green energy can offer some growth opportunities, and you'll be helping the planet in the process. Energy stocks can also offer higher dividend yields than many sectors.

5. Consumer staples

This sector likely has some of the most familiar stocks you can think of. Currently making up over 8 percent of the S&P 500, consumer staples includes firms like Coca-Cola, Procter & Gamble, Unilever, and Walmart. And yet, this sector is somewhat underrepresented in the S&P 500. This sector is considered a safe haven for investors, because it often performs better than other sectors during times of market uncertainty. That's because even during the worst of times, we all still need basic household products. This sector also has an average dividend yield of nearly 3 percent, making it attractive to income investors.

To get more exposure to consumer staples, take a look at ETFs such as the iShares Consumer Goods ETF [IYK] and Vanguard Consumer Staples ETF [VDC].

6. Small cap stocks

When you invest in the S&P 500, you're investing only in the largest companies. These companies may offer solid returns, but it's never good to be invested too heavily in companies of a similar size. To build a truly diversified portfolio, it helps to invest in a healthy dose of smaller companies as well. Small cap stocks are generally those with market capitalization between $300 million and $2 billion. These firms tend to be more volatile, but their gains can be more dramatic. Consider that the T. Rowe Price Small Cap Fund [OTCFX] has averaged a return of around 20 percent over the last year, compared to about 16 percent for the S&P 500. Small cap value stocks — comprised of small companies generally considered undervalued by fund managers — have performed even better over the last year.

7. Mid-cap stocks

Not too big and not too small, mid-cap stocks include some very well-run companies in a wide range of industries, and they can bring growth and stability to your portfolio. If you want to invest in midcaps, forget the S&P 500 and go with the S&P 400, which includes the top mid-sized companies and routinely outperforms the smaller and larger asset classes.

The Vanguard MidCap ETF [VIMSX] has seen a 10 percent annual return since 2004, and the T. Rowe Price Midcap Growth Fund [RPMGX] has seen a 13 percent annual return since the early 1990s.

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How the Risk Averse Can Get Into the Stock Market

Philip Brewer — Mon, 06 Nov 2017 08:30:15 +0000

The stock market can be risky. Just 10 years ago, due to the financial panic and subsequent Great Recession, stocks lost half their value in the course of not much more than a year. But the stock market is also a great investment: Long term gains are large, and even the biggest losses are routinely reversed in a matter of a few years.

The upshot is that you should almost certainly have at least some money in the market.

But since it's always either rising or falling, and since nobody wants to be foolish, it's often hard to get into, or back into, the market. And yet, because of the large gains the market routinely offers over the long term, it's absolutely worth doing — even for those terrified of risk. (See also: How to Get Over These 5 Scary Things About Investing)

Figuring out how much to invest

The best way to think about your portfolio when you're risk-averse is by recognizing that a significant amount of your money is not part of it and should not be invested at all. If you cover your other important financial bases first, you may feel better about investing.

First, make sure you have adequate liquidity balances — that's cash on hand to deal with the fact that your income arrives on one schedule (biweekly paychecks, perhaps) while your bills arrive on a different schedule (some monthly, others perhaps annually or semi-annually).

Second, make sure you have an adequate emergency fund to deal with events like an unexpected loss of income, or expenses that come out of the blue. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

Third, make sure you have a plan to fund medium-term expenses (a savings account or CD or maybe an intermediate-term bond fund). These are things you know you're going to buy in the next few years.

Once you've got those bases covered, the rest of your money is your investment portfolio.

By identifying how much of your money is not part of your investment portfolio, you may find yourself much more comfortable thinking about committing some fraction of the rest of your money to the stock market.

However, maybe you've done that and you're still not comfortable. That brings us back to where we started. In particular, it raises the question: If you know the market is the right place for a sizable chunk of your portfolio for the long term, why are you hesitating to commit funds now?

Ask yourself why you're afraid

There are probably two big reasons why people hesitate to get into the stock market: Either because the market seems "too risky," or because they're "waiting for the right time."

The way to get yourself to make the move into the stock market depends on which reason is blocking you right now.

Too risky

If it's just that the market seems too risky, you can often get started investing by going small. If you can't bring yourself to put 70 percent of your portfolio into stocks (which is actually a reasonable allocation if you're fairly young), can you bring yourself to put 5 or 10 percent in?

When I was first starting to invest, most mutual funds had minimum investments that were pretty large (compared to the size of my portfolio), but there are now ways to invest amounts as small as just a few hundred dollars into stocks.

If the market seems very risky, pick a very small amount of money — small enough that you could absorb even a 50 percent loss without endangering your long-term goals — and take the plunge. Put that small amount into the market. Better yet, set up some sort of automatic investment (a payroll deduction into a 401(k) or an automatic transfer to a mutual fund or brokerage account) that would send a small amount away every month or every paycheck.

If you can find an amount small enough that you're willing to risk it — and especially if you can set up some sort of automated further investments — you set yourself up to get past your risk aversion the easy way: By seeing gains start piling up right away. And if they don't — if your investments start off by losing money — you'll still be OK, for two reasons. First, you'll know that your losses are so small that they scarcely matter over the long term. Second, you'll know that your future investments are buying stocks at a lower price (and buying low is an essential part of "buy low/sell high"). (See also: How to Invest If You're Worried About a Stock Market Crash)

Waiting for the right time

If the issue is that you accept that the market is the right place to be for the long term, but right now is the wrong time to get in (perhaps because the market seems kind of high, perhaps because it has recently dropped and you worry it might drop further, perhaps because you see major risks to the economy from business conditions or the international situation or Congress), I have two thoughts.

First, understand that it hardly matters. I saw a study some years back that compared two hypothetical brothers. Each had invested $2,000 a year in stocks in his IRA, but each year one brother had the good luck to make his investment on the day the stock market hit its low for that year. The other brother had the bad luck to make his investment on the day that the market hit its high for the year.

The result? After 10 years, it barely mattered. The lucky brother had a tiny bit more money, but both of them had a lot more money than the guy who kept his money in cash waiting for a "better time" to invest that never came.

Second, approach it just as I advised the person who thought the market was too risky: Start small.

Maybe now isn't the right time to jump in with 70 percent of your portfolio, but surely having 0 percent of your portfolio in the market is the wrong choice.

Go ahead and put a little money in. It doesn't have to be a lot. (And, once again, even better if you set up some sort of automated investment so you're continuing to put money into the market regularly over time.)

Finding the right balance

Suppose you do start small, but through a combination of further investments and growth in the market, find yourself a few years down the road with a sizable portfolio and with a large portion of it invested in stocks. When do you have too much in stocks?

One answer is that you have too much if it's worrying you. If you're having trouble sleeping at night, or if hearing the market report on the news ruins your appetite, then by all means sell some stocks and put the money into a CD or something. If you're still anxious a month later, sell some more. (See also: Find the Investing Style That's Right for You)

I would advise that you not use this as an excuse to time the market. The market will always be going up or down and neither circumstance is a good reason to change your mind about having stocks in your portfolio.

Instead, you should probably have a target asset allocation. Figure out what you want in stocks (and bonds, real estate, gold, cash, etc.) and buy and sell as necessary to return to that target allocation from time to time — usually annually is good. This is a process called rebalancing your portfolio. (See also: The Basics of Asset Allocation)

An old rule of thumb is to set your stock allocation percentage at 100 minus your age, and invest the rest in bonds. So someone in their 20s would put 70 to 80 percent into stocks while someone in their 60s would put 30 to 40 percent into stocks. That's a perfectly good rule, although with people living so much longer now than even a generation ago, it should probably be a bit more aggressive for people in the years just before and just after retirement. (See also: 7 Reasons to Invest in Stocks Past Age 50)

Your asset allocation is important, but don't let that paralyze you. The worst thing you can do is agonize over your asset allocation to the point that you never get around to investing.

Put a little money in stocks right away. Set up some sort of automatic investment. Once you have a tidy sum invested in stocks, start putting some of the new money in bonds. Only after those investments start getting large do you need to think about whether it's time to add some more exotic choices.

Start small. Start simple. But above everything else: Start.

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Things You Need to Know About Investing in Company Stock

Tim Lemke — Mon, 16 Oct 2017 08:30:10 +0000

If you are employed by a public company, there is a chance that you will be offered the option to invest in company stock in your 401(k) or purchase company shares at a discount. This can be a nice perk for employees, and a possible incentive for them to work hard and remain loyal to the company.

But investing in company stock is not without its pitfalls. You may recall stories about workers from Enron, Lehman Brothers, and other firms who lost much of their retirement money when those companies went bankrupt.

If you have the chance to purchase company stock, consider taking advantage of it. But also be aware of some of these key pieces of information beforehand.

1. Sometimes you get company stock for free or at a discount

Companies distribute stock to employees in a number of different ways. Sometimes, it's simply given to workers as part of compensation plans. Other times, it's in the form of options that allow workers to buy shares at a certain price. (For example, you may be able to lock in shares at $45 per share even if they are selling at $60 on the open market.) This can be a nice benefit to employees beyond the normal salary, and it's often designed as an incentive to make them feel more invested in the company's success. If the company does well and share prices rise, employees can benefit financially. But the flip side is also true. If the company performs poorly, you could lose.

2. You already depend on your company

Your financial well-being is already heavily dependent on the success of your employer. The company pays your salary, offers you health benefits, and may match your contributions to your retirement plan. If you accept company stock, even more of your financial future is tied up with the health of the company.

"By using one's financial capital (i.e. 401(k) balance) to purchase employer stock, an individual is effectively over-allocating to the future success of his or her current employer," Morningstar said in a research report on the issue. This may be fine when the company is doing well, but bad news if the company is struggling. If you do accept company stock, take steps to diversify your income and investment holdings so your success and the company's success are not so intertwined.

3. Company stock should not be your sole retirement strategy

Many people have found themselves in trouble when they've decided to put all of their retirement plan contributions into company stock. Or, they've accepted company stock as compensation without contributing their own money into a diverse set of investments. This is dangerous because it places all of your retirement money into a single company that could go bust at any time.

This is what happened with many Enron employees, who were left with nothing for their retirement when the company collapsed. Company shares should only be viewed as one component of a broader investment portfolio that includes a healthy mix of stocks from various industries and asset classes.

4. There may be tax implications

Unless your employer allows you to buy company stock as part of a tax advantaged retirement plan, you will be asked to pay taxes on any dividends you earn, and on capital gains when you sell. So keep this in mind at tax time.

If you own a large amount of company stock, those shares could represent a sizable tax bill that you will have to plan for. And if you decide to sell shares shortly after acquiring them, remember that capital gains could be taxed at the normal income rate rather than the long-term capital gains rate, which is lower.

5. Companies that offer stock aren't necessarily stronger

You should not assume that a company's stock will perform well just because they are offering shares to you. In fact, there is some evidence to suggest that companies that dish out a lot of stock to employees actually perform worse than companies that don't. You may feel like you are cheating if you invest in companies other than your own, but your future self will thank you.

6. You may end up with more company stock than you realize

If you've acquired company stock over the years and it's performed well, you may find that over time it has taken on a disproportionate share of your investment portfolio's value. On one hand, it's good that the share price has risen, but now your portfolio is way out of balance and a big bulk of savings is at risk if those shares drop in value.

It always makes sense to check your portfolio frequently and rebalance when you find yourself overweight with any one investment. This is especially true when dealing with company stock. As a general rule, avoid letting company stock make up more than 10 percent of your total investments.

7. Owning company stock has become less popular

Offering company stock used to be more common than it is now among organizations looking to attract top talent. The percentage of company stock in 401(k) plans has declined over the last decade. Back in 1999, company stock made up about 17 percent of the assets in 401(k) plans, but that figure has declined to 7 percent, according to the Employee Benefit Research Institute. And it appears that newer employees are less likely to place company stock in their retirement plans; EBRI reported that just 30 percent of new workers placed company stock in their 401(k) plan, compared to 44 percent of all planholders.

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Bookmark This: A Step-by-Step Guide to Choosing 401(k) Investments

Damian Davila — Thu, 21 Sep 2017 08:31:06 +0000

It's no secret that 401(k) fund options are notoriously opaque. While target-date funds provide convenience to investors, they often come with higher fees than alternative investment vehicles, have highly variable returns, and aren't a good fit for many retirement savers. Let's simplify things, and review a low-stress strategy for building a solid two-to-three-fund portfolio for your 401(k).

The downsides to target-date funds

Designed to gradually adjust your investment mix as you approach retirement age, target-date funds have exploded in popularity since their designation as qualified default investment alternatives by the 2006 Pension Protection Plan. The upsides of target-date funds are that they're easy to select (96 percent of Vanguard plans make it the default investment option), they automatically rebalance, and they offer appropriate investment diversification. (See also: What You Need to Know About the Easiest Way to Save for Retirement)

However, all that convenience comes at a high price. A 2015 review of over 1,700 target-date funds by FutureAdvisor determined that their average expense ratio (the annual fee charged to shareholders to cover operating expenses) was a relatively high 1.02 percent, meaning that you'd pay $51 every year for every $5,000 in your balance. Assuming an average investment return of 7 percent per year, you would miss out on an extra $4,998 in retirement savings over a 30-year period.

On top of high fees, some target-date funds' returns barely cover their high annual expense ratios. The same review of 1,700 target-date funds pointed out that the lowest five-year average annual returns were 2.9 percent. (Returns are expressed net of expense ratios.) As of September 2017, 2.9 percent is not that much higher than the rate of a five-year CD at a credit union.

Here's a better alternative to target-date funds.

Your guide to choosing your 401(k) investment options

In his 2013 letter to Berkshire Hathaway shareholders, Warren Buffett (aka The Oracle of Omaha) provided an investment strategy that would "be superior to those attained by most investors who employ high-fee managers." Buffett recommended putting 90 percent of one's investments in a very low-cost S&P 500 index fund, and the remaining 10 percent in short-term government bonds. This is the same advice that he has set in his will. (See also: The 5 Best Pieces of Financial Wisdom From Warren Buffett)

More and more 401(k) plans are offering passively managed index funds that track a benchmark, such as the S&P 500. And for good reason: The Vanguard 500 Index Investor Shares Fund [Nasdaq: VFINX] has an annual expense ratio of 0.14 percent, just a $7 annual fee for a balance of $5,000. That's $44 in annual savings when you compare it to a target-date fund with a 1.02 percent annual expense ratio.

Worried that this approach doesn't provide you enough diversification? Think again: An index fund tracking the S&P 500 is investing in 500 large-cap companies. That's as diversified as you can get. (See also: How Too Much Investment Diversity Can Cost You)

Let's use Buffett's advice to build your 401(k) plan's portfolio.

Step 1: Check your plan for a U.S. equities index fund

There is a good chance that your 401(k) plan offers a low-cost S&P 500 index fund. Buffett personally recommends an S&P 500 Vanguard index fund. Vanguard is an investment management company known for having very low fees compared to competitors, especially on its index funds. In 2016, close to 60 percent of Vanguard plans offered an index core giving you access to broadly diversified index funds for U.S. stocks. In truth, you can do just as well with other index funds tracking the S&P 500, such as the Fidelity 500 Index Investor [Nasdaq: FUSEX] and the Northern Stock Index [Nasdaq: NOSIX].

In the event, that you don't have access to a low-cost index fund tracking the S&P 500 through your workplace 401(k), you have two action items. First, see if your plan offers another large cap index fund (one investing in large U.S. companies based on a market index). This type of fund normally invests at least 80 percent of its assets in securities within its benchmark index, such as the Fidelity Large Cap Stock Fund [Nasdaq: FLCSX] and the Vanguard U.S. Growth Fund [Nasdaq: VWUSX]. Second, contact your plan administrator and request adding a low-cost S&P 500 index fund.

Step 2: Check your plan for a fund of short-term investment-grade bonds

Just like there are index funds for investing in equities, there are also index funds for investing in bonds. For example, there is the Vanguard Short-Term Investment-Grade Fund [Nasdaq: VSFTX], which has an annual expense ratio of 0.20 percent, or $10 in fees for a balance of $5,000.

Don't have access to such a fund? Look for a low-cost fund giving you the most exposure to high- and medium-quality, investment-grade bonds with short-term maturities, including corporate bonds, pooled consumer loans, and U.S. government bonds. Why short-term maturities? Short-term bonds tend to have low risk and low yields, ensuring that one portion of your nest egg remains stable at all times — something you'll really benefit from during any recessions.

Then, request that your plan administrator add a low-cost index fund for domestic bonds.

Step 3: Allocate 90 percent to the equities index fund and 10 percent to the bonds index fund

Now you're ready to rebalance your portfolio. Using your online portal, look for an option that says "exchange funds" or "transfer money between funds" to move your nest egg dollars from your existing investments into the equities index fund and bonds index fund. (Note: Depending on your plan rules, including vesting rules, you may not be able to move 100 percent of your balance until a certain date. In that case, move everything that you can and the remaining once it becomes eligible.)

Exchange your entire 401(k) balance and allocate 90 percent of that amount to the equities index fund and 10 percent to the bonds index fund. Confirm your transaction.

Step 4: Adjust your future contributions

To keep future contributions going into the right place, adjust your paycheck investment mix so that 90 percent of withholdings go to the equities index fund and 10 percent go into the bonds index fund.

If your 401(k) offers an automatic rebalance feature, opt-in for it so that your portfolio is automatically readjusted to the 90/10 without you moving a finger. If your 401(k) doesn't offer that feature, plan to manually rebalance your account once a year.

Step 5: Revisit the 90/10 allocation at important life changes

Marriage. Birth of your first child. Purchase of your first home. Being able to start making catch-up contributions. Reaching age 59 1/2. These and more critical milestones in your life may require you to adjust your 90/10 allocation. As you get closer to retirement age, you should gradually shift from a growth strategy (selecting funds that exhibit signs of above-average growth) to an income strategy (picking funds that provide a steady stream of income) so that you hold fewer stocks and more bonds. The beauty of a target-date fund is that is does all of this for you automatically as you age. Without one, you'll need to stay on top of this occasional rebalancing yourself.

The bottom line

One of the main reasons that your 401(k) will perform better is that you're minimizing fees. If you were to allocate 90 percent of a $5,000 401(k) balance into the Vanguard 500 Index Investor Shares Fund [Nasdaq: VFINX] and 10 percent into the Vanguard Short-Term Investment-Grade Fund [Nasdaq: VSFTX], you would just pay $7.30 in annual fees. That's $43.70 in annual savings over putting the entire $5,000 in a target-date fund with a 1.02 percent annual expense ratio. It doesn't sound like a large amount of savings, but compounded over the years it can add up to thousands of dollars more in your retirement fund.

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This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Surprising Ways Confidence Can Hurt Your Investments

Tim Lemke — Wed, 26 Jul 2017 08:00:17 +0000

There may come a moment when you feel like you have this investing thing all figured out. You've made some great stock picks and your portfolio is going gangbusters. But are you letting your confidence get the best of you and your investments?

Being confident is OK. You need some confidence in yourself to invest in the first place. But being too cocky can lead you to make bad investment choices, and have a blind spot to your own weaknesses. Here are some of the ways confidence may actually hurt your investments.

1. You develop a selective memory

Maybe you bought shares of Facebook when they were trading below $25, and have made a killing on the investment since. You like to hold up that one purchase as proof of your genius as an investor. But are you forgetting about the other investments that didn't do so well? On balance, are you really any smarter than anyone else out there?

Don't let your memory of one great decision delude you into thinking you have a special gift as an investor. Doing so can make you believe that every stock will eventually turn out to be a winner, even if there's no rational basis for your confidence.

2. You have too much faith in the market

While it's true that history shows the stock market has gone up consistently over time, it's still important to protect your investments against a possible downturn. As you get older and approach retirement age, consider shifting some investments into less volatile instruments, such as bonds, even if you believe the market will continue to go up.

It's also important to avoid being too optimistic about markets in the short term. If you're investing money that you need in a year or two, the stock market may not be the best place to put it. Having faith in the market is crucial to building wealth over time, but protecting your investments against a down period is also part of the formula for success.

3. Your portfolio is not properly balanced

So you've had some great success with some of your investments, and decide to buy more shares of those that have done the best. There's nothing wrong with buying a lot of something if it performs well for you, but it's important to keep your overall portfolio from getting out of whack. This means not being too heavily invested in one particular stock or group of stocks.

Ideally, your portfolio should have a nice mix of stocks from various industries, sectors, and asset classes. Depending on your retirement age, mixing in some bonds and dividend stocks may also make sense. You may fall in love with a certain investment, but you should not let it dominate your portfolio. Diversification is key to mitigating risk. (See also: The Basics of Asset Allocation)

4. You're taking on too much risk

Investing is not without risk, and you must be comfortable with that if you plan to accumulate wealth over time. But don't be too tempted to take on extra risk just to chase higher returns. It's one thing to invest heavily in stocks, but it can be financial suicide to go after notoriously volatile investments, or to engage in risky practices like trading on margin or buying and selling options.

The best approach is to build a portfolio that roughly performs in line with the whole stock market, ensuring that you'll likely make money over time but will avoid catastrophic downturns that wipe out your whole savings.

5. You never check up on your investments

For most people, it's not necessary to check your investments every day and obsess over every movement in the markets. But you don't want to completely ignore your investment accounts, either. Even if you are invested in simple, reliable things like index funds, an occasional check-in is usually a good idea. (See also: The 4 Best Investments for Lazy Investors)

Without a checkup, you may be unaware that certain investments are underperforming. You might allow your portfolio to become unbalanced, leaving you under- or over-invested in some areas. You may be left unaware of company sales or mergers that result in changes to your investment mix. Don't get cocky; the stock market has gone up reliably over time, but your investments still need some tending to from time to time.

6. You trade too often

Let's face it: Buying and selling stocks can be fun. And when you feel confident in your stock picking abilities, you'll feel the urge to trade stocks frequently. You may even feel like you can "time" the market. But trading frequently has financial consequences.

First, if your stocks are in a taxable brokerage account, you'll end up paying tax on any gains when you sell. Second, most brokerage firms charge a commission for every trade. These expenses can put a dent in the value of your portfolio.

7. You miss out on popular, but well-performing investments

Imagine there's a hot stock that everyone is buying. But you stay away, because you think everyone else is dumber than you. Your confidence got in the way of rationally examining an investment on its merits rather than being influenced by the decisions of others. Buying a stock just because it's popular is silly, but so is refusing to buy it for the same reason. (See also: 7 Everyday Things That Are Surprisingly Awesome Investments)

8. You hold on to investments too long

Years ago, you bought 100 shares of OmniCorp and it netted you a massive return in the first year. You still have some of those shares, but the company has since been struggling, and may even declare bankruptcy. But still, you refuse to cut your losses and sell, because you made so much money from this stock early on. You are utterly convinced the company will turn things around, despite all evidence to the contrary. This is a dangerous mentality to have, and can cost you plenty in the long run.

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How to Save for Retirement When You Are Unemployed

Tim Lemke — Wed, 12 Jul 2017 09:00:14 +0000

When you're unemployed, saving for retirement may be the last thing on your mind. It may seem impossible to save for the future when you have no steady income to even pay basic bills.

But depending on your situation, it may still be possible to build your nest egg even if you're not working full-time. Here are some tools and suggestions for keeping an eye on the future during a period of joblessness.

Familiarize yourself with IRAs

Individual retirement accounts (IRAs) are great for people who don't have access to employer-sponsored retirement plans like 401(k) accounts. A traditional IRA is similar to a 401(k), in that any contributions are deducted from whatever taxable income you have. With a Roth IRA, on the other hand, earnings are taxed up front, but any gains you have won't be taxed when you withdraw money at retirement age.

IRAs are useful for people who are self-employed, or who earn money inconsistently through part-time or freelance work. So if you're not employed full-time but still have some earned income, these accounts can help you save.

Think of retirement savings as a necessary expense

When you're unemployed, it's important to get a handle on all of your expenses so that you know where you need to cut. You may find that there are a lot of costs (luxury purchases, eating out, cable TV) that can be taken out of your household budget, while other expenses (food, electricity, debt payments) are more necessary. If you think of retirement savings as a necessity, you will be forced to cut spending elsewhere.

Roll over your old 401(k)

If you've been laid off from a job, you will no longer be able to contribute to the 401(k) you may have had from your employer. But the account will still exist and the money is still yours. You can let the old 401(k) account sit, but it's better to roll it into a traditional individual retirement account (IRA). The IRA will give you more flexibility and investment options, and may also have lower fees. And you can begin contributing to it once you have any earned income at all.

Focus on rebalancing

You may not be able to add much to your retirement accounts, but you can work to make sure they are optimized. This means making sure you have the right mix of investments based on your retirement date, and getting the optimal blend of stocks in various industries and asset classes. It's always smart to examine your portfolio to ensure you are not over- or underinvested in any one area.

Look for higher bank interest rates

If you're not taking in much income for the time being, you need to have your cash savings working for you. That means any cash savings you have should generate as much income as possible. Interest rates are still quite low, but many online banks offer interest rates on CDs and savings accounts that are higher than average.

Avoid the temptation to cash out

It may be tempting to take money out of your retirement funds, but you should avoid it if at all possible. One of the best ways to see your retirement savings grow is to let your investments do their thing. You can see a meaningful increase in your retirement savings just from market gains, even if you're not contributing for the time being.

Withdrawing from retirement accounts, however, has consequences. First, any money you take out has no chance to grow and help you expand your overall retirement savings. Second, there are penalties and taxes associated with taking money out of retirement accounts early. (See also: 5 Questions to Ask Before You Borrow From Your Retirement Account)

Continue to focus on growth, if you can

If you are unemployed and have some investments in a taxable brokerage account, you may be tempted to shift them to dividend stocks or other income-producing investments. This can give you extra income at a time when you may need it. But making this kind of adjustment could have a long-term negative impact on the overall growth of your portfolio. If dividends, bonds, or other income-focused investments will help you keep the lights on, fine. But it's best to focus on finding other sources of income, or reduce your spending first before going this route.

Reinvest dividends, if you can

If you do have dividend stocks already, you can still contribute to your retirement portfolio by reinvesting any dividend income you get from stocks. You may be tempted to use that investment income to pay bills and help get through your unemployed period, but if you can get by without it, direct the dividends to buy more stocks and other investments instead. Even small contributions added to your retirement accounts can add up to considerable savings over time.

Get your spouse involved

Perhaps you never thought to include your spouse in retirement planning because you felt it wasn't necessary while you were working. Now his or her income can be directed to help you save. This may be a challenge, since they are now also working to help pay more of the bills. But there are some ways to use your spouse's income for your own retirement accounts. If you have a traditional or Roth IRA, your spouse's earned income can go toward your account. (Note: This is only allowed if you file your taxes jointly.)

Plan to pay into accounts later

If you are unemployed but expect to be working in short order, you can postpone contributions to your IRA and add money later, even if it's after the end of the year. In fact, you can contribute to an IRA all the way up until April 15 of the following year. So for example, let's say you planned to max out your IRA by making monthly payments. (This would be about $458 monthly for a total of $5,500 for the year — the maximum amount allowed by the IRS for people under 50.) But let's say you are out of work from August through October of that year. You can hold off on contributing during that time and make up the difference in later months, even the first few months of the following year, if necessary.

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Start Planning Now for When Your Target-Date Fund Ends

Dan Rafter — Fri, 12 May 2017 08:30:12 +0000

There's a reason why so many people invest their retirement savings in target-date mutual funds offered within their 401(k). These funds are designed to be simple: Your money is automatically invested in a mix of stocks, bonds, and other asset types based on your age and the year you plan to retire.

As you get closer to your target date (the year you expect to hit retirement), the managers of your target-date fund gradually ramp down your risk — moving more of your dollars away from high-risk, growth-oriented investments like stocks, and focusing instead on safer, more conservative investments like bonds or cash. This "set it and forget it" approach allows you to easily stash money away for retirement without constantly rebalancing the fund yourself.

The goal is to have the right asset mix when your target-date fund hits its target. But this leads to the big question: What do you do when your target-date fund finally does reach this endpoint?

Reaching the target date

According to the Investment Company Institute, the target date isn't a date when investors should automatically cash out their entire target-date fund. It's simply an estimate of when investors will retire, and therefore stop making new investments in the fund. Most target-date funds can be kept open beyond the target date.

What happens when the fund reaches that target date depends on whether the fund is guided by one of two basic investing approaches.

If a target-date fund has what is known as a "to" glide path, the fund manager will stop adjusting the fund's asset mix once it hits the target date. In this scenario, your investment mix will remain in place until you cash out the fund.

There's also the "through" glide path. In this approach, the fund manager will continue to adjust the fund's mix of investments even as the target date comes and goes.

It's important to remember that target-date funds offer no guarantees. Your fund manager will rework your asset mix as your target date approaches to minimize your investment risk. But no manager can guarantee any set amount of dollars by this date.

What can you do when your target date arrives?

When your target-date fund hits its target date, you have three basic choices of what to do with your money.

1. Do nothing

First, you can essentially choose to do nothing. You can instead leave your money in your target-date fund after you retire. You won't be able to make new contributions to the fund, of course, but as with all 401(k) investments, your target-date fund will continue to grow on a tax-deferred basis. This will remain the case until you begin making withdrawals from the fund. You are required to begin taking your minimum withdrawals from your 401(k) by age 70 ½ at the latest.

2. Roll over funds into an IRA

If you want to be more hands-on with your investments, you can instead roll over the target-date fund, and any other investments in your 401(k), into an IRA. If you roll the money into a traditional IRA, you can continue to make contributions until you hit the year in which you turn 70 ½. If you roll your 401(k) funds into a Roth IRA, you can continue making contributions as long as you are earning income. If you are not working, though, and not earning income, you can't contribute to a Roth no matter your age.

3. Cash out your fund

Finally, you can cash out your 401(k) (and the target-date fund within it) once you stop working for the employer who offered it to you. If you rollover your 401(k) into an IRA, you won't have to pay taxes. But if you cash out, you will owe income tax on the amount you withdraw from the plan. If you cash out before you turn 59 ½, you'll have to pay income taxes and a 10 percent penalty.

The best option of the three depends on how much time you want to spend focusing on your investments. If you prefer to let others manage your investment, the "do-nothing" approach might be your best move. If you'd rather have more control, on the other hand, rolling over your target-date fund into an IRA is probably the better choice.

If you need liquid cash immediately, cashing out your fund might be necessary — but the tax hit you'll take often makes this the least attractive option.

This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Traps to Avoid With Your 401(k)

Damian Davila — Thu, 23 Mar 2017 09:00:15 +0000

More and more Americans are choosing an employer-sponsored 401(k) as their preferred way to build up their nest eggs. As of 2014, an estimated 52 million Americans were participating in a 401(k)-type plan.

When used properly, a 401(k) can be a powerful tool to save for your retirement years, but there are a couple of crucial pitfalls that you have to watch out for. From high fees to limited investing choices, here is a list of potential downsides to 401(k) plans — and how to work around them.

1. Waiting to set up your 401(k)

Depending on the applicable rules from your employer-sponsored 401(k), you may be eligible to enroll in the plan within one to 12 months from your start date. If your eligibility kicks in around December, you may think that it's fine to wait until the next year to set up your retirement account.

This is a big mistake for two main reasons.

First, contributing to your 401(k) with pretax dollars allows you to effectively reduce your taxable income for the current year. In 2017, you can contribute up to $18,000 ($24,000 if age 50 or over) to your 401(k), so you can considerably reduce your tax liability. For example, if you were to contribute $3,000 between your last two paychecks in December, you would reduce your taxable income by $3,000. Waiting until next year to start your 401(k) contribution would mean missing out on a lower taxable income!

Second, your employer can still contribute to your 401(k) next year and make that contribution count for the current year, as long as your plan was set up by December 31 of the current year. Your employer contributions have to be in before Tax Day or the date that you file your federal taxes, whichever is earlier.

How to work around it

If you meet the requirements to participate in your employer-sponsored 401(k) toward the end of the year, make sure to set up your account by December 31st. That way, you'll be ready to reduce your taxable income for the current year through your own contributions and those from your employer before their applicable deadline (December 31 and Tax Day or date of tax filing (whichever is earlier), respectively).

2. Forgetting to update contributions

When you set up your 401(k), you have to choose a percentage that will be deducted from every paycheck and put into your plan. It's not uncommon that plan holders set that contribution percentage and forget it. As your life situation changes, such as when you get a major salary boost, marry, or have your first child, you'll find that your contributions may be too big or too small. (See also: 5 Times It's Okay to Delay Retirement Savings)

How to work around it

To keep a contribution level that is appropriate to your unique financial situation, revisit your percentage contribution every year and whenever you have a major life change. Don't forget to also check whether or not you elected an annual increase option — a percentage by which your contribution is increased automatically each year — and adjust it as necessary.

3. Missing out on maximum employer match

Talking about contributions, don't forget that your employer may contribute to your plan as well. In a survey of 360 employers, 42 percent of respondents matched employee contributions dollar-for-dollar, and 56 percent of them only required employees to contribute at least 6 percent from paychecks to receive a maximum employer match.

How to work around it

Employers require you to work a minimum period of time before starting to match your contribution. Once you're eligible, meet the necessary contribution to maximize your employer match. One estimate puts the average missed employer contribution at $1,336 per year. This is free money that you can use to make up for lower contribution levels from previous months or years.

4. Sticking only with actively managed funds

When choosing from available funds in their 401(k) plan, account holders tend to focus on returns. There was a time in which actively managed funds were able to deliver on their promise of beating the market and delivering higher-than-average returns. That's why 401(k) savers often choose them.

However, passively managed index funds — funds tracing an investment index, such as the S&P 500 or the Russell 2000 — have consistently proven that they can beat actively managed funds. Over the five past years, only 39 percent of active fund managers were able to beat their benchmarks, which is often an index. That's why over the same period, investors have taken $5.6 billion out of active funds and dumped $1.7 trillion into passive funds.

How to work around it

Find out whether or not your 401(k) offers you access to index funds. Over a long investment period, empirical evidence has shown that index funds outperform actively managed funds. Review available index funds and choose the ones that meet your retirement strategy. (See also: 3 Steps to Getting Started in the Stock Market With Index Funds)

5. Chasing high returns instead of lower costs

When reading the prospectus of any fund, you'll always find a disclaimer warning you that past returns aren't a guarantee of future returns. So, why are you holding onto those numbers so dearly? As early as 2010, investment think tank Morningstar concluded that a fund's annual expense ratio is the only reliable indicator of future investment performance, even better than the research firm's well-known star rating.

And guess what kind of funds have the lowest annual expense ratios? Index funds! For example, the Vanguard 500 Index Investor Shares fund [Nasdaq: VFINX] has an annual expense ratio of 0.16 percent, which is 84 percent lower than the average expense ratio of funds with similar holdings. If your 401(k) gives you access to lowest cost Vanguard Admiral shares, you would shed down that annual expense ratio even further to 0.05 percent.

How to work around It

When evaluating a fund in your 401(k), look for comparable alternatives, including index funds. To maximize the growth of your nest egg, chase funds with lower annual expense ratios and investment fees. Regardless of their performance (which tends to be better anyway!), you'll minimize your investment cost. (See also: Watch Out for These 5 Sneaky 401(k) Fees)

6. Not periodically rebalancing your portfolio

Even when choosing index funds, you still need to periodically adjust your portfolio. Let's assume that you follow this investment recommendation from Warren Buffett for your 401(k): 90 percent in a low-cost index fund, and 10 percent in government bonds. (See also: The 5 Best Pieces of Financial Wisdom From Warren Buffett)

Depending on the market, your portfolio allocation may be way off as early as one quarter. If the S&P 500 were to have a huge rally, you may now be holding 95 percent of your 401(k) in the index fund. That would be much more risk that you may be comfortable with, so you would need to take that 5 percent and put it back into government bonds. On the other hand, holding 85 percent in government bonds would make you miss your target return for that year. Forgetting to rebalance your portfolio once a year when necessary is one easy way to derail your saving strategy.

How to work around it

Many 401(k) plans offer an automatic annual rebalancing feature. Review the fine print of this feature with your plan and decide whether or not it's suitable for you. If your plan doesn't offer an automatic rebalancing feature, choose a date that makes the most sense to you and set it as your day to rebalance your portfolio every year.

7. Taking out 401(k) loans

Treating your 401(k) as a credit card is a bad idea for several reasons. Doing this:

Creates additional costs, such as origination and maintenance fees;
Becomes due in full within 60 days of separating from your employer;
Turns into taxable income when not paid back, triggering potential penalties from the IRS and state and local governments; and
May quickly turn into a bad habit: 25 percent of 401(k) borrowers go back for a third or fourth loan, and 20 percent of them take out at least five loans.

How to work around it

Treat your 401(k) as a last-resort source of financing. There are very few instances when you should borrow from your retirement account. Make sure that you go through all of your credit options and include the opportunity cost of foregoing retirement savings, including potential taxes and penalties, when comparing a 401(k) loan against another type of loan.

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

9 Costly Mistakes DIY Investors Make

Tim Lemke — Wed, 05 Oct 2016 10:30:08 +0000

With the right approach and education, it's possible for people to handle their own investments. But it's also easy to make mistakes that could cost you large sums of money in the long run.

If you're a do-it-yourselfer, ask yourself whether you're making any of these mistakes below. If so, it may be worth seeking professional advice from a certified financial planner.

1. Trading Without Considering Fees and Taxes

For many investors, it's fun to trade stocks. The actual buying and selling can be a bit of a rush, especially when things are going well. But all of that activity can come with a cost, in the form of transaction fees and capital gains taxes. If you are finding that the returns on your portfolio seem a bit lackluster, it may be because you're investing without taking these costs into account. More experienced investors and financial advisers understand how to avoid extra fees and maximize returns as a result.

2. Getting Emotional

Investing your own money can sometimes be hard on the psyche. You may go through stretches where you see your portfolio shrink. Stocks that you personally selected may not always perform the way you predicted. Markets can be volatile, and not everyone can stomach it. If you find yourself getting stressed out by the investing process or buying and selling based on emotion, you may want to consider having a financial adviser take over the reigns.

3. Not Investing Enough

When you invest on your own, you may only be guessing as to how much you need to save. And it's common for investors to feel a little skittish and invest too little if the market is down. A financial adviser may be more tuned into the appropriate level of risk an investor can take on, and will usually advise a more aggressive approach for someone far out from retirement.

4. Not Diversifying Enough

Most do-it-yourselfers understand the basics of diversification, and will invest in index funds that track the S&P 500 or broader stock markets. And that's perfectly fine. But often, these funds are heavily weighted toward larger companies or certain industries. If you are investing only in basic index funds, you may not have good exposure to international markets or smaller companies, for example. There may be entire industries that will be underrepresented in your portfolio.

To achieve true diversification, you can have an S&P Index fund as a base, but should also look for funds and stocks that fill in the gaps.

5. Failing to Rebalance

You may think you're creating a diverse portfolio based on the investments you've selected. But have you checked the balances recently? Over time, portfolios can get out of whack if certain investments are performing better than others. For example, you may think you're investing in 50% large cap, 25% small cap, and 25% mid cap stocks. Until one day, you check your account and realize that small cap stocks make up 40% of the portfolio. Financial advisers will recommend when to rebalance, and offer advice on how to avoid taxes in the process.

6. Trying to Beat the Market

Some investors insist on doing things themselves, because they believe they are expert stock pickers and can beat the performance of the overall stock market. In most cases, they are wrong. Numerous studies have shown that even professional investment managers can't beat the market on a regular basis, and that most investors would be best off with a portfolio of index funds.

7. Falling in Love With Shiny New Things

Do-it-yourselfers can become enamored with whatever the hot stock is at the moment. They go for name brands and flash rather than looking closely at a balance sheet. They also tend to go with what's familiar, rather than doing some research and finding investments that are less well known but of sound quality.

8. Having No Backup Plan

If you are an older DIY investor, do you have a plan for what happens to your investments if you are incapacitated? Are you sharing your investment accounts with your spouse or other loved ones? Many DIY investors are too stubborn to seek help from anyone, and thus run into problems when they are no longer in a position to manage things themselves. It's fine to handle your own investments if you're confident enough to do so, but it's wise to have a plan for how things will be dealt with if you're no longer in charge.

9. Becoming Too Consumed

Realistically, the average person can handle their own investments while checking in only periodically each week. A properly balanced portfolio does not need a lot of maintenance. But investing can be like an addiction to some people, and it's possible to spend hours a day buying and selling and becoming obsessed with the movement of the markets. If you're finding that your investing is having a negative impact on your relationships and other aspects of your life, it may be best to back off and let someone else handle things.

This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Too Much Investment Diversity Can Cost You

Damian Davila — Thu, 25 Aug 2016 10:30:14 +0000

Financial experts agree that you shouldn't to put all your eggs in one basket. But just like with everything else in life, moderation is essential to truly reap the benefits of diversification. Spread out your investment funds into too many funds and you'll end up with a subpar portfolio bogged down with excessive charges and, even worse, potentially more risk than you're willing to bear. Here are four warning signs that you may have your investments in too many baskets — and how to fix it.

1. Paying Too Much in Investment Fees

The more that you branch out of plain vanilla investments, the more likely that you'll end up paying more investment charges and fees. Take, for example, the portfolio that Warren Buffett has laid out in his will: "Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund."

Let's take a look at the potential investment fees of such a portfolio.

Since the Oracle of Omaha prefers Vanguard and chases low fees, let's assume that both investments are in index funds. It's safe to assume that he meets the $10,000 minimum investment required for the Vanguard Admiral index funds. So, he allocates 90% of his portfolio to the Vanguard 500 Index Fund Admiral Shares [Nasdaq: VFIAX], which has a 0.05% expense ratio, and 10% of his portfolio into the Vanguard Short-Term Government Bond Index Fund Admiral Shares [Nasdaq: VSBSX], which has a 0.10% expense ratio. For a $10,000 portfolio, Buffett would pay $55 in investment fees.

If Buffett were to start diversifying into other types of investments, he would very likely run into higher expense ratios. For example, the Vanguard New York Long-Term Tax-Exempt Fund Admiral Shares [Nasdaq: VNYUX] has a 0.12% expense ratio (despite its $50,000 minimum investment requirement!) and the Vanguard Interm-Tm Corp Bd Index Admiral [Nasdaq: VICSX] has a 0.25% purchase fee on top of its 0.10% expense ratio. Assuming that he were to allocate 50%, 30%, 10%, and 10% to the New York muni bond fund, S&P 500 index fund, short-term government bond index fund, and the intermediate-term corporate index fund, respectively, Buffet would pay $220 on investment fees!

How to Fix It: Calculate your current total of investment fees across all your holdings. If the total is above what you're willing to pay (a useful rule of thumb is that anything beyond 1% of your total investment is too much), then it's time to focus your investments in lower-cost options.

2. Rebalancing Portfolio More Often

Speaking of fees, there is a higher chance that you'll run into more of them when you hold lots of investment categories. In the 90%-stocks-and-10%-bonds portfolio example, you only need to keep track of two funds. This means that figuring out when your portfolio is no longer meeting your target asset allocations is straightforward — and you may not need to do it as often. For example, you could set a target to rebalance when 80% of your portfolio is in stocks and 20% in bonds.

On the other hand, spreading your money out too thin can complicate keeping track of asset allocations and make you trade more often. Here's an example: Assuming a target 3.5% allocation in an emerging markets index fund, big market swings could force you to buy or sell many times throughout the year, triggering many charges. From front-end loads to back-end loads, there are plenty of investments to keep an eye on. And yes this even applies to 401K accounts! (See also: Watch Out for These 5 Sneaky 401K Fees)

How to Fix It: Tabulate how much you're incurring in fees on top of the regular annual expense ratios of your portfolio holdings. If that percentage is too high, or consistently increasing throughout the years, you need to consolidate your portfolio into fewer holdings.

3. Experiencing Diminishing Returns

Of course, you might be thinking that the extra returns of a very diversified portfolio may more than compensate for those additional fees and charges.

Let's bust that investment myth.

In a joint-study by The Wall Street Journal and Morningstar, the portfolio that generated the highest return over a 20-year period was a 70-30 mix of U.S. stocks and bonds, yielding a 9.1% annualized return. A portfolio with 40% in U.S. stocks, 20% in U.S. bonds, 10% in foreign developing market stocks, 10% in international bonds, and the rest in a mix of investments, including emerging market stocks, commodities, and hedge funds, yielded only an 8.8% annualized return.

How to Fix It: Measure each of your funds against its respective benchmark. If an investment has been missing the benchmark for too many quarters or years, it may be time to cut that fund loose.

4. Owning Too Much of the Same or Wrong Type of Investments

Another issue with putting many eggs in many baskets is that you can unintentionally end up with more eggs than you thought in a particular basket or, worse, a wrong basket.

Let's assume that you hold an index fund tracking the S&P 500. As of August 8, 2016, that means that your portfolio would hold about 3.08% on Apple Inc, 2.40% on Microsoft Corporation, and 1.53% on Facebook Inc. Class A shares. If you were to also hold an index fund on the technology sector, you'll probably end up increasing your holding on each one of those investments. For example, the Vanguard Information Technology Index Fund Admiral Shares [Nasdaq: VITAX] has those same three stocks among its top four largest holdings.

Additionally, if you're open to throwing more money around investments, you could end up buying some investments that fail to meet your investment objectives. Remember the late 1990s dot-com bubble? How about 2008's housing bubble? During those times, too many individual and institutional investors were buying financial instruments that they shouldn't have been purchasing. If you force yourself to allocate 5% "somewhere," then you could end up with the wrong type of investment.

How to Fix It: First, read the prospectuses of your mutual funds and other accounts and understand their actual holdings. Using this information, you can spot whether or not you hold too much of the same investment. Second, review your investment objective (ie; income vs growth) and evaluate whether or not your current investment funds qualify for that objective.

The Bottom Line

Holding all of your money in a single stock is definitely not a good idea because it would have a 49.2% average standard deviation (a measure of risk). At 20 stocks, your portfolio risk is reduced to 20%. However, every additional stock added to your portfolio will only further decrease your portfolio risk by about 0.8%.

The evidence suggests that due to greater returns, very marginal risk reductions, and lower fees over time, you would be better off with simpler diversification on stocks and bonds. Some financial advisers suggest that when you have more than 20 stocks or mutual funds, you're actually minimizing returns instead of maximizing them. So, before adding that extra holding, keep in mind that an index fund tracking the S&P 500 is already splitting your investment into 500 baskets!

How many different types of investments is too many?

This article is from Damian Davila of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Most Important Thing You're Probably Not Doing With Your Portfolio

Qiana Chavaia — Thu, 07 May 2015 11:00:07 +0000

Life changes, and so do financial markets. That's why it's important to periodically examine whether your portfolio still reflects your financial goals. "Rebalancing" is simply the process of bringing your portfolio's assets back to their original, planned percentage-mix of investment types. The reason for this is that some investments appreciate, while others depreciate over time, creating a different balance than you may have intended.

Why Rebalance?

One investing rule of thumb is that stock and bond prices move in opposite directions. Let's say you're 35, and allocate 65% of your portfolio to stocks and 15% to bonds. The economy is moving along nicely and you have a good year in the stock market and by the end of it, stocks represent 75% of your portfolio. This asset mix is out of alignment with your goals! To bring it back into balance, you will need to sell the over-weighted asset (stocks in this case), and purchase the under-weighted asset — bonds. This realigns your portfolio with your investment objectives.

How Often, How Far, and How Much: How Frequently Should You Rebalance?

There are three rebalancing strategies. How often you choose depends on whether you're still saving and re-investing the dividends, or retired and taking withdrawals.

Time Strategy

For a systematic approach, investors can follow the time-table strategy. This can be daily, monthly, quarterly, yearly, or whatever works. With this approach, it will not matter how far away your assets deviate from your goals. The only variable impacting your rebalancing decision is time. Of course, which frequency you choose should be determined based on your time horizon, risk tolerance, diversification strategy, and the costs to rebalance.

But the average investor doesn't have the time nor resources for a daily — or even monthly — rebalancing strategy, and most of us choose less frequent rebalancing..

Threshold Strategy

With the threshold strategy, the one thing that will trigger a rebalance is deviation away from your target goals by a definitive amount, say 3%, 5%, or 10%. Deciding on this strategy could require daily, monthly, or quarterly rebalancing, or it may be that you won't need to rebalance for five, 10, or 15 years. Again, your investment goals should help you determine whether this strategy is appropriate for you.

Hybrid: Time and Threshold

Here, both the time and threshold strategies guide your decision to rebalance.

You will rebalance your portfolio on a periodic time-table, but only if your assets deviate from your goals by a pre-determined amount. Therefore, if you reach your time schedule and your assets are below the threshold, you would not rebalance. Likewise, if your assets exceed the threshold, but you haven't reached the scheduled rebalancing date, you will wait to rebalance.

For the average investor, rebalancing too frequently could result in higher tax costs (from selling assets) and added transaction fees. But many experts suggest taking a hard look at least once a year at whether your portfolio's asset mix still matches your intended goals.

How often do you rebalance your portfolio?

This article is from Qiana Chavaia of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

One Simple Trick to Get the Best Tax Benefit From Your Retirement Portfolio

Philip Brewer — Wed, 08 Jan 2014 10:37:23 +0000

The most basic strategy for long-term investing is asset allocation. But keeping to an allocation means rebalancing your portfolio, and rebalancing is fraught with complications — one big one being the tax implications of the sales you need to make. A simple trick can help you deal with that issue, but first let's take a closer look at asset allocation and rebalancing. (See also: The Best Asset Allocation for Your Portfolio)

What Is Asset Allocation?

The idea of asset allocation is to spread your investments among various categories (stocks, bonds, cash, gold, real estate, etc.), with the percentages in each category chosen to balance your desire for return and willingness to take risk.

There are a lot of rules of thumb for asset allocation.

Spreading Your Wealth Around

One simple one is to set the stock fraction of your portfolio equal to 100 minus your age — so a 24-year-old would go with a portfolio of 76% stocks with the rest in bonds. Each year the portfolio gets a little more conservative, gradually shifting to only 35% stocks by age 65.

An asset allocation championed by financial writer Harry Browne was a simple 25% each divided among stocks, bonds, gold, and cash.

Many financial writers and advisors have model asset allocations. There is, of course, no way to know what asset allocation will turn out to be the best (until the future arrives, and it turns out that an asset allocation of 100% in whatever went up the most would have been best).

My own sense is that any reasonably well-diversified portfolio will be okay: Just pick one. Sticking to an asset allocation means that you automatically avoid the error of putting all your money into whatever last year's hot investment was. (See also: How to Know if a Company Is Worth Your Investment)

What Is Rebalancing?

Because investment prices are constantly changing, your portfolio will almost immediately be out of balance. If stocks have gone up, the percentage of your portfolio invested in stocks will be above the target level. Rebalancing is the process of getting each category of your portfolio back to its target percentage. (See also: 7 Online Investing Tools and Apps)

In theory, rebalancing is easy:

Calculate your total assets.
Apply your target percentages to figure out how much money you should have in each category.
In any category that's over its allocation, sell enough to bring the category down to the target.
Use the money from those sales to buy the appropriate amount in each category that was under it's percentage.

In practice, rebalancing is trickier than that, for several reasons.

Rebalancing Complications

The first issue with rebalancing is deciding how often to do it. You could do it every day — or even every second — selling a little of anything that had gone up a penny and buying whatever had gone down a penny, but that much churning would just add complexity and expense to no particular benefit. The general consensus is that annual rebalancing is about right, but you could make the case that doing it monthly or quarterly would be better.

The second issue with rebalancing is procrastination. There's just natural inertia — it's one more thing to do, but one that doesn't have a real deadline, so it gets put off until later. (See also: 10 Ways to Stop Procrastinating)

There's another factor, though, which is that after a year, your portfolio is probably pretty far off from its target percentages — but in what seems like a good way. You'll have more of your winners and less of your losers, and who doesn't want that? Selling your winners is always tough, and buying the laggards even tougher.

Those are both real issues, but this post is about the third issue with rebalancing, which is taxes.

Tax-Efficiency in Rebalancing

Besides the issue of it just being tough to let your winners go, rebalancing also raises the issue of capital gains taxes. All those sales of winners incur tax liabilities. (Worse, since you're not selling the losers, you don't even have any losses to offset your gains.)

Rebalance Via Contributions Rather Than Sales

There's one basic trick to ameliorate this issue, which works pretty well: Use your contributions to rebalance your portfolio. Instead of dividing your contributions up the same as your target percentages, divide them up so as to move your portfolio closer toward balance.

The calculations can get complicated if you let them — but you don't need to let them.

If you make contributions frequently, and especially if a single contribution isn't big enough to bring your portfolio entirely back into balance, you can do it the easiest possible way: Figure out which category is the most dollars below its target, and put your whole contribution into that one category. Do the calculation afresh for the each contribution, and your portfolio will stay reasonably close to your desired asset allocation.

The same thing can work when you leave the contribution phase of your life and move into the draw-down phase: Use your withdrawals to move your portfolio back into balance by selling from whatever category is the most dollars over its target.

Rebalancing by targeting your contributions works very well, especially in the early phases of building your portfolio, when each month's contribution is large compared to the size of your total portfolio.

After ten or twenty years, your portfolio (we very much hope) will be large compared to each month's contribution, and it will drift from your target asset allocation faster than targeting your contributions can bring it back in line. This is somewhat eased by the fact that you'll probably be able to make larger contributions as you progress along in your career, but eventually market volatility will almost certainly force you to going back to plan A: Sell things that have gone up and buy things that have gone down. But a careful application of rebalancing with your contributions will minimize the amount you have to sell — and thereby minimize the amount of capital gains taxes you incur. (Clever use of tax-advantaged accounts, like IRAs and 401(k)s, will also help.)

Do you look after your retirement funds via asset allocation? What tricks do you use to keep everything in balance?

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: