16 Jul

Avoiding Mistakes and Using Good Investments can Help to Build Your Nest Egg

Written by Michael Alexenko, CFA.

There are no silver bullets for increasing your nest egg. Some people think that Wall Street is a rigged game and if they could only find the right person to get them on the inside track that they'll never lose money regardless of how the market is performing. They have to get that fantasy out of their heads.

The best way to increase your nest egg is avoid mistakes. Don't try to time the markets, develop an investment strategy and diversify your portfolio. Make use of some great exchange traded funds (ETFs) that give you access to asset classes that until a few years ago were hard for the individual to invest in. For Real Estate you have (VNQ or ICF), Emerging Markets (EEM or VWO) and International Small Cap (DLS or SCZ). These funds offer great diversification benefits to a long term investor and can help to enhance returns and drive down overall portfolio risk. Rather than trying to find the one stock that is going to make you rich consider adding a Micro Cap ETF, like IWC. Small companies have the greatest growth potential and adding about 2.5% of your total portfolio's total value to IWC could be good for someone trying to boost his/her investments' firepower.

If your employer offers a 401(k) make sure you maximize your contributions, especially if your employer offers even minimal contribution matching. There may be no easier mistake to avoid than this one.

Watch out for excessive investment costs. There is little reason why you can't construct your own quality portfolio for less than .25%. Vanguard and iShares are two companies you need to make maximum use of to avoid the return erosion that high investment costs can cause. If you can't get a straight answer from a broker/financial advisor about how much your total investment costs are then run fast. If you need help building your portfolio then paying no more than 1%-1.25% in total fees and expenses is very achievable with respectable independent firms.

Know your risk tolerance. I saw too many people really rattled in 2008/09 and some decided to sell stock near the market bottom. That's a devastating self-inflicted wound. Realize that losing 20% of $100,000 is $20,000. 20% sounds benign, but when you convert the percentage into dollars it can give you a greater appreciation for what a bear market can mean. Imagine having a $500,000 portfolio that is hit with a 40% bear market and now you're left with $300,000. That's pain that most people cannot stomach. The selling low and buying high offense is hard to commit if you know your true risk tolerance and you implement a strategy consistent with your risk appetite. Having the right investment mix will allow you to sleep well, during good or bad markets.

06 Jun

Don’t Let External Factors Force You to Commit Strategy Errors

Written by Michael Alexenko, CFA.

Despite the Federal Reserve's manipulation of the bond and stock markets through the distortion of interest rates investors and potential retirees cannot mistakenly assume that the rules of correct portfolio management have been repealed. Diversification, asset allocation and risk tolerance remain critically important to building a portfolio that is tailored to the specific needs of each individual investor.

In 2009 then Fed chairman Ben Bernanke wanted to force people out of savings accounts and certificates of deposit and into riskier assets and he was successful. There probably always are a percentage of retirees that plan to stash their retirement funds in wrongly perceived risk free bank savings vehicles. The problem with this plan is that it violates the rules of long term investing that require diversification and asset allocation. That's why the Fed's policies became and remain particularly punishing for them, because without reasonable diversification of their money the investors have suffered extreme loss of interest income. These savers learned the tough lesson that a cash account is not a risk free investment.

Just because the investment markets are warped by the Fed doesn't mean that an investor who needed and desired 35% invested in risk assets and the balance in capital preserving bonds and cash should now have 100% invested in stocks and 0% in bonds because she fears that interest rates will rise and make her bonds drop in value. An investment strategy doesn't become obsolete and unworkable because of exogenous events. Because an authentic strategy has flexibility in order to allow the investor to take a little more or less risk depending on informed evaluation of market conditions. For example if an investor with a 65% targeted allocation to bonds fears that rising interest rates will wreak havoc on her bond values she should then, by an equal amount, increase the percentage of her holdings to short term bonds and decrease her long term bonds. That will lower the sensitivity her bonds have to changes in interest rates.

Too frequently inexperienced investors view decisions in their portfolios as all or nothing actions. If they own a stock that has had strong gains they make their decision about selling more complicated by considering only the option to sell all of it or nothing. In the same way people are now contemplating whether they should own any bonds at all because the Fed's abuses will become inflationary and bond values are destined to collapse. That's been the dominant belief for the last 5 and ½ years and it hasn't turned out to be a very good one as bonds have delivered good total returns.

Don't let the markets dictate your investments actions and don't be persuaded by media noise that claims you need to disregard disciplined investing because things have suddenly become different.