Choosing the Proper Benchmark

What a difference a week makes in the stock market! I thought we were in a pandemic. The lessons to learn from the current economic cycle are: 1) Markets don’t function with emotional bias based on the current state of the population; and 2) You shouldn’t try to time the markets based on “one-off” instances of change in the governance of our country.

Too many offerings of unfiltered and unverified reporting of market trends, expected apocalyptic tax changes and, overall chaos, fail to consider the market makers and buyers of large numbers of trading shares who do not make decisions based on a whim. You should approach your long-term investing strategy in the same manner. Make sound decisions based on facts and evidence while clearly focusing on your future needs.

How do you know if your portfolio is performing well? One method we recommend is the use of a proxy benchmark. There are many indices to choose from, but the proper application is to utilize a benchmark that meets your ideal portfolio allocation. If you are investing your retirement savings in a 60/40 equity to bonds allocation, you will not want to use the Standard & Poor’s 500 Index (S&P 500) as the lone index. Instead you may wish to use a blended index that provides for consideration of bond performance in the same percentage as your portfolio.

Let us explore how benchmarks are constructed so that you will understand their application to your planning process. For example, the S&P 500 Index is a market-capitalization weighted index of the 500 largest U.S. publicly traded companies. This means that the companies within the index are weighted based on their market capitalization and shares traded. Another common benchmark is the Dow Jones Industrial Average (DJIA) which is a price-weighted index. To understand how the DJIA is weighted, think about the individual share prices of the thirty (30) companies included in the index and the higher priced stocks receive a greater share, or weight, of the allocation to the index. By using daily share prices, the index seeks to account for stock splits, dividends paid or corporate divestitures (spinoffs) in its performance reporting.

When reviewing the performance of an asset class such as bonds, within your portfolio, consider a broad-based benchmark such as the Barclays U.S. Aggregate Bond Index (Barclays Agg). This benchmark index includes the entire universe of domestic, investment-grade, fixed-income securities traded in the United States. As a broad index including government securities, mortgage-backed securities, asset-backed securities, and corporate securities, it serves as an appropriate comparison to well-diversified bond portfolios.

There is a great deal of expertise, time and knowledge required to invest in markets. If you are concerned about the performance of your retirement assets, seek out a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™ professional. You may be glad you did. See you on the golf course!

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The Best Index to Gauge the Performance of Your investments

The DJIA, S&P500, Russell 2000, Nasdaq Composite, etc. There are hundreds of indices that report on a variety of investments. Which is the most appropriate for your family? How do you know if your investments are performing in a manner that will help you reach your goals? Keep reading, we have the answer.

While assisting our clients in reaching their retirement goals, we use our proprietary LifePlan SolutionTM process. An outcome of this process is a special index we use to provide our clients a better understanding, not to mention an easier process for monitoring their assets, by computing a unique index – The Family Index.

Your family is unique. Your tolerance for risk, cash flow needs and goals for the future may or may not require investing your lifetime savings in the same manner as the aforementioned indices. We apply our process to your family’s cash flow needs over its projected lifetime and determine the needed return to accomplish your goals. As simplistic as it sounds, the process is quite easy for our clients to understand and, more importantly, confidence is maintained because they realize it is particularly tailored to their family’s needs.

Discipline to adhere to the plan is necessary for your family to truly benefit. When the markets are reporting 10% returns for the year and your portfolio achieved 7%, it is vital to remind ourselves that you didn’t participate in the negative year so deeply nor the highs of the current year. Additionally, your family is most likely not 100% invested in the stock market as represented by the DJIA or S&P500.

Recent market performance has been setting record highs. All markets move in cycles. If you wish to reduce the volatility in your family’s investments, it is critical that you allocate the assets in a manner that meets your risk tolerance and other qualitative needs. Many of our clients appreciate the process mentioned above but seek guidance on a continuous basis to make certain any plan modifications required by changes in their family’s needs or desires are properly and timely addressed.

One of the most critical mistakes we have witnessed clients performing is market timing. It has been scientifically proven that the average investor is not capable of investing in a manner to predict the rise and fall of markets. Don’t fall into the trap of listening to “water cooler” experts that “know how to beat the markets”. Too often the “expert” has been proven wrong but your family is the one that pays the price for the lesson learned.

The Family Index is one tool we utilize in an arsenal of tools to help your family realize its dreams. Don’t attempt short cuts and expose your family’s future to gambling on market timing. Seek out a Certified Financial PlannerTM practitioner to help you prepare, implement and monitor a plan that is sound and provides your family with confidence about the future.

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How Do You Define Risk?

Danger! Danger! Red flashing lights! Sirens breaking through the still night awakening you from a deep sleep! These are simple, yet effective, methods of alerting you to risks that arise in life. Don’t you wish investment risk were that simple to alert you when you are about to face an inanimate action that has the power to destroy your life savings?

We accept certain risks in life everyday. Once you leave the safety of your bed, you may be subject to risk. Let’s focus on one type of risk – financial risk. You can control the level of risk in your financial life by taking prudent steps to minimize risk when possible. For example, if you are 80 years of age, it may be too risky to invest in a new tech startup with 50% of your retirement portfolio. If you were 24 years of age, this may be viewed more as an opportunity.

As specialists in retirement planning, we believe it is critical to properly measure and mitigate risk when possible. Many of our clients come to us with portfolios that are highly illiquid or invested in a manner that is not in their best interest. When we ask questions pertaining to their acceptable level of risk, the client will generally be moderate or conservative in their approach to investing their hard-earned money.

However, after a careful analytical analysis of their portfolio we inform them of their current investment risk level and their eyes pop open like they are watching a scene from a horror movie. To mitigate the risk, we believe several factors must be considered in their portfolio design:

  1. Consider liquidity needs
  2. Research suitable and appropriate types of investment positions
  3. Determine the tax-effect of the proposed investments
  4. Properly diversify the portfolio to control the level of risk acceptable by the client.

Simply investing the portfolio in its initial allocation does not resolve the client’s risk issues. Proper monitoring of the performance and appropriate rebalancing of the asset allocation to its original target are critical to maintaining the client’s risk level in the portfolio. The financial planning required for an advisor to fully understand the client’s long- and short-term needs and goals entails significant education, experience and knowledge of the economy.

Certified Financial Planner practitioners are professionals that maintain one of the highest credentials as a witness to their competency and ethics. Don’t risk your lifetime savings to risk. What you don’t know could truly ruin your future. Ask for a second opinion regarding your retirement portfolio. Better to find out early if there is a problem in your future.

Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee or future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loass, including total loss of principal

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