Displaying items by tag: retirement

Stress-o-meterThe summer, and now autumn of 2011 has proven to be extremely volatile in the stock market, and in asset markets in general. Stocks, bonds, and commodities all have seen dramatic fluctuations, both up and down. Triple digit moves in the Dow (DJIA) that were once rare have lately been the norm. This type of volatility can be a boon to active traders, but it can be frightening, even downright dangerous for everyday “retail” investors.

Any novice investor will tell you that the key to successful investing is to buy low and sell high. Seems simple right, and in concept it is, but in practice it can be very difficult to actually accomplish. The emotion and psychology of the stock market can often be at odds with the psychology of self-preservation that is very much at play when people are making critical financial decisions. When investing, similar to other aspects of life, people tend to follow a herd mentality; generally selling in times of panic, when stocks prices have already fallen and are low, and buying in times of euphoria and hubris, when stock prices are elevated.

So what do you do? How do you preserve or attempt to grown your capital under these conditions? Well the first thing to do is to consider your situation, and be clear about your goals. What might be good advice for a younger investor with a higher risk appetite could be very poor advice for someone closer to retirement, with less ability to sustain potential losses.

Lets look at the two ends of the spectrum. For a younger investor with a longer-term investment horizon, high market volatility can be a good time to take action. High volatility almost always coincides with downward pressure on equity markets, which will at some point create good buying opportunities. Have a shopping list of stocks, do your research, and buy with discipline. Pick an entry point and begin to buy up a portion of the overall position that you want to hold long term. You should then continue to purchase on market dips until you have completed your position, if the market continues lower you will lower your average cost as you purchase the remainder of your position. If the market moves higher, your position will appreciate in value, albeit with fewer shares than you may have intended.

Once you have accumulated your position the toughest part may be to stand your ground. A given during times of high volatility is that the markets may well overshoot fair valuation, and continue down to levels that are irrationally low. If you still believe in the fundamentals of the companies in which you’ve invested, then the only thing to do is stand your ground. You have to be willing to accept the potential for a short-term loss on paper, knowing that in the long term you’ve made a wise purchase.

On the other end of the spectrum, what do you do if you have a low risk tolerance and you’re anxious because of market volatility? The best advice is to review your portfolio, and make sure that your asset allocation and risk stance is appropriate to your life situation. Especially if you haven’t rebalanced your portfolio recently, it may be time to carefully readjust. Although it may be a precarious time to be moving around your holdings it is an excellent time to seek the advice of an investment professional, and make certain that your portfolio matches your current needs. A good financial adviser will seek to understand your needs, and help you to develop a plan that aligns you asset allocation to your future needs given current economic conditions.

High market volatility, big moves up and big moves down are good at creating headlines, good at churning stomachs, but in general not very good at creating wealth for retail investors. Even for experienced investors, turbulent markets can cause serious heartbreak (consider all the hedge funds reporting staggering market losses for the past quarter). If you have dreams of being a hero, make sure you can afford the potential for loss. If you want to come through high market volatility without increasing your risk, talk to your financial professional, seek only the advice of the most level headed people you know, and remember that often the safest course is to sit tight and ride out the storm.

Investing ideas come and go, the best are time tested and never fall too far out of favor. Dividend investing is just such a strategy, and it’s one that has come back into vogue.

Given the current Federal Reserve’s monetary policy and the recent declines in the equity markets, bond markets have been on fire through the end of the third quarter and into the beginning of the forth. As bond prices have risen yields have fallen sharply (bond prices move inversely to bond yields). How does this affect the average investor? It means that the interest return on bonds has fallen, and therefore holding bonds in a retirement portfolio will generate less income. This has caused money managers and individual investors to seek yield elsewhere.

As of the close of the third quarter (Q3 2011) the dividend yield of the S&P 500 at about 2.15% exceeds the yield on a 10 Year Treasury which stands at 1.80%, by more than a quarter of a point. This is something that does not happen often, and is clearly due in part to the current monetary policy in place by the Fed, which has pushed down interest rates to historic lows. It is likely also due in part to stocks being cheap in relative historic terms. If you believe in the strength of the U.S. economy over the long term, these facts would suggest that it is a very good time to be investing in large-cap stocks with attractive dividend yields.

There are some things to keep in mind while investing for dividend yield, among them; dividends are not guaranteed. In particularly difficult times, especially in an acute credit crunch as was experienced in 2008, companies may suspend dividends. And the suspension of dividends can punish a stock’s price, which causes a two-fold loss: the loss of the dividend income, as well as a decline in the value of the stock. For this reason it is important to know when investing in a company that it is financially strong, and has the cash flow to be able to support future dividend payouts.

Diversification is also an important consideration in putting together your dividend portfolio. Exposure to too few industries or sectors can create several risks, and these risks are among the very exposures we’re trying to avoid, especially in times of heightened uncertainty. Consider the 2008 financial crisis, when financial firms halted dividend payments en mass. Having been over-invested in financial firms would have caused dramatic losses in both portfolio value as well as income stream. At the same time a well-diversified portfolio of dividend-oriented equities would have fared relatively well.

Dividends that are unsupportable should also be a big red flag. Dividend yield is the percentage of the share price that is paid out annually as a dividend (Annual Dividends per Share / Stock Price per Share). So a stock with a $1 annual dividend per share, which traded at the last dividend date at $20 per share had at that time a 5% yield. That same stock, trading today at a $10 share price, would have a 10% yield. The very high yield coupled with the steep share price decline is likely to be a warning that this hypothetical company could be in dire straights, and that dividend may not be sustainable. Suffice it to say, that as with all things in life, “If it seems too good to be true, it probably is.”

One should also consider that if the economy and stocks enjoy a significant recovery, these sectors might lag the broader recovery. History however tells us that a well-diversified portfolio with a strong dividend yield will show strong compounded gains over time.

Well of course, this question is too broad to have an answer that is both simple and comprehensive.  The details of how an annuity works very much depend on the specific type of annuity that you are considering. In an effort to make you a more informed investor, lets first look at the basic concept of an annuity contract.

In general an annuity is an investment vehicle offered by a financial institution (usually an insurance company), into which one makes either a single lump sum payment or series of payments. In return the financial institution will make payments to you (the annuitant), beginning either immediately (called an immediate annuity) or beginning at some future date (called a deferred annuity).

Annuities offer the opportunity to guarantee an income stream, in some cases for the rest of your life. In essence they can work as an inverse life insurance policy. While a life insurance policy is designed to provide a benefit in the event that one does not live to their life expectancy, an annuity can provide protection in the event that you live longer than your life expectancy.

Types of Annuities:

In order to provide you with more information below is an overview of a few different types of annuities. These are meant to facilitate your ability to have an informed conversation with your insurance agent, broker, financial planner or other financial professional, when considering your investment options. Annuities come in a myriad of different types, and have different benefits, features and risks. Ask your financial professional for a prospectus on the annuities you are researching and consider the specifics of the particular annuity contracts that you are considering to determine whether or not they meet your investment needs.

Immediate Annuities: are those that begin to pay out immediately after funding.

Deferred Annuities: are those that do not begin to pay out until a future date.

Both immediate and deferred annuities can be broken down further into Fixed or Variable annuities.

Fixed Annuities: guarantee your principal and a rate of return while your account is invested. The financial institution offering the annuity contract manages the funds in a fixed annuity, generally investing these funds very conservatively. The payments from a fixed annuity are guaranteed to be a certain amount per dollar invested. The timeframe over which annuity payments occur can be a pre-defined period (for example 5, 10 or 15 years), or an open-ended period, generally your lifetime (or the lifetime of you and your spouse or other beneficiary in the case of a “joint and survivor annuity”). Fixed annuities are generally considered to be a low-risk investment option. Fixed annuities are the most popular type of annuity contract because they are such stable investment vehicles, especially in times of high volatility for other investment classes. It is important to fully research the fixed annuity contract that you are considering; fixed annuities may come with age restrictions, and penalties should you need to access your principal before maturity. Fixed annuities have many different variations, including; “equity-indexed annuities”, “life annuities”, “joint annuities”, “joint and survivor annuities”, and “life annuities certain”, to name just some of the options that are available.

Variable Annuities: allow you to invest your annuity assets among a range of investment options, rather than have the assets managed by the financial institution. A primary advantage of a variable annuity is that you can benefit from higher than expected performance of your investments. Conversely the primary drawback of a variable annuity is the principal risk and lack of certainty as to the amount of annuity payments that you will receive. Variable annuities carry higher risk than fixed annuities, based on the risk of the underlying investments, which are generally mutual funds (of equities, bonds, or money markets).  Other features of variable annuities include tax deferral and death benefits. Variable annuities (and fixed annuities) are tax deferred investments, which means that you will not have to pay taxes on the investment gains of your annuity account until your receive payments from your variable annuity*. Variable annuities also carry a death benefit, which means that in the event of the annuity holder’s death before annuity payments begin your beneficiary will receive a death benefit payment. Typically the death benefit of a variable annuity is at least equal to the total annuity premiums paid less any withdrawals, even if the annuity account has lost value.

* It is important that you fully understand the tax-deferred nature of annuities when considering this feature. Funds withdrawn from a variable annuity (including normal periodic payments) are taxed at ordinary income tax rates, which will often exceed capital gains rates. The benefit of the tax-deferred nature of a variable annuity will likely only be realized if the annuity contract is a long-term investment. You may want to consult a tax advisor as well as your financial professional when considering these features.

While considering an annuity, remember that you will pay for the features and benefits of any annuity contract, as you would with any normal product or service purchase you make in your everyday life. Annuities will typically carry administrative fees, mortality and expense risk charges, and surrender charges. You will also likely incur the fees associated to the underlying investments in your annuity account (mutual fund expense fees as an example). Additionally withdrawals from your annuity account before the age of 59 ½ may result in a 10% federal tax penalty in addition to ordinarily applicable taxes on income and investment gains.

A reverse mortgage is a type of home loan that allows homeowners 62 years of age or older to convert some of the equity in their home into a stream of tax-free income. There are a number of options available when looking for a reverse mortgage. There are non-FHA options, typically known as proprietary reverse mortgages, and there are government insured FHA approved reverse mortgages called a Home Equity Conversion Mortgage (HECM)*.

Be cautious when considering any reverse mortgage that is not FHA insured, and beware of any service or counselor that charges a fee to help connect you to an approved borrower; these services are often scams that take advantage of seniors and seek to charge significant fees for providing a service that can be found elsewhere for little or no charge. Non-FHA mortgages may be absolutely legitimate, and may meet your needs better than an FHA-HECM (for instance if you need to access more equity than the FHA limits will permit), however reverse mortgages can be extremely complex arrangements, and the FHA guidelines provide a measure of oversight that should not be overlooked.  As with any significant financial transaction, do your research, and seek the advice of a trusted financial professional.

Features of FHA Reverse Mortgages:

  • You do not make monthly payments to the lender as you do with a traditional mortgage or home equity loan
  • Remaining equity in your home DOES become an asset of your estate in the event of death
  • Proceeds from a reverse mortgage can be taken as a lump sum, through a line of credit, or as payments over time (lifetime or fixed term).
  • Proceeds from a reverse mortgage can be used for any purpose

Requirements of FHA Reverse Mortgages:

  • Borrower must be age 62 or older
  • Residence must be the borrowers primary residence
  • Borrower must receive HUD approved counseling prior to loan origination
  • Residence must be a single-family home, a 2 to 4-unit home where the borrower occupies one of those units, or a condominium or manufactured home that meets FHA requirements
  • You must own your home or have a low mortgage balance that can be paid off by the proceeds of the reverse mortgage
  • Residence must be properly maintained
  • Hazard Insurance and Property taxes must be kept up to date by homeowner
  • Repayment in full is due at the time of death of the borrower, in the event that the home is sold, or if the homeowner fails to adhere to the terms of the mortgage contract (for example failure to pay property taxes or hazard insurance premiums)
  • Borrower fails to live in the residence for a twelve (12) consecutive months

The Federal Government provides more information on reverse mortgages and FHA approved lenders on their website:


* In Canada a similar type of vehicle to a reverse mortgage exists called a Canadian Home Income Plan (CHIP).  Note that some rules and limitations of a CHIP vary from those of an HECM.