Asset allocation and diversification are important concepts in investing. Although many investors think of them interchangeably, they are, in fact separate concepts. Asset allocation refers to how you choose to spread your money among investments. Every investor practices asset allocation by virtue of having invested. Whether or not that asset allocation represents diversification is another matter altogether.
Diversification is a portfolio attribute that can be achieved through asset allocation. The purpose of diversification is to manage risk by investing in many different types of assets. Stocks and bonds from companies of different sizes and from different countries all have places in a diversified portfolio.
There are many considerations in building a diversified portfolio, but here are three decisions that may hinder your quest for ideal diversification.
- Choosing to invest in individual stocks and bonds instead of mutual funds or ETFs. It is difficult to find consensus among experts on the number of stocks or bonds required to build a diversified portfolio, but the numbers generally fall in the 20-50 range for the US stock market alone. Effective diversification requires exposure to international stocks and bonds, as well. For most individual investors, diversifying this way just isn’t practical.
- Using a global fund to fill an international allocation. Global funds may invest in securities from every country in the world, including the one you live in. Some global funds from US companies can invest up to 50% (or more) of their assets in US securities. This may lead to overlap with your domestic investments and make your portfolio less diversified than you intended. If you’re looking for exposure to countries other than the one you live in, go with an international fund. If you’re looking to diversify further, choose a fund with allocations to emerging markets, which don’t correlate as closely to the US as larger countries do. (Keep in mind that emerging markets also add risk, so size your allocation accordingly.)
- Choosing a fund by name alone. Sometimes investors spend a great deal of time determining exactly how they want their portfolios to be allocated, then lose it in the implementation stage. Some, as described above, may end up with far less international exposure than they wanted. Others match their asset allocation goals with fund names that describe asset classes without looking any further. A mid cap fund that behaves like a large cap fund, for example, defeats the purpose of the mid cap allocation altogether. A careful reading of the prospectus will tell you how much latitude is given the portfolio manager for an actively managed fund, and which index is being used to define an asset class for an index fund. Also, a look at a fund’s Morningstar style box will tell you if its name is representative of its current holdings.
Eggs and baskets
Diversification is the embodiment of the old adage about eggs and baskets. Just as important as choosing asset classes, however, is how you choose to invest in those asset classes. A diligent investor looks beyond the theoretical world of indexes to actual investments, making sure they reflect the desired asset allocation
Success in binary options will depend on a number of things. However, it shouldn’t come as any surprise that a trader will never get very far in their career without a solid binary options broker and platform to handle their business. While you’ll have a number to choose from, thanks in large part to how popular binary options have become in a short amount of time, this also means you have quite the challenge ahead of you in trying to choose one.
The following features should be signs, though, that a binary options broker is worth your time and money.
Any site you spend money on should involve high quality security. Otherwise, it suggests they don’t take your business very seriously. Maybe they do, but they’re clearly not taking any steps to safeguard your money, which is just as bad.
Make sure a binary options broker is using 128 bit SSL encryption from a reliable provider. Most traders keep a lot of money with their online brokers. If this type of encryption isn’t being used to protect your investment, expect a hacker to eventually take advantage.
In the past, most traders had a long and treacherous road separating them and success. Not only did they have to make a number of mistakes, but each of these had to cost them a good deal of money too.
Fortunately, binary options help cut down on a lot of these risks. However, you can do even more by only considering a broker who provides demo software. This will allow you to play the market without ever losing any money. Although you won’t win any either, the learning opportunity is more than worth it.
Even veterans of trading should look for demo software. Whether you want to test out a new strategy or explore new markets, doing so without risking any money is ideal.
Returns on Losses
More and more, brokers are offering returns on options that don’t end up in the money. It won’t be a ton of money, but when you consider that many brokers give back as much as 15%, you can see how that would add up quickly over time. That’s all money that can all be used to make better investments that pan out too.
Plenty of Assets
A binary options broker can have all the expertise in the world and a great platform to complement it. However, if they lack a wide array of assets for you to invest in, your profits are going to be limited. Beginners will also suffer from a lack of exposure and may never fully appreciate the markets that are available to them.
The next time you’re looking for a binary options broker to handle your business, consider the above features that are essential. This way, you’ll know that hard work is the only thing standing between you and success.
Retirement planning is a broad concept. So broad, in fact, that the term is almost useless in discussion without clarification as to context. To one person, retirement planning means directing as much money as possible to a 401(k). To another, it means maintaining the ideal asset allocation as retirement draws nearer. Still others are worried about withdrawing funds in a tax-efficient manner. But in all three examples, much like on the first page of results from a Google search of the subject, retirement planning is about money.
Saving versus planning
Some of us are so daunted by the sheer task of accumulating enough money that we don’t give enough thought to what that money is for. We save, but we fail to plan.
If your dream is to have a place to live, food to eat and adequate health care, your task is relatively simple. But if your vision of your golden years includes a more exciting existence, now is the time to plan.
Write it down
It’s time to make a list. A really big list. Don’t hold back. Start with the things that first come to mind, then dig deeper. Inside all of us is a trunkful of ideas that we’ve put away without even realizing it, labeling them as unrealistic or far-fetched. This is the time to locate that trunk and drag it out into the light. Have you thought you might like to live in another country? Put it on the list. Try out a new career? Live in an RV? It all goes on the list.
Include everything – things you want to do or have (though I’d put more emphasis on the first), how you want to feel, what words you want to use to describe your life. Will your life be active? Peaceful? Simple? Putting all of these ideas in one place can build a framework for decision-making later in the process.
Take some time with the list. Let it stew and revisit it. Add things. Take things off. Take time to periodically force rank each item to see if your priorities have changed. The list may change dramatically over time, more so if you are in your early working years. But the fact that the list exists can help you make decisions today about saving and spending today by giving shape to your retirement goals.
Make “some day” today
The danger of overly diligent retirement saving is in focusing so much on tomorrow that you fail to live today. The items on your list are things to look forward to, yes, but they also serve as a record of things you’re putting off. None of us is guaranteed time, so consider moving some of them to a more immediate list.
You may also discover that some of your dreams are better suited to your younger self or that you can benefit from them earlier than planned. Some may be obvious – if your dream is to climb Mt. Everest, you have a substantially better chance of succeeding if you attempt it in your 30s than if you wait until your 70s. Furthermore, if your dream is to build a house on a lake to live in when you retire, you might be able to purchase the property earlier and enjoy it during your working years.
Funding the list
Obviously, we only have so many retirement dollars. Inevitably, some things will have to come off your list. If you’ve put enough work into your list, that decision will be easier. It is less painful to give up your dream of spending a year traveling around the world if you gave it up in favor of owning a vacation home for spending time with your children and grandchildren.
Moving some of your dreams into your working years can also help you stretch your retirement dollars. Saving up your vacation time to take a month-long trip around the world before you retire, for example, can be the compromise that reduces your retirement income needs but still lets you get a taste of your dream.
The Bottom Line
The hard truth is that most of us spend our working years focused on the financial aspects of retirement, and fail to imagine our total retirement experience. But failing to plan for your retirement dreams can mean failing to plan for your life, and that can lead to missing out. You may not be able to do everything on your list, but don’t let it be because you waited too long to plan.
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When you’re heading off for a long road trip, make sure the vehicle you’re going to be driving is up for the task. There’s nothing worse than having car trouble out in the middle of nowhere. The potential of getting stuck is real, so it’s always better to be prepared for anything.
A month before going on your road trip, take your car to the shop and have it looked at by a professional mechanic. Tell him you’re setting off on a long trip and would like to know the status of the car’s oil, filters, brakes, suspension, heating/cooling, tires, battery charge and belts. If anything is worn out, leaking or needs to be changed, have the mechanic perform all the necessary repairs in one go. This will save you time and maintenance costs, not to mention the hassle of having something blow-up on you while travelling.
Take an emergency kit and a bug-out bag with you. Emergency kits must have emergency medical supplies such as pain killers, anti-diarrhea medicine, Tums, rehydration salts, anti-inflammatory meds, gauze/bandages, antiseptic, small scissors and burn medication.
Your bug-out bag should have supplies that will keep you and members of your group alive for three days. This includes water, food, water purification tablets, a flashlight, a knife, extra batteries, a multi-tool, flares, a reflective vest, stormproof matches, a compass and a map.
Check your trunk for the jack, early warning device, tool set and spare tire. Be sure the spare tire is in good working condition and is properly inflated. Bring extra water for the radiator and a car fire-extinguisher. Check the manual. If you’re driving an import or exotic and the manual is in another language, download an English version or hire an automotive translation service. I know this is a lot, but if something does go wrong, these steps can save your hide.
Eyeball your Vehicle
Now that you have all you need to survive a mishap, make sure you don’t get into one in the first place! Two weeks after having your car checked by a professional mechanic, eyeball her for any physical issues. Check the tire pressure and wear. Check all the lights and electrical components like blinkers, sound system, GPS, etc to see if something isn’t working. Check the wiper blades for issues with visibility and change them if needed.
Drive your vehicle and be on the lookout for any leaks and weird noises. If the engine is revving more than it should during idling, have it checked ASAP. If you feel that it lacks the power to pass other vehicles or if it’s struggling and put-puttering, bring it back to the shop. If you’re all over the place when you’re going fast, the steering is off-center and needs to be fixed. If you veer either to the left or right, it’s an alignment problem.
Be sure to take only what you need with you. You won’t need snow chains and ice skates on a trip to Florida, so take it out of the trunk. Balance your luggage and passengers so that both sides of the car will have more or less the exact same load. Never load up the vehicle and passengers more than what is indicated on the manual. When in doubt, check the side of the door. Newer vehicles will have information regarding tire pressure and load capacity stamped on the side.
Wherever you’re headed, make sure you follow the steps I outlined here so you can avoid any road problems and have a safe, fun trip. Just in case you do run into some trouble, being prepared and having the emergency kit, bug-out bag and extra supplies with you can save your life and the lives of your loved ones. Drive safe!
Having a child changed my whole world, in ways massive and small – most of which are beyond the scope of this blog. One of the most profound changes I experienced can be summed up in one, innocuous-sounding word: worry. The sheer number of options for a parent to worry about is astonishing.
One of the things I worry about is her future. I would like her to have the opportunity to attend college, but I worry about sending her off into the world with massive amounts of debt. Consequently, I put a fair amount of time and money into giving her an unencumbered start so that she can have the best chance to thrive, financially and otherwise.
When saving for college isn’t enough
I’m sure there are quite a few parents out there who can relate. Planning for our children’s future while taking care of their needs today is a balancing act that many of us are all too familiar with. But for a few close friends of mine, there is an extra layer of concern.
Parents of children with disabilities often find themselves in an untenable position. In many cases, the cost of care for a child with a disability places tremendous financial pressure on the entire family. While it’s true that government programs can – and do – pay a significant portion of these costs, often the family is still on the hook for a daunting amount. Even if parents are able to scrape together funds to save for college for their children without disabilities, there is little that can be done to save for children with disabilities that doesn’t disqualify the child from the federal programs necessary to pay for his or her care.
A solution…sort of
Until recently, the answer to this dilemma was a special needs trust, which is an irrevocable trust set up to provide for the needs of a disabled individual without impacting eligibility for public assistance. But creating a trust is an involved process involving an accountant, attorney and usually, a great deal of money. Furthermore, assets in a trust can be subject to significant tax liability, and any distributions are taxable to the recipient.
A better solution
Enter the 529 ABLE account, created late last year. (ABLE stands for Achieving a Better Life Experience.) ABLE accounts will allow up to $14,000 per year in contributions (the current gift tax exclusion), tax-free growth, and qualified distributions that are excluded from gross income for the beneficiary. Funds up to $100,000 held in an ABLE account will be exempt from the $2,000 limit that determines eligibility for Medicaid and SSI.
ABLE accounts will not have quite as much latitude as special needs trusts when it comes to qualified distributions, but the definition is still fairly broad. Distributions can be used to cover, among other things, education, housing, health care, employment training and management, financial management, and funeral expenses. Additionally, any funds left in an ABLE account after the death of the beneficiary will be used first to repay any Medicaid or SSI benefits received by the beneficiary after the account was opened.
There are also notable differences between ABLE accounts and Section 529 plans. While account size limits will be the limit already set by the states for 529 plans, the contribution limit for a given year will be equal to the gift tax exclusion for that year. The accelerated gifting provision for 529 plans will not apply to ABLE accounts.
Other differences apply to beneficiary designation. The account owner and beneficiary for an ABLE account must be the same person, and assets placed in the account are deemed an irrevocable gift to the beneficiary. Also, while there is no limit on the number of 529 plans that can be opened for a single beneficiary, ABLE accounts are restricted to one account in one state for each individual.
Next steps for ABLE accounts
While the legislation that created ABLE accounts is federal, the accounts will not be available until the states set them up. There is no clear timeline for this process.
Additionally, there are many areas in the legislation creating ABLE accounts that will require some guidance and clarification as the plans are implemented. But ABLE accounts are a big step in allowing the families of individuals with disabilities to put aside money to help give them a brighter future.
I write about personal finances for a living, but that doesn’t mean I’ve always managed my own money like an expert. In fact, it’s some of the difficult growing pains I faced that lead directly to my self-education on financial management. And, having overcome those difficulties is why I do what I do today.
When I’d reached rock bottom, I held roughly $40,000 worth of debt. Here’s the story of how that happened, and, more importantly, what I did to get out of it.
How I Fell Into $40,000 Worth of Debt
Shortly after I started my college career many years ago, I received a credit card offer in the mail. My parents rarely used plastic, and frankly I didn’t understand the rules very well. After I filled out the application and sent it in, my shiny, new card arrived in the mail. From there, I didn’t waste much time.
I started eating out at nice restaurants, picking up bar tabs with friends, and I never missed a local sporting event or major musical concert that hit town. My credit limit was only $1,000, and from the get-go I only ever made the minimum payment each billing cycle. After about six months, my limit was raised to $3,000 and I also signed up for two more cards. Thinking that my minimum payment strategy was going well, I got a taste for nice clothes and started upgrading my wardrobe. I took a few vacations over the following years, as well.
When it came to my college education, my parents paid the tuition, books, and all other expenses, with the agreement that I would pay them back when I graduated. I didn’t find work right away, though, and even after I did – a full-time gig at a restaurant – I still wasn’t making all that much money. Eventually, I started going over my limits, and keeping up with the minimum monthly payments was getting tougher.
At this point I had about $25,000 in credit card debt and I owed roughly $15,000 to my parents. I was living with them at the time, and they started getting a little suspicious when I fell behind on my payments to them. My mother got hold of my credit card statements, and when she saw what a financial mess I was in she gave me an ultimatum: Do something about it or she would take over my finances. I certainly didn’t want that, so it was exactly the wake-up call I needed.
How I Got Out of It
When I finally got serious about my debts, I wanted them off the books as quickly as possible. Here’s what I did.
Back then, there was no Internet, so I wrote my budget out on paper (today I would use a site like Mint or PearBudget, or maybe even a Microsoft Excel spreadsheet). I created categories for rent, utility bills, and transportation, and I estimated my food and clothing costs as best I could. I worked my numbers out down to the penny, giving myself a wide berth for any non-fixed expenses. I wasn’t going to play fast and loose with money anymore.
Reduced Monthly Bills
I managed my thermostat by setting it at 68 degrees in the winter and 78 in the summer. I cut back on my cable TV plan, eliminating three paid movie channels and reducing my overall channel package. I also took shorter showers and hardly ever used my air conditioner. I cut coupons from the Sunday paper to save on groceries, and rented a studio apartment for dirt cheap housing.
Halted Personal Spending
I quit buying new clothes, stopped eating out entirely, and swore off sporting events and concerts. Instead of going out to bars with friends, I invited them over on weekends to watch movies or play board games. From time to time, I would fill up my car with gas and my fridge with food and see how many days I could go without spending any money at all. The only time I would allow myself a modest personal purchase was when I reached one of the benchmarks I set for myself concerning my level of debt.
Excelled at Work
By this time I’d secured a restaurant management position, making about $35,000 per year. I put my heart and soul into my job and garnered close to a $1,500 bonus check each and every month – when my counterparts weren’t seeing bonuses half that. Since that was money I hadn’t factored into my budget, it all went either to my credit card debts or to my parents for those college bills.
All along, I kept a keen eye on my credit card balances and watched the pay-down plan progress. I did the same for the debt I owed my parents. After approximately three years of uber-frugal living, I erased my credit card totals and got a glorious letter in the mail – just around the same time my parents told me I no longer owed them any money.
The moral of the story is simple. It doesn’t matter if you have $10,000 in debt or $50,000, you can do something about it. The biggest obstacle is committing to a debt-free life. Once you do, employ the above tips, persevere through the tough times, and you’re sure to find yourself debt-free one day, too. When you do, you just might be stunned at how light your spirit is, and how full your checking account is.
Are you currently in significant debt? If so, when are you going to do something about it?