Target-Date Funds are a big topic in mutual funds right now, for investors and fund companies alike. Investors see them as a one-stop shop for retirement investing. Fund companies have found target-date funds to be a gold mine. Morningstar reports that target date funds account for one third of investment flows for companies that offer them.
The concept of a target-date fund is fairly simple. Funds are categorized by year of retirement, and their asset mix reflects the amount of time before that date. For example, funds targeting retirement in 2050 are most likely invested in more stocks, theoretically giving them more return potential than funds targeting 2025, which would likely be weighted towards more conservative investments, such as investment grade bonds.
Look beyond retirement date
Estimating your retirement year is simple enough, but it isn’t the only consideration in choosing a target-date fund. The composition of a one company’s fund may differ dramatically from that of another company’s, even though they ostensibly target the same retirement year.
The formula for transitioning the portfolio from equities to bonds is called the fund’s glide path, and it is determined entirely by the investment manager’s philosophy. For example, some funds transition almost entirely to bonds, or even cash, as the retirement date nears, in order to protect the portfolio from short term market swings. Others maintain an equity allocation right up to, and sometimes beyond, the retirement date. Likewise, some portfolios remain static after the retirement date, while others continue to shift their allocations beyond retirement.
Choosing a target-date fund
Every glide path comes with its own level of risk. How you choose a fund depends on your level of involvement with your investments. For example, if you find the idea of risk/return profiles relative to stocks and bonds mind-numbingly boring, you may want to choose based on your own risk category – conservative, moderate or aggressive. Rather than immersing yourself in the details of asset allocation, you can simply look at the fund’s risk relative to its benchmark index, and choose based on your own risk tolerance. If you have believe that only a fool would be invested in stocks past age 50, you should probably look for a fund whose glide path most closely reflects that belief.
Another aspect of target-date funds that bears consideration is expense. Since these are “funds of funds,” you need to factor in two layers of expense. The first is the cost of the target-date fund itself, and the second is the expense related to the underlying investments. As the asset mix changes in response to shrinking time horizon, the expense ratio may change to reflect the differing costs of the underlying funds.
Target-date funds are not for everyone. Once you make the initial investment in a target-date fund, you turn over the reigns. There is no phoning the portfolio manager to suggest a greater allocation to small caps, so if you like to tinker with your investments, you may want to think carefully about other options for all or part of your retirement savings.
A solid option for retirement investing
Overall, target-date funds are an option worth considering for retirement. A strategy that includes target-date funds can help to diversify your portfolio with investments that are reallocated automatically to suit your decreasing time horizon. Target-date funds can be used exclusively, if reallocating your own portfolio doesn’t appeal to you, or as part of a larger strategy that includes other investments.
“Insanity: doing the same thing over and over again and expecting different results.”
Everyone makes mistakes. I know I’ve made a few, and that’s OK. Mistakes that we learn from help us grow and broaden our vocabulary on what works out or what doesn’t work at all. Mistakes only become costly when you fail to learn from them and it becomes repetitive. See Einstein’s quote above? It works for your personal life and your business life. But since our focus is on business, let’s forego the life lessons for now. Let’s talk business.
You Need a POS System
Any successful business owner will tell you that if you want to run yours the right way, you have to invest in a solid and reliable point of sale system. There is no two ways about it. A perfect example would be two restaurant owners, Pete and Julie.
Pete knew early on that he would need to invest in a POS system for his restaurant to monitor his inventory, employees and sales using just one system. Pete can get sales reports on the fly; he can remotely check stock and order from his suppliers; his staff clock in automatically using the same POS system, making monitoring and payroll easier. Customer orders and checkouts are also faster because Pete opted to get handheld POS for iPad use. Orders are sent straight to the kitchen and customers can settle their bill tableside.
Julie wanted to save money. She bought a cash register, note pads/pens for order taking, a log book where she manually logged everything in her stock room and asked her employees to use a spreadsheet to log in/out for their attendance and payroll. She also hired an accountant each week to crunch her numbers based on all tabs and receipts, which she had to tally with her staff every night right after closing time. Orders were manually taken and it took longer for customers to settle their bill.
Pete or Julie?
As you can see, Pete was doing everything right from day one. He thought long term and invested in a point of sale system so that he can put all his energy into running his restaurant instead of running around trying to manage every aspect of it. The point of sale system Pete was using warned him when his stocks were low and showed him what his top selling dishes were.
It also showed him which staff member made the most up-sells and who was taking extended breaks. He could check on his sales reports while on vacation and the system also allows him to reward his most loyal customers because he knows who they are and what they love.
Jullie on the other hand, was trying to run a marathon with one foot. By not recognizing the importance of a POS system, her job slowly became a nightmare. Day in and day out, she used the same cash register and did everything old-school, even paying an accountant each week to help her balance her books and see if she was making any money.
She always seemed to run out of inventory, and would blame her employees for pilferage but she had no proof. She kept on doing what she was doing and using what she had, expecting to make money, expecting a different result. She might’ve made a little, but she could’ve seen better returns had she invested early on in a POS system for her restaurant.
The Right Investment
Don’t make the same mistake Julie did. You invested a considerable sum already on your business, not to mention all the time, love and sacrifice you put into it. Think long term and don’t be a cheapskate when it comes to investing in a point of sale system. It’s one of the best investments you can make and it’ll pay for itself in a few months because it just plain works. Mistakes don’t pay for themselves, because you always foot the bill.
It would be difficult to be unaware of the debate surrounding health insurance today.
As the Affordable Care Act jumps into the already-muddied waters surrounding health care and its rising costs, topics for debate and discussion are legion. One of these is the high deductible health plan, or HDHP. Simply put, HDHPs offer lower monthly premiums in return for significantly higher deductibles, or the amount of money you have to pay out of pocket before insurance kicks in to cover all or part of your health care costs. When my family was offered the choice between a traditional plan and a HDHP with an Health Savings Account, or HSA, we chose the high deductible plan and never once looked back.
Here are 5 reasons I love my high deductible health plan:
The math works.
I have a rule of thumb when it comes to finances and financial products. Always look at real numbers. Articles and posts about the pros and cons of any category of insurance are helpful in understanding how policies work and any potential pitfalls, but virtually meaningless when it comes to making an actual choice. In our case, the available options offered similar coverage once the deductible was met, so I took coverage out of the equation. Then I added the yearly premium, the deductible (I assumed we’d have to pay it), and the remaining amount until the out-of-pocket maximum for each of the choices we were offered. I was surprised to find that the high deductible option actually saved us a bit of money. (My husband’s employer puts $900 into our HSA at the beginning of the year, which puts the HDHP in the top spot by about $250.)
Preventive care is covered at 100%.
As with all plans under the Affordable Care Act, HDHPs cover preventive care at 100%, so it’s not like I’m pulling out my debit card every time someone in my family sees the doctor. All of our check ups, well visits, and vaccines are covered, the same way they would be with the more expensive plan.
We hit the deductible and the world didn’t end.
Actually we’ve hit it more than once. This is important, because it is the piece that makes the HDHP work for my family. When we made our health care election, I started off by directing the difference between the traditional plan premium and the HDHP premium into our Health Savings Account (HSA) each month. (Because contributions to an HSA are pre-tax, putting the difference in premium into our HSA has exactly the same impact on our income as paying the larger premium for the traditional plan.) The result was that the amount we saved each year was nearly equal to our deductible. (This is why it is so important to work with actual numbers from actual plans – it’s the only way to find that out.) In the years we’ve had significant health expenses, we were able to meet the deductible with no problem, and the money we paid out of pocket once insurance kicked in at 80% was already available in our HSA from previous years.
I have the potential to keep significantly more of my money for retirement.
The thing to remember about premium dollars is that once they are paid, they are gone. No getting them back if your healthcare costs are lower than the amount you are paying each month. But deductible dollars are another matter.
I put deductible dollars into my HSA each month, but I only pay them out for care my family needs, which means that if we don’t need them, I get to keep them. Meeting the deductible is by no means a regular occurrence for my family, so we would be just fine continuing to contribute the premium difference to our HSA. (Even if we did meet our deductible each year, the math still argues for keeping the same plan.) However, since we don’t meet the deductible each year, our HSA has grown, tax-free. In fact, we now contribute the maximum allowed by the IRS, even though it exceeds our deductible, because that money can be invested and earn a return, or used for health care expenses at any time. It should be abundantly clear to anyone who spends time on the internet that extra money to put toward health care in retirement is never going to be a bad thing.
I make better choices with my healthcare dollars.
Obviously, I am enamored of the economic benefits of our high deductible health plan. There is, however, an argument to be made for a larger benefit. Going down this road has taught me to be aware of where my healthcare dollars are going, and to make careful choices about how and when my family receives care. And responsible choices by individuals have broader implications for the state (and cost) of healthcare in our society.
With today’s fast-paced environment and a lot of things to take care of at the same time in our daily lives, not to mention our financial matters, we need all the help and advice we can get.
If you are trying to balance finances, your life at home, your job or a business and other extra stuff you need to do, you can simply lose track of the things that you need to prioritize first.
If you are investing for your future it’s important that you stay educated and aware of the markets. Don’t have time for that? This is where wealth management experts come in.
What is Wealth Management?
Wealth management is an investment-advisory which tackles financial planning, investment portfolio management and other types of financial services.
Individuals who have high net worth, small business owners and even families who needs the assistance of wealth management experts, can have them. The best wealth management strategies work effectively is if you have accumulated some amount of wealth.
Historically, the entry bar for having an expert was high but recently more investors are managing their own expenses therefore the entry bar has gone down and became more accessible. The net worth needed to qualify for wealth management services vary from each institution so it’s best to ask them what their requirements are first.
Some firms however, offer this service to a certain minimum amount in investments but it’s customizable to meet the specific needs of the client.
Think of wealth management as a professional, all-in-one service, for financial/investment advice, tax/accounting services and estate/legal planning and! This is definitely an added bonus, instead of seeking services from different sources amounting to higher expenses in the long run.
Can You Do this Yourself?
Absolutely. Not every person is in the position or even needs to hire an expert.
If you’re still working on building your net worth it’s a good idea to learn as much as you can now and then get help when your situation changes and you have more complex decisions to make.
There are free resources all around you that can help you learn how to manage your money, begin investing, save for your future, and optimize your taxes and more. So while you might not need expert help right now it’s good to know that you have that option in the future if you decide to go that route.
Determining the best time to invest can be a nerve wracking business. Ideally, we’d all invest at the market’s low point, and watch our returns climb as we sat back and congratulated ourselves on our stellar timing and market acumen. Alas, we are stuck with real life, where markets are unpredictable and determining the very best time to buy nearly impossible.
One purported solution to this dilemma is dollar cost averaging. Rather than putting all of our money into the market at one time, we hold on to it, doling it out a little bit at a time, feeling secure that we are lowering our average share price with each investment.
Lower average purchase price
Dollar cost averaging is a strategy based on mathematical averages. Say, for example, you have $10,000 to invest. Rather than investing it all at once, you decide to invest $100 a month for a little over 8 years. That $100 will buy more shares in the months when prices are low, and fewer when they are high. The theory is that this helps to smooth the volatility of your investment by lowering your average price per share.
To an extent, the logic is indisputable. If you buy more shares when the price is low, and fewer when the price is high, your average price per share will be closer to the low side than the high side. That’s how averages work. The mistake is in assuming that reducing the volatility of the purchase price will have a similar effect on the performance of the investment.
The presumed advantages of dollar cost averaging have been soundly debunked, unfortunately. In 1992, larger brains than mine compared dollar cost averaging to two other investment strategies – buy and hold and optimal rebalancing. While dollar cost averaging involves doling out your investment a little bit at time, both buy and hold and optimal rebalancing involve a single, lump sum investment.
Dollar cost averaging as a strategy came in dead last. Essentially, the reduction in average price from dollar cost averaging was more than offset by the loss of investment gain. More simply, the lower average share price doesn’t make up for the return lost by the money that is waiting to be invested. (The owners of those larger brains I mentioned are John Knight and Lewis Mandell, and they published their findings in the Financial Services Review (Vol.2, Issue 1) in a paper entitled “Nobody Gains from Dollar Cost Averaging: Analytical, Numerical and Empirical Results.”)
A comforting myth
It’s no great mystery why we find dollar cost averaging so appealing. As a concept, it plays nicely into our reservations about investing. None of us wants to risk putting the entirety of our investable capital into the market on the most expensive day of the year. Since stock prices are unpredictable, there is great allure in a strategy that takes the guesswork out of determining the very best time to buy, and minimizes the risk that we will have paid a premium for something we could have gotten more cheaply had we timed things differently. However, the evidence suggests that the risks of buying high are far lower than those of holding back and not putting all of our investable capital to work at one time.
Regular investing is important
No one – not Knight and Mandell, and certainly not me – is saying that regular investing is a poor strategy. It’s important to note that, from a definition standpoint, dollar cost averaging involves an amount of money you already have – like the $10,000 in our example above. On the other hand, Knight and Mandell note that regular investments from periodic income would be considered lump sum investments, since you are investing all of your available capital at one time.
The moral of the story is this – if you’ve earmarked it for investing, invest it, and let share prices fall (or not) where they may.
Investments with tax benefits are an attractive option for diversifying your portfolio. The IRS offers tax breaks for savings goals such as retirement and education, but you can reduce your taxes further by looking beyond these options. The following products either offer tax-free earnings, or are more tax-efficient than many people realiz
1. Municipal Bonds
Municipal bonds are those issued by a state or local government, and they can be very attractive to those looking to cut their tax bill. Many municipal bonds pay interest that is exempt from federal taxes, and often from state and local taxes. Municipal bonds fund projects for the community, like schools or highways, so they are also a way to invest in improving the place where you live.
It’s important to remember that it is only interest on municipal bonds that is exempt from federal tax. Any discount at purchase or profit on the sale of a bond may be taxable. Also, investing in municipal bonds for their tax exemption requires some due diligence. Bonds issued to fund projects that don’t primarily benefit the community pay interest that is taxable, and certain other municipal bonds are subject to the Alternative Minimum Tax.
2. Life Insurance
Life insurance as an investment usually brings our some pretty strong opinions, many of them negative. However, I am a believer that there are no inherently evil products – only unsuitable ones. And what is unsuitable for one investor might be a perfect fit for another. Life insurance comes in two broad categories – term and permanent. Permanent life insurance includes a cash value account, which can be invested to earn a return. Those earnings are exempt from federal tax. What makes permanent life insurance a potential investment for the living is that the policyholder can borrow this money, tax free, for pretty much any purpose.
It bears repeating that this is a contentious subject. Permanent life insurance premiums generally run over ten times those of term, and of course a good chunk of that goes to fees and cost of insurance. But for those who are looking for tax-advantaged investing options and have maxed out their retirement contributions, life insurance is worth a look.
ETFs are a bit different than the other two items on this list in that they do not enjoy any special tax treatment from the federal government. However, I think they belong in a discussion about reducing tax liability because they are remarkably more tax efficient than their alter ego, the mutual fund. ETFs buy and sell securities less frequently than mutual funds, which means they realize fewer gains and thus pay far less in capital gains tax.
There are two reasons for ETFs’ lower trading activity. First, ETFs are generally index funds, which means that they buy and sell securities less frequently than an actively managed mutual fund. ETFs buy and sell mostly to rebalance the portfolio or to reflect any changes in the underlying index.
Secondly, the structure of an ETF is fundamentally different than that of a mutual fund. When an investor redeems mutual fund shares, the fund must sell securities to raise the cash to pay the investor. ETFs trade on the secondary market, where buying and selling has no effect on the securities in the fund. Even if an institutional investor purchases enough shares to redeem them from the fund, the investor receives the underlying securities rather than cash, so no taxable transaction takes place.
Taking advantage of opportunities to lower tax obligations is especially important for long-term investors, since the effects can be compounded over many years. Looking beyond the basics and gaining a true understanding of where tax liability is incurred in an investment can make you a more efficient – not to mention wealthier – investor.