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It’s Time For Investors To Rebalance Their Portfolios (Morningstar)
As the market starts to see more volatility creeping in, Morningstar’s Christine Benz recommends that investors take the time to reposition their portfolios and check their asset classes.
“I think it also makes sense to dig a little bit deeper, even intra-asset class, to see whether some rebalancing might be in order. Even though small-cap stocks have sold off so far in 2014, they still have had a tremendous run relative to large-cap stocks, so you may need to do a little bit of trimming there, even though the market has done some of that work for you within equities,” Benz said.
“Also take a second look at some of the more defensive holdings in your portfolio. They may not look especially great in terms of relative returns over the past five years, but chances are you want them in your portfolio; you want something that will be a little bit more defensive that will hold up well during these periodic bouts of volatility,” she said.
“Within fixed income, also take a look at your exposures. We’ve seen a tremendous runup in some of the more credit-sensitive bond types. High-yield bonds in particular have had a tremendous run. The typical high-yield fund has returned something like 11% over the past five years on an annualized basis. The typical core-type intermediate-term bond fund has returned just 5%.”
Clients Are Choosing a Lump Sum Payout Over Continuing Pension (Wall Street Journal)
An increasing number of clients are concerned about large companies lacking proper pension plans, according to Kevin VanDyke from Bloomfield Hills Financial. He said this is leading to more employees taking a lump sum payment, rather than waiting for the pension plan.
“The immediate lump sum payout gives the client more control over their retirement benefits and greater flexibility in how they are used. However, both the adviser and the client need to be disciplined in the management of these assets, or else there’s a real risk that the client will end up outliving their income stream,” VanDyke wrote in a WSJ column.
“What this means from an adviser’s standpoint is we have to treat these lump sum assets very carefully. We view the money from the payout as essentially the same as the client’s pension, and the client can’t afford for us to screw it up. So if we’re investing in equities, we also have to have a backup plan to generate income in case the market goes down. For example, certain insurance products offer minimum income benefit riders. The minimum income guarantee may not be not as good as the monthly check from a pension, but it’s enough for the client to live on in a worst-case market scenario.”
According to a report from FA Insight, the median client base for advisory firms grew 6.7% in 2013, the highest rate since the survey started six years ago, reported Jeff Schlegal from FA Mag.
“Advisors can partly thank the financial markets for their good fortune, but that’s not the whole story. ‘Advisors are doing a good job managing their costs, with expenses as a share of revenue hitting a record low in the six years of our study,’ says Dan Inveen, principal and research director at FA Insight,” Schlegal wrote.
“The study found that while nearly three-quarters of respondent firms reported significant growth rates, only one-third grew without negative side effects. Hence, FA Insight’s report stresses the importance of strategic business development and marketing,” Schlegal said. “The report found 85 per cent of firms said they have a strategic plan, but many firms also indicated those plans aren’t particularly effective.”
These Is How Much Your Client Needs To Save To Make It Through Retirement (Financial Planning)
One frequent question that comes up when planning retirement is, “How much, and how early, should I start saving?” Financial Planning’s Craig L. Israelsen wrote up some guidelines based on salary and expenses, to figure out exactly how much is needed to fund your retirement.
“There’s an easy rule of thumb here: For each additional decade of retirement income, your client should save another 5% chunk — but the correlation is tightest when clients start building a portfolio early,” he said. “For 30-year-olds, moving to a 10% savings rate from a 5% savings rate provides nine additional years of retirement income. Moving to 15% from 10% adds nine years, and moving to 20% from 15% adds eight years. In general, adding an additional 5% to your savings rate lengthens the longevity of your retirement portfolio’s by nearly a decade.”
Junk bonds have been on the decline recently, which could have created more buying opportunities, especially in ETF investing. Mike Aneiro from Barron’s spoke in a video interview about the potential upside.
“If you wait out what’s happening right now, a lot of people say the fundamentals of the high-yield market are still pretty good. There’s no wave of defaults or anything like that that happened in July,” he said. “But, as we’ve been warning at Barron’s for a while, just overvaluation can be a problem, lack of liquidity can be a problem. And when you stir in a little bit of volatility and geopolitical risk, this is when the pullbacks happen.”
“Now the flipside of that is now “Is this a good buying opportunity?” And in the longer term, it is a pretty decent chance to buy in, because the market has gone through some similar steps over the past few years, and it has always bounced back,” he said. “Even during the big bond sell-off in May and June of 2013, high-yield market finished that year up 7.4%. So if you’re going to buy, this is a good time to do it. That doesn’t mean the risk have abated completely.”
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