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There are always going to be risks in your investment decisions, but choosing wisely between risk factors can help create a long-lasting and dependable portfolio. Morningstar’s Christine Benz identifies the three most overrated risks: invading principal, losses in core-type bond funds, and international stock volatility.
1. Invading principal: “For investors who need a higher yield than 2.5% to 3%, the choice is to edge out on the risk spectrum to generate a higher yield or to tap capital to make up the shortfall. I’d argue that periodically tapping capital from appreciated assets–right now, that means stocks and lower-quality bond types–is preferable to venturing into higher-yield/higher-risk investments,” Benz said.
2. Losses in core-type bond funds: “Investors are wise to not be complacent about the bond market. Even as declining bond yields–combined with fairly mild inflation–have made bonds a pretty tranquil investment over the past three decades, a reversal of those trends could spell losses for bond portfolios,” Benz said. “
But it’s also a mistake to overestimate the impact of rising rates for the core-type bond funds that populate most investors’ portfolios.”
3. International stock volatility: “Many investors assume that investing overseas will bring greater risk to their portfolios. And it’s true that the typical foreign fund is more volatile than its U.S.-focused counterpart,” she said. “That said, foreign-stock funds vary dramatically in their volatility levels. Some lower-risk foreign-stock funds could reasonably serve as core holdings for risk-averse investors.”
How To Talk To Your Clients About The Realistic Retirement Expectations (Financial Planning)
Miriam Rozen wrote in Financial Planning about the importance of sitting down with clients and discussing realistic expectations for retirement. This process will make retirement planning decisions much easier for the client and the advisor.
Deena Katz, chairwoman of Evensky & Katz / Foldes Financial Wealth Management of Miami tells Rozen that resetting expectations can be hard. “Her approach is blunt,” writes Rozen. “But I tell them, ‘Do you want to eat less well, or sleep less well?’ ‘ With that not entirely rhetorical question, Katz walks the clients through the need to balance the risks they are willing to assume as investors against the amount of money they would actually need to afford the retirement lifestyle they picture,” according to Rozen.
These Tactics Will Help Clients Who Are Late To The Game Save For College (Wall Street Journal)
For some advisors, clients may already be behind in saving for their children’s college. By the time they hire a financial advisor, their kids may already be in high school, and fast approaching higher education. For those, Melissa Sotudeh from Halpern Financial recommended looking for financial aid opportunities, tax strategies, and subtle ways to cut costs.
“Think about what the child’s interests are. Many universities have cooperative education programs that lets students do an internship for a semester. I push clients in that direction, since work experience is invaluable and the child will actually earn money,” she said. “Parents can utilise certain tax strategies if their child has an internship. If the student earns enough money, they might qualify for the American Opportunity Tax Credit, which provides up to $US2,500 towards the cost of tuition and expenses.”
Robo-Advisor Assets Have Grown 37 Per cent In The Last Three Months (Wealth Management)
According to Corporate Insight, assets managed by robo-advisors have grown from $US11.5 billion at the end of March to $US15.7 billion. That’s a 36.5% growth over three months, Diana Britton from Wealth Management reported. Some of the leading names include: Assetbuilder, Betterment, Covestor, FutureAdvisor, Personal Capital, SigFig, and Wealthfront.
“All these new startups aren’t going to turn the world upside down tomorrow or this year,” Grant Easterbook, an analyst at Corporate Insight, told Britton. “But look at the long-term trends here: Gradually baby boomers are retiring, and over time, firms that want to win new business will have to shift prospecting to more tech-savvy, Gen X and Gen Y clients.”
“If you think about the key tenets that make a good online-focused investment advice solution, it’s modern and user-friendly websites, low cost, low minimums, transparency on performance and fees. What Gen X and Y will likely want sounds a whole lot more like what these new guys are doing,” he said.
Although the rise of robo-advisors poses a threat to traditional financial advice, Megan Graf from InvestmentNews wrote that there are six lessons advisors can learn from their new competitors.
“The growth of online advisers so far shows that there’s a service curve along which all sorts of businesses are possible. By scaling your size and streamlining your services, you can reach a pool of prospects untouched by your competitors. Short of building your own online platform, a traditional adviser can compartmentalise their services to build scale within a small business in a strategic way, and finally tap into the mass-affluent market. It’s been waiting there all along,” Graf said.
These lessons include: competing in your preferred specialisation, marketing at a larger scale, prioritizing online experience, calling less frequently, and creating client templates.
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