Your IRA or 401k and how escaping reality is just more fun!!!

 

A few days ago was an anniversary of our marriage.  My husband got me a very beautify ring.  And I got him, what I though was a very thoughtful gift, the game of Shogi (Japanese Chess) and a book with details on the game.  He looked at the game and said he'll think about the value of learning a new set of rules and symbols and suggested to try and play regular chess first.  My reply was "We both played chess before!  What's the challenge?!"

I was disappointed, I wanted us to learn a new hobby that would replace our current pass time of watching TV series and going to the movies.  Fast forward a few days, the box with Shogi is now carefully placed out of sight and we are back to watching True Blood, Dexter, Orange is the New Black, and the Walking Dead.  This might be because the default for de-stressing is to escape reality by watching something entertaining on TV.  Another, component is the routine or inertia of what we have been doing.  Change is usually hard if not impossible for most people.

This leads me to believe that many private investors who set their investment accounts to a specific set of funds never look back because they are in the same state of mind as our state of mind when it comes to spending evenings by watching TV.  While not getting into the game of Shogi will not effect our immediate retirement plans, I think we will miss out on learning something new and complex, which they say is good for brain exercise and overall well being.  What the investors are missing by not revisiting their retirement portfolio, are the changes in the market that directly effect their ability to maximize the return of their invested money. 

Many people I speak with about their IRAs or 401ks note to me that their balances seem to be the same as they were a few years ago.  If I left my IRA balanced the same way that it was balanced a few years ago I would be in a loss. Because a few years ago bonds and CDs were stronger than most stocks while now most bond saturated portfolios are flat or in the negative. 

In order for an investment portfolio to do well it is key to introduce new information in the management and review your investments regularly.  It is also key not to become complacent.  As seen in commercials, where a couple is realizing their 401K has disappeared and they don't know why, it's a valuable skill to break up the routine. 

To maximize your return, instead of setting the portfolio and forgetting it, YOU MUST:

1. review it quarterly or more frequently
2. make sure it is returning as much as the Dow Jones (DIA), NASDAQ(QQQ), S&P 500 (SPY), or another index(es) that you chose for your investment plan
3. make certain you are maximizing your tax savings by allocating the maximum to this tax deferred investment account
4. review your diversification (do not have more then 5 or at most 10) to be certain you allocate the higher percentages to sectors that are positioned to do well in the next quarter
5. trade!  Yes, you can sell positions to reinvest the proceeds in what you perceive will be a stronger sector.  Remember your gains in this account are not taxable* (if you comply with IRS rules)

How often do you check on your money?

They say that quarterly is enough. However, if you don't report an error on your bank/credit card statement within a 60 day window (after getting the statement) you would have missed your boat and will have to "eat" any unauthorized transactions. When it comes to your portfolio (investments under management, 401k, IRA, 403b, TSP, or other) should you give it the same level of attention? After all, you are working very hard to accumulate this money for a comfortable lifestyle at retirement.
 
Don't feel bad if you haven't been looking at your portfolio for over a quarter. Some people just throw the money in and don't review (forget re-balance) their retirement savings for years.  Here are a few reasons for looking at your money more often: 1) markets change, what once was a hot stock or sector no longer is, 2) bonds are not risk free, 3) mutual funds can underperform, 4) there are new investment opportunities each year (for example MLPs).
 
If you have a difficult time reminding yourself to look at your portfolio you can engage an investment advisor to do it with you. Even if you spend several hundred dollars each quarter (for an hourly fee advisor) you will end up gaining thousands over time in healthy investment portfolio returns.  Here is a few hints for your review:
 
1) If you don’t know how your portfolio performed compared to market or a specific benchmark you haven’t looked at the right performance indicators.
2) If your portfolio is simply following the market you are overpaying for management. If you pay a professional manager to diversify your portfolio they should earn their fees.
 3) If your money is in mutual funds, how much do you pay for mutual fund management fees (known as expense ratio, which is money spent on paying the fund's managers and for transactions, if actively trading)? Are the fees higher than 1%? Do you know of less expensive alternatives (ETFs, which usually have lower expense ratios)? If the management fee/expense ratio is 2.5% your money has to make 2.5% to break even forget outperforming the market.

Is your money secure at the Bank?

As many risk averse high net worth investors you might've been parking your money in a non-interest bearing deposit account but the unlimited FDIC coverage for those accounts ended on January 1, 2013. 
Now what? You could find out how your bank is doing by reviewing the Uniform Bank Performance Reports (published by the FDIC) or reading an analyst report (but we remember the recent credit crisis and the limited value that should be placed on analyst ratings). Unfortunately banks' regulatory ratings are not public but if the banks are in real trouble you can generally find Formal Agreements, Memos of Understanding and other similar communication published on the regulatory websites (FDIC.gov, OCC.gov, etc).
If you think "better be safe than sorry" and would like an alternative, a safety net can be a CDARS program. This program is offered only by some banks; it allows up to $50,000,000 (fifty million -- but the coverage may be different depending on availability) FDIC insurance coverage through member banks swap of deposit money. The rates on these deposits are generally lower than the general CD rates at the banks because the banks have to pay a spread (a small fee) to the administrator.
You can secure your money in the bank! CDARS can provide significantly more FDIC coverage for your money. To find a bank in your area that participates in this program visit CDARS.

Global portfolios are the only way to go.

Chinese export surge lifts shares, commodities

Full Article: http://reut.rs/ULneGP

World shares, commodities and growth-linked currencies rose on Thursday as stronger-than-expected Chinese exports raised hopes of a more robust recovery in the global economy this year.

Before you move into ROTH IRA

We have a tendency to take shortcuts. It is a psychologically proven design of most humans. But before saying I am converting to ROTH to take advantage of the current low capital gains rate (recommended by your trusted financial adviser) perform a long term analysis.

Tax planning

Should it be focused on highest possible return or optimal performance? The answer is personal preference. Some people only focus on getting the most money back, this is generally not the most effective financial planning or resource management. Others invest time to reach the balance between optimal earnings and taking advantage of all possible deductions. One tax professional reiterated: all good tax decisions are inevitably bad business decisions.

Cultivate your inner milli(onaire)

Is it possible that everyone has the opportunity to cultivate the habits necessary to become wealthy? 

Maybe. 

If you have the desire and the drive (I believe) you can become more financially secure than you may be now.  Here are four simple steps (when I say simple I mean straight forward not that they are easy to implement or introduce):

Start at the beginning:  Where do you want to be financially?  Start with easy goals, such as a savings account for a rainy day (i.e. three to six months of basic expenses saved up for an emergency).  You can also look at your current debts and prioritize the pay off by taking care of the most expensive credit lines (the ones with the highest interest rate), going down the list to the least expensive credit (such as mortgage or student debt, which are in most cases tax favorable).

Next: Review your income (all money you have coming in from work, hobbies, refunds, etc) and your monthly expenses (focus on the necessities and discretionary spending).  Take a look at our sister blog on NeizvestAcademy that pertains to the budget strategies.

Lastly: Use a retirement calculator, usually available online through your bank's website to estimate how much you'll need to save annually to reach your financial goal.

Now for the simple but not necessarily easy part: identify sources of savings or additional income to help yourself reach the financial security goals identified in the first three steps of this process.