Tips From Donna Gordon ( September 2016 Wesban Monthly )
by Donna Gordon on September 7th, 2016

​Tips From Donna Gordon
September 2016 Wesban Monthly


Politics and Investment Performance

With President Obama's time in office coming to a close, here's the result of an investigation into the relationship between the composition of the legislative and executive branches of the U.S. government and market performance. The 'unified' situation refers to years when the Senate, the House of Representatives, and the White House were all controlled by the same party. The 'partially divided' situation represents years when the House and Senate were controlled by the same party, but the White House was held by a different party. The 'completely divided' situation uses data from years in which the two houses of Congress were divided. Both the S&P 500 and the diversified portfolio (60% stock/40% bond) averaged the highest returns during unified years, lower returns during partially divided years, and the lowest under completely divided years.



Retirement Planning in Your 20s and 30s

Is it too early to start planning for retirement in your 20s? The answer is no. As life expectancy continues to increase, planning early can ensure a comfortable retirement. While planning for retirement at this age may be the last thing on your mind, the earlier you start the better chance you have of achieving your retirement goal. An early start also allows more time for your investment to grow through compound interest. In addition to starting early, here are some steps you should consider when planning for retirement in your 20s and early 30s.
Maximize your employer match: Young investors should consider maximizing their employer 401(k) match, since failure to take advantage of this benefit means missing out on free money. Typically employers match 50 cents per dollar invested by an employee, up to a predetermined maximum contribution percentage. If your employer provides this, make sure to put enough money in your 401(k) plan to maximize your employer match.
Consider a Roth investment: Much like a company-sponsored retirement plan, traditional IRAs are a common investment vehicle. Traditional IRA contributions are not taxed, but withdrawals are taxed. A Roth IRA or Roth 401(k) gives you the option of taxing your contribution up front at the time of investment while the account grows in value tax-free thereafter. This means that withdrawals during retirement are not subject to income tax, provided you are at least 59 1/2 and the account is held for five years or more. This is a great way for younger investors to take advantage of lower tax rates, especially if they expect to be in a higher tax bracket closer to retirement.
Manage your risk: One mistake young investors make is selecting a less-than-optimal stock/bond allocation based on their age. Typically, investors in their 20s or 30s are best advised to select a stock-heavy portfolio with a minimal allocation to bonds. For investors who feel less comfortable with selecting their own investments, target-date funds can serve as a convenient alternative. Target-date funds start out with heavier allocations to stocks and become more income-oriented depending on the participant's age. If you are in your 20s or 30s, it might make sense to choose an aggressive portfolio allocation and limit your investment in bonds.
Avoid market-timing: A look back in time suggests that some of the biggest gains in the stock market have followed periods of poor market returns. Investors can make the mistake of timing the market by pulling out of their investments during market losses and buying back when the market has rebounded. Investors who attempt to time the market run the risk of missing periods of exceptional returns. With time on your side, it is best to adopt a long-term approach to investing. 
Keep in mind that you should first determine how much money you may need in retirement as well as determine your annual expenses such as living, healthcare, and miscellaneous spending before considering the options outlined above. It is always a good practice to track your spending in addition to identifying your savings and investments.
This is for informational purposes only and should not be considered tax or financial planning advice.
401(k) and IRA plans are long-term retirement-savings vehicles. Funds grow tax-deferred. Withdrawal of pretax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Direct contributions to a Roth IRA are not tax-deductible but may be withdrawn free of tax at any time. Earnings may be withdrawn tax and penalty free after a five-year holding period if the age of 59 1/2 (or other qualifying condition) is met. Otherwise, a 10% federal tax penalty may apply. Please consult with a financial or tax professional for advice specific to your situation.


A Risk Drill for Foreign Stocks

While the past several years haven't rewarded global investors, there will be market environments when foreign stocks do better than U.S. (The year 2012 was the most recent example.) More important, investors who diversify globally gain exposure to some world-class companies that just happen to be domiciled overseas.
Yet as much as diversifying overseas makes sense, it's also worth bearing in mind the risks of doing so. Many of the same risk factors that apply for U.S. stocks, such as valuation and concentration risk, apply for foreign-stock investors, too. But foreign-stock investors confront a few other risk factors that are specific to investing in the asset class. As you survey your foreign-stock holdings today, here are some of the key questions to focus on, as well as details on how to find the answers.
Question 1: Is the investor's time horizon long enough to regroup from bad currency movements?
As with foreign bonds, this is the risk that currency losses will reduce any gains, or magnify any losses, associated with the underlying investments. While foreign-currency fluctuations can have a meaningful impact on the returns that U.S. investors earn by investing in foreign bonds, currency fluctuations generally play a smaller, but still significant, role in foreign stock returns.
Not speculating on foreign currencies is the best way to avoid getting burned by a bad currency move. Because currency fluctuations tend to wash each other out over longer time frames, investors with a similarly long-term approach would do well to opt for products that take a consistent stance on currencies (either hedged or unhedged) and call it a day.
But investors with shorter time horizons should be more mindful of foreign-currency risk; the shorter the time horizon, the more likely it is that the investor would encounter a bum foreign-currency move that could dampen gains over his holding period. That's important because U.S. investors usually spend their portfolios in dollars, not in foreign currencies. Because currency risk is such a wild card, it's one of the key reasons the asset-allocation experts at Morningstar reduce foreign equities as a percentage of a portfolio's total equity allocation as retirement approaches.
Question 2: Is the portfolio overly exposed to geopolitical risks?
Geopolitical risk can take a toll on foreign equities, as investors will tend to jettison the securities from countries where there's military action or economic or political unrest. For example, Russian equities dropped sharply in 2014, owing to sanctions related to its actions in the Ukraine, as well as falling energy prices. Of course, crazy stuff can happen anywhere. But investors can mitigate geopolitical risk by not gorging on emerging markets, which tend to be particularly vulnerable to geopolitical shocks, as well as avoiding hefty bets on any single region or country.
Question 3: Is the portfolio overloaded on emerging markets?
The extent to which a foreign portfolio is exposed to emerging markets will be a key determinant of how volatile it is. That volatility can translate into real losses in certain periods: The typical emerging-markets funds lost more than 54% in 2008, whereas broad foreign large-blend funds lost 10 percentage points less that year, on average. Of course, there will be time periods when emerging markets far outperform developed, so investors will want to be careful about shunning them altogether. A broad foreign stock index fund that buys both can serve as a good benchmark for your own emerging-markets exposure: Many have between 15% and 20% of assets in emerging markets today. But risk-averse investors, especially those approaching retirement, may want to downplay emerging-markets-heavy investments.
Question 4: Does the foreign-stock position exacerbate economic sensitivity?
The U.S. market generally is well-diversified across sectors. But foreign markets tend to skew more heavily to certain industries—for example, broad foreign stock index funds hold more in basic materials and financials than broad U.S. index funds, and smaller weightings in healthcare and technology. The net effect of these sector tilts, assuming an investor buys a broad foreign stock index fund, is a bigger weighting in cyclically and economically sensitive industries. That, as well as the relative strength of the U.S. dollar in times of turmoil, helps explain why foreign markets have often performed worse than U.S. in global economic downturns like 2008’s.
Question 5: Will high costs erode a big share of the portfolio's return?
Owing to both convention and small differences in the actual costs of management, foreign large-blend funds typically charge more than U.S. ones. For example, the typical large-blend fund in Morningstar's database has a 1.06% expense ratio in 2016, while the average domestic large-blend fund charges 0.91. Specialized foreign funds, such as those that invest exclusively in small caps, emerging markets, or a specific region, often charge fees that exceed 1.5%. Those levies can drag on investors' take-home returns and exacerbate losses in down markets.
This is for informational purposes only and should not be considered financial planning advice.
Diversification does not eliminate the risk of experiencing investment losses. Holding a portfolio of securities for the long term does not ensure a profitable outcome, and investing in securities always involves risk of loss.
Stocks are not guaranteed and have been more volatile than the other asset classes. International investments involve special risks such as fluctuations in currency, foreign taxation, economic and political risks, liquidity risks, and differences in accounting and financial standards.
The investment return and principal value of mutual funds will fluctuate and shares, when sold, may be worth more or less than their original cost. Mutual funds are sold by prospectus, which can be obtained from your financial professional or the company and which contains complete information, including investment objectives, risks, charges and expenses. Investors should read the prospectus and consider this information carefully before investing or sending money.




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