Is Your Portfolio Like a Baseball Team?

Is Your Portfolio Like a Baseball Team?

            If you’re a baseball fan, you’re no doubt aware that the MLB All-Star Game is being played on July 12. But while you’ll probably appreciate the grace and skill of the players, you may not realize just how much a baseball team can teach you about other aspects of life — such as investing.

            Specifically, consider the following characteristics:  

• Consistency — Baseball teams need to be consistent. They choose quality players and must have the patience and discipline to stick with those players during slumps. As an investor, you should choose quality investments and have the patience and discipline to stick with them over the long haul.

• Diversification — A baseball team doesn’t have just one type of player — it contains pitchers, catchers, infielders and outfielders. Your portfolio also needs to be diversified because if you own only a single type of investment, and a market downturn strikes that asset class particularly hard, your portfolio could take a big hit. Owning a diversified mix of stocks, bonds, government securities, certificates of deposit (CDs) and other investments can help reduce the effect of market volatility on your holdings. Keep in mind, though, that diversification, by itself, can’t guarantee a profit or protect against loss.

• Unity — While a baseball team contains a diverse collection of players, they all strive toward a common goal. And the mix of investments in your portfolio needs to work together to help achieve the various goals you’ve established, such as a comfortable retirement, college for your children and a legacy for your family. To work toward your individual objectives, you will need to create an investment mix that’s based on your risk tolerance, time horizon, family situation and other factors. 

• Flexibility — While every member of a professional baseball team is a good player, one might be better than another in a given situation. For instance, a faster runner might pinch-run for someone else. And as you move on in your “game” of life, you will need flexibility in making your investment decisions. As one example, when you near retirement, you may want to reduce your exposure to risk somewhat, so you might decide to replace some — but certainly not all — of your growth-oriented vehicles with investments that can offer greater protection of your principal.

• Good management — Even the best group of baseball players needs a manager to guide them and make decisions during a ballgame. And to help you make investment choices during different times in your life, you might benefit from working with a financial professional — someone who knows your risk tolerance, investment preferences and long-term aspirations.

You may never find yourself surrounded by the greatest ballplayers in the world — but remembering these traits can help keep your portfolio “in the game.”

             

Explore Different Options When Purchasing Bonds

Explore Different Options When Purchasing Bonds

As an investor, you may find that bonds can be a valuable part of your holdings. But there’s more than one way to own bonds, so you’ll want to be familiar with the various investment vehicles available — because the more you know, the better the choices you’ll be able to make.

So, let’s look at three popular ways of owning bonds:

• Individual bonds —When you buy an individual bond, you will receive predictable interest payments. And when your bond matures, you’ll get the original principal back, unless the issuer defaults, which is not common in cases of “investment grade” bonds. However, the value of your bond — the price you could get for it if you sold it on the open market before it matured — will fluctuate over time, primarily in response to interest rates. (When market rates go up, the value of your bond drops, and vice versa.) In general, you’ll pay at least $5,000 for an individual bond, though that amount may vary. Consequently, while this approach gives you more control, it can be more time consuming and require a larger investment in order to   build a diverse fixed-income portfolio.   

• Bond funds — By investing in a bond-based mutual fund, which may own dozens of different types of bonds, you can efficiently increase your diversification, which is important, because diversification can help reduce    credit risk (although it can’t guarantee a profit or protect against a loss). A bond fund does not pay you a fixed rate of return; instead, you receive dividends, which will fluctuate based on the underlying bonds’ interest rates and capital appreciation. In addition, bond funds don't have a maturity date when principal is repaid.  Keep in mind that when you purchase bond funds, you could be subject to capital gains taxes in two different ways: if you sell your fund shares for a profit or if the fund manager sells an underlying bond for more than it’s worth. This increased capital gains liability is one reason that many people put bond funds in a tax-deferred vehicle, such as an IRA or a 401(k). 

            • Bond UITs —  A unit investment trust (UIT),   like a mutual fund, contains a variety of bonds, so you get the benefit of diversification. Unlike a mutual fund, however, a UIT is not actively managed and does not change its holdings. And since no manager is involved in making changes or trades, a UIT has low management fees. A UIT is typically established for 20 to 30 years, but, as an individual investor, you can sell your shares whenever you want, for whatever the market will bear.

Although UITs can be some of the most cost-efficient, low-risk options in the fixed-income arena, they are not without risk. Specifically, since a UIT’s bonds provide fixed interest rates, there’s always the possibility that the bonds will lose purchasing power to inflation over time.

            When choosing how to own bonds, you’ll need to evaluate many factors — and we’ve only looked at some of them. You may want to consult with a financial advisor to determine which methods of bond ownership are appropriate for your needs. By doing your homework, and getting the help you need, you can maximize the advantages of adding bonds to your investment mix.

FINANCIAL FOCUS Own a Small Business? Consider These Retirement Plans

For a variety of reasons, many people, particularly those in the baby boom generation, are considering retiring later than they might have originally planned. If you’re in this group, you’ll want to take full advantage of those extra working years by contributing as much as you can to a retirement plan that can help you build resources, defer taxes and, ultimately, maximize income. And if you own a small business, you’ve got some attractive plans from which to choose.

Let’s look at two of these retirement plans — the “owner-only” 401(k) and the defined benefit plan.

If you have no employees other than your spouse or a partner, you can establish an “owner-only” 401(k), also known as an individual 401(k). This plan offers many of the same advantages of a traditional 401(k): a range of investment options, tax-deductible contributions and the opportunity for tax-deferred earnings growth. You may even be able to choose a Roth option for your 401(k), which allows you to make after-tax contributions that have the opportunity to grow tax free.

            Your owner-only 401(k) contributions consist of two parts: salary deferral and profit sharing. In 2011, you can defer up to $16,500 of income, or $22,000 if you’re 50 or older. The amount of your profit-sharing contribution is based on your earnings. The sum of your employer contribution and your salary deferral contributions can’t exceed $49,000 in 2011 (or $54,500 if you’re 50 or older). Keep in mind that if your spouse is employed by your business, you each can contribute the maximum amount allowed.

            You’ve got considerable flexibility in funding your owner-only 401(k). Both the salary deferral and the profit-sharing contributions are discretionary, so you can change them at any time based on your business’s profitability.

            Now, let’s move on to the defined benefit plan, which might be appropriate for you if you are highly compensated and have no other employees. By establishing a defined benefit plan, you’ll be providing yourself with a monthly payment (or “benefit”)           

for life, beginning at the retirement age specified by your plan. In 2011, the yearly benefit limit is $195,000.

            The amount you can contribute to your defined benefit plan each year is based on several variables, including your current age, your compensation level and your retirement age. But you’ll certainly be able to contribute large amounts: A defined benefit plan is the only retirement account that allows contributions in excess of the limits placed on 401(k)s and other defined contribution plans. Generally speaking, the closer you get to retirement, the larger your maximum yearly contributions will be. (This is because you’ll have fewer years left in which to fund your defined benefit.) And since your defined benefit contributions are tax-deductible, you are, in effect, getting a big boost from the government to fund a generous retirement plan.

Here’s one more benefit to owner-only 401(k) and defined benefit plans: You can contribute to both of them at the same time. But before you choose either or both of them, consult with your tax and financial advisors. After all, you work hard to help provide for a comfortable retirement tomorrow — so you’ll want a retirement plan working hard for you today.

           

Lifetime Income: A Great Mother's Day Gift

Mother’s Day will soon be here.  If you’re a mother, you will (hopefully) receive thoughtful cards and gifts. But there’s one present you may eventually want to give yourself, and it’s a gift that truly does keep on giving: a strategy for your retirement. Of course, it’s important for everyone to build adequate financial resources for retirement — but the challenge is even greater for women. Largely due to family responsibilities, women spend, on average, 12 years less in the workforce than men, according to the Women’s Institute for a Secure Retirement. Less time in the workforce equates to lost earnings, missed promotions, smaller and fewer raises and reduced retirement plan benefits. In fact, men have, on average, about $91,000 in Individual Retirement Accounts (IRAs), including all IRA types and the amounts rolled over from other retirement accounts into IRAs, compared to just $51,000 for women, according to a recent report issued by the Employee Benefit Research Institute.

Whether you’re married, divorced, widowed or single, you’ll want to build financial resources of your own and be prepared to manage your finances during your retirement years. You’ll be helping yourself, and, by becoming financially independent, you’ll also avoid the possibility of depending on your grown children for support.

To help ensure a financially secure retirement, consider these ideas:

• Fully fund your IRA each year. As the numbers above show, women are way behind men when it comes to funding their IRAs. And IRAs, with their tax advantages, are great retirement-savings vehicles. A traditional IRA has the potential to grow on a tax-deferred basis, while Roth IRAs have the potential to  grow tax-free, provided you’ve had your account at least five years and you don’t start taking withdrawals until you’re 59-1/2. So make it a priority to “max out” on your IRA each year. In 2011, you can put in up to $5,000 to a traditional or Roth IRA, or $6,000 if you’re 50 or older. 

• Boost your 401(k) contributions. Put in as much as you can afford to your 401(k) or other employer-sponsored retirement plan. At the very least, contribute enough to earn your employer’s match, if one is offered. (In 2011, you can put in up to $16,500, or $22,000 if you’re 50 or older.) Your earnings have the opportunity to grow tax-deferred and you have a range of investment options, so your 401(k) or other retirement plan can be an effective, flexible way to put money away for the future.

• Invest in an annuity. If you’ve reached the contribution limits of your IRA and 401(k), you may want to consider purchasing an annuity, which can be structured to provide you with regular payments for the rest of your life. And this lifetime income source is especially important to women, who, at age 65, can expect to live, on average, almost 20 more years, compared to slightly over 17 for men of the same age, according to the Centers for Disease Control and Prevention.

As a mother, you willingly spend a great deal of time and effort on your children. But it’s important to also think about yourself and your future, so review your strategy for retirement with your financial advisor, and take the actions needed to help make sure you can enjoy all the Mother’s Days of your life in the comfort you deserve.