Happy With My New Fidelity IRA

On February 3, 2010, Fidelity Investments offered commission-free trades on 25 iShares ETFs. As a small investor and a die-hard, dollar-cost averager, this intrigued me. My biggest obstacle to dollar-cost averaging ETFs was brokerage firms' commission fees. Even at low-commission fee Scottrade, I would need to buy $700+ of any one ETF in order to limit my commissions to 1%.

If I had $700+ to invest monthly, I wouldn't care too much about brokerage commission fees. But alas, since most of my income is going towards paying down student loans and my 401k, I don't have that kind of money to play with invest. (Some day, though, some day.)

Anyhow, I was happy to see that Fidelity was offering TIP commission-free. (I currently have 10 shares of TIP in my Scottrade accounts.) I was even more excited that EEM (MSCI emerging market fund), IVW (S&P500 growth fund), LQD (investment grade corporate bond fund) and EMB (emerging markets bond fund) were also offered commission-free. I was sold.

Traditional v. Roth?
I chose to open a Traditional, non-deductible IRA. Although I expect my 2010 AGI to be below the $105,000 - $120,000 threshold, it may not be if I get laid off at the end of the year and am given my lump-sum severance. In order to avoid the headaches of a potential re-characterization from a Roth to a Traditional IRA and coverting it back to a Roth, I just chose to open a Traditional IRA and convert it a Roth next year.

Open Account With $2,500 or $200/month?
Since I intend to dollar cost average over the year, I chose the SimpleStart IRA process which waives the usual $2,500 minimum investment in lieu of $200 monthly automatic contributions.

I chose to invest $220/month and keep the rest of the money in my numerous "high" interest-bearing savings accounts. Fidelity offers an FDIC-insured, deposit sweep, but it's currently earning 0.10%. That's pretty much close to nothing.

DRIP Feature
I've currently elected to invest solely in income funds in my IRAs to create a source of tax-free, passive income stream in my retirement. I figure that since I'm not presently investing much money in my IRA (in comparison to my 401k), I'm not sacrificing that much potential growth for safety.

For the first two months, I bought couple shares each of LQD and EMB. They both pay out about $.40/share in dividends per month. I was delighted to learn that my Fidelity account also has a DRIP feature which would reinvest my dividends into the ETFs. (I don't think my Scottrade accounts have this feature.)

With the DRIP, I earned an extra 0.005 share of EMB and an extra 0.004 share of LQD and should be getting more at the end of the month. Woo hoo!!

All in all, I'm happy with my new Fidelity account. I'll be the first to admit that the iShares ETFs aren't my first choice, but if I want to dollar-cost average, this is currently my best option. If I can find additional monies to invest, I'd also eventually like to add growth fund ETFs into the mix. My 401k is woefully lacking in growth funds and this may be a great way for me to diversify.

Bought 7 Shares of TIP

Update: Oh great. This guy thinks if there's theoretically one type of Treasury bond that the government can default on, it's TIPS.

~~~

I have on ongoing deal with my buddy. (He's co-worker #1 from my prior post.) We joke that we so suck at sports betting and investments, that we'll tell each other about our next bet/investment. For example, if I give my bookie $100 for the Lakers to win the next game, I need to warn him. Based upon my horrendous track record of ALWAYS betting on the wrong horse, he'll just "know" that the Magic will win.

Similarly, if I buy a stock, I need to tell him so he can AVOID that investment since more likely than not, it'll sink like a rock. (Conversely, if I sell, he'll buy since it'll suddenly sky-rocket for no reason.)

I consider today's post as a sort of public service because I bought 7 shares of TIP in my Roth IRA for $101.47/share (ACB $717.29, including $7 trading fee) yesterday. And sure to form, I've already lost money since it's currently worth $708.75.) But I'm not really concerned about the actual value of this ETF. I bought it because it pays out a monthly dividend.... usually.

TIP is the ticker symbol for the iShares ETF "that seeks results that correspond generally to the price and yield performance of the inflation-protected sector of the United States Treasury market as defined by the Barclays Capital U.S. TIPS index. The fund invests at least 90% of the assets in the inflation-protected bonds of its underlying index and at least 95% if the assets in U.S. government bonds. It may also invest up to 10% of assets in U.S. government bonds not included in the underlying index. The fund invests up to 5% of assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents."

In March 2008, I bought 3 shares of this ETF in my taxable account at $110.31 (ACB $331.23 since no trading fee incurred). Although the ETF value is down 8.2%, it's paid out $18.83 in dividends. This reduced my loss to -2.61%.

Since March 2008, the ETF paid dividends of anywhere between $.33/share to $.93/share. (Note: It didn't pay any dividends during November '08 to March '09, during the whole market crash turmoil, though.) Had I researched this ETF more carefully, I would NOT have purchased it in my taxable account since the monthly dividends make this a tax inefficient investment. So now I've purchased 7 more shares in my Roth.

I don't expect this ETF will be volatile nor do I think it will have much of a downside or an upside. I think it will continue to trade within the narrow price channel of where it is now ($99-$102/share).

So why did I buy it?

1. I'm obsessed with finding an income stream in retirement just in case Social Security goes BK. (I know, I know. Some of you have already commented that some form of Social Security may still be there when I'm over 60. But I'm just hedging my bets. And you know how bad my bets are!) If I accrue TIP and other high-dividend yielding funds in my Roth over the years, I may have some tax-free monthly income that I can supplement my 401k.

2. My spidey senses tell me that inflation is on its way. Maybe not this year and maybe not even next. My private student loan APR has already creeped upwards slightly (3.451% in January to 3.598% in March). The loan rate will be re-setting in July and I'm guessing it'll be higher. Owning TIPS (Treasury Inflation Protected Securities) is one way to hedge against inflation since it pays interest adjusted for inflation, similar to the I-Bond. Unlike purchasing TIPS directly from the Treasury, TIP may not be the perfect way to hedge against inflation, but this is the only way that I know of that I can own TIPS in my Scottrade Roth.

I ask you: Do you think inflation is on its way? What are you doing to protect yourself?

Avoiding the Near-Retiree Stock Market Crash Freak-Out

I'm seriously afraid of being one of the near-retirees who freak-out in a serious market downturn and pull out all of her money from the stock market. (Actually, I'm more worried of becoming one of those crazy, old, cat-ladies. But that's another post.) Is there anything I can do to prevent the "near-retiree-stock-market-crash-freak-out"?

Money Magazine's latest issue highlights a 61 year-old whose retirement account asset allocation before the 2008 market crash was 85% equities and 15% bond funds. (Egads! I'm half his age plus 6 and even I'm not that aggressive!) As you may have already guessed, his portfolio got slammed 40%. Ouch.

My current 401k asset allocation is primarily based upon using CNNMoney.com’s asset allocator. And I also compare my allocation against the conventional wisdom of subtracting my age from 110% and putting that amount in equity funds. This should work fine while I'm young or while the market's going up.

But asset allocation won't necessarily protect me when I’m 57 and my account drops 25%+ with a possibility that the market won't recover in the next 10 years. But at the same time, the money will probably need to last another 30+ years, so I can't panic and suddenly become too risk averse either.

This got me thinking about Jim Cramer's advice that money you need in the next 5 years need to be out of stocks, which is similar to Motley Fool's advice of :

1. Any money you need in the next year should be in cash.
2. Any money you need in the next two to five (or even seven to 10, depending on your risk tolerance) years should be in a safe fixed-income investment, such as certificates of deposit or bonds.
3. Any money you don't need in the next five to 10 years is a candidate for the stock market.

Currently, retirement is decades away, so I can be as aggressive in my asset allocation as I'm comfortable of being. But, perhaps as I get older, maybe I need to stop looking at my 401k as a monolithic account and I need to think of it more like 5 different "buckets of assets" with different time frames and apply a different allocation to each bucket.

For example, suppose I'm 55 with a target retirement age at 60. (Let's also assume that I already have 8 months' emergency fund saved up and I'm also on track to saving 1 year's living expense in cash by the time I'm 60.)

In this scenario, bucket #1 will account for 20% of my total 401k asset that I'll be planning to tap between ages 60-66. I have a time frame of 5 years so the asset allocation in bucket #1 will have 30% equities and 70% bonds/stable fund. As I get closer to 60, bucket #1 will eventually be all stable fund.

Bucket #2 will have a longer horizon of 10-15 years, so the asset allocation in bucket #2 will be 75% stocks and 25% bonds/stable fund. Eventually, as bucket #1 gets depleted, the asset allocation in bucket #2 will move towards 30% equities and 70% bond/stable fund. So on and so forth.

Based upon a rudimentary number crunching I did over the weekend, this is what my asset allocation could potentially look like in my mid-50s:

TOTAL ALLOCATION RISK (Age 55): High

Equity Fund: 75%
Bond/Stable Fund: 25%

Consisting Of:
Bucket #1 (20% of total funds): Equity 30%/Bond-Stable Fund: 70%
Bucket #2 (20% of total funds): Equity 75%/Bond-Stable Fund: 25%
Bucket #3 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%
Bucket #4 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%
Bucket #5 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%

TOTAL ALLOCATION RISK (Age 61): Medium

Equity Fund: 57%
Bond/Stable Fund: 43%

Bucket #1 (20% of total funds): Equity 0%/Stable Fund: 100%
Bucket #2 (20% of total funds): Equity 30%/Bond-Stable Fund: 70%
Bucket #3 (20% of total funds): Equity 75%/Bond-Stable Fund: 25%
Bucket #4 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%
Bucket #5 (20% of total funds): Equity 90%/Bond-Stable Fund: 10%

TOTAL ALLOCATION RISK (Age 66): Low

Equity Fund: 31%
Bond/Stable Fund: 69%

Bucket #1 (0% of total funds): DEPLETED
Bucket #2 (25% of total funds): Equity 0%/Stable Fund: 100%
Bucket #3 (25% of total funds): Equity 30%/Bond-Stable Fund: 70%
Bucket #4 (25% of total funds): Equity 75%/Bond-Stable Fund: 25%
Bucket #5 (25% of total funds): Equity 90%/Bond-Stable Fund: 10%

TOTAL ALLOCATION RISK (Age 72): Low

Equity Fund: 35%
Bond/Stable Fund: 65%

Bucket #1 (0% of total funds): DEPLETED
Bucket #2 (0% of total funds): DEPLETED
Bucket #3 (33.4% of total funds): Equity 0%/Stable Fund: 100%
Bucket #4 (33.3% of total funds): Equity 30%/Bond-Stable Fund: 70%
Bucket #5 (33.3% of total funds): Equity 75%/Bond-Stable Fund: 25%

TOTAL ALLOCATION RISK (Age 78): Low

Equity Fund: 14%
Bond/Stable Fund: 86%

Bucket #1 (0% of total funds): DEPLETED
Bucket #2 (0% of total funds): DEPLETED
Bucket #3 (0% of total funds): DEPLETED
Bucket #4 (50% of total funds): Equity 0%/Stable Fund: 100%
Bucket #5 (50% of total funds): Equity 30%/Bond-Stable Fund: 70%

TOTAL ALLOCATION RISK (Age 84): Low

Equity Fund: 0%
Stable Fund: 100%

Bucket #1 (0% of total funds): DEPLETED
Bucket #2 (0% of total funds): DEPLETED
Bucket #3 (0% of total funds): DEPLETED
Bucket #4 (0% of total funds): DEPLETED
Bucket #5 (100% of total funds): Equity 0%/Stable Fund: 100%

I'm not sure if this type of mental planning will help me avoid the "near-retiree-market-crash-freak-out" I dread. If anything, perhaps I can take some solace from reading about another couple in Money Magazine:

In 2000, a year after David McMickens retired from his 40-year job as a State Farm supervisor, he and his wife Judy lost half of the $500,000 portfolio when the tech bubble burst. It’s not hard to see how: At the time, they had 90% of their savings in stocks – a risky allocation for their age and retirement status.

But the McMickens didn’t panic. Between their Social Security benefits, pensions and ample cash in the bank, they simply delayed tapping their nest egg, giving it time to bounce back. By 2005, it had, and they began working with financial planner Stephen Iaconis to create a more balanced portfolio, now 60% in stocks and 40% in bonds. Though they’ve lost 24% in the past year, their experience taught them not to worry; once again, they’re relying on pensions and Social Security ($80,000/year), plus a cash cushion ($75,000), to help them postpone tapping savings. Says David: “We can just sit tight and wait for our nest egg to grow again.” – Ismat Sarah Mangla for Money Magazine, March 2009 issue, Page 69

What I can't take solace in, however, is that I won't have a pension and I may not get any Social Security.

Now what?

I Opened a Treasury Direct Account!

No, I'm not running for the hills... Yet... (I joke! I joke!) But, the recent stock market crash did give me some food for thought.

Why Buy Bonds?
Investing in bond funds is safer than investing in stocks but this recent stock market crash made me sufficiently concerned that bond funds alone are an insufficient means of providing income as well as capital preservation in retirement.

Suze Orman's book, The Road to Wealth, defines a bond as

[A] debt security, or IOU, issued by a corporation or government agency in exchange for the money you lend it. In most instances, bond issuers agree to repay their loans by a specific date and to make regular interest payments to you until that date. ... With most bonds, the issuer must give you your investment money back, at face value, on the maturity date of the bond.

A bond fund, on the other hand, is

[A] mutual fund that is made up entirely of bonds. Bond funds come in all shapes and sizes, just as bonds do, but the interest rate on a bond fund is not fixed, as it most often is on a single bond. Bond funds pay income every month, however, and investors like knowing they can rely on that check. ... Bond funds do not have a maturity date. ... Because bond funds don't have maturity dates, you can't be sure how much of your original investment you will get back when you sell your shares.

So, in essence, bond funds have the advantage of being more liquid than individual bonds but they don't guarantee the return of your principal.

My bond fund (PTRAX) in my 401k demonstrates this perfectly. PTRAX (PIMCO Total Return/Intermediate-Term Bond Fund) pays dividends regularly, but as of October 18, my cost basis for the fund is $15,848.59 but the current value (including the reinvested dividend) is only $15,107.25 (or, -$741.34, or -4.68%). (Of course, the loss in this bond fund is nothing compared to the losses in my equity funds!)

Why Savings Bonds?
My recent attempt to invest in a short-term California muni-bond was thwarted by the minimum purchase amount. My Scottrade account also has a prohibitive minimum amount of $5,000-$10,000 (and $1,000 increments thereafter) to purchase various bonds.

Sigh... what's a small (and I mean small) investor like me to do?

According to CNN Money's site, U.S. Treasurys are the safest, most liquid investments on the planet next to cash. Per Suze Orman, the U.S. Treasury's Series I Bonds are perfect for non-retirement account money:

1. that you want to keep safe and sound,



2. don't need current income from, and



3. will not need to withdraw for at least 5 years.

Series I bonds have a variable interest rate (4.84% through October 31, 2008) that is tied to the consumer price index (CPI) and thus provide protection against inflation. If inflation goes up, so does the interest rate on these bonds (theoretically).

Many talking heads on CNBC are flappin' their gums about a deflationary economy. But I'm betting that we're headed more towards a '70s-style stagflation. But what do I know? Notwithstanding my bachelor's degree in Economics, I clearly can't read economic tea-leaves (and I still have quite a ways to go to fully fund my emergency fund), so my preference is to only invest a small amount.

The beauty of Series I bonds is that you can purchase the bonds electronically in $25 denominations at TreasuryDirect's website.

Another advantage of the Series I bonds is that the interest on the bonds are tax-deferred until I redeem the bond. Even when I do redeem the bond, I will only have to pay federal tax (all I-bonds are exempt from state income tax, with some exceptions).

For those with little ones, interest earnings on the I-bonds may be excluded from Federal income tax when used to finance education.

The drawback of I-bonds is that I can't redeem the bonds for at least 6 months and I will get penalized with 3 months' interest if I redeem in less than 5 years.

(Please note my disclaimer on the sidebar.)

My Plan
I've been living one pay raise behind this year. Rather than increasing my discretionary spending by the amount of my raise, I've been funneling my raise (approx. $30/paycheck) into my savings. I'll just start investing $25/month in the Series I bond instead.

This will give me some inflation protected income in the future. Perhaps I can use some of the proceeds from the I-bonds as a down payment for my first house. :-D

It's The End of the World and I Feel Fine

I've been humming REM's song a lot these days. It's no wonder since 60% of those polled think that we're very or somewhat likely to experience another Great Depression.

Whether we're in a recession or depression is really irrelevant when:

1. I'm about to be laid off,
2. my 401k is now down 35% from the end of last year and quickly cascading towards nothing,
3. I only have about 4 months of emergency fund saved up (including my investment account and ESOP), and
4. I'm up to my eyeballs in debt.

When I started writing this post, I was going to question all the relentless cheerleading going on right now by many financial writers who encourage people to stay in stocks despite the cascading market crash, like Liz Pulliam Weston of MSN Money and Brett Arends of WSJ. The advice is rooted in historical data that supports how those who pull out of the stock market during a severe downturn never get back in time to benefit from the rebound.

But as we all know, historical performance doesn't necessarily guarantee future performance. (I even state that in my disclaimer.) What if this market crash is different than before? What if our free market system, our banking system and stock market is irreparably damaged? What if the global community no longer considers the U.S. a safe haven of investments and stop investing in our economy?

I was curled up in a fetal position sucking my thumb until suddenly I just said, "F#(@ it. If I lose it all, I lose it all."

Once I said this to myself, I felt much better. Of course, I have the benefit of knowing I have decades to make up for such a catastrophic loss. But this is a key step to overcoming my fear, particularly my fear of making a mistake. This reminded me of FDR's seminal speech: the only thing I have to fear is fear itself.

A Wall Street Journal article writes:

During the Great Depression, an entire generation became convinced that owning stocks was dangerous.
...
Depression-level stock phobia might be making a comeback. Will you suffer from it or conquer it?
...
First and foremost, Americans are afraid. ... As finance professor Meir Statman of Santa Clara University says, "Fear increases pessimism."
...
[I]t is hard not to be bullish. As an intelligent investor, you must always ask: What is my edge? What information or skill do I possess that the people on the other side of the trade don't? In normal times, that is a high hurdle. Today, however, you need only two things in order to have an automatic edge: cash and courage.

For people who have the courage but not cash (like me, he he), the article recommends rebalancing my investment portfolio by selling a little of anything that's gone up and buying more of whatever's gone down. Since that's already part of my plan, I'll remain on course.

The Wall Street Journal article points out: if you were among the courageous few who bought and held stocks during and after the Depression, you earned spectacular returns.

To be frankly honest, I'm not looking for "spectacular returns". I'll be happy with returns that beat inflation by the time I retire. :-D



Regardless of what the market does today, I wish you all an excellent weekend.

It's Official - I'm Losing Money in My 401k

I really hate to start off the week with a downer post but here goes. Since 2001, I've contributed $86,208.64 to my 401k (including my company match). The current value of my 401k is $85,762.41, or -0.52% total return/-0.14% annualized return.

Up until now, I haven't lost any of my contributions. But now that it's fallen below my total contribution amount, I'm feeling a little bit queasy in my stomach.



In my prior post, I discussed the reasoning behind my current 401k target allocations which are:

Investment Fund (Classification)	Target %
DODFX (Int'l Multi-Cap Value)	20%
DODGX (US Large-Cap Value)	20%
BTIIX (S&P500 Index)	20%
NBGEX (Small-Cap Blend)	20%
PTRAX (Intermediate Term Bond)	15%
MLTXX (US Treasury Fund)	5%

Based upon my target allocation, I should have 80% in equity funds, 15% in bond funds and 5% in Treasury funds.

But now, my allocations look like:



I'm going to reiterate that I'm not going to do anything other than to realign my investments to match my target allocations at the end of the year, if necessary.

But here's where I need to do a serious gut check: I am anticipating a long-term (i.e., 10-year to 20-year) stagnation or worse, a downward trend in the market. The current market crisis is caused by over-leveraging and excessive risk-taking by both individuals and businesses. When access to easy money gets cut off, the ability to invest also declines. The recent passage of the $700 billion bailout "rescue" plan will theoretically unclog the liquidity problem in the credit market, but it does not address the deleveraging process that needs to take place in the underlying market.

In this Los Angeles Times article, Harry Holzer, a labor economist at Georgetown University and a fellow at the Urban Institute commented, "[T]here's a good chance this [recession] will be more severe than [in 1990 and 2000, which lasted 8 months], because the last two were not accompanied by the widespread financial crisis that we have now."

This Marketwatch article validates my worries as well. The article argues that the Investment Rate measures the demands for investments over long-term cycles and thus forecasts future market cycles.

The article states:

[I]f demand is increasing over extended periods of time, over the course of many years, we could rationally assume that the market and the economy will fare well. In fact, this has been the case since 1981. Every year, between 1981 and 2007 the demand for investments increased annually. More people had money to invest, and reason to invest it at the same time. During that upward sloping cycle in the Investment Rate market declines and economic downturns were short lived, buy-and-hold strategies worked extremely well for passive investors, and buying the dips made sense religiously. This was true during every major down cycle, including the "crash" of 1987.

However, at the end of 2007 the upward sloping cycle which began in 1981 came to an end. A new era began at the end of 2007, an era representing diminishing demand for investments going forward. The Investment Rate identified this in 2002, when it was first offered to the public.

...

The declines that began at the end of 2007 relate directly to the Great Depression and the Stagflation period of the 1970s because, in all three instances, overall demand for investments on a consumer level was shrinking. The average duration of a major down cycle is 11 years.

The third major down period in history has only just begun.

I am wondering: If this is true, can I really stick to my current plan over the course of 10+ years of diminishing returns? I realize that this is how fortunes are made. In the famous words of Warren Buffet: "Be greedy when people are fearful and be fearful when people are greedy."

During this time, though, I wonder what kind of psychological toll this will take on me?

Why The Down Market Is Good For Me

So.... the U.S. financial market is in the toilet, our free-market capital system is now looking a little bit Socialist and my tax bill will be huge soon. Last Wednesday, my 401k was down $14,000+. (Although it's back up slightly, I think this recent rally is a short-term, fake-out.)

There's no other way to say it - this really bites.

But since my retirement is 20-30 years away, I'm not (too) worried because there is still plenty of time: (1) to dollar-cost average, (2) for the market to rebound and (3) for my money to compound.

And beyond that, there is one reason why I think this volatile, down market is good for me: I can learn, while my money is less at risk, how to protect my assets proactively in a bear market when I'm closer to retirement.

It's The Allocation, Stupid
Whenever the stock market tanks, there is no shortage of articles telling people what stocks/funds to buy and what defensive moves should be taken. But by the time the market is in a downward trend, it's probably too late to move assets around without falling into the trap of "buy high, sell low."

With respect to retiring in the current bear market, Craig Carnick, who runs Carnick & Co. in Colorado Springs, Colo., recommends raising a buffer of cash ahead of time as the easiest way to keep a portfolio intact during uncertain times. In this article, Carnick says,

"The key to overcoming volatility is that you're not in a position where you're forced to sell at a loss." Carnick recommends keeping up to 20 percent of a portfolio in cash or cash equivalents, or enough for two to three years' worth of income, plus a mix of bonds with varying maturities set to expire over seven to eight years to replenish that money.

In the same article, Dean Barber, a financial planner and founder of Barber Financial Group, says allocating as much as 30 percent of a portfolio to treasury inflation-protected securities, or TIPS, isn't unreasonable, given shaky markets and rising price pressures.

Barber recommends filling out a portfolio with exposure to commodities, cash, and foreign stocks, adding that no more than 30 percent of any retirement portfolio should be in domestic stocks. A few years ago, the allocation would have been 60 percent. That's just too risky now, Barber says. "Retirement is not like golf. There are no mulligans. If you mess it up, you go back to work for 20 years. People can't afford to get it wrong," he says. "The portfolio we have today is more defensive."

Take Profits and Re-Allocate While You're Up
In January 12, 2008, I read this article about various index fund portfolios maintained by real people. One of the highlighted portfolio is managed by Ted Aronson of AJO Partners. In the article, Ted Aronson highlights the importance of taking profits off the table and reinvesting in laggard performing funds/stocks.

"The equity funds in [Aronson] family's taxable portfolio averaged a return of more than 21% the past five years, thanks to his high 40% in foreign funds: But 'I realize a change -- a big change for a lazy investor -- is needed. Time to take some profits off the table,' says Aronson.

'For a U.S.-based investor, 40% international is way too high at this juncture. With the dollar's weakness goosing up foreign returns, and emerging markets having gone almost straight up for five years, time to trim the tree.'

So Aronson is taking 10 whole percentage points "out of emerging markets and putting half into TIPs and half into high-yield bonds." His detailed reasons:

Everything has gone up double digits over the past five years -- except bonds

Emerging markets have gained 36% a year -- nearly a five-fold increase

Dollar is weak retrospectively

Moving money from emerging markets to junk bonds leaves plenty of capital at risk (how you make money)

So, since most portfolios are likely out of balance, Aronson recommends this key asset re-allocation: 'If an investor held anything like 20% in emerging markets five years ago and was 'lazy' in the interim, your holding is more like 40% of the portfolio by now! Moving it down to 10% (from an original 20%) will entail lots of gains. C'est la vie.' My translation: No one goes broke taking profits.).

Now comes this year's big lesson: Aronson warns that most investors will psychologically resist selling the big winners and buying lesser performers. But that's what rebalancing and "Modern Portfolio Theory" (the theory behind Lazy Portfolios) is all about. You stick to your asset allocations as sector performance waxes and wanes over the long-term. Otherwise you're just chasing hot sectors and engaged in high-risk market-timing.

Alternatively: If you're serious about your long-term results, instead of doing an end-of-year rebalancing, rebalance each month. But not by selling high performers, just add new money from your regular monthly savings program to keep your portfolio in line with the original allocations."

At the time I read this article (January 2008), I recall thinking, "But, the emerging market fund is so 'hot'! I wouldn't do this!" Well..... since 12/31/07, the emerging market fund is down over 29% and the bond fund is down less than 5%. I guess this is why Aronson is the pro and I'm the amateur. He he.

I always thought that following market movements and trends were important to establishing your own personal asset allocation. But the more I think about it, Aronson's recommendation is less about market timing and more about having an appropriate, diversified allocation and maintaining the allocation through market ups and downs. In other words, if my current allocations are completely out of alignment with my target allocations, that should be a hint for me to reallocate my assets.

Therefore, as I get closer to retirement, I'll need to remember to take profits off of bloated asset categories while it's up and re-allocate to a more conservative portfolio which consists of higher allocation of cash, bonds and TIPS.

Planning for Retirement When Social Security Goes Belly-UP

I was cleaning piles of paperwork on my desk and found my 2007 Social Security Statement. Apparently, the Administration didn’t have enough time to update my statement since it listed my 2007 income as $242. So I went to the Social Security Administration’s website to check my estimated benefits.



I’m estimated to get $2,408/month when I retire at 67, or, $2,994/month when I retire at 70. (In case you’re wondering, the present value is only approximately $686/month and $758/month respectively.)

Initially, the SSA takes pains to point out that those are just estimates and the actual figures could differ. Who cares? I’ve heard that Social Security will run out of money some time in 2040, just in time for my retirement! Ha!

Worse yet, pessimists argue that Social Security could run out of money within the next ten years. Optimists, on the other hand, argue that Social Security won’t ever run out of money.

Call me a sour puss, but if I had to bet on the federal government administering a bucket of money efficiently and responsibly, I’d rather err on the side of caution and assume I won’t be collecting any Social Security, ever. That being said, I need to plan accordingly and I’ve laid out the following retirement planning goals for myself.

1.) Contribute the Maximum Possible to My 401K
In my prior post, I discussed various reasons why I wasn’t reducing my contributions to attack my debts more aggressively. The potential insolvency of the Social Security system is another big reason, since I won’t be getting a pension.

2.) Contribute the Maximum to my Roth IRA
The Roth is critical since it’ll give me tax-free money in my retirement. Although I don’t expect to be in a very high tax bracket in retirement, it won’t hurt to have some money I can withdraw without having to set aside a portion to pay Uncle Sam.

Additionally, since the Roth is a tax-free (versus a tax-deferred) investment vehicle, it’s also the perfect account to invest in tax-inefficient investments like REITs (real estate investment trusts) and gold ETFs.

Right now, my priority is to pay down debt and save for an emergency fund, so funding my Roth IRA has taken a backseat. But I try to contribute a little bit of money into my Roth IRA every year, even if it’s as little as $490.

3.) Contribute to a Taxable Investment Account
The taxable investment account is another form of a tax-deferred account since I won’t incur any tax liabilities until I sell my stocks and ETFs. Additionally, if I’ve held the stocks for over a year, I would only have to pay taxes on my earnings at a favored capital gains rate. (I realize that this tax favored treatment of capital gains may change, depending upon the new administration that gets voted in this year.)

Since I don’t have time to monitor individual stock performances, my investments in my taxabale account have been of the “buy-and-hold” variety, using low-cost ETF’s. I’ve started with $1,000, allocated equally between a foreign large blend ETF (ticker: VEU), a total stock market ETF (ticker: VTI) and an inflation-protected bond ETF (ticker: TIP). (I modeled my starter investment portfolio after the Margaritaville Portfolio created by Dallas Morning News’ columnist, Scott Burns. When I have more money to invest, I plan to diversify my investments a bit more.)

4.) Buy Long Term Care Insurance When I’m 55 or So
As you can see from my blog title, I don’t expect to procreate. That means I’ll need someone, other than my kids, to care for my chronic ailments in my old age. (Wow, this is depressing.)

According to Parade Magazine’s February 17, 2008 article, “on average, a home health aides costs $19/hour; an assisted living facility is $2,968/month; a private room in a nursing home is $206/day.” Medicare and Medicaid rarely (if ever) cover these costs.

Parade provides these recommendations:
• Buy from a company that has top financial ratings;

• Avoid policies you need a paycheck to pay for. You must be able to afford premiums after you retire;

• Don’t buy more insurance than you need. Few people require lifetime benefits. The average stay in a nursing home is just 2.5 years and 43% of residents stay less than 1 year;

• Don’t choose a policy solely on the seller’s recommendation.

Another good source for information can be found at AARP’s website.

5.) Buy An Immediate Annuity When I’m 65
It’s bad enough that I won’t have a pension and I’m probably not going to be able to collect any Social Security. But my genetics, ethnic background and my gender all point to a long life. This creates serious concerns that I will outlive my retirement funds.

Ideally, I’d like to get an income stream that will replace the Social Security payments I (probably) won’t be collecting. I’ve estimated that it would cost me about $200,000-$250,000 to purchase an income annuity when I’m between 65-70. (I haven’t really thought this through, but I’ll probably need to tap my 401k to pay for this. I should also remember to purchase the annuity when the interest rates are high.)

The good news with an income annuity is that I’ll get income for life. The bad news is that it won’t be adjusted for inflation like Social Security.

With all that said, am I being paranoid? Maybe. But I'd rather be prepared than sorry.