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Lessons Learned From Prince’s Untimely Death

I gave my thoughts to Kiplinger’s Stacy Rapacon on lessons we can learn from the unfortunate passing of Prince. The music legend apparently passed away without a proper estate plan. Or if he had an estate plan, no one knows where it is… which is just as bad. See below:

Keep a copy of your will somewhere handy and be sure to tell your family—or at least your lawyer—where it is. All the estate planning in the world is for naught if your loved ones don’t know where the documents are. In Prince’s case, he was unmarried and had no surviving children, so at least in this case there are no grieving widows and orphans to worry about. But chances are that Prince intended his multi-million-dollar fortune to go, if not to a friend or friends, then to a charity. His wishes may never be carried out if his will cannot be found.

I’ve told my wife repeatedly where to look for the documents in the event I meet an untimely end. But I also know good and well that, if that day came, she might not be mentally able to deal with it at first. So, I keep one of the estate lawyer’s business cards pinned to the bulletin board in our kitchen. Yes, it’s a little morbid, but at least the number is there to call if she needs it. The estate lawyer has copies of all of our documents in the event that the originals are lost or destroyed.

You can read the full article here.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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A Little Portfolio Spring Cleaning

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Photo credit: stavos

Around this time every year, “well-used” shirts magically disappear from my closet. For years, I thought I was losing my mind. Then I realized that it was my wife’s not-so-subtle way of telling me it was time to do a little spring cleaning.

Out with the old, in with the new.

She’s right. It was time to throw away the moth-eaten T-shirts with mustard stains. But had she not taken the initiative (or had she actually informed me of what she was doing), they would still be cluttering up my closet.

Spring is a good time to clean out your house and take your old junk down to the curb. But it’s also a fine time for a little portfolio spring cleaning. Tax season has just ended, so you’re more likely to have household finances on your mind.

It’s smart to use this time wisely, take the initiative and do a little house cleaning on your investments. After all, due to the compounding effects of returns, small changes today can make a big difference years or even decades down the line.

So with the following five article, we’re going to do a little portfolio spring cleaning. Enjoy!

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Looking At Muted Returns? Your 401(k) Might Be Your Best Friend

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First-quarter 401(k) account statements will be arriving in mail boxes in a few short weeks. When they do, a lot of Americans will wonder why they even bothered contributing. For all of the day-to-day noise, the market is going to finish the quarter pretty much where it started. And to think, the market hasn’t even crashed yet.

Running on a proverbial treadmill like that is frustrating, and I’d love to tell you to expect better returns for the rest of the year.

But based on where stocks are priced today, I wouldn’t get your hopes up. Looking at the cyclically-adjusted price/earnings (CAPE) ratio, the S&P 500 is priced to deliver annual returns of zero… over the next eight years.

You’ve no doubt heard the conventional wisdom that stocks “always” return 7%-10% over the long-term.

Well, that’s certainly been the case up until now… and will probably be the case going forward.

But again, we’re talking over the long-term, which in the world of financial planning might mean 30 years. In the interim, the results can look a lot different.

From September 1996 to March 2009 – a period of more than 13 years – the S&P 500 went nowhere. And not to be outdone, old timers that survived the bear markets of the 70s might remember that the market went nowhere from 1968 to 1982…

And that’s before adjusting for inflation.

Adjusting for inflation, it would have been well into the 1990s before investors saw a positive return on their 1968 investments!

So again, while stocks “always” return 7%-10% over time, there can be long stretches when returns come nowhere close to that. And based on today’s valuations, we may well be at the front end of one of those periods today.

So… what should you do with your savings?

Well, to start, you should max out your 401(k) plan at work.

You might want to read that last sentence again. Yes, I am recommending (if I had the authority, I would say I was ordering) that you put every last penny you can afford to save into your company 401(k) plan.

And I say that fully expecting the returns on most mutual funds to be terrible in the years ahead.

Even with a bleak market outlook, your 401(k) plan is likely to be your best bet at earning a reasonable return.

Remember, investment returns are only part of your total “effective” returns. These can be broken down into:

  1. Investment returns
  2. Employer matching
  3. Tax benefits

Let’s say you keep your entire 401(k) balance in a money market or stable value fund earning a big fat zero in returns.

Well, guess what? The other two sources of return are looking pretty good.

Let’s start with matching. This will vary from employer to employer but usually falls into a range of 3%-6% of your salary. If your employer is matching you dollar-for-dollar, your effective return on the portion they match is 100%. You’ve doubled your money as of day one.

The tax benefits are also nothing to take lightly. Every dollar you pay to the government in taxes is a dollar you no longer have.

Frankly, I’d rather run my money through a paper shredder one dollar bill at a time than give it to the government.

But every dollar saved from taxes by stuffing it in a 401(k) plan is a real addition to your wealth. If you’re in the 25% tax bracket, then you’ve effectively “earned” 25% on the salary you defer into your 401(k) plan.

Let’s use real numbers. Say you earn an even $100,000 per year and that you’re in the 28% tax bracket. You’re disciplined and you manage to defer the full $18,000 per year… and you keep the funds in a money market fund earning effectively nothing. Your employer is fairly generous and matches you at 4%. Here’s how the numbers shake out:

Investment Return:$0
Matching ($100,000 * 4%):$4,000
Tax benefits: ($18,000 * 28%):$5,040
Total gains:$9,040

You just made a 50% “return” on your $18,000 contribution… without putting a dollar at risk in the stock market.

Naturally, I have to put the usual disclaimers here. Empployer matching and tax savings are not “returns” in any traditional sense of the word. But they most certainly can add to your wealth over time, so it can make all the sense in the world to maximize your 401(k) contributions.

So I’ll repeat. The market may not offer much in the way of upside. But it still makes all the sense in the world to stuff every dollar you can get your hands on into your company 401(k) plan.

Photo credit: Ken Teegardin

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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All About Robo-Advisors

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Tadas Viskanta at Abnormal Returns posted an interesting piece on the rise of robo-advisors: Peak Robo-Advisor? Tadas asked his fellow financial bloggers to chime in on the robo revolution, and I shared my thoughts below:

Q: Venture capital has likely dried up for stand-alone robo-advisors. If so, where does the business of rob-advising go? Or said another way is robo-advising simply going to be the way advisors manage client accounts going forward?

A: I really see the robos getting atomized into smaller and smaller operations. We’re nearly to the point where every advisor can offer their own robo. In fact, I’ve been working with Wes Gray and his team at Alpha Architect to do exactly that.

This is a big deal because the biggest impediment to an advisor growing their practice is time. Your instinct is to try and serve every client that knocks on your door. But the reality is, you can’t. Your time is simply too valuable to do a lot of sit-down meetings with clients that have only modest sums to invest. Time has a monetary value, and you actually lose money on smaller clients. You have the same amount of regulatory compliance headache with a $10,000 client as a $10,000,000 client. Arguably, you actually have more.

But a robo setup changes that. With a robo setup, you can still profitably serve smaller clients, get them the same portfolios you would give a high roller, and all the while keep the regulators happy. A robo setup also allows a larger client to “kick the tires” and try out your services before committing a larger portion of their net worth to your management.

You can read the rest of the answers here.

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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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What Should You Put in a Rollover IRA?

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Americans who retire or change jobs face one of the most important questions of their financial lives: What to do with a 401k plan that might have ballooned to be a huge piece of their net worth after years of saving and employer matching. Excluding the value of any home equity, the 401k plan might very well account for virtually your entire net worth.

So what do you do with it after changing jobs or retiring matters?

For most Americans, a rollover IRA is the best option, as the fees are often lower and the list of potential investments generally a lot broader. Rolling your 401k balance into a rollover IRA is easy and can almost always be done with standardized forms from your new broker.

But moving the funds is only the first step. Once the funds are transferred, you still have to invest them.

When you first started working and contributing to your 401k plan, you were young and had an entire lifetime of saving and investing in front of you. An aggressive allocation to stock funds probably made sense. But by the time you move your funds to a rollover IRA, chances are good that you are in a very different stage of life, and a very different kind of allocation might be appropriate.

But this is what makes a rollover IRA such a fantastic investment vehicle. You can often hold assets in it that you would never be able to hold in a 401k plan, such as gold, real estate or even artwork.

Now, I’m not suggesting you run out and buy an Andy Warhol print with your retirement funds. But the fact is that you can consider more exotic asset allocations with a Rollover IRA than you ever could via your employer’s 401k plan.

So with no more ado, let’s jump into some assets to consider for your Rollover IRA.

Alternative Investments

“Alternative investments” is a broad term that can mean a lot of things to a lot of people.

I try to keep my definition simple. To me, an alternative is anything other than stocks, bonds or cash. This can be anything from raw land to an aggressive futures trading strategy and everything in between.

With bond yields low, I’ve been using various alternatives as a substitute for bonds in client portfolios. In particular, I’ve been using market-neutral hedge funds for accredited investors and private REITs and business development companies for both accredited and ordinary investors alike. And in all cases, I’ve placed them in client rollover IRAs where possible.

This is something that requires a little research, however. You have to be careful what you hold in a rollover IRA because certain assets can create real tax headaches. The same unrelated business taxable income (UBTI) issues that make MLPs difficult to own in an IRA also make certain hedge funds (particularly those that use leverage) difficult to own. You should always discuss the details with your tax advisor before attempting to put an alternative investment in your IRA.

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Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.

Photo credit: GotCredit

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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