Listening to the financial news, you may conclude that the stock market is rebounding nicely from the March lows, even considering September’s predictable volatility. When you look at your personal September 30 investment report, however, will you still feel so pleased?
We know that large technology companies are driving the overall markets, and that the five largest companies are contributing the lion’s share of the gains. If you hold a Large Cap Growth fund, you are likely very pleased with its year-to-date results.
Almost all other holdings are lagging, and they offset the technology sector’s strong 2020 returns. The ones that stand out, in just a few categories and with results through Friday, September 25th, are:
By size –
Small cap companies – These are U.S. publicly traded companies that are small on a relative basis. The representative Russell 2000 is down -10.7% YTD. Small cap value companies have been particularly hard hit.
By geography –
Developed non-US – These are companies represented by the MSCI EAFE Index (Europe, Australia and the Far East), which is down -8.15% YTD.
By sector –
Energy and Financials – Energy and Financial companies have done far worse than other companies based on the S&P 500 sector analysis. Energy is down -47.7% YTD and Financials are down -22.1% YTD.
Every year will have its winners and losers, but this year there are far more on the losing side. The above are just some that, as a group, are below their values at the start of 2020. Now we understand better why our diversified portfolio is not performing as we would hope.
Should we just continue to ride it out? Should we change our allocation to exit these hard-hit positions? There are reasons why staying invested in these areas makes sense, despite recent returns.
While small public companies are lagging in 2020, the Callan Periodic Table of Investment Returns 2000-2019 reports that small companies outperformed large companies in 12 of the past 20 years. Internationally, 65% of the world’s capital markets are outside of the U.S. and, as such, are diversifiers from single country risk. And we all know that the economic downturn from the pandemic has had a negative impact on both energy and financials, in addition to the implications of low interest rates. Do we really believe that this impact will persist well into the future?
If we have a long-term investment strategy that considers diversification a basic principle, then a wholesale change in our allocated investments due to recent results takes us off course. What may be considered, however, are the opportunities to rebalance our positions, possibly trim as we look to the future, and review the comparative performance of the underlying holdings.
Keep in mind, even the most unloved investments may redeem themselves as we move to 2021!
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Suzanne Mestayerhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngSuzanne Mestayer2020-10-01 09:01:362020-10-01 09:01:36The Great Unloved of 2020 (Investments, that is)
I know something’s wrong when a business owner / plan sponsor tells me that they don’t pay any fees for their 401(k) plan. I can’t think of a case where this could be true. The plan sponsor might not be writing a check for services, but there’s no doubt a plan provider is collecting a fee. Plus, plan sponsors have a fiduciary obligation to regularly review, understand and judge those fees to be reasonable, and document the review process. So, if a plan sponsor thinks there are no fees? That could be a problem.
How do service providers collect fees? There are various ways and many of these can be confusing for plan sponsors. Providers are often paid directly out of the employee’s accounts in the form of asset-based or per-account fees.
Record-keepers usually charge a fee in the form of an asset but could charge a flat fee per year. Either way, that fee is most likely deducted from the participant’s account.
Third Party Administrator fees are sometimes bundled with the record-keeper’s fees but could also be billed directly in which case the plan sponsor would write a check.
Investment management fees charged by the investment funds or ETFs offered in the plan lineup are asset based and taken directly from the assets of the fund. Sometimes, the investment management fee, the record-keeper/TPA fee and other fees are reported as one number appearing to be the cost of the investment choice.
Here’s the good news: plan fees are generally disclosed in an annual disclosure document by the record-keeper. The plan sponsor must review this disclosure, understand what each service provider is being paid, deem the fees reasonable and document the review. Yes, this is the plan sponsor’s fiduciary duty, but investment advisors can assist and help plan sponsors understand where fees are coming from and how they’re collected.
The bottom line is that no one I know in the financial services world works for free. Some plan fees are reasonable, but upon review, others are not. Because fees are deducted from the participant’s account, they effectively reduce the growth of the account. That means it’s critical to ensure fees are reasonable for the success of the plan.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Fritz Gomilahttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngFritz Gomila2020-09-17 08:26:262020-09-17 08:26:26Thin(k) About Your 401(k): Plan Plan Fees: The Three Rs – They Are Real And Must Be Reviewed And Deemed Reasonable
When you don’t know where you are going, any road will get you there. – Lewis Carroll.
This is true in life, careers, and our financial futures. It is particularly relevant when the stock market is as volatile as it has been throughout 2020. Our human tendency is to react in ways that undermine our long-term investment success, motivated through either fear or greed. We are especially susceptible when we don’t have clarity about where we are going
In her recent CityBusiness article, Suzanne outlines 3 tips to choosing the road for your financial future. Click here to read more.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Suzanne Mestayerhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngSuzanne Mestayer2020-09-15 06:24:362020-09-15 07:11:03Choosing the Right Financial Road
I love when a chart makes you do a double take. When a chart makes you go “Yes!” but then after another minute “Oh”.
Because municipal bond yield is usually exempt from state, local and federal taxes, investors are willing to take less yield than they would for a treasury – thus the squiggly line is under 100 most of the time.
Cue 2020. Yield from 10-year yield from municipals is now better than what we can get from a 10-year treasury.
Wait, wait, before you think you figured out how to get some steady income from municipal issued bonds, it’s worth a pause to remember the math driving the line in this chart. The 10-year treasury yield (the base of the number) has gone from well over 2% to about .70%. It doesn’t take much muni yield to create a number that will graph higher than 100.
In fact, muni yield has been on a wild ride in 2020, but has settled out at an all-time low as well. Ouch! The main advantage of buying a municipal fund is the tax savings on the yield. Unfortunately, this space is also facing significant challenges as municipalities and states struggle with revenue losses during COVID. It is unclear how badly our local governments are struggling because their fiscal year has just ended, and they don’t report for several more months.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Sarah Bomhoff, CFA, CIPMhttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngSarah Bomhoff, CFA, CIPM2020-09-11 07:25:122020-09-11 07:25:12Thoughts in Charts: Municipal Bond Double-Take
One of the most important choices we have with our investments is the allocation of our dollars. How much will we invest in stocks, in bonds, or in any other assets? Large or small, growth or value? Studies have shown that over 90% of the returns on our investments are driven by this very basic decision. It should not be taken lightly, and many questions should be asked to help determine which allocation makes the most sense for our situation and risk tolerance.
As we read about this topic, we often find that 60% stocks/40% bonds has become almost a classic for a balanced portfolio. Do we really believe this to be the right allocation, or are we just unwittingly using 60/40 more often than not? Most importantly, it should reflect our unique needs and goals.
There are times when an investor will likely want to invest more or less aggressively. For example, a 100% stock portfolio may be great when you are 35, with a very long runway until retirement to absorb market fluctuations. It’s not always so wise when you need to tap your investments for living expenses in retirement.
The best retirement plans consider the answers to a host of differing questions:
Do you have health concerns?
Do you plan to retire completely or gradually reduce your work life?
How do you plan to use your time? Travel? Hobbies? For how long?
Are you depended upon for the needs of other family members? Caretaking responsibilities, or financial needs?
Do you know how much it will cost to maintain your desired standard of living? Will you really cut your costs, or will the costs of your post-retirement simply replace your current spending?
What is your best strategy for claiming Social Security benefits?
Your answers to these questions, as well as many others, should create a plan reflective of you and your needs.
Why is the 60/40 allocation so common? It’s a good balance when you need it.
The 60% often reflects the need for continued investment growth historically obtained from stocks. With life expectancy increasing, many people are planning a 30+ year retirement. In contrast, bonds traditionally provide relative stability and fixed income. In our current low interest rate environment, though, the income aspect may become harder to achieve. As we age in retirement, the stocks/bonds ratio may move to 50/50 then to 40/60 and so on. It should be a process customized to your situation.
In the years leading up to your retirement, you should carefully consider your very personal answers to the questions above and plan accordingly. And don’t be surprised if it leads to a 60% stocks/40% bonds allocation along the way!
We talk a lot about 401(k) plans, but many nonprofit organizations including churches, non-profit hospitals and public-school systems use the 403(b) as a qualified retirement plan for employees. And, like the 401(k), you can “catch-up” in the 403(b), which has a very interesting additional catch-up provision. As in a 401(k), employees who are 50 years of age and older in a 403(b) can make contributions beyond the maximum allowed. These amounts are determined annually. For 2020, employees can save $19,500 and those over 50 can make a catch-up contribution of an additional $6,500.
Here is where it gets interesting. As long as the plan allows, employees with 15 years of service are eligible to make a catch-up contribution prior to reaching 50 year of age. Of course, there is a limit to how much, which is determined by the lesser of:
$3,000
$15,000, reduced by the amount of additional elective deferrals made in prior years because of this rule
$5,000 times the number of the employee’s years of service for the organization, minus the total elective deferrals made for earlier years.
You might wonder, what happens if an employee is eligible for both the 50-year-old and the 15 years of service catch-up provisions. As long as the plan allows, the participant can use both. However, the 15-year catch-up is subject to a lifetime limit of $15,000 as well as other tests; and savings in excess of the limit must be first applied to the 15-year catch-up. Additionally, Click here for additional information on 403(b) contribution limits. And, make sure you talk to your tax professional before taking advantage of this potentially great way to save more for retirement through your 403(b) plan.
https://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.png00Fritz Gomilahttps://thirtynorth.com/wp-content/uploads/2017/04/LOGO-ThirtyNorth-Rev2017-1.pngFritz Gomila2020-09-02 10:12:442020-09-02 10:12:44Thin(k) About Your 403(b) Plan: Catch-Up Contributions – A 403(b) Plan’s Special Extra
The Great Unloved of 2020 (Investments, that is)
Listening to the financial news, you may conclude that the stock market is rebounding nicely from the March lows, even considering September’s predictable volatility. When you look at your personal September 30 investment report, however, will you still feel so pleased?
We know that large technology companies are driving the overall markets, and that the five largest companies are contributing the lion’s share of the gains. If you hold a Large Cap Growth fund, you are likely very pleased with its year-to-date results.
Almost all other holdings are lagging, and they offset the technology sector’s strong 2020 returns. The ones that stand out, in just a few categories and with results through Friday, September 25th, are:
By size –
Small cap companies – These are U.S. publicly traded companies that are small on a relative basis. The representative Russell 2000 is down -10.7% YTD. Small cap value companies have been particularly hard hit.
By geography –
Developed non-US – These are companies represented by the MSCI EAFE Index (Europe, Australia and the Far East), which is down -8.15% YTD.
By sector –
Energy and Financials – Energy and Financial companies have done far worse than other companies based on the S&P 500 sector analysis. Energy is down -47.7% YTD and Financials are down -22.1% YTD.
Every year will have its winners and losers, but this year there are far more on the losing side. The above are just some that, as a group, are below their values at the start of 2020. Now we understand better why our diversified portfolio is not performing as we would hope.
Should we just continue to ride it out? Should we change our allocation to exit these hard-hit positions? There are reasons why staying invested in these areas makes sense, despite recent returns.
While small public companies are lagging in 2020, the Callan Periodic Table of Investment Returns 2000-2019 reports that small companies outperformed large companies in 12 of the past 20 years. Internationally, 65% of the world’s capital markets are outside of the U.S. and, as such, are diversifiers from single country risk. And we all know that the economic downturn from the pandemic has had a negative impact on both energy and financials, in addition to the implications of low interest rates. Do we really believe that this impact will persist well into the future?
If we have a long-term investment strategy that considers diversification a basic principle, then a wholesale change in our allocated investments due to recent results takes us off course. What may be considered, however, are the opportunities to rebalance our positions, possibly trim as we look to the future, and review the comparative performance of the underlying holdings.
Keep in mind, even the most unloved investments may redeem themselves as we move to 2021!
For disclosures, please click here.
Thin(k) About Your 401(k): Plan Plan Fees: The Three Rs – They Are Real And Must Be Reviewed And Deemed Reasonable
‘
I know something’s wrong when a business owner / plan sponsor tells me that they don’t pay any fees for their 401(k) plan. I can’t think of a case where this could be true. The plan sponsor might not be writing a check for services, but there’s no doubt a plan provider is collecting a fee. Plus, plan sponsors have a fiduciary obligation to regularly review, understand and judge those fees to be reasonable, and document the review process. So, if a plan sponsor thinks there are no fees? That could be a problem.
How do service providers collect fees? There are various ways and many of these can be confusing for plan sponsors. Providers are often paid directly out of the employee’s accounts in the form of asset-based or per-account fees.
Record-keepers usually charge a fee in the form of an asset but could charge a flat fee per year. Either way, that fee is most likely deducted from the participant’s account.
Third Party Administrator fees are sometimes bundled with the record-keeper’s fees but could also be billed directly in which case the plan sponsor would write a check.
Investment management fees charged by the investment funds or ETFs offered in the plan lineup are asset based and taken directly from the assets of the fund. Sometimes, the investment management fee, the record-keeper/TPA fee and other fees are reported as one number appearing to be the cost of the investment choice.
Here’s the good news: plan fees are generally disclosed in an annual disclosure document by the record-keeper. The plan sponsor must review this disclosure, understand what each service provider is being paid, deem the fees reasonable and document the review. Yes, this is the plan sponsor’s fiduciary duty, but investment advisors can assist and help plan sponsors understand where fees are coming from and how they’re collected.
The bottom line is that no one I know in the financial services world works for free. Some plan fees are reasonable, but upon review, others are not. Because fees are deducted from the participant’s account, they effectively reduce the growth of the account. That means it’s critical to ensure fees are reasonable for the success of the plan.
For disclosures, please click here.
Choosing the Right Financial Road
When you don’t know where you are going, any road will get you there. – Lewis Carroll.
This is true in life, careers, and our financial futures. It is particularly relevant when the stock market is as volatile as it has been throughout 2020. Our human tendency is to react in ways that undermine our long-term investment success, motivated through either fear or greed. We are especially susceptible when we don’t have clarity about where we are going
In her recent CityBusiness article, Suzanne outlines 3 tips to choosing the road for your financial future. Click here to read more.
For disclosures, please click here.
Thoughts in Charts: Municipal Bond Double-Take
I love when a chart makes you do a double take. When a chart makes you go “Yes!” but then after another minute “Oh”.
Because municipal bond yield is usually exempt from state, local and federal taxes, investors are willing to take less yield than they would for a treasury – thus the squiggly line is under 100 most of the time.
Cue 2020. Yield from 10-year yield from municipals is now better than what we can get from a 10-year treasury.
Wait, wait, before you think you figured out how to get some steady income from municipal issued bonds, it’s worth a pause to remember the math driving the line in this chart. The 10-year treasury yield (the base of the number) has gone from well over 2% to about .70%. It doesn’t take much muni yield to create a number that will graph higher than 100.
In fact, muni yield has been on a wild ride in 2020, but has settled out at an all-time low as well. Ouch! The main advantage of buying a municipal fund is the tax savings on the yield. Unfortunately, this space is also facing significant challenges as municipalities and states struggle with revenue losses during COVID. It is unclear how badly our local governments are struggling because their fiscal year has just ended, and they don’t report for several more months.
Clearly this is a space we are watching closely.
For disclosures, please click here.
Is a 60/40 Investment Allocation for Everyone?
One of the most important choices we have with our investments is the allocation of our dollars. How much will we invest in stocks, in bonds, or in any other assets? Large or small, growth or value? Studies have shown that over 90% of the returns on our investments are driven by this very basic decision. It should not be taken lightly, and many questions should be asked to help determine which allocation makes the most sense for our situation and risk tolerance.
As we read about this topic, we often find that 60% stocks/40% bonds has become almost a classic for a balanced portfolio. Do we really believe this to be the right allocation, or are we just unwittingly using 60/40 more often than not? Most importantly, it should reflect our unique needs and goals.
There are times when an investor will likely want to invest more or less aggressively. For example, a 100% stock portfolio may be great when you are 35, with a very long runway until retirement to absorb market fluctuations. It’s not always so wise when you need to tap your investments for living expenses in retirement.
The best retirement plans consider the answers to a host of differing questions:
Your answers to these questions, as well as many others, should create a plan reflective of you and your needs.
Why is the 60/40 allocation so common? It’s a good balance when you need it.
The 60% often reflects the need for continued investment growth historically obtained from stocks. With life expectancy increasing, many people are planning a 30+ year retirement. In contrast, bonds traditionally provide relative stability and fixed income. In our current low interest rate environment, though, the income aspect may become harder to achieve. As we age in retirement, the stocks/bonds ratio may move to 50/50 then to 40/60 and so on. It should be a process customized to your situation.
In the years leading up to your retirement, you should carefully consider your very personal answers to the questions above and plan accordingly. And don’t be surprised if it leads to a 60% stocks/40% bonds allocation along the way!
For disclosures, please click here.
Thin(k) About Your 403(b) Plan: Catch-Up Contributions – A 403(b) Plan’s Special Extra
We talk a lot about 401(k) plans, but many nonprofit organizations including churches, non-profit hospitals and public-school systems use the 403(b) as a qualified retirement plan for employees. And, like the 401(k), you can “catch-up” in the 403(b), which has a very interesting additional catch-up provision. As in a 401(k), employees who are 50 years of age and older in a 403(b) can make contributions beyond the maximum allowed. These amounts are determined annually. For 2020, employees can save $19,500 and those over 50 can make a catch-up contribution of an additional $6,500.
Here is where it gets interesting. As long as the plan allows, employees with 15 years of service are eligible to make a catch-up contribution prior to reaching 50 year of age. Of course, there is a limit to how much, which is determined by the lesser of:
You might wonder, what happens if an employee is eligible for both the 50-year-old and the 15 years of service catch-up provisions. As long as the plan allows, the participant can use both. However, the 15-year catch-up is subject to a lifetime limit of $15,000 as well as other tests; and savings in excess of the limit must be first applied to the 15-year catch-up. Additionally, Click here for additional information on 403(b) contribution limits. And, make sure you talk to your tax professional before taking advantage of this potentially great way to save more for retirement through your 403(b) plan.
For disclosures, please click here.