If your mutual fund isn’t performing up to snuff, then look at the fund manager’s style. If the stock market is growth-oriented and your manager is a value manager who looks for bargains, you may be wise to hang on. Value-style investing comes in and out of favor, and you wouldn’t want to miss the upside. Of course, if an inept mutual fund manager is the only reason you can find for the lagging performance, you can sell. Just try to wait until a fund’s performance has been impaired for at least two years in order to avoid unnecessary losses.
If a bond is doing poorly, maybe because the stock market is booming (typically, when the stock market is doing well, bonds are lagging, and vice versa), ask yourself what cost you can expect from hanging on to the bond until maturity. Compare that expense with what it will cost you to sell the bond. If interest rates rise substantially, say to 15%, and you’re hanging on to a bond paying 4%, you might well be better off selling the older issue and buying a new bond.
If a stock is struggling, look at the company. Forget about what’s happened to date for a moment. If you discovered the company again today, would you buy it? Do some future analysis on the company’s prospects. Don’t let your answer be clouded by negative feelings about the past few months or years. If you bought the stock because you believed that the company was well-positioned for a turnaround due to new and competitive products or services, sales, profits, or other facets of its financial position, hang on a bit more. The last thing you want to do is take a loss on a stock that may turn around a few days or months after you give it the boot. At the same time, if you decide you wouldn’t buy the stock again today, or some of the economic reasons that attracted you to the stock in the first place haven’t panned out, selling is okay.
Is the entire market taking its lumps? If so, your then investment isn’t immune. If one or more sectors of the stock market are taking a licking, consider the impact to your stock, bond, or mutual fund. A sluggish economy, or one that is in retreat, can play havoc with investments. Investments are long-term endeavors. Don’t sell just because of an economic downturn. You’ll take a loss.
An economic downturn can create a buying opportunity if it sends the price of stocks spiraling downward.
Of course, maybe one or more of your investments isn’t performing up to your standards. This kind of letdown happens to the best of us, and you can count on a disappointment once or twice in your investment life. When underperformance hits home with one of your investments, take a deep breath and try to figure out what’s happening. Figuring out how long to hold on to an investment that isn’t producing any growth is a challenge. You have to first determine what is keeping the investment on the rocks. The following sections offer a look at why an investment may be underperforming.
When you sell a stock, bond, or mutual fund, make sure that you find a suitable replacement and don’t leave the cash lying in your checking account, where it may be pilfered away by life’s daily expenses.
After you start investing, monitor your progress to ensure that you’re on track. Make the anniversary of your first investment your day of financial reckoning (or at least that month). When the day arrives, sit down and take an earnest look at what you’re investing in, how much you’re investing, whether or not your goals have shifted or changed completely, and whether or not you’re saving enough (and earning enough on your investments) to reach your goals. The ultimate measure of your portfolio isn’t whether or not you’re beating the benchmarks. It’s whether or not you’re reaching your goals. Are you? For example, if you determined at the outset that you needed to invest $500 a month and earn an average annual return of 9%, are you hitting your goal?
If you’re meeting or beating your goals, you’re in great shape. If you’re not, identify what’s wrong. Maybe you’re not investing enough. You may have to pay off some bills so that you can find more money in your household budget to invest. Or you may find that your 401(k) needs greater funding so you have to increase the percentage of your pay you contribute each week or month.
To ensure that your investment plan is a workhorse that’s pulling its weight, feed it. As you get raises at work, or come into “found” money — maybe a small inheritance, a bonus at work, or a tax refund — consider investing some or even all of these funds in your portfolio.
You’re investing hard-earned money, so you want to enjoy a sense of comfort and confidence in your investments’ potential to perform as expected over time. I emphasize the phrase over time because chasing short-term performance can drive you crazy.
Investments can look mighty risky if you track their performance every day. In contrast, risk tends to flatten out a bit if you look at it year to year. In fact, since the late 1920s, few classes of investments have lost money over a 10-year period. Of course, some individual investments have lost money, but the general rule applies: Holding on to investments for a longer period of time will reduce your exposure to losses. Do you want to avoid undue risk? Invest for the long-term — or, at the very least, five years. If you need to tap your investments earlier than that, stick to shorter-term cash equivalents, such as money market mutual funds (which invest in high-grade bonds with shorter maturities), certificates of deposit, and money market accounts. Learning how to gauge the market is different from thinking you can predict the market. No one —not even the most savvy broker — knows with any real certainty how well or how poorly the market will fair in the future.
Everything is relative, regardless of which investment performances you’re measuring. What may have been great performance a year ago may be considered good, bad, or indifferent today, depending on how the particular market you’re invested in is doing.
Unless you have evidence of other negative indicators, don’t knee-jerk into selling an investment just because its performance lags behind an index one year. You’re investing for the long-term. What’s underperforming its index this year may well bounce back next year.
The trick to using indexes is to be able to definitively tell how well the performance of your investments stack up against their peers in the market you’re in. With that know-how, you can answer questions like: Is this stock’s performance average? Is this mutual fund’s performance above average? Is this bond’s performance poor?
How does your performance compare with the indexes? Although you don’t want to be 50% or more off the indexes or benchmarks for your investments, lagging 10% to 20% behind is nothing to sneeze at. For example, if in 1998 your investments came in 20% under the S&P 500’s 28% performance, you would have reported more than a 22% return. Could you live with that? You should be happy to. With a 20% return, you’ll more than double your initial investment in four years. These are the kinds of years you come to live for as an investor. And you’ll be glad you built a portfolio rather than investing in just one or two stocks that may have entirely missed this increase in value.
by Brad O'Neil
Any day is a good day to start teaching children about saving and investing.
But the "official" Teach Children to Save Day was Tuesday - so you may want to take this opportunity to launch your efforts toward helping your children develop solid financial habits.
The American Bankers Association Education Foundation established National Teach Children to Save Day to highlight importance of teaching children to save and plan for the future.
But as a parent, what steps can you take? Here are a few suggestions:
Explain the "three pools" concept. Encourage your children to divide their money into three pools - one for saving, one for spending and one for giving.
The "spending" pool should be for fairly inexpensive purchases, such as small toys, whereas the "saving" pool should be earmarked for bigger purchases they may want to eventually make, such as video games or a new bicycle.
You may want to suggest your children use the "giving" pool to put aside money for birthday presents or contributions to charitable groups.
Exhibit appropriate behavior. Children may learn best by imitating their elders, so it's important you set a good example in the area of smart financial behavior.
Take time to explain to your children that, for example, you'd like to buy a new car, but you can't afford one now, so you are saving for it. And look for similar opportunities to stress connections between saving and reaching goals.
Simplify the concept of investing. You might think young children can't grasp the meaning of investing, but that's not really the case. Use simple terms and concepts, and they'll get it.
You might say, "Anyone can buy little parts of a company. These little parts are called stocks, and the more people like what the company makes, the more stock they will buy, and the more the stocks have the potential to be worth."
Then you can connect the potential growth of stocks with the achievement of very long-term goals, such as a new home or the chance to retire comfortably.
Make investing fun. You can make investing seem more real to your kids by playing a "stock-picking" game. Each member of your family could choose to follow the stock of a company with which the kids are familiar.
You can create a daily chart of the stock prices, and at the end of a given time, such as three months, award a prize to the person whose stock has gone up the most.
Make sure to point out to your kids that stock prices will always go up and down and, in as "child-friendly" a way as possible, explain some key factors - demand for products, competition, basic economic forces - causing stock prices to fluctuate.
Teach Children to Save Day only lasted 24 hours - but the financial lessons you impart to your children will stick with them a lifetime.
by Gwen Allen
No matter what your plan, or lack thereof, one thing is for certain—saving for retirement is a major concern for most people. No longer shrouded in the protection of employer pension plans, more and more individuals are wondering how to save for retirement.
Accredited Asset Management Specialist (AAMS) Brian Michel of Edward Jones said people face a much different circumstances today than they did 20 years ago.
“Pension plans (defined benefit plans) are really becoming a thing of the past and mostly used today by tradesmen,” Michel said. “Companies have moved to 401K (defined contribution plans) because they are cheaper. So now it is up to an employee or individual to save for their retirement.”
As a result, many people are going to or have retired without adequate funds, he said. The reasons are numerous, but he said many people put themselves at risk because they either do not know how to invest, do not feel they can afford it or are under the impression that it is too late.
No matter their age or income, Michels encourages people seek help
“There is always a sacrifice for investing, but the more you can invest today the better off you will be tomorrow,” he said.
For those who believe they live paycheck to paycheck, Michels said there are always cuts that can be made today to save for the future.
“I'm a young guy but kind of old-school,” Michels said. “I believe in taking a piece of paper and pen and writing down every expense to see where every dollar goes. It is impulse buying that makes people feel like they are living paycheck to paycheck.”
He said when unnecessary spending is identified, cuts can be made and positive cash flow (even as little as $10 or $20 a month) can be redirected for investing.
Starting anywhere is better then nowhere, and he said the earlier this is done the better.
According to Michels, a 25-year-old saving $5,231 a year (assuming an 8-percent return), they can expect to have a million dollars at retirement. All things equal, a 35-year-old would have to save $12,618 a year, and a 45-year-old would have to save $34,678 a year to get the same results by retirement.
“There are people who work for money, and people who let money work for them,” Michels said. “You really need to be a little bit of both (to retire comfortably).”
Of course, a million dollars today is not what it was even five years ago. With life spans increasing, Michels said it is vital to not only have a plan, but to be disciplined enough to stick with it.
“People with a plan always end up with three times more at retirement then those without,” Michels said. “Long ago people would retire and just sit around. Now they want to travel and see the world, so if you want to ensure a comfortable lifestyle in retirement then you will need at least 75 percent of your annual income (as when you were working).”
He said most people are surprised when they learn how much they can put away for retirement despite their circumstances.
Interestingly enough, he said wealth is not only attainable but realistic as most millionaires in the United States have annual incomes of about $60,000.
“It's not what you make, it's about what you keep,” Michels said. “You need to plan for tomorrow today.”
As the name suggests, the Lehman Brothers Aggregate Bond Index represents an aggregate of the performance of a number of bonds, including U.S. Treasury bonds and corporate bonds. For investors in U.S. bonds or bond funds, this is the benchmark for relative performance and the direction of the market.
