Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Friday, February 15, 2013

Trailing Returns

When judging mutual fund performance, people often look at trailing returns. Trailing returns ask the question, "how has this fund done in the past year, past three or five or ten years?" Returns are simply the price change over the given period, expressed as a percentage of the starting price.

The starting date matters a lot in measuring returns. As price of funds or stocks changes every day, moving the starting date a few days around can make a huge difference. If a stock is at $110 today, measuring from a $100 starting point gives you a 10% gain, but if it traded at $95 around that time gives you a nearly 16% return - what a difference a day makes!

The implications for funds are more interesting still. Five years ago on Valentines Day S&P 500 closed at 1348.86, one year later it closed at 789.17. Yesterday the closing price was 1521.38, this made a 2.4% annual return for the past 5 years, but a 17.8% annual return for the past 4. Clearly, the day you measure from matters.

These returns are so dramatically different because of the massive drop in the market from the end of 2007 to the beginning of 2009. When you measure from a market peak - most returns will look lackluster, but measuring from a trough will make them look exceptional. Keep starting dates in mind when looking at trailing returns, and make sure to compare them to something you have a better grip on.

Thursday, February 14, 2013

What to do with that raise!

Everyone is buzzing about the potential for the minimum wage to be raised to $9 from $7.25/hr. This is exciting news for anyone making less than, or maybe just near $9 as they would see their wages increase immediately. What is the best use of all that newfound pay?

It is always important to have money saved for a rainy day (or a disaster, or recession really). Regardless of your wage level, a raise is an opportunity to save more money that you weren't even spending before. A cash savings account is important for short term needs.

A raise shrinks your debt when compared to your income. This personal inflation is good for you if you have a balance left to pay on a credit card or other revolving debt. As long as your spending doesn't increase proportionally, the extra income puts you in a much better position to save. While mortgage and other fixed rates are low right now, credit card balances can always do with lowering.

Reducing debt, increasing savings and spending should be a good thing for the economy. While all of the extra money may create some inflation, it would do more to bolster the positive economic trends we have already.

Thursday, February 07, 2013

Catching Up

Here at New Perspectives, we like to keep an eagles eye on fees. Fees are a drag on portfolio performance and every dollar that you can cut from fees is a dollar in your account, earning a return. We custody most of our assets at TD Ameritrade because of their low fee structure for administration and great low cost options for investment. We are big fans of exchange traded funds (ETFs) for their annual fee and tax benefits.

TD Ameritrade has a slate of ETFs which are free for us to trade in client accounts. These are excellent and fit well into our portfolio management process.

In the past few years, Schwab (disclosure, i use Schwab as a retail broker) has started to step into the ETF game itself. They have made a few basic ETFs with low fees and no trading comissions for Schwab brokerage clients. Schwab has not had the diversity that TD Ameritrade had, however, until now. Schwab announced today that they are offering clients over 100 free to trade ETFs on their platform.

Regardless of the platform, lowering or eliminating costs is a win for the investor. We continue to keep an eye on the lowest cost, most effective way to manage portfolios as the investment industry finds efficiencies and drives down cost through competition.

Tax Diversification

At the end of 2012, people were still not sure what income tax rates would be now. Diversifying the tax status of your investments makes sense in the face of uncertainty about future tax rates. While deferring income into a 401(k) or IRA is great for saving on taxes now, a Roth IRA will save you on taxes later. Adding a taxable brokerage account gives you long-term savings that you can access at any time.

The new year brings new retirement account contribution limits. This is a welcome boost from the $5,000 limits that have been in place since 2008. The new contribution limits for 2013 are as follows:
  • Traditional and Roth - $5,500
  • SIMPLE IRA - $12,000
  • 401(k) – $17,500
  • SEP IRA - $51,000
  • If you are over 50, catch up contributions are still the same.
All contributions are limited by your total taxable income, and the SEP IRA is limited to 25% of your income. There is more information on our website, and check with your CPA or tax preparer for more details.

Remember, if you contribute to a Traditional, SIMPLE, SEP or 401(k) account, your contributions are tax deductible. This gives you instant savings on your taxes!

Tax rates are still favorable for investing, so even saving in a taxable account is worthwhile. With IRAs, Roth IRAs and taxable accounts giving you more options on the tax status of your accounts, diversification between account types is still an excellent idea.