Proper Use of Target Date Funds in your 401k.

Retirement Target Funds are Designed to be a Solo Player

According to the Employee Benefit Research Institute (EBRI), 74% of 401k plans offer some kind of “target date retirement” funds. These are funds which purport to diversify your investment across asset classes based on your estimated retirement date. The further away the retirement date, the heavier the allocation to equities (stocks). As the target date draws nearer (or passes, indicating the individual may already be in retirement) the asset allocation shifts more in favor of fixed income and cash investments. The funds are supposed to be simple one stop solutions to the question of how to invest your 401k funds for retirement.

The EBRI also states that 41% of investors use the target date funds in their investment mix, and 15% of 401k assets are held in target date funds. The implication (confirmed by my observations in the field) is that many people use Target Date Funds in their 401k, but it is usually not their ONLY holding.
The problem is that mixing Target Date Funds with other investments may defeat the very purpose of the fund.

Used correctly, a Target Date Fund should usually be the only holding in your 401k. Why is this? Aren’t you supposed to diversify your holdings? Well, yes and no. Of course, diversification is important. It is not good to have all of your assets in stocks (unless you are a young and aggressive investor). Likewise, being all in cash likely won’t help you achieve your goals. Balance is important. But the Target date funds are already diversified by their very design. They split their investment dollars amongst many other mutual funds covering all major asset classes, according to how the issuing company feels that the average person retiring at that date ought to be invested. Since the fund has diversified for you – there is really no need to diversify further.

What I see people do (and supported by the EBRI statistic above) is invest a portion of their portfolio in the Target Date Fund, and then add several more investments around it. Maybe the thinking is that investing can’t really be this simple – I must have to do more! But these additional funds are unnecessary for most investors, and make sense only if you are trying to accomplish one of the following objectives:
a) You are retiring near the Target Date, but are adding stock investments because you believe you are more aggressive than the average investor your age.
b) You are retiring near the Target Date, but are adding cash / bond investments because you believe you are more conservative than the average investor your age.
c) You are much smarter than the people making the asset allocation choices at the mutual fund company in question, and are adding positions to compensate for errors in the fund’s investment strategy (Just kidding on this one).

While this can work for some investors, it is difficult to really understand how the funds you have added to the Target Date funds will impact your risk exposure. This is why mixing the Target Date funds with other investments can defeat the purpose of owning a Target Date fund in the first place.
If you feel the Target Date allocation is too aggressive or too conservative for your taste, there is a much easier solution. If you are more aggressive than the average investor of your age, then choose a Target Date fund 5 years later than your actual planned retirement. If you believe you are more conservative, choose a date 5 years sooner than your planned date. This way you can be pretty sure you have a fund which is well diversified, consistent with your retirement goal, and offering a level of risk you can live with.

Questions about your 401k or other investments? Give us a call. Our fee only financial planning services and advice can help you make better financial decisions and keep you on track to achieve your most important goals.

OPEC Wages War on U.S. Once Again

But you won’t hear much complaining from Congress or the President (yet)

OPEC is waging war against the US with a new weapon. One we’ve never seen before. For the last 35 years or so, OPEC’s weapon of choice was the ability to turn off its oil spigots. The rest of the world would shudder at the thought.

Gradually though, OPEC has been losing relevance. They now only control about 40% of global output. Over the last three years, that influence has been slipping faster than ever as U.S. oil production skyrockets.

So faced with losing all its power, OPEC is trying a new strategy. Pump as much oil as possible and, in concert with the U.S. shale producers, flood the market with cheap oil. Why would they want the price of oil low? That is indeed the question.

It really makes no sense from an economic point of view. After all, if OPEC were to cut production by a few million barrels a day, they could remove the entire current surplus and the price of oil would likely go back up to $80-90 per barrel – almost double. Their revenues would be far greater for selling less oil. It seems to be in their self interest if their goal is simply to maximize revenues.

But if their goal is to once again become a force in the global economy, then their current strategy might make sense. They need to cripple the U.S. shale drillers and Canadian tar sand processors who are stealing their market share. They realize surely that if they cut production they will make more money – but so will the other world players (who will keep producing full tilt). Maybe they just think it’s not fair that they do all the work while the other 60% of oil producers reap the benefits – or perhaps they really do intend to destroy their competition.

What OPEC has that none of the other producers have is the ability to produce lots of oil cheaply. Their oil sits under desert sands in huge wide open deposits. Stick a straw in the ground and oil comes up; no deep ocean drilling, no boiling tar sand to release trapped oil, no fracking or miles of horizontal drilling under the ground. So OPEC knows it can survive regardless of the price of oil. And it knows that many of its competitors cannot.

If OPEC persists with this strategy, U.S. consumers will be seeing very cheap gas prices for quite some time. Our domestic oil producers won’t be so happy. Nor will the high yield bond markets. Drilling for oil takes a lot of money, and many oil drillers have borrowed lots of money in their quest for the Texas Tea. The problem is they need to be selling oil at $80 a barrel to make enough money to pay back their loans. Cheap oil on a sustained basis means the more indebted drillers will likely default and declare bankruptcy.

I sense a big yawn coming from most readers. Who cares? I LIKE paying $1.95 a gallon! But it may impact all of us through the financial markets. No one thought the mortgage crisis was going to hurt anyone except a few sub-prime lenders. Wrong! If default rates on high yield bonds escalate, I would be surprised if it does not send shock waves through other markets.

The risks aren’t limited to junk bonds. Emerging market debt is another area that could be at risk (and which also may have broader implications). Venezuela is almost certain to default on debt (even without the oil price collapse, they were at risk. Russia is increasingly a threat as well. On the flip side, emerging markets that import a lot of oil (India, Indonesia, Thailand, Philippines) stand to benefit greatly. Still, we learned from the financial crisis that the financial system is highly interconnected, and pain in one place, whether it be US junk bonds or emerging markets debt, can quickly spread throughout the financial system and economy. It will pay to be watchful.

So what is an investor to do? Well, as you know you cannot go running to cash every time there is the threat of a crisis. There is ALWAYS the threat of a crisis. And it is just too soon to know how this might play out. Consumers will benefit from low prices. So will many businesses. And low prices will eventually cause cutbacks in supply as producers choose not to drill new wells at these prices, thus reducing the glut which is driving prices down. But this takes time. And the driller who is struggling to pay his debts is unlikely to stop drilling – even $40 a barrel is better than selling nothing at all! But some experts are predicting that the farther the price falls today, the more dramatic the future supply cutbacks may become – and if reduced supply runs headlong into increased demand from businesses and consumers gorging on cheap energy – lookout. In that environment prices may bounce back with a vengeance and the survivors (including the OPEC gang but also our energy majors and less indebted shale drillers) will be duly enriched. Just don’t expect this to play out in months; it will more likely take years. These are interesting times to be an investor.

Active Management vs. Index Funds – The Debate Continues

Study Sheds New Light on Merits of Active Fund Management

All of you investment geeks out there are familiar with the debate: are the actively traded mutual funds we are all so familiar with any better than a simple low cost fund which mimics an index of stocks such as the S&P 500.

NerdWallet recently released an interesting study on the topic, which you can read here if you are interested in all the statistical mumbo jumbo. But here is my summary of the key results.
Only 24% of actively managed fund managers beat their benchmark index over the last 10 years. This result should not be too surprising in direction – but it is surprising in degree. I have not seen under-performance to this degree published before. But wait, there are a few other interesting points from the study…

If you strip out the management fees from the funds, actively managed funds actually outperformed their indexes! The writer interprets this as managers can outperform the market, but then take all the relative out-performance away in fees!

Actively managed funds do add value in managing risk. The study found that volatility in returns (i.e. difference in ups and downs) was significantly less for actively managed funds than for index funds. Perhaps this is because managers have the option of holding more cash or taking defensive positions when markets are overvalued – the study does not offer an explanation, only the result.

Risk adjusted returns between actively managed and index funds are comparable. This means the lower risk in actively managed funds more or less offsets the deficit in performance (lower returns may be ok if risk is lower too).

Large funds perform better than small funds. I suspect this out-performance is better explained by lower fees of many large funds. I wish they would do a follow-up study on how the least expensive quartile of active funds performed vs. the index.
Actively managed fixed income funds did ok. This seems to support my own belief that the bond market is less favorable to index investing generally, and active management may be preferred in the fixed income space. I have technical reasons for my belief too complicated to get into here. Fees are becoming an issue however. With ultra low interest rates, it is harder and harder for funds to earn enough to cover their expenses and generate an attractive return for investors.

Can we have the best of both worlds? Why not? There is no magic to index investing. The advantage of index funds isn’t about having a superior investment strategy. Index funds have low management fees and low trading costs – and so they tend to perform better than funds with higher fees and expenses. But many funds that do NOT religiously track an index also have very low costs. And these funds tend to outperform as well. Perhaps it is best to recast the debate from one of “do index funds outperform actively managed funds?” to “do low cost funds outperform high cost funds?”

At Financial Pathways we have been increasing our use of low cost funds in our managed accounts. We have been using more index based Exchange Traded Fund and low cost mutual funds, and have been while turning away from more expensive mutual funds. The research may not be perfectly clear on active vs. passive as an investment strategy, but it is becoming clear that fees matter and lower fees are better than higher ones.



Obamacare Subsidy Uproar

As I predicted, we are already seeing the beginning of the next tidal wave of controversy over the Affordable Care Act (aka Obama-care).

As we head into tax season, many individuals of modest means may find they are losing their tax refunds, or need to write large checks to the government.

This is going to be a huge surprise to many who either a) made more money than expected in 2014 or b) didn’t understand how the “subsidies” for health insurance actually worked.

For individuals or families with incomes that are within 400% of the poverty line (this is as high as $95,400 for a family of four) the ACA offered tax credits to help pay for health insurance through the exchange.

Now normally, you receive a tax credit as a direct refund of taxes owed, so you don’t actually receive the money until you file your taxes. But Congress recognized the cash flow strains of modest income families, and decided to offer a means of getting the tax credit right away. The exchange would ask the applicant to estimate what their 2014 income would be, and would then use that estimate to PREDICT the tax credit the individual MIGHT receive if their income estimate was correct (remember – they are estimating 2014 income in November of 2013!) Then they allow the applicant to use the ESTIMATED tax credit to help pay for their premiums throughout the year.

In effect, the government is giving the insurance applicant an ADVANCE ON THEIR 2014 TAX RETURN.

Here is the HUGE problem. Many people have estimated their income incorrectly, and will not actually qualify to receive the tax credit. If they have already received it – guess what? The government wants it back. If 2014 rises above the subsidy threshold by even $1, a household may owe the government back some or all of the subsidies received throughout the year. That could be anywhere from hundreds to many thousands of dollars, which most people of modest means will not be able to afford.

The IRS compared the estimates provided in the applications to 2012 tax data in an attempt to catch errors, but a lot can change in 2 years. Here are just a few of the possible errors that could happen during the course of a year:

  1. A child in the household starts working a part time or summer job. The ACA tax credits are not based on the parents income, as on the joint tax return, but on HOUSEHOLD INCOME including the kids. So a child going to work and earning $2000 for the summer could end up forcing the family to repay thousands in subsidies.
  2. A contractor or small business operator makes more money than expected.
  3. A commissioned salesperson has a good year.
  4. An employee receives an unexpected bonus.
  5. An early retiree takes extra money from an IRA to fix a leaky roof.
  6. An employee takes a new job, or gets a promotion.

Requiring people to predict their income for a year in advance and then penalizing them heavily for making more money is a terrible idea! It incentivizes people to work under the table to maintain subsidies. It penalizes those who take an extra job to help make ends meet, and the family whose spouse or child take a part time job to help pay the bills.

Budgeting in the 21st Century

This week I finally brought my own family’s personal financial planning into the 21st century.  Not sure what took me so long!

For years I have been a diligent (anal?) collector of budget data.  Using Quicken software, I have laboriously imported and categorized almost every transaction made using any of my family’s accounts.  I setup links to credit cards, banks, investment accounts, etc.  I would even split up and allocate mortgage payments into escrow, interest and principle, and then later record the escrow disbursements to pay for homeowners insurance and property taxes.  This is what I would do for fun on Friday night (and somehow I am still married!)

The problem is that I began to find that all the data I was collecting was not helping me at all in the all-important exercise of setting up a budget and communicating that budget to the rest of the family, especially my Chief Financial Partner and spouse, Laura.   The data was there all right, but it was simply too hard to see, interpret, and use to be useful on a daily basis.

So it was time to try something new.

While visiting the app store with my phone, I decided to download, a personal finance / budget app.  Using only my phone, I quickly setup links with my key financial institutions, namely my bank and primary credit card.  The system downloaded the past 3 months of financial transactions and automatically categorized the expenses as best it could.

With historical data in place, it was time to set about creating a budget.  For this I put down the phone and went to my trusty laptop.  What Mint wanted to do was to help me create a budget using the categories it had automatically assigned to all my transactions.  Well, that might be ok for most users, but I am a little picky about such things, so I took the time to browse through the transactions and fix what Mint had done.  What is really cool is that I can tell Mint to remember a category I assign, and to always use that category when it sees this same payee in the future.

Check payments (yes, I still pay a few things by check) are a little more complicated.  It can’t assign a category, because it can’t identify who the payee is on a check.  I have to look up each check and edit manually.  But we are down to maybe 10 checks a month at this point, so this is only a 5 minute chore.

Once I was satisfied with the way all the income and expenses were categorized, I let Mint start building my budget.  This was a little more awkward than it could have been, but still was seamless when compared to the Quicken system.  Using the past 90 days history it had imported, Mint would suggest a budget amount for each category, such as groceries, movies, mortgage and rent, etc.  I could either accept, or modify based on what I wanted that budget to be.  I can even tell Mint whether a budget is reset every month (i.e. use it or lose it, like the cable bill) or if it will carryover (such as a vacation or car repair budget which will increase monthly until you spend it later).    I kept at it until all spending and income items were included in the budget.

Here is why I love Mint.

Once you set Mint up, it is extremely easy to maintain.  Data imports automatically every day, and most items are properly categorized automatically (once I trained it to use the categories I like).  Most importantly, every budget item is graphically represented in a simple row of green bars.  As each category’s budget is spent, its bar gradually turns red.  If I exceed a budget item, I can be alerted by email.

For a budget system to really work, it needs to be easy enough to use every day with a minimum of effort.  With Mint, I (or my wife) can pull out the phone, load the app, and immediately see how much of our “lawn and garden” budget we have used before I go out to the nursery to buy a trunk full of shrubs and perennials.  If the budget allotted to lawn and garden is all spent, I have two choices:  Wait until next month, or “borrow or steal” money from another budget category.

The ability to make these “on the fly” budget changes is critically important.  A budget system can’t be too rigid, or it simply won’t work in the real world.  Mint makes it as simple as clicking arrows to increase or decrease a budget category, all the while showing you how much total money you have left in your overall budget.  So if there is no more money in my fishing tackle budget, it takes me 30 seconds to move money from my wife’s clothes shopping budget (but we’ll keep that our little secret!)

Another important feature is the ability to establish and track clear saving goals, so that saving for college or retirement take on the same importance as all our other spending goals.

I will report back after using this app for a few months, but I am extremely impressed with my initial experience.  I will still use Quicken for my more complex tasks, such as business expense tracking, and investment account activities – but I think Mint will be my “go to” app for daily household budgeting.

Need help setting up a budget for your family?  Give Financial Pathways a call, we’d be happy to help.  After all, getting spending and debt under control is the very first step on the road to financial freedom.  We’d love to take that first step with you.

What is Your Ideal 401k Savings Rate?

But is a 15% Retirement Savings Rate Out of Reach for Most?

The magic number used to be 10%.  If you saved 10% of your pay consistently into your 401k, it was said, you would be able to retire in comfort.

New research is suggesting a higher number, see this article from Investment News.

But wait a minute and let’s read between the lines, and consider the harsh realities of life.

The article admits it is basing its assumptions on an individual in their mid 30’s who has not started saving yet.  They point out that a young person just starting out can be fine with saving 8-10% of their pay.  In other words, the old 10% assumption isn’t obsolete at all.  It was always assuming a lifetime of savings at that rate.

The article also admits that it is quite difficult to get people in their 30’s to save at this level.  If we think about it, that makes sense.  This is the age when people are buying their first homes, having children, still paying student loans in many cases, and often stretched to their financial limits.  So does that mean they are doomed to retirement poverty?

Not necessarily.  There are two ways to make up for the fact that saving can be especially difficult during the middle years of life.  The first (and best) as already mentioned is to save aggressively early in life.  Money saved early on can benefit from many years of compound growth.  I have noticed that individuals who started saving in their twenties tend to come into retirement with very healthy retirement accounts.

But this is the real world, and we all know that twenty-somethings are not very good at saving.  Frequently they are struggling to get their careers on track, living hand to mouth, struggling with debt, and have priorities other than retirement.

Most people then wind up playing catch up.  And this is not necessarily a bad strategy, even if it is a bit risky.  As people get into their mid to late 50’s, they may find their mortgages are paid off (or at least the mortgage payment seems less onerous than it was in their 30s), kids are finishing college (if they didn’t wait too long to have kids!), and hopefully they are in their peak earning years in their careers.  That all adds up to significant free cash flow which can be plowed into retirement savings.

Traditional advice indicates that waiting to save for retirement is a bad idea because you need to save such a large percentage of your income that it is simply not feasible.  But for many people, saving large sums of money later in life is MUCH MORE FEASIBLE than saving smaller amounts earlier in life.

Don’t get me wrong, it is still best to save early, save aggressively, and save often.  If you can manage 15% (including the employer match) then by all means do so!  The catch up strategy entails many risks, including a shorter time horizon increasing investment risk, and health issues that impair your earnings ability later in life.  But if you can’t manage 15% of your pay right now, don’t panic.  Avoid tapping home equity with cash out mortgages, don’t overspend on college, and you may find you can kick savings into high gear in the last decade of your career.  Believe me, you won’t be alone in that effort!

Gambling vs. Investing: Ownership Mindset is the Difference

Is investing the same as gambling?  I hear the analogy expressed frequently in my line of work.  But those who make the analogy misunderstand investments and why we buy stocks in the first place.

I can understand that the market often seems to offer no more predictability than a roulette wheel or a horse race.  This is particularly true when observing short term changes in portfolio value.  No amount of investment skill can ensure a successful result next week, next month, or even next year.  Betting on short term market movements really is just that – betting.

Most of us do not invest to gamble on stock price movements, however.  We invest so our money grows and generates income for retirement or other goals.   To understand the difference, let’s consider what owning a stock actually means.

Suppose you buy a stock – Exxon for instance.  With that stock purchase you now own the rights to a portion of Exxon’s profits – forever.  You also own a share of all of Exxon’s oil wells, refineries, chemical plants, office buildings and patents – for as long as you own the stock.  From now on, every dollar the company earns or invests in new production facilities, or to buy other companies – you own a piece of that!  Look at it that way and it doesn’t feel much like gambling, does it?

Maybe the price of Exxon stock falls this month.  Does that mean that your share of Exxon’s profit earning machine is not still helping you achieve your goals?  Did the value of an entire lifetime of profits suddenly decrease just because the price of Exxon fell this week?  Is it not still a great company to own a piece of?

Let’s use a different analogy.  Let’s suppose you invested $50,000 to start your own successful business.  You own 100% of the profits of the business, and you own your furniture, inventory, etc.  Will you spend much time worrying about what your business is worth today?  Of course not.  You hope the business will keep earning profits for you, and you know there will be good years and bad.  Certainly you hope that someday you will be able to sell your business for a profit – but who cares what the business is worth TODAY!  The price only matters when you are ready to sell!

Investing in stocks requires the same sort of long term owner perspective.  Even when you invest in mutual funds or index funds, think of yourself as an owner of the various companies that the mutual fund owns.  The next time you get all worried about where the market is going next month, think of all of the managers and employees working in all of those companies doing what they do every day with the sole purpose of earning money for you, the shareholder.  Think of all of the profits those companies are earning being reinvested in ways that should produce more profits for you in the future.  If a recession comes along and the market determines that your portfolio of stocks is suddenly worth less – who cares?  Rest assured that “your” management team (they work for you after all) is doing everything they can to get through any rough patches and make you as much money as possible.  Think like an owner!  Sit back and let your companies do the work, and stop worrying about what the market thinks the stock is worth today!

It should be understood that investing in stocks does involve risks!  While we don’t want to worry too much about how the market values our stocks on any particular day, such price fluctuations can be important to investors who will need to sell their stock holdings soon.  Even the independent business owner will start to think more about the value of his business as he gets closer to retirement.  Severe losses in the stock price may also be a sign that the market is worried about the company’s long term prospects.  I do not wish to downplay the fact that risks are real, and need to be carefully considered and understood by an investor.  The point of my article is that investors would do better to stop worrying about short term changes in the value of their portfolio and start investing as a business owner with a longer time horizon.

Do They Think We’re That Stupid?

Credit Card Points Promotions That Don’t Measure Up

I occasionally find marketing promotions almost insulting.  A recent offer I received from PNC bank is one such case.

The offer promised 50,000 “points” if I would open a new credit card with them.  On top of that, they promised that I would earn 4 “points” for every dollar I spent.  Well, that got my attention.  Heck, all my other cards only give me one point for every dollar.

But wait…my momma didn’t raise no fool, and I’ve been around the financial industry long enough to know that you should NEVER accept a financial product marketing pitch at face value.

In this case, my BS meter focused on “points”.  What is a point anyway?  Are all points created equal?  Is a PNC point the same as a Chase point, or an American Express point?  Apparently not.

Before filling out the application, I went straight to and did a little research.  On the assumption that a point is only worth what it can buy, I did a little comparison shopping.  I chose a nice simple reward – a $100 Amazon gift card.  At PNC, I could buy a $100 Amazon card with 40,000 points. (1/4 cent per point)  I then logged into a competing card (Chase) and found that the same $100 Amazon card would cost me 10,000 points (1 cent per point).

My somewhat cynical take is that the marketers assume that I will jump at the 50,000 point bonus, thinking that most consumers will assume that all points are equal, and thus 50,000 bonus points are actually worth $500.  Only once they go to redeem their points will they find that their bonus points are only worth $100, and the four points per dollar spent is no better than the 1 point per dollar that their old card likely paid them.

By the way, speaking of point deflation, I have noticed that American Express points aren’t worth what they once were either.  A $100 American Express gift card at American Express Rewards will now cost 20,000 points, making an American Express point worth only ½ cent, or only ½ of the Chase Visa card.

So there you have it.  Just one more reason to mind the fine print when it comes to financial companies.

Promises, Promises: “Alternative Strategies” Disappoint

As an investment manager, the concept has great appeal. Our clients frankly don’t like volatility. Steady growth is the goal of most of our investors, minus the gut wrenching losses that often accompany investments in stocks.

We intuitively know that there are ways to “insure” against risk. One can buy “put options” on stocks for instance. Put options are like term life insurance for stocks. For a set period of time, the option gives you the right to sell a stock at a given price. If the stock price falls below that level, the put option becomes more valuable.

Another intuitively attractive strategy is to buy a stock you think will go up, and then “short sell” another stock you think will go down. A “short sell” is simply a way to profit from a stock when it loses value. If the overall market crashes, the “short” position should increase in value, offsetting your losses in your more traditional “long positions”.

Starting around the time of the financial crisis, funds employing these and other more complex strategies started becoming popular. Early performance was promising. We noticed that funds like Marketfield (following a long/short strategy) and Schooner (using an options based strategy) did indeed appear to be fulfilling the promise of steady returns with lower risk. Returns were decent if not spectacular, while in downturns they seemed to hold up rather well. We started to deploy these funds in certain client accounts.

More recently, these so-called “alternative” investment strategies have failed to perform. Marketfield was a huge disappointment to many investors. Thanks to a very strong showing in the first few years of its existence, the fund attracted a lot of attention (including my own). Morningstar had given the fund a Bronze rating – a stamp of approval given to relatively few mutual funds. Then along came 2014. The fund’s manager made some absolutely terrible calls. The fund lost 12% in a year in which the S&P 500 was up 14%. Now I understand the idea of these strategies is that they will often zig when the market zags – but this kind of performance in a relatively stable market environment was disappointing to many.

It was so disappointing in fact that the Wall Street Journal did an article this week on the funds fall from grace. Click here to read the article – as yours truly is quoted in it – first time I’ve been quoted in the print edition of the bible of finance, and in a lead article no less!

At the same time, Schooner was also disappointing, with returns that lagged the market when the market was up, but offering only modest protection on the downside when markets fell off.

Why the disappointment? After all, as I noted at the start of this article, the strategies make sense from an intuitive point of view. The reasons are many, but can be summed up as follows:

a) Fees. Marketfield charged exorbitant fees. Now fees are not everything. If the fund delivered consistently positive returns with less risk, I wouldn’t care what the fees were. But it raises the performance bar over which the manager must leap in order to be successful.

b) Other expenses. Not even showing up in management fees are the strategy’s execution costs. Every time a fund buys or sells a position (or an option contract) there is a cost associated with that trade. Such costs do not show up in the management fees or expense data of the fund – but they do hamper returns. Both option strategies and long short strategies are expensive to implement over time. Again – if the strategy works, I have no problem.

c) Lack of volatility. These types of strategies really thrive when markets are more uncertain. For the past year or two, markets have been sleepy. This will eventually change, and the environment will improve for the managers of these funds. But the expense load and poor performance make waiting very difficult.

d) Size. With Marketfield in particular, the fund may have struggled due to its own popularity. As huge amounts of money flow into a popular fund, managers often struggle to put all that money to work.

e) Bad Calls. Marketfield in particular relied on its manager’s predictions regarding broad trends in the market. Results of the fund would depend on the accuracy of these calls. In its early years, their calls were dead on accurate. But in 2014 Marketfield’s crystal ball clouded over and the strategy suffered accordingly.

Whatever the reasons for the under-performance, my patience has completely run out over the last few months. As noted in the Wall Street Journal article, I have reduced or eliminated my positions in alternative strategies generally – and apparently I was not alone in making this move! While I remain somewhat nervous about the market at these levels, I am more prone now to use less expensive and time proven defenses such as keeping some cash on the sidelines (to take advantage of future market opportunities). Simplicity has a certain new found attraction.

Five Financial New Year Resolutions:

Five Financial New Year Resolutions:

1. Review Your Retirement Savings Strategy. Most Americans don’t spend a lot of time thinking about their employer retirement accounts. They sign up, choose a percent of salary to contribute, choose some investment options, then forget about it. But are you saving as much as you should? Do your investment choices still makes sense? Are you taking on too much risk? Or are you being too cautious with your investments.

2. Review your Life Insurance coverage. Do you have enough life insurance? Most people have no idea. “I have a policy at work…I think” is a common response. If you have loved ones who rely on your income to earn a living, then you owe it to them to make sure that you have sufficient coverage to provide for them if something should happen to you. There is no need to get fancy about life insurance – term coverage is adequate for most people.

3. And don’t forget disability insurance. While you are at it – review your disability coverage as well. Did you know the odds of losing income to disability are far greater than the odds of dying prematurely? And similar to life insurance, you owe it to your loved ones to make sure that they will not lose everything if you are unable to work. Employer policies often are capped at relatively modest income levels – if the benefits offered would not be sufficient to support your family you may want to consider adding additional coverage. Perhaps your employer plan provider allows you to purchase additional coverage during an open enrollment period. If not, you may want to consider shopping for a supplemental policy in the commercial market. And even if the insurance costs more – there is a benefit to buying your own coverage, as it is not dependent upon your continued employment!

4. Create a will (or update your obsolete one). OK, you know you should. You’ve been putting it off. So just get it done. Nearly everyone probably should have a will, but it is extremely important for those who have children from a previous marriage, minor children, children with special needs, large estates, property in other states, or who have specific desires as to how assets should be distributed at death.   Attorneys often recommend taking care of two other documents at the same time they are creating wills. Those are a power of attorney and a health care directive (or living will). The power of attorney names another person to be able to handle your financial affairs if you are unable to do so. A health care directive provides specific instructions regarding the medical care in the event you cannot express your wishes.

5. Review your beneficiary designations. This financial “ought to” is often forgotten or overlooked. Did you know that even if you have a will, many of the assets you own will not be distributed according to the will. Retirement accounts for instance will be distributed to the beneficiaries named in the account, regardless of what your will says. The same is true of annuity and insurance contracts. Many people forget to update their beneficiary designations after a divorce, or after the death of a spouse, or after creating an estate plan or will. Furthermore, if you have an estate plan which puts money into a trust, you may (or may not) want to name the trust as beneficiary – rather than your spouse or kids.

Is all of this too overwhelming?  Not sure where to begin?  A financial physical by Financial Pathways can help you get the year started on the right foot.  If you are already a client, and you haven’t been in to see us in a while, call us to schedule a financial review and update.  If you are not yet a client, why not call us today to see how we can help you improve your family’s financial health with our fee only financial planning services.