After having several hours to think about it over the weekend, After the Market Crash could be the perfect time to Adjust Your Asset Allocation. Last time out, we looked at Asset Allocation for Your Pension Plan and while we have already mentioned that asset allocation has been proven as a key to efficiently maximizing your investment returns the key is to remain fully invested. That being said, these are special times.

Volatility Rules in 2011.

As was the case in 2010, volatility rules was again in 2011. There have been numerous reasons to point out, European sovereign debt, crazy commodities, surging emerging markets and their inflation dangers and the King of all risks: AAA US Treasuries. How long will this game last? What does this mean for investors? When the market goes through a correction (or Crash, depending on how sensitive you are), it could be the best time adjust your portfolio. Now, we’re not advocating timing the market, just taking advantage of how the world works. Once again fear rules! If you can remain objective, you may be able to benefit.

Sell Fixed Income.

We’ve seen fear take over and drive up the price of fixed income. It is possible that this coupled with the drop in stocks means that you now have too much fixed income in your portfolio. If this is the case, it may be advantageous to sell some of of longer maturities. If you are only holding term deposits, remember than patience is a virtue.

Dividend Stocks Make Great Sense.

Last week I was reading about the dichotomy in today’s economy. The companies with the most cash in the bank can still borrow and move forward with their projects. Those who need financing to keep on going on running into difficulty. How can you translate this into success for your portfolio? Invest in businesses with proven track records and solid balance sheets. Where do you find these companies? They pay dividends! At the risk of sounding like a broken record, my suggestion is to pick investments with the best track record. Picking investments that pay dividends gives you access to the best of both worlds, income and growth!

Your Self-Directed Retirement Savings Plan.

Since you are in control of how to invest your self-directed retirement savings, you are able to pick and choose how to make portfolio match Your Ideal Asset Allocation. As previously mentioned, be sure to look at the 7 Ways to Invest Your Retirement Savings to ensure you take advantage of the situation that has presented itself. So instead of panicking over the portfolio you own, take an objective look at where you stand compared where you want to be (asset allocation). If you have cash on the sidelines, use it to fill in the gaps. There are great deals to be had. If you don’t have idle cash, sell some fixed income (before rates rise) to buy dividend producing stocks.

After watching Shark Week on Discovery, go for the kill!

Author: Robert

In this next segment of the Pension Advice Series, let’s look into the details behind Guaranteed Fixed Income Investments. After having looked at 5 Considerations When Building a Laddered Fixed Income Portfolio, the next logical question to answer was with regards to the guarantees offered by some investments. As discussed last time out, there are many products that can be used to fulfill your fixed income needs.

These include non-guaranteed investments; ETFs, mutual funds, debentures, banker assurance notes, commercial paper and preferred shares as well as those with a notion of guarantee; term deposits (certificates of deposit and guaranteed investment certificates), bonds and treasury bills. Let’s look at these last three in greater detail.

Treasury Bills.

Treasury bills are issued by Federal Governments and are generally hold the highest rating in terms of safety against default and have terms to maturity of less than one year. So the safety of the guarantee is related to how solid the issuing government is in the ability to pay back their debt. Stay away from the PIGS (Portugal, Ireland, Greece and Spain) if you are looking for guaranteed investments.

These are rarely held in individual portfolios of less than a million dollars as there are other ‘safe’ products that pay higher interest rates and therefore are less affected by transaction costs. Often used as the basis for money market mutual funds, as well as the cash portion of institutional portfolios and pension funds. So if you are looking for an investment in “near-cash”, treasury bills are the benchmark to measure against. If you see another investment, such as asset-backed commercial paper boasting the same AAA rating yet offering twice the yield of t-bills, remember the fiasco that touched off the most recent stock market meltdown before you make your purchase.

Term Deposits.

The next segment to look at are term deposits which are also referred to as certificates of deposit and guaranteed investment certificates, depending on where you live and where you look. The concept is rather simple. You deposit your hard-earned cash in a financial institution for a certain amount of time (term) in return for their promise to pay you a guaranteed rate of interest and the return of your capital. The guarantee offered is as good as the strength of the financial institution and the government agency that regulates the deposit insurance, if available.

In the USA, the Federal Deposit Insurance Corporation (FDIC) guarantees the safety of deposits in member banks, up to $250,000 per depositor per bank. In Canada, the Canadian Deposit Insurance Corporation (CDIC) works in a similar manner up to $100,000 per depositor per financial institution for deposits up to 5 years in length. In general, the higher the amount invested, the higher your rate. Again if security is really important, be sure to understand the rules regarding federal deposit insurance.

Bonds.

As touched upon last week in an article I wrote a while ago, Create a Fixed Income, Don’t Confuse Return with Revenue, you will need to be even more careful when buying bonds. First of all, not all bonds are alike. The safety of a bonds guarantee is based on the financial strength of the issuer. In general, federal government bonds are safer than state/provincial and municipal issues (PIGS notwithstanding). More often than not, government bonds are safer than corporate issues.

Now let’s see how a bond works, the issuer has created a security (always read the prospectus before buying) that states the rate of interest is paid, the frequency of payments (annually or semi-annually) and the maturity date (when the capital borrowed is returned).

So, in other words, an investor lends the issuer their hard-earned cash for a set period of time and is paid rent in the meantime. This is done as the issuer can normally pay less interest than if they are borrowing from a financial institution (as the risk is diversified over many lenders). As an investor, the return on your investment (yield) and capital are only guaranteed if you hold the security until maturity and if the issuer does not default. So stay away from companies, municipalities, even states (ex. California) who are not financially sound. You should be concerned with the long-term financial viability of the issuer because it is the maturity date that counts if you want your capital back, just ask Germany about their Greek debt!

We hope that this information about guaranteed fixed income investments has helped clear up any lingering questions about the subject. Next time out, we’ll diversify the portfolio beyond fixed income by adding a growth segment and look at different approaches using Asset Allocation. Does your portfolio include guaranteed fixed income investments? If not, where are you invested?

Author: Robert

Asset allocation has been proven as a key to efficiently maximizing your investment returns and will always generate a number of questions. Today, we will strive to provide answers to those who question how to make sense of your asset allocation when a significant amount of your savings is tied up in a pension plan. So after reviewing Amy’s Results: Generate Income From Your Own Pension Plan and discussing fixed income products in depth, we turn our attention to diversifying a portfolio by adding a growth segment to the mix.

We will concentrate on how to incorporate growth investments into the picture and as such, you will find it helpful to look back at 6 Considerations of Where to Invest Your Retirement Savings. We’ll divide our attention based upon whether or not you are fortunate enough to work where they provide a company pension plan.

Company Pension Plan: Defined Benefits.

While we have already addressed the importance of choosing Your Ideal Asset Allocation, let’s look at how your company’s pension plan fits into your overall portfolio. If you are among the few left with a defined benefit pension plan, you are quite fortunate. Many businesses (and soon governments too, perhaps) have started to move away from offering these types of plans. Here is why: a defined benefit pension plan is a fixed income offering.

So, in terms of your asset allocation, the cash transfer value of your company pension plan should be used in its entirety when calculating the dollars you have allocated to fixed income. Employers are shying away from defined benefit plans as safe investments have historically low returns and growth investments in the stock markets have been drubbed on an increasing rapid rate. So rather than be responsible for benefits, employers are changing to defined contribution plans to reduce their risks. Remember, a defined benefit pension plan is 100% fixed income.

Company-Sponsored Defined Contribution Pension Plan.

If you are like the rest of us and have a defined contribution company pension plan, you probably have a list of investments to choose from. My suggestion is pick the investment with the best track record (use an independent firm like Morningstar to judge) and the lowest fees. More often than not, the trust company or insurance firm who manages the account on behalf of your employer charges their fees on top of those within the mutual funds/segregated funds. Often these fees go up when the amount of growth inside the fund rises, for no explicable reason. It’s like like their fiduciary costs climb based on the risk inside the fund!

Anyways, you are better off with a balanced or dividend income fund if the fees are lower and the fund has a solid track record. In this way, you can likely just pick one or two funds for the contributions. Use the funds asset allocation to determine what percentage of your assets are allocated to fixed income versus growth. Send us your comments if you have questions on the choices available to you.

Self-Directed Retirement Savings Plan.

If you have total reign over how to invest your retirement savings, then the choices available to you are virtually unlimited. If you haven’t already done so, take a look at the 7 Ways to Invest Your Retirement Savings that covers the range of options open to you. You will want to start off by understanding your investor profile. This will help you understand your comfort level with risky assets and depending on where you invest, guidelines will be suggested to help you determine the percentage of your savings dedicated to growth and fixed income products.

These days, you might want to consider Guaranteed Fixed Income Investments to go along with your growth investments. As interest rates rise in the coming years (we hope), any fixed income ETFs and mutual funds will likely drop in value, or at best tread water. So don’t be greedy, just try to beat inflation for the next two to three years in the fixed income component. The remainder of your portfolio can concentrate on growing your nest egg for retirement.

Enough said for today, we’ll look at how your age and the number of years until retirement affects your Asset Allocation and Pension Plan choices.

Author: Robert

(photo credit: bluecowboy2002)