Portfolio Allocations Matter

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Portfolio Allocations Matter

If the events of 2022 and 2023 haven’t conveyed that portfolio allocations matter to investors, it’s challenging to imagine what kind of investment landscape would drive that message home. It’s incredible to think that we’re already entering the fourth quarter of 2023! Before we know it, hurricane season will be behind us, and snow will be on the horizon for our clients in the Northern and Western states. As we approach the cooler months of the year, we can’t help but reflect on the past two years and appreciate the progress we’ve made. In comparison to the turbulent investment climate of 2022, 2023 has provided a welcome break from market volatility.

Take a look at the stark differences in performance of some of the major indices as of Friday, September 22nd as compared to their 2022 returns:1

Index
YTD
2022
S&P 500 (Large Cap)
+13.87
-18.31
NASDAQ (Tech)
+35.23
-32.38
Russell 2000 (Small Cap)
+1.95
-20.46
U.S. Aggregate (US Bonds)
-0.43
-13.01
S&P 500 Growth-only
+18.54
-29.41
S&P 500 Value-only
+8.78
-5.25

We often describe investing as a journey with both high and low moments. The extent of these highs and lows largely hinges on the composition of one’s portfolio and the strategy adopted. Portfolio allocations matter. Unless an investor holds a passive strategy aiming to closely replicate an index, like the ones mentioned earlier, they are likely to experience wildly different results than those published.

During our review meetings, we maintain a consistent practice of evaluating clients’ actual performance against a composite benchmark. This benchmark is a blend of various underlying indices with specific weightings, designed to mirror the composition of real-world portfolios and tailored to each client’s specific requirements. For instance, when examining a 60/40 benchmark, its year-to-date return stands at a positive 5.62%, in contrast to the negative -16.47% loss experienced in 20222. This divergence in results is noteworthy when compared to the major indices mentioned earlier.

This shows that portfolio allocations matter in real-world investment portfolios. The choices made in terms of how to invest (security selection) and where to invest (such as in specific sectors, asset classes, or countries) can significantly influence the nature of one’s investment journey. Fortunately, our clients entrust us to navigate this journey and make crucial decisions about investment design and strategy. The construction of a real-world portfolio takes into account various factors, including investment costs, the economic landscape, client objectives, risk tolerance, risk capacity, time horizon, and personal preferences. Each portfolio can be as unique as the individual it’s tailored for, highlighting the beauty of personalized investing.

Because portfolio allocations matter, tailoring their design necessitates setting realistic expectations. While it may be tempting to invest in an S&P 500 ETF with the aim of replicating its historical annual returns, typically around 10%3, the real challenge lies in sticking to that strategy plus dealing with the human element of investing and our natural tendency to avoid losses and discomfort.

Can one “set it and forget it?”

Looking at the differences of the S&P 500 index above can help paint this picture. Assume an investor buys an S&P 500 ETF (ticker SPY) on Jan 1st, 2022. Also assume that no additional trading nor reinvesting of dividends occurs. As of Friday, September 22nd 2023, this investor is still experiencing a negative return since the initial investment, despite nearly two years having passed. This hypothetical situation can be quite challenging to digest and underscores the importance of managing expectations in the realm of investing, which is just as crucial as the decision to invest in the first place. If you were this hypothetical investor who “set-it,” are you currently “forgetting it?” The answer to that is likely different for each person.

In reality, most investors don’t own just one investment but a myriad of investments they acquired over time as new money was contributed to their accounts. Human behavior is shaped by countless events, ranging from wars and recessions to business and personal triumphs, none or all may occur in any given year. The real challenge for investors lies in sifting through the overwhelming amount of information and noise generated by these events. The key question becomes: What makes up that critical percentage of information that warrants their attention and consideration?

The answer? It depends. It depends on how you’re affected by the events and how likely they are to influence your financial decisions. There’s a common saying that “the best strategy is one you’ll stick with.” Unfortunately, it’s not that easy since portfolio design has many facets to it. We explore those nuances during our onboarding process with new clients by showing them why portfolio allocations matter. We strive to uncover what they want their portfolio to accomplish and then design a specific mix of investments to help them achieve their goals. Each client is different and that’s what we value the most.

As we approach the end of 2023 and the likely challenges and volatility that lie before us, we’d welcome the opportunity to meet with you. We’re fiduciaries first and pride ourselves on being the outsourced financial planners’ and investment advisors’ that families can turn to when life becomes complicated. We take pride in being the kind of company our clients rely on when they want to discuss ideas or seek advice on a wide range of financial matters. We’re enthusiastic about the opportunity to be a valuable partner on your investment journey. You don’t need to invest alone when we’re here to help. Here’s how you can get in touch with us.

1https://www.ftportfolios.com/Commentary/Insights/2023/9/25/week-of-september-25th
260/40 Benchmark is a composite (blended) benchmark comprised of 38% iShares Russell 3000 Index ETF, 5% Vanguard Real Estate ETF, 9% MSCI EAFE Index, 8% iShares MSCI Emerging Markets ETF, and 40% iShares Core US Aggregate Bond Index ETF. Return calculated as of close of trading on 9.22.23.
3https://www.dimensional.com/us-en/insights/let-the-compounding-commence

Reliance on an Investment Philosophy

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Investment Philosophy

 

“The important thing about an Investment Philosophy is that you have one you can stick with.”

– David Booth, Founder and Executive Chairman of Dimensional Fund Advisors

Last week markets continued their slide as investors fled equities for safer-haven assets like U.S. Treasury Bonds. The buying pressure of US Treasuries caused the interest rates on these bonds to decrease. It’s important to remember that bond prices and bond rates (also called yields) move inversely to each other; as more investors push up the price of bonds, yields will decrease. The opposite happens when investors sell out of bonds and buy equities. In spite of all of this, we believe a reliance on an investment philosophy is crucial.

What’s driving the direction of both bond and stock markets?

Two words: Tariffs, FED.

That’s been the name of the game over the last 18+ months, and at times, I feel like we are repeating the same ole song and dance.

A few months ago, the difference between the 3-month and 10-year Treasury bond yield went negative for the first time since 2007. The financial media took this as a sign of imminent recession; however, we maintained the stance that no recession was in sight. On Wednesday, August 14th, the difference between the 2-year and 10-year Treasury bond joined the 3mo/10yr in turning negative. Economists call this negative difference an inversion of the yield curve. An inverted yield curve has preceded each of the previous 7 recessions. As of my writing this, global stock markets are not taking this news lightly – mid-day Wednesday August 14th, the major US indices are down around -2.75%. However, bond markets are signaling conflicting information.

There are a few components that we are continuing to monitor that may explain this inversion and why it doesn’t necessarily spell doom.

European Economic Weakness

Germany posted its first negative GDP results (-0.1%). Recall that a technical recession is two consecutive quarters of negative GDP. This would fit the narrative of a global economic slow-down. In addition, there’s rumors of trouble with a hard-Brexit plan from the EU. Add these issues to Italian Populist Party concerns and one has the makings of trouble abroad. But the US economy, by most measures, is still relatively healthy. Last Quarter’s GDP decreased to +2.1% from 1st Quarter results of +3.1%; well within the range of GDP reports over the last 9 years.

Market Expectations of Further FED Rate Decreases

Three weeks ago, the FED reduced the Federal Funds Rate after a multi-year period of raising rates. The last increase was December ’18. At that time, I believed (and still do) that the economy did not need that final rate hike. Markets felt the same sentiment that caused the rest of December’s rapid market decline. It wasn’t until the FED signaled a cautionary policy in moving rates going forward (i.e. data dependency) that stock markets rebounded to 2019 highs between January and July. And if by political pressure, the FED essentially removed the December rate hike through its rate decrease last month. The FED called it a “mid-cycle adjustment” however, investors wanted more and still do. The question remains if the recent market turmoil and additional tariff action by the Trump Administration will force the FED to reconsider their stance. We almost have to question if one is driving the other? As of today, the bond markets are pricing in a 100% chance of another 0.25% rate cut in September. This pricing in may be the sole reason for the yield curve inversion. Remember that we believe (1st Pillar of our Investment Philosophy) all available information and expectations of the future are reflected in market prices. If investors are expecting the FED to reduce rates, it only makes sense that current rates would also decrease. Yield Curves have historically inverted due to tight monetary policy – that isn’t the case today. And why is no one talking about the $1.4 TRILLIONS of dollars in excess reserves still flooding the system? US monetary policy is not tight by our measures and some would say it’s simply, less-loose.

Why First Trust Portfolios says “This Is Not 2008”

Tariffs

The Trump Administration recently removed some tariffs and delayed others until Dec 1st. The mixed signals from President Trump explains much of the volatility in recent trading days. To say it has been whipsawed action would be an understatement. Markets were moving higher on signs of progress in trade talks with China but dropped significantly as a result of the inverted yield curve. As I’ve been meeting with clients over the last couple of weeks, I’ve explained the rationale behind why the world needs a successful trade agreement with China. To recap, I believe the global economy will benefit when trade secrets and other intellectual property are protected across country borders. These secrets are crucial to keeping capitalism and free markets alive. There remains an additional benefit to tariffs that hasn’t been discussed much – supply chain transitions to non-tariff countries. US companies with locations in China may be forced to transition their business to neighboring countries where labor costs remain low compared to the US but still comparable to China. If US corporations can strategically exit China to avoid tariffs, the Chinese economy may feel more pain than they are experiencing through a loss of jobs and tax revenue. This could be another pain point for the Chinese needed to force the US and China to meet in the middle on an agreement. The only concern I have here is whether the Trump Administration is ready to give a little ground to gain a lot of ground. If we look to President Trump’s twitter feed, I’m not certain he’s willing to capitulate on any demand. This, in my opinion, would be a mistake; negotiations become successful when two opponents meet in the middle.

Conclusion

We, as advisors, monitor these data points and concerns daily and we must remain focused, diligent, purposeful and unemotional in our approach to wealth management. Looking to the Investment Philosophy and the empirical evidence that is deeply rooted in academic science, each client’s portfolio strategy is designed with their financial goals, risk tolerance, and risk capacity in mind. For this reason, every portfolio is built with economic downturns, stock and bond market corrections in mind. It’s the primary reason we use fixed income assets to soften volatility. Recessions are a part of the economic cycle and avoiding them is not possible. It is highly provocative to imagine a strategy that gets out at the top of the markets and in at the bottom at precisely the right times. Imagine the money one could make and the emotional stress one could avoid with such a strategy? The reality is that such a strategy is impossible for humans to implement consistently and reliably and there is a plethora of data to support this impossibility.

Here’s what we will be/are doing for our clients. We believe that maintaining a consistent allocation to a globally diversified portfolio within your risk tolerance remains the most reliable method to achieving your long-term financial goals. To maintain this consistency, we rely on rebalancing techniques to keep allocations in-check as global markets move. This means that, at times, we’ll sell out of portions of one position and buy into others. We may also replace positions or add positions as necessary to take advantage of depressed prices and/or other opportunities. These actions aren’t meant to time the market, per se, but rather to ensure prudent management of our client’s investment portfolios.

Whether you’ve been a do-it-yourselfer or have been working with another financial advisor, maybe it’s time you consider a second opinion? Our phone lines are open, email inboxes properly filed and ready for your message. We’d love nothing more than the opportunity to sit down and show you why we’re different and how we believe our Investment Philosophy can help create calm during market storms.

Here’s how you can get in touch with us today. 

 

Where There’s a Will, There’s a Way

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WILL

We’ve all heard this phrase: where there’s a will, there’s a way. It’s typically said during difficult moments where success seems almost impossible; almost as if to say my determination will be enough to get through this trouble.

When we die, our troubles disappear for us…but not for those we love. Our loved ones inherit both the good and bad that accumulated during our lives. To make the life of your loved ones less troubling, perhaps you should think of this phrase a bit differently.

Where there’s a WILL, there’s a way.

A WILL is a legal document that transfers what you own to your beneficiaries upon your death. It also names an executor to carry out the terms of your WILL and a guardian for your minor children, if you have any. Your signature and those of witnesses make your WILL authentic. Witnesses don’t have to know what the WILL says, but they must watch you sign it and you must watch them witness it. Hand-written WILL s — called holographs — are legal in about half of the states, but most WILL s are typed and follow a standard format.

According to Legalzoom, it’s estimated that 55% of American adults don’t have a WILL or another estate plan in place. And that percentage is even worse among minorities – 68% for African-Americans and 74% of Hispanic-Americans.(1)

Without a WILL, you die intestate. The laws of your state then determine what happens to your estate and your minor children. This process, called administration, is governed by the probate court and is notoriously slow, often expensive, and subject to some surprising state laws. Do you really want a court deciding vital family matters such as how to divide your estate and custody of your children?

So, who needs a WILL?

We believe the short answer is everyone! However, it’s imperative to make a WILL as soon as you have any real assets, or get married, and certainly by the time you have children. Your WILL should contain several key points in order to be valid. The following list are some of the items that your WILL should address:

  • Your name and address.
  • A statement that you intend the document to serve as your WILL.
  • The names of the people and organizations — your beneficiaries — who will share in your estate.
  • The amounts of your estate to go to each beneficiary (usually in percentages rather than dollar amounts.)
  • An executor to oversee the disposition of your estate and trustee(s) to manage any trust(s) you may establish.
  • Alternates to provide both executor responsibilities and trustee(s).
  • A guardian to take responsibility for your minor children and possibly a trustee to manage the children’s assets in cooperation with the guardian.
  • Which assets should be used to pay estate taxes, probate fees and final expenses

The answers to these points should give your WILL the necessary resources to address what you wish to happen to your estate. We believe it’s very important to seek the professional skills and guidance of an estate planning attorney who can take your answers and draft a WILL that is completely tailored to you. Estate laws change over time and establishing a relationship with a local estate planning attorney can help you keep your legal documents up to date.

Check out: You don’t know what you don’t know until you know it.

We’re not attorneys, don’t give legal advice, and don’t receive any form of referral fee, but, we help our clients quarterback this discussion with a competent estate planning attorney. In fact, we’re often the first person family members call on to do a lot of the leg work during the time of a loved one’s unfortunate death. When a WILL isn’t present, or doesn’t accurately address your current assets and liabilities, it can create a lot of uncertainty, stress for family members, and costs at a time when they are mourning the loss of you. Get in touch with us today to start the process of gathering the information to create your WILL. Where there’s a WILL, there’s a way; you just need the determination and help to get it done.

1. http://info.legalzoom.com/statistics-last-wills-testaments-3947.html

 

Positive News Articles

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Positive News Articles

Where are all the positive news articles? Do you ever listen to the news and find yourself thinking that the world has gone to the dogs? The roll call of depressing headlines seems endless. But look beyond what the media calls news, and there also are a lot of things going right.

It’s true the world faces challenges in maintaining stable and well-functioning social, environmental, and economic systems. The legacy of the financial crisis is still with us, and concerns about climate change and sustainability are widespread.

Europe is grappling with a refugee crisis; China faces a difficult transition from an export and industrial-led economy to one driven by domestic demand; and the US is preoccupied with a sometimes rancorous election campaign.

But it’s also easy to overlook significant advances in raising the living standards of millions, increasing global cooperation on sustainability, and efforts to build greater transparency and trust in financial institutions.

Many of the 10 developments cited below don’t tend to make the front pages of daily newspapers in the form of positive news articles or the lead items in the TV news, but they’re worth keeping in mind on those occasions when you feel overwhelmed by all the grim headlines.

So here’s an alternative positive news articles bulletin:

  1. Over the last 25 years, 2 billion people globally have moved out of extreme poverty, according to the latest United Nations Human Development Report.1
  2. Over the same period, mortality rates among children under the age of 5 have fallen by 53%, from 91 deaths per 1000 to 43 deaths per 1000.
  3. In September 2015, all members of the UN set 17 sustainable development goals for 2030, including targets for eliminating poverty and hunger and lifting standards in health, education, water, energy, and infrastructure.
  4. Global trade has expanded as a proportion of GDP from 20% in 1995 to 30% by 2014, signaling greater global integration.2
  5. Global bank regulators recently announced that since the financial crisis they have implemented reforms to reduce leverage, address systemic risk, and build capital buffers into the banking system.3
  6. The world’s biggest economy, the US, has been recovering. Unemployment has halved in six years from 10% to 5%.4
  7. Global oil prices, while about 80% up from January’s 13-year lows, are still 50% below where they were two years ago. While bad news for the oil sector, lower prices also raise real incomes for consumers, increase profits outside energy, and decrease costs of production.
  8. While fossil fuels still play a major role in the economy, renewable energy sources—such as solar and wind— accounted for nearly 22% of global electricity generation in 2013 and are seen rising to at least 26% by 2020.5
  9. We live in an era of rapid innovation. One report estimates the digital economy now accounts for 22.5% of global economic output and projects digital technologies could generate $2 trillion of additional output by 2020.6
  10. The growing speed and scale of data are increasing global connectedness and transforming industries as new discoveries are made in such areas as engineering, medicine, food, energy, and sustainability.

No doubt many of these advances will lead to new business and investment opportunities. Of course, not all will succeed. But the important point is that science and innovation are evolving in ways that can help mankind. The world is far from perfect. The human race faces major challenges. But just as it is important to be realistic and aware of the downside of our condition, we must also recognize the major advances that we are making.

Just as there is reason for caution, there is always room for hope. And keeping these positive news articles and trends in mind can help when you feel overwhelmed by all the bad news. Working with an investment advisor and financial planner can help you keep a perspective on the positive news articles that have an impact on your portfolio and long-term financial plan. Looking at the daily barrage of negativity through traditional media outlets as well as Facebook and other social media platforms can seriously dampen your mood. A constant state of depressed emotions and feelings can have lasting negative effects on the decisions you make with your money. One of the core investment philosophies of Coastal Wealth Advisors is keeping emotions in check – thereby helping to prevent our clients from making poor decisions at the worst times. Let us be your fiduciary; let us help you towards a more meaningful investing and planning experience. Get in touch today to learn about our unique financial planning process.

Image credit: Nitin Dhumal

1.”Human Development Report 2015: Work for Human Development,” United Nations.
2.”International Trade Statistics 2015,” World Trade Organization.
3.”Finalising Post-Crisis Reforms: An Update,” Bank for International Settlements, November 2015.
4. Bureau of Labor Statistics, May 26, 2016.
5. “Renewable Energy Statistics,” International Energy Agency, March 2016.
6. “Digital Disruption: The Growth Multiplier,” Accenture and Oxford Economics, February 2016
7. Authored by Jim Parker of Dimensional Fund Advisors. Original article here.

401k Rollover

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401k rollover

There’s been a reoccurring theme in the financial services industries surrounding a 401k rollover. A simple Google search of the topic loads thousands of results. Many of the big investment firms spend millions of marketing dollars to rank for the “401k rollover” search term just so they can convince you to perform a 401k rollover to their management platform. And I know what you’re thinking…”aren’t you an investment firm also interested in my 401k rollover?” And the answer is “yes, I am…but only when it’s in your best interests.” Recall that we are a fiduciary and must always recommend what is best for you, even if it means not doing business with us. And there are times when a 401k rollover is not the best option for you just as there are times when it is. The Department of Labor is finally catching on to this long-running practice and is proposing that all advisors on 401k plans act as a fiduciary in their approach, especially when recommending a 401k rollover to a client. The details of their plan are far from being solidified but the good news is that this fiduciary standard is designed to protect you and your hard-earned dollars and we fully support the DOL’s efforts. Can you believe there are advisors who do not have to do what is in your best interests? We can’t either.

The story these investment firms tell to convince you to do a 401k rollover is that of greater investment options, control of your money, continued tax-deferred growth, and unlimited portability. And while these are all true, most of these same benefits are also available inside your existing plan.

I’ll refrain from defining a 401k in this post as you likely understand what a 401k is and how it benefits your retirement plan. What you may not fully understand is what happens to your 401k when you no longer work for that employer. And this unknown is manipulated into uncertainty by investment firms when they market “don’t leave your 401k behind” as if to subconsciously suggest that your 401k would be in jeopardy if you no longer work for the company. This couldn’t be further from the truth. The money you earned and contributed pre-tax to the plan is, and always will be, yours no matter what happens to the company. Depending on the plan structure and vesting schedule, even the matching contributions that you are legally entitled to will be yours no matter what happens to the company. So don’t be misled by this fake fear.

Now that you know your money is safe, as in, not in jeopardy of being consumed by the company in the event of insolvency or similar, in the old 401k plan, let’s outline your possible options and when each may fit your best interests. Please note, if your money is invested in the stock and bond markets, it is still subject to loss of principal and the risks associated with being invested.

 

401k Rollover Option 1: Transfer the Money into your New 401k

If you’ve moved onto another job that offers a 401k plan, you can combine your old 401k with your new one when you become eligible to contribute to it. Your plan sponsor will be able to give you all of the details and paperwork to accomplish this simple transfer. And here’s why this option may benefit you:

  1. If you’re a younger employee, combining small balances into one account helps you keep everything all together as you build a dollar cost averaging plan into your payroll deductions.
  2. The IRS allows you to borrow against 401k money and set up a payroll deducted loan payment back to yourself versus having to take a straight withdraw from an IRA and possibly incurring taxes and penalties. This rule difference may make sense if you know you might be or are inclined to be in a financial pickle in the future.
  3. Tax deferred growth continues and the transfer is considered tax-free (meaning no taxes are due when you combine the two accounts).
  4. If the expense ratios of the investment options inside of the new plan are cheaper than your old 401k, you may achieve cost savings by combining the accounts.
  5. A higher balance 401k may offer you better incentives when seeking advice from your plan sponsor.
  6. Ability to gain access to additional investment options, if available.

Why combining with your new 401k may not make sense:

  1. Investment selection is more restrictive and/or more expensive than your current plan.
  2. You’re giving up access to a reputable investment firm who you may feel comfortable with.
  3. Your new plan doesn’t allow transfers (this would be rare in our experience).
  4. You lose certain guaranteed benefits when transferring –especially when your 401k is a variable annuity with enhanced living benefit riders (these riders traditionally have expenses associated with them, so it’s important to analyze their value as well).

Most important items to consider:

  1. Fees – always consider both management fees, plan fees, and fund expense ratios. Just because a fund is cheap doesn’t mean it’s the best value for you and the same is true for more expensive funds.
  2. Range of investment options – more options tend to give you greater flexibility to adjust your allocation if the economy dictates, but too many investment options can become overwhelming to new investors.
  3. Loss of benefits or gain of new benefits – comparing the “all-in” costs versus value relationship is a must.
  4. Your new employer won’t make matching contributions to your transferred balance, so don’t think you can game the system, smarty pants.

 

401k Rollover Option 2: Leave the Money in your Old 401k

I think we’ve made it pretty straight forward in your ability to know that you don’t have to rollover your 401k. Just as you analyzed the option to combine the 401k with your new one above, it may well make sense to simply leave the account alone. The only considerations not mentioned above are:

  1. If you believe your old company has an executive inability (incompetent plan administrators) to adequately manage the investment choices going forward, it may make sense to remove your hard-earned money from their oversight.
  2. If your balance is below a certain level as directed by the plan documents, you may be forced to move your account. We’ve seen minimum balances as high as $5,000 for non-participant, former employees.

 

401k Rollover Option 3: Cash it out (take a Lump Sum Distribution)

This option is the one that will likely hurt the most when the tax man comes in April. If you’re under age 59.5, you’ll pay ordinary income taxes plus a 10% early withdraw penalty. High income earners could see close to half of their retirement savings wiped away by choosing this option. In addition to giving large sums of money to the IRS, you lose out on future tax-deferred earnings benefiting from compound interest growth. In our experience, no matter how you look at it, this option rarely makes sense. Even if you are in severe debt and the taxes you’d pay are better than whatever situation you’re in, you could still avoid the 10% penalty by rolling the account to an IRA and then set up what’s called a 72t distribution. There is a lengthy list of rules regarding this specific IRS rule so please give us a call if you think this may make sense for you. We’ll work with your accountant to develop a plan that fits you.

 

401k Rollover Option 4: Rollover to an IRA

Let’s say that you’ve determined that the other 401k rollover options aren’t that attractive. Now it would be time to analyze rolling over your 401k to an IRA. This is where you’ll want to look at various companies and what they may propose. Just as you reviewed your new 401k, you’ll want to consider:

  1. Fees – management fees, expense ratios, trading costs, commissions, mortality & expense charges, loaded funds, etc. Some or all may apply depending on who you’re speaking with. If the fees are significantly higher in one company versus another, ask why. Do your research before committing and don’t be afraid to ask – all advisors must disclose how they are compensated and what your “all-in” fees will be. If they don’t tell you or it’s still vague, run far and fast. Stick to the old adage: if it sounds too good to be true, it usually is.
  2. Management approach – how will your account be managed? Passive, top down, bottom up, active, cyclical, etc. When will trades occur and how often? How often will review meetings occur and what can you expect during those meetings? Will the account be managed on a discretionary basis or will they need permission to make adjustments each time?
  3. Investment allocation – what mix of stocks and bonds, sectors, styles, and approaches will you take? Will alternative asset classes and commodities (rarely offered in 401k plans) be a major component of the mix? How about structured products and limited partnerships? IRAs have the ability to invest in many types of asset classes that can’t be found inside of typical 401ks. Even investing in hard assets like real estate and physical metals such as gold and silver can be accomplished given the right, qualified custodian. Keep in mind the more non-traditional your selection, the more rules there tend to be.
  4. Value added services – if fees are higher, are additional services included to justify the increased costs? Is a financial plan, budget guidance, or debt management included? How often advice is rendered – unlimited or certain number of times per year? Is the management approach the reason for higher fees? It can often make perfect sense to pay higher fees when the value of services offered is considered. Having an advisor that you can trust to help you manage your financial life can be a huge relief to the burden this may cause.
  5. Type of advisor – not all financial advisors are the same. Some earn commissions on trading activity while others are fee-only. Some tend to be a hybrid of both types and how they operate at different capacities can be vague (think of the DOL rule we talked about earlier in this post). Not to tout ourselves, but we believe it’s best to work with a fiduciary; a person who must keep your best interests at the forefront of every decision they make.
  6. Special tax considerations – if you own the stock of the employer you work for, you may want to consider leaving the stock in the 401k. There are special tax considerations to analyze with a qualified CPA that allows this type of stock to be taxed when withdrawn at a rate lower than ordinary income taxes. We’ll help you work with your accountant in analyzing if this fits your situation.

The decision you make with your 401k rollover is very important and shouldn’t be taken lightly. Don’t assume that because it seems like everyone rolls over their 401ks to an IRA, that it’s the best option for you. Your situation is drastically different than your friends and family. You are unique and so too should your money management plan. Outside of your personal home, your 401k is most likely the largest asset you own and will naturally become the cornerstone to your retirement income. We want to be your trusted financial partner to help you determine which option is best given your unique circumstances. We are a Johns Island Financial Advisor who builds financial plans and investment strategies for our clients. Anywhere you want to go; we’re here to help guide you along the way. Let’s start a conversation today.

 

Image Credit: Flickr

 

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