Shortcuts

By Scott Lummer
Chief Investment Officer, mPower

I have received several questions over the past few weeks that deserve attention. Individually, the answers are not long enough to constitute a column (even with my long-windedness). So, I will answer them in a short-answer format. In the future, to add variety, perhaps some of you could ask questions requiring multiple-choice or true-or-false answers.

How often do you suggest rebalancing?

In theory, you should rebalance as frequently as possible. Indeed, some pension plans rebalance daily (usually using futures). However, my research has found that systematic rebalancing on an annual basis accomplishes nearly all of the desirable goals of risk control. You also may want to consider rebalancing after large market movements, but that is often the most difficult time, psychologically (as evidenced by the next question).

Tech stocks have already taken some hits this year. Would it be wise to rebalance now or wait for additional growth?

My answer to this type of question is always the same — never delay; do it now. If it's a good investing idea in the future, it's a good idea now. Who knows for sure whether there will be additional growth?

Would it be acceptable to rebalance by adjusting your contributions to an account, investing less in the faster-performing portion of your portfolio, and increasing your contribution to the slower performer? This would prevent your having to sell off a portion of the portfolio in order to rebalance, which is very important if your portfolio is not in a tax-deferred account.

This is an excellent question and answer combined, and it is precisely how one should balance an account that is taxable, or for which you pay commissions. However, within a 401(k) plan, it is fine to rebalance by moving money among funds.

When it comes to wireless companies, what's the difference between CDMA and TDMA?

I included this one to show you the variety of questions I receive. I haven't a clue what the answer is, and hopefully will live a fulfilling life despite my ignorance.

If I have an aggressive approach to investing, what is a realistic average annual return estimate to use in a 401(k) calculator?

Stocks have averaged an annual return of 11 percent over the past 70 years — that would not be a bad number to use.

In order to invest in bonds, would you suggest using bond funds or individual bonds?

Although diversification is less important for bonds than it is for stocks, most investors would find it difficult to properly diversify a bond portfolio on their own. It would likely be less risky and cheaper to use a bond fund.

You haven't addressed the hardest question. It's not "How did that guy on Survivor get through medical school?" It's "How did Kim Basinger ever get a Best Actress award?"

You're right; those two questions, along with the possible existence of extraterrestrial life, make up the trilogy confronting today's philosophers.

My daughter recently changed jobs and promptly assigned me the responsibility of deciding what to do with the $59,000 in her 401(k) plan. I decided on several mutual funds, and prepared the rollover IRA papers for her to sign. Being very busy, she put it off. That was a piece of good fortune, because the market declined over the next few months. If I had mailed those papers at that time, her IRA would have been worth around $8,000 less. Any thoughts?

I'm happy for you, I really am, particularly since the main task my daughter assigns me is keeping her younger brother away from her glitter makeup. But, let's not confuse good fortune with good practice. Once a strategy is decided, delays in implementation tend to hurt more often than they help. For example, similar procrastination in 1998 would have cost your daughter $18,000 in lost gains.

In a divorce, am I entitled to part of my spouse's 401(k)?

Although these issues are out of my realm of expertise (assuming there is such a realm), I do know that most divorce courts treat 401(k) investments in the same way as any other asset.

For more information on this topic, please see the column by my colleague Ted Benna and read our article.

Do you think online day trading or other risky things would be a viable move for me? I am 50 years old, earn $50,000 a year and have $10,000 in my 401(k) plan. I have three children (ages 7, 12 and 14) to put through college (with scholarship help of course). Any suggestions you could give me to rapidly build up my retirement funds would be greatly appreciated.

I'm sorry to say that there are no shortcuts. The surest path to disaster is participating in get-rich-quick schemes. I know it's difficult to start saving late. But, your best alternative is to invest as much as you can in funds, and make do with your proceeds. In all sincerity, you would probably be better off buying lottery tickets than day trading your account.

* * * On a more personal note, one of the best aspects of my job is reading the e-mail I receive from readers. I promise you that I read every note. I like the questions; I like the suggestions; heck, I even liked the message from the guy who criticized my spelling (what I enjoyed most were his grammatical errors). From reading your messages, I learn about the true concerns of today's investors. This makes me, and mPower (my employer) better financial advisors.

If the issue you raise is general enough to be of broad interest, I eventually address it in this forum. If your question has a short and simple answer, I try to respond personally.

But, I hope you understand that I can't answer every message; they are too numerous. Please keep the questions coming anyway, though, because they are always of interest.

Oh, and if you are wondering whether those seemingly idle offers of cash and favors help ... they do. :)

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Shortcuts

By Scott Lummer
Chief Investment Officer, mPower

I have received several questions over the past few weeks that deserve attention. Individually, the answers are not long enough to constitute a column (even with my long-windedness). So, I will answer them in a short-answer format. In the future, to add variety, perhaps some of you could ask questions requiring multiple-choice or true-or-false answers.

How often do you suggest rebalancing?

In theory, you should rebalance as frequently as possible. Indeed, some pension plans rebalance daily (usually using futures). However, my research has found that systematic rebalancing on an annual basis accomplishes nearly all of the desirable goals of risk control. You also may want to consider rebalancing after large market movements, but that is often the most difficult time, psychologically (as evidenced by the next question).

Tech stocks have already taken some hits this year. Would it be wise to rebalance now or wait for additional growth?

My answer to this type of question is always the same — never delay; do it now. If it's a good investing idea in the future, it's a good idea now. Who knows for sure whether there will be additional growth?

Would it be acceptable to rebalance by adjusting your contributions to an account, investing less in the faster-performing portion of your portfolio, and increasing your contribution to the slower performer? This would prevent your having to sell off a portion of the portfolio in order to rebalance, which is very important if your portfolio is not in a tax-deferred account.

This is an excellent question and answer combined, and it is precisely how one should balance an account that is taxable, or for which you pay commissions. However, within a 401(k) plan, it is fine to rebalance by moving money among funds.

When it comes to wireless companies, what's the difference between CDMA and TDMA?

I included this one to show you the variety of questions I receive. I haven't a clue what the answer is, and hopefully will live a fulfilling life despite my ignorance.

If I have an aggressive approach to investing, what is a realistic average annual return estimate to use in a 401(k) calculator?

Stocks have averaged an annual return of 11 percent over the past 70 years — that would not be a bad number to use.

In order to invest in bonds, would you suggest using bond funds or individual bonds?

Although diversification is less important for bonds than it is for stocks, most investors would find it difficult to properly diversify a bond portfolio on their own. It would likely be less risky and cheaper to use a bond fund.

You haven't addressed the hardest question. It's not "How did that guy on Survivor get through medical school?" It's "How did Kim Basinger ever get a Best Actress award?"

You're right; those two questions, along with the possible existence of extraterrestrial life, make up the trilogy confronting today's philosophers.

My daughter recently changed jobs and promptly assigned me the responsibility of deciding what to do with the $59,000 in her 401(k) plan. I decided on several mutual funds, and prepared the rollover IRA papers for her to sign. Being very busy, she put it off. That was a piece of good fortune, because the market declined over the next few months. If I had mailed those papers at that time, her IRA would have been worth around $8,000 less. Any thoughts?

I'm happy for you, I really am, particularly since the main task my daughter assigns me is keeping her younger brother away from her glitter makeup. But, let's not confuse good fortune with good practice. Once a strategy is decided, delays in implementation tend to hurt more often than they help. For example, similar procrastination in 1998 would have cost your daughter $18,000 in lost gains.

In a divorce, am I entitled to part of my spouse's 401(k)?

Although these issues are out of my realm of expertise (assuming there is such a realm), I do know that most divorce courts treat 401(k) investments in the same way as any other asset.

For more information on this topic, please see the column by my colleague Ted Benna and read our article.

Do you think online day trading or other risky things would be a viable move for me? I am 50 years old, earn $50,000 a year and have $10,000 in my 401(k) plan. I have three children (ages 7, 12 and 14) to put through college (with scholarship help of course). Any suggestions you could give me to rapidly build up my retirement funds would be greatly appreciated.

I'm sorry to say that there are no shortcuts. The surest path to disaster is participating in get-rich-quick schemes. I know it's difficult to start saving late. But, your best alternative is to invest as much as you can in funds, and make do with your proceeds. In all sincerity, you would probably be better off buying lottery tickets than day trading your account.

* * * On a more personal note, one of the best aspects of my job is reading the e-mail I receive from readers. I promise you that I read every note. I like the questions; I like the suggestions; heck, I even liked the message from the guy who criticized my spelling (what I enjoyed most were his grammatical errors). From reading your messages, I learn about the true concerns of today's investors. This makes me, and mPower (my employer) better financial advisors.

If the issue you raise is general enough to be of broad interest, I eventually address it in this forum. If your question has a short and simple answer, I try to respond personally.

But, I hope you understand that I can't answer every message; they are too numerous. Please keep the questions coming anyway, though, because they are always of interest.

Oh, and if you are wondering whether those seemingly idle offers of cash and favors help ... they do. :)

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.