End-of-Year Financial Planning Priorities

End-of-Year Financial Planning Priorities

By: Stuart Vick-Smith Maximize retirement savings, manage spending, watch for tax deductions and rebalance your portfolio. BAM ALLIANCE member Stuart Vick Smith tackles some priorities to consider hitting on your year-end financial to-do list.   KVUE: End-of-Year Financial Planning from Stuart Vick Smith on Vimeo. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them. The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. © 2016, The BAM ALLIANCE Click here to read the original...
American Pension Crisis: How We Got Here

American Pension Crisis: How We Got Here

By: Tim Maurer My adopted home of Charleston might have been ranked the “Best City in the World,” but the state of South Carolina is earning a less distinguished label as a harbinger of the country’s worst pension crises. And yes, that’s crises—plural—because U.S. state and local government pensions have “unfunded liabilities” estimated at more than $5 trillion and funding ratios of just 39%. What does that mean, exactly? When a company or government pledges to pay its long-term employees a portion of their salary in retirement—a pension—the entity estimates how much it (and its employees) will need to set aside in order to make those payments in the future. An underfunded pension is one that simply doesn’t have sufficient funds to make its promised future payments. Corporate pensions in the United States are in trouble, with the top 25 underfunded plans in the S&P 500 alone accounting for more than $225 billion in underfunding at the end of 2015. But states and municipalities are in even worse shape. This week, the Charleston-based Post and Courier estimated that South Carolina’s shortfall alone was at $24.1 billion, more than triple the state’s annual budget! How did we get here? There are two glaring reasons for our current pension crisis: poor investment decisions and greedy assumptions. Pension actuaries assume that contributions to the plan will grow by investing the principal in stocks, bonds, mutual funds, hedge funds and private equity investments. Just like retirement planning for a household, the prudent investor assumes a conservative expected growth rate. But, almost universally, the big pension plans assumed more aggressive rates—because that permits them...
You Won’t Get Fooled Again: Understanding the Availability Bias in Investing

You Won’t Get Fooled Again: Understanding the Availability Bias in Investing

By: Tim Maurer You’re no fool. But let’s imagine for a second that a major public figure said something—something false—over and over (and over) again. Regardless of its questionable veracity, is there a chance you’d be more likely to believe the proclamation simply because you’ve heard it often and recently? Like it or not, the answer is an emphatic “Yes.” You and I are more likely to believe something is true when it’s readily available—that is, when we’ve heard it frequently and, especially, when we’ve heard it lately. This phenomenon is dubbed the “availability heuristic,” and even though it was discovered and named (by Amos Tversky and Daniel Kahneman) more than 40 years ago, it likely hasn’t caught on in the broader public awareness because its title includes the word “heuristic.” Nonetheless, the availability heuristic’s power to persuade is not lost on marketers, salespeople, lobbyists and politicians. They use it on us all the time. But let’s explore the errant biases in investing, in particular, that while readily available often lead to sub-optimal outcomes. Active vs. Passive The debate rages (and no doubt will continue to do so) over whether active stock pickers are able to beat their respective benchmark indices. The implications seem simple: If fee-charging money managers aren’t persistently outperforming their benchmarks, we likely should not be paying them for underperformance, right? If you knew, for example, that nine out of 10 active managers failed to beat their benchmarks over the short and long term, would you be likely to put your money at risk trying to find the one that might add value by capturing that elusive...
How Much Investment Risk Can You Stomach?

How Much Investment Risk Can You Stomach?

By: Jim Pavia Basically, risk tolerance is the measure of how much risk someone can handle as an investor. Financial advisors say that risk tolerance is the amount of risk that an investor is comfortable taking, or the degree of uncertainty that an investor is able to handle, explains Manisha Thakor, director of Wealth Strategies for Women at Buckingham and The BAM Alliance. Risk tolerance often varies with age, income and financial goals. It can be ascertained by many methods, including questionnaires designed to reveal the level at which an individual can invest but still be able to sleep at night, Thakor said. When it comes to risk tolerance, investors need to ask themselves some tough questions, according to Thakor. For instance: How much money do you have available? And how much of it can you afford to lose? Thakor said investors also need to look at their financial time frame. The length of time remaining until you reach your goal matters when it comes to how much risk you can handle in your portfolio. For example, as investors approach retirement, they will have a lower risk tolerance, since they don’t have decades to rebuild if a riskier investment causes problems. Additionally, emotions come into play when you are talking risk tolerance, she said. If risky investments are going to stress you out to the point that it affects you in other areas of your life, that can be an issue. It also matters if you are so risk-averse that you never include investments that can potentially grow your wealth. Get this delivered to your inbox, and more info...
More Evidence on Which Factors Really Matter to Investors

More Evidence on Which Factors Really Matter to Investors

By: Larry Swedroe In a recent article, I discussed the findings from a study by Brad Barber, Xing Huang and Terrance Odean, “Which Factors Matter to Investors? Evidence from Mutual Fund Flows,” which appeared in the October 2016 issue of The Review of Financial Studies. In their paper, the authors investigated whether investors tend to consider common equity factors when assessing mutual fund managers. In other words, do investors attempting to identify a skilled active manager strip out the returns that can be traced to a mutual fund’s exposure to the investment factors known to explain cross-sectional equity returns? In a perfectly rational world, fund flows should only respond to alpha, and not what is simply beta (loading on, or exposure to, a factor). They found, however, that the single-factor capital asset pricing model (CAPM), with market beta as its sole explanatory factor, did the best job of predicting fund-flow relations. Market Risk Correlation To Fund Flows This result implies that investors primarily tend to consider mutual funds’ market risk when evaluating performance, and that it is positively correlated with fund flows. The authors found that while investors do not completely ignore other factors that affect fund performance, they place less emphasis on the size and value factors than they do on market risk. In addition, they found no evidence that investors pay attention to the momentum factor. Interestingly, Barber, Huang and Odean also found that investors who buy mutual funds from the broker-sold channel respond more to factor-related returns than investors buying in the direct-sold channel. This means that investors in the former channel are likely attributing returns...
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