Category Archives: Uncategorized

The Trouble with 401(k) Plans

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The 401(k) plan is now the primary retirement plan for employees in the private sector and Ted Benna isn’t happy.  Benna is regarded as the “father” of the 401(k) plan but now he calls his child a “monster.”

There are several problems modern with 401(k) type plans.

  1. They are too complicated. The typical 401(k) plan has dozens of investment options. These are often included to satisfy government regulatory demands for broad diversification.  For the plan sponsor, who has a fiduciary responsibility, more is better.  However, for the typical worker, this just creates confusion.  He or she is not an expert in portfolio construction.  Investment choices are often made when an employee gets a new job and there are other things that are more pressing than creating the perfect portfolio.  Which leads to the second problem.
  1. Employees are given too little information. Along with a list of funds available to the employee, the primary information provided is the past performance of the funds in the plan.  However, we are constantly reminded that past performance is no guarantee of future results.  But if past performance is the main thing that the employee goes by, he or she will often invest in high-flying funds that are likely to expose them to the highest risk, setting them up for losses when the market turns.
  1. There are no in-house financial experts available to employees. Employee benefits departments are not equipped to provide guidance to their employees; that’s not their function.  In fact, they are discouraged from providing any information beyond the list of investment options and on-line links to mutual fund prospectuses.  Doing more exposes the company to liability if the employee becomes unhappy.

What’s the answer?  Until there are major revisions to 401(k) plans, it’s up to the employee to get help.  One answer is to meet with a financial advisor – an RIA – who is able and willing to accept the responsibility of providing advice and creating an appropriate portfolio using the options available in the plan.  There will probably be a fee associated with this advice, but the result should be a portfolio that reflects the employee’s financial goals and risk tolerance.

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Types of mutual funds: passive vs. active

A passive mutual fund invests in a portfolio that mirrors the component of a market index. For example, an S&P 500 index fund is invested in the 500 stocks of Standard & Poor’s 500 Index. There is no attempt made to try to determine which stocks are expected to do well and which are not.

Actively managed funds are managed by an individual manager, co-managers, or a team of managers. The mangers try to buy stocks that they think will outperform the market.

The costs associated with passive investing are lower than the costs of active management. Active managers attempt to justify their higher costs by doing better in either up or down markets.

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Thoughts From Around the Investment World

We thought that our readers would be interested in reading the thoughts of some of the leading money management companies. We get information from these companies on a regular basis, and wanted to start passing some of it along. Today we look at the view from the money management shop INVESCO.

Thoughts on the global economy:

U.S. money and credit markets will be on the path toward normalization after seven years of abnormally low rates. This is a sign that, despite the weakness in other developed and emerging economies, the U.S. is back on the road to normal growth.

On U.S. Growth Stocks

As we look forward, considering today’s evidence, we believe the bull market will continue, but is likely moving into later stages. As sales continue to grow, profit margins remain high, and valuation growth slows, annual equity market returns in the mid-to-high single digits seem more likely than outsized gains.

We’ll bring you more commentary from major investment firms on a regular basis. Feel free to contact us with your own questions.

Note: We are passing this information along for educational purposes only; it is not an endorsement of the profiled company or their views.

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What the tortoise knows about financial security.

Remember the race between the tortoise and the hare? The tortoise won because he kept plugging along while the hare took a nap. Everyone would like to get rich quick; it’s the reason that people buy lottery tickets. But the chances of actually striking it rich are astronomical.

The way to get financially well-off is within the reach of almost anyone, even people who start out poor. What it takes is following a few simple rules.

  • Avoid destructive behavior.
  • Get an education and acquire a skill.
  • Spend less than you earn.
  • Start saving early.

The temptation to parlay a small bundle of cash into a fortune is what gets most people into trouble. Consistent saving over time is much more likely to pay off than strategies such as timing the market. Risk-the-farm investing strategies have a high probability of failure, but saving and prudent investing always wins.

Getting rich slowly is the primary way that most people achieve their financial dreams. The advantage of saving 10% or more of your income cannot be overemphasized. Do that and then let compounding go to work for you.

Compounding does a lot of the heavy lifting for investors. But it needs time to work. That means starting the process as early as possible and staying with it as long as possible. Waiting until you’re in your 40s or 50s means that you have given up twenty to thirty years of financial growth that you will never get back.

Want to have a million dollars by the time you’re 65? If you begin when you’re 25 with $25,000, save $3000 a year and invest the money to get a 7% return you’ll have $1 million when you’re 65. Of course as you get older and make more money you’ll be able to increase your savings rate, and end up with more than a million.

Finally, control your emotions or – better yet – hire an investment manager who will help control your emotions for you. Markets don’t go in one direction forever and that’s a good thing to keep in mind when the inevitable correction happens. An investment portfolio that lets you sleep well at night helps to cushion the blow of a decline and avoid the temptation to “bail out” at exactly the wrong time. In fact, investing more when the market’s “on sale” is a way to increase your wealth.

This is New Year‘s Eve; 2016 starts at midnight. It’s a great time to start if you have not done so already.

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Warren Buffett lost money this year.

Even the savviest investor can have a bad year. Buffett’s Berkshire Hathaway is down over 11% in 2015.

The reason for the decline is the declining price of oil and other commodities. Berkshire Hathaway has a big investment in railroads that make much of their money hauling commodities such as oil and coal.

It also has big positions in American Express and IBM which declined 24% and 13% respectively this year.

If you broke even this year you beat the “Wizard of Omaha.”

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How Do I Start Saving and Making My Money Grow?

We contribute to several forums that provide advice to novice investors. One of the most popular questions goes like this:

• I’m 28 and will start a new job soon. I have accumulated $10,000 in a savings account and will be able to save an additional $1000/month when I start my new job. I need advice on how to start an investment plan.

It’s a good question. The person asking it usually has some money in the bank and has enough income to add to his or her savings. But because interest rates are so low the savings are not growing. There are three common reasons for not starting an investment program.

Not knowing where to start. The mechanics of opening an investment account can be complicated.

Fear of making a mistake. People work hard for their money and don’t want to lose if because they made some rookie error.

Not knowing who to trust. Who will provide good, honest advice for you?

Here’s how to begin an investment plan that works for people of all ages.

  • Find a Registered Investment Advisor (RIA) who is a fiduciary: who put their clients’ interests ahead of their own and provide unbiased investment guidance. They will help you through the process.
  • Find someone with experience. You don’t want to deal with someone who’s learning with your money.
  • Find someone who is accredited. A CFP™ (Certified Financial Planner) is trained to give advice on all aspects of financial planning.
  • Find someone who does not charge commissions. It eliminates conflicts of interest.
  • Find someone who has a good reputation in the community.

At Korving & Company, we’ve been helping people just like you make better decisions about their money and their lives for thirty years.

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Why is Berkshire Hathaway is not on the “Too Big To Fail” list?

It appears that the Bank of England sent a letter to the U. S. Treasury asking why Berkshire Hathaway is not on the list of “too big to fail” institutions.

If you are on the list it is deemed that you are a financial institutions “whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity.”

MetLife, along with a number of other primary insurers, has sued the U.S. government about it’s designation as an SIFI (‘Systemically Important Financial Institution.”)  Being designated an SIFI brings along with it considerably more regulation.

New regulations under the Dodd-Frank legislation, mandate that financial institutions that fit SIFI qualifications, will have to meet higher capital standards and develop contingency plans for potential future failures.

But here’s something that most people are not aware of: insurance companies often take out insurance against catastrophic losses from other insurance companies.  The companies that insure the insurance companies are called “reinsurers.”  Berkshire Hathaway, run by Warren Buffett, is the largest of these reinsurers in the U.S. and the third largest in the world.

So who is more important to the financial stability of the financial system, retail insurance companies or the big global reinsurance companies that insure the insurers?  To me, the answer seems obvious.

To use your local bank as an example.  If it goes broke (and many have) it’s no big deal because your money is insured by the FDIC (Federal Deposit Insurance Corporation).  But if the FDIC went broke, that would be a BIG DEAL.  Then no one’s bank deposits would be safe.

Insurance is Berkshire’s most significant business – accounting for 27% of net earnings last year – and providing Warren Buffett with the capital to invest in stocks and acquisitions.  But Warren Buffett has friends in high places which may explain the reason he’s not on “the list.”

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Survivors’ Income

We are frequently asked to help people whose spouses have died to help settle the estate and plan for life as widows or widowers.  One of the big questions that they face is determining what it costs to live as a single instead of a couple and where the income is going to come from.

We wrote a book specifically designed to help answer those questions.

Below is from page 53 of BEFORE I GO – WORKBOOK

Keep in mind that it’s a lot easier to determine the answer to many of these questions ahead of time, while both husband and wife are still living, and access to information about survivors’ pension benefits, social security income and annuity income are easy to determine.

For a copy of BEFORE I GO and BEFORE I GO – WORKBOOK contact us or order it from Amazon.com

My Survivors’ Income:

“GUARANTEED” INCOME
Social Security:         $__________________
Pension income #1: $__________________ Source:_____________________
Pension income #2: $__________________ Source:_____________________
Pension income #3: $__________________ Source:_____________________
Annuity #1:                $__________________ Source:_____________________
Annuity #2:               $__________________ Source:_____________________
Other Guaranteed:   $__________________ Source:_____________________
SUBTOTAL GUARANTEED: $__________________

PORTFOLIO INCOME:
Interest Income:       $__________________ Source:_____________________
Dividend Income:    $__________________ Source:_____________________
Rental Income:         $__________________ Source:_____________________
Business Income:     $__________________ Source:_____________________
Other:                         $__________________ Source:_____________________
Other:                         $__________________ Source:_____________________
SUBTOTAL PORTFOLIO: $__________________
GRAND TOTAL:                   $__________________

 

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3 Mistakes to Avoid

There are several common mistakes that many investors make when they view their investments.

  1. Comparing your investment results to the S&P 500.
    • This is the biggest error people make.  The returns you should be concerned about are those that you require to meet your objective.  Most people have some objectives that involves money.  It could be a certain level of income, a certain level of wealth, a specific home or other lifestyle objective.  But none of these are tied to a stock market index.  Everyone who wants to beat the S&P 500 as it goes up 50% must realize that they may well go down over 50% if there’s a repeat of 2008.
  2. Viewing the future through a rear view mirror.
    • Too often people will buy last year’s top stock pick or “Hot” mutual fund.  There’s a reason why prospectuses always say “past performance is no guarantee of future results.”  I vividly remember as the year 2000 approached and the Dot.com bubble was peaking.  Money was pouring into internet and tech stocks and delivering spectacular results.  But then the tech bubble burst and those who invested because they believed that those returns would continue lost their savings.  Since then we have seen other bubbles – including the real estate bubble – burst.   People lost their homes and their dreams.  It’s dangerous to view the future by looking backward.
  3. There’s no such thing as a free lunch.
    • If something looks too good to be true, find out what the catch is.  Some are simply scams by crooks who want to sell you worthless securities.  But there are investment products out there that seem to be too good to be true.  But that’s because the people selling these products don’t tell you the downside or won’t explain what can go wrong.  One example were the “structured notes” that were offered with a guarantee against loss.  The problem was that the guarantee was issued by a company that went bankrupt.  Insurance products are sometimes sold without sufficient explanation.

Quite often, the best thing that you can do is to ask the advice of an RIA, an experienced financial advisor, a fiduciary, who is can provide unbiased advice and has the knowledge and experience to know what to look for and what questions to ask.

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Would you invest with a billionaire hedge fund manager who made a fortune during the housing crisis?

Watch out.

Many people would jump at the chance and many wealthy people have given John Paulson lots of money to invest for them.

But there’s a downside to trying to get rich via the stock market. The people who “swing for the fences” often strike out.

We found this article in Private Wealth an excellent illustration of this point.

Billionaire John Paulson posted the second-worst trading year of his career in 2014 as a wrong-way energy bet added to declines tied to a failed merger and investments in Fannie Mae and Freddie Mac.

The worst performance was in the Advantage Plus fund, which plummeted 36 percent last year, two people with knowledge of the returns said. …

Paulson & Co.’s performance placed it near the bottom of the hedge fund pack last year as the industry returned a meager 1.4 percent. The manager, who shot to fame after making $15 billion on the housing crisis in 2007, has struggled to regain its footing since 2011 when bets on the U.S. recovery went awry, losing money in all of its main strategies — including a 51 percent tumble in the Advantage Plus fund. Paulson also lost money in investments tied to gold and Europe’s economy, causing assets to dwindle to $19 billion, half the peak in 2011 ….…

Investors in the Advantage fund have lost 48 percent since the end of 2010, while clients in Advantage Plus are down more than 66 percent. ….

At Korving & Company, we are fiduciaries, Paulson is not.  He’s a hedge fund manager who makes big bets.  We don’t bet, we invest.

We manage retirement money. People nearing retirement don’t want to see the money they are saving cut in half. That could force them to work years longer than they planned. People in retirement who saw their savings plummet would have no choice but to reduce their lifestyle.

With that in mind, we do the opposite of Paulson. Our primary directive is keeping what we have and making a fair rate of return on that money by a carefully thought out process of diversification.

Realizing that even the smartest or luckiest investors – like Paulson – can be wrong, we focus on picking good funds but making sure that if any of our fund managers has a bad year, our clients will not have their plans interrupted or their lifestyles affected.

To go back to our baseball analogy, we just want to get on base and do so consistently.

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