All Posts by Chris Chen CFP

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Chris Chen CFP CDFA is a Wealth Strategist with Insight Financial Strategists LLC in the Boston area. He specializes in retirement planning and divorce financial planning

Jul 01

Socially Responsible Investing

By Chris Chen CFP | Financial Planning

 

Socially Responsible Investing

By Harshita Mira Venkatesh

At a Symposium on Impact Investing held at the Vatican during the third week of June, Pope Francis appealed to sustainable investors to support social justice through their actions. According to the Pope: “It is important that ethics once again play its due part in the world of finance and that markets serve the interests of peoples and the common good of humanity.”

Changing ourselves as individuals is merely the first step. The second more imperative question to ask is: how can we make the companies and organizations around us behave and act in a systematically conscious manner for the advancement of society? As individuals some of us may feel overwhelmed by the scale of such a question. The answer was highlighted by Pope Francis during the symposium: we should make our investments count .

Impact investing or Socially Responsible Investing is when you not only invest in a corporation but also in the message they spread. For instance:

Starbucks is one of the most powerful coffee chains in the world. While they brew their signature coffee blends, they simultaneously aim to keep the underlying coffee bean environmentally equitable by using “Green Coffee” or fair trade coffee.

Ben and Jerry’s make wholesome dairy products and they also donate more than 7.5% of their pre-tax profit to various charities around the world.

Dell supports 4,615 charities around the world. In addition the Dell Social Innovation Challenge aims to mentor and nurture social entrepreneurs who have potentially socially consequential ideas.

Whole Foods may be our local grocer; internationally the organization supports 40,000 impoverished female micro-entrepreneurs.

The list goes on. It may be worthwhile to note that while these companies have achieved paramount corporate Socially Responsible Investing standards, they are also highly profitable enterprises. Socially Responsible Investing does not mean forfeiting gains, just choosing how to obtain them.

The inevitable question arises: do these organizations use their socially conscious efforts to mask their corporate greed?

None of these organizations are not 100% socially responsible in their actions.  Yet they have taken stride to mitigate their harmful activities as well as promoting social causes.  It is precisely this trend that we as social investors should campaign for.

There are a wide array of Socially Responsible Investing funds available offered by several well established fund managers as well as specialized advisers. These funds screen companies based on their ESG (Environmental, Social and Governance) standards. They simultaneously attempt to retain a diversified portfolio to mitigate the underlying risk.

  • The Calvert Social Index Fund is an index fund benchmarked on the Calvert Social Index® established to measure the performance of US-based sustainable and responsible companies. It has a diversified 699 issues in its current portfolio and a four star rating from Morningstar. The average return annually over a ten year period ranging from 4/01/04 to 3/31/14 for the A-shares is 6.15%, while the return of the Calvert Social Index during this period is 7.21%.

  • Another notable one is the Parnassus Fund which is benchmarked against the S&P 500. The average return of the A shares (post tax and excluding distribution fees) over a ten year period (01/01/04 to 12/31/2013) is 6.99% .The return of the S&P 500 by comparison for this period is 7.39%.

  • The iShares MSCI KLD 400 Social ETFis indexed to the MSCI KLD 400 Social Index (a free floating adjusted capitalization weighted index consisting of companies which comply with strict ESG standards). The fund’s performance since inception (11/14/06 to 12/31/13) has been 6.11%. The Index by contrast had a 6.65% annual average return over the same period.

  • The Green Century Balanced Fund contains a diversified portfolio of stocks and bonds. It is benchmarked against the S&P 500 Its return over the last ten year period has been 4.97% (04/01/04 to 3/31/14), compared with 8.34% for the S&P 500 over the same period.

These choices are not exhaustive. However, they demonstrate that there are Socially Responsible Investing choices that are valid from an investment standpoint. These Socially Responsible Investing options are diversified and varied. They are constructed in such a way that you need not sacrifice on returns in order to be socially conscious.  

If you are interested in Socially Responsible Investing, take some time to research the possibilities and consult your Financial Planner regarding the investment options available and how they may fit in with your goals and your portfolio.

_____________________________________________________________________________

This blog post is contributed by Harshita Mira Venkatesh, a student at the University of Rochester majoring in Financial Economics and Applied Mathematics.  Harshita is also a summer intern at Insight Financial Strategists LLC for the Summer of 2014.  She intends to pursue a career in equity research analysis.

Note:  All content provided on this blog post is for informational purposes only. We make no representation as to the accuracy or completeness of any information on this site or any information found by following any link on this site. The information is general in nature and may not be applicable or suitable to an individual’s specific circumstances or needs. Application to an individual situation may require considerations of other matters. The investments featured in this blog post are for illustration purposes only. No representation is made as to their suitability for any individual’s portfolio. If you have questions about the mutual funds described, please contact your investment professional.

May 30

The IRS thinks you are cheating on your Spousal Support

By Chris Chen CFP | Divorce Planning , Financial Planning

 

The IRS thinks you are cheating on your spousal support

Spousal SupportAccording to the Journal of Accountancy, the IRS has increased resources devoted to scrutinizing alimony, or spousal support.  

As is well known amongst divorcing individuals and the professionals who support them, the tax code allows the payor of spousal support to deduct it from taxable income, while the recipient must include it in taxable income. So if Kevin pays Kate $30,000 of spousal support a year, he can reduce his taxable income by that amount while she is supposed to claim it as income, and pay taxes. 

Predictably, divorced couples don’t agree about spousal support any more than they do about anything else. On March 31 2014, TIGTA , the Treasury Inspector General for Tax Administration, an IRS watchdog, issued a report identifying a large tax gap between spousal support deductions by payers and the corresponding income claimed on ex-spouses’ returns.

With its mouthful of a title (“Significant Discrepancies exist  between Alimony Deductions Claimed by Payers and Income Reported by Recipients“), TIGTA clearly wants us to pay attention.  TIGTA found that for the 570,000 returns that they analyzed for the tax year 2010, deductions exceeded income by more than $2.3 billion. More than 47% of returns showed discrepancies between the spousal payments deducted and the income reported.

According to Mike Conti, a CPA in Boston, TIGTA estimated that the IRS revenue loss from spousal support errors could add up to $1.7 billion over a five year period. Although that is small compared to the estimated $385 billion tax gap experienced in the US, spousal support is now a target for the IRS that has been identified and quantified. 

In fact, the IRS reported adjusting its audit filters to catch more high risk returns. The WSJ (paid access) reports that the IRS is developing “other strategies” to address the spousal support tax gap. In other words, divorcing individuals, at least those paying and receiving spousal support will be at a higher risk for an audit.

There are enough things going on in a divorce that a potential IRS audit may not make it to the top of the list of concerns.  However, given that it is now completely predictable, it is better for divorcing individuals to pay the extra attention and avoid the audit or be ready for it.

For people paying spousal support as well as for those receiving it, it is important to ensure that:

1. You fully understand what is alimony and what is not. Separation agreements are written in a legal style that is not always clear to non-lawyers. If you are not sure, if you have questions check with a financial specialist such as a CFP® professional, a Certified Divorce Financial Analyst (CDFA) or a CPA.

2. You agree with your ex on what spousal support amount you are putting on your respective tax returns. Having a discrepancy between what he files and what she files could put both of you at greater risk for an audit.

3. Your separation agreement correctly specifies spousal support. If it does not and you get audited, alimony could get disallowed. If you have not done so already, take the opportunity to verify that your separation agreement correctly specifies spousal support.

4. You get professional post-divorce support. You will need it anyway for any number of other issues. Analyzing spousal support and filing taxes correctly are just two of them.

5. Avoid pushing the envelope on this issue. It is simply not worth the additional aggravation. 

(a version of this post appeared on boston.com)

 

Mar 23

8 Strategies For Financial Success

By Chris Chen CFP | Financial Planning

8 Strategies For Financial Success

File:Financial Planning.png

If you fail to plan, you plan to fail. That was the subject of a presentation I made recently at Sun Life Financial in Wellesley. While this may sound like an old cliché it illustrates a very important aspect of personal finance: a financial plan is critical.

Regardless of age or income it is essential that you have a personal financial plan for your finances. However, creating a strategy for financial success is actually the easy part; you just need to know where to start. The 8 strategies below can serve as a guide for straightening out your finances and building a better financial future.

1. Develop a Budget

There are many reasons to create a budget. First, it builds a foundation for all the other suggestions in this article. Second, it allows you to pinpoint problem areas and correct them. Third, you will learn to differentiate between your needs and your wants. Lastly, having a financial plan to cover expenses planned and laid out will give you peace of mind. Once done, be sure to stick with it! 

2. Build an Emergency Fund

As part of your budget, you will also need to plan for an emergency fund. Unfortunately we cannot plan the unexpected. We just know that it will happen sooner or later. To cover yourself in case of an emergency (i.e. unemployment, injury, car repair, etc.) you need an emergency fund to cover three to six months of living expenses. 

An emergency fund does not happen overnight. It needs to be part of your budget and financial plan. It also needs to be a in separate account, maybe a savings account. Or some in a savings and some more in a CD. The bottom line is that it needs to be out of sight and out of mind, so that it will be there when needed.

3. Stretch Your Dollars

Now that you know what you need and what you want, be resourceful, and be strategic when you spend on what you want. For instance re-evaluate your daily Dunkin Donuts or Starbucks habit, if you have one. Can it be weekly instead of daily? If you eat out for lunch everyday, could you pack lunch some days? 

4. Differentiate between Good Debt and Bad Debt

It is important to remember that not all debt is created equal. There is a significant distinction between good debt and bad debt. Good debt, such as a mortgage, typically comes with a low interest rate, tax benefits, and supports an investment that grows in value.

Bad debt, such as credit card debt, will burden you with high interest rates, no tax benefits, and no hope for appreciation. Bad debt will actually reduce your standard of living. When looking at your financial plan you want to make sure that you are keeping bad debts to a minimum. Actually, don’t keep to a minimum: make it go away. 

5. Repay Your Debts

Paying back your debts, especially the bad ones, is one of the most important steps to the success of a financial plan, because debt will only increase if you do not actively work to pay it off. You should include in your budget a significant amount of funds for debt repayment. 

Fact is paying off debt is a drag, and sometimes it is difficult to see the end of the tunnel. One way to accelerate the process of paying debt down is to pay strategically. When you pay over your minimum payments, don’t spread it around all your debts. Concentrate your over-payment on a single debt, the one that’s closest to being paid off. It will make that payment go away faster. And when it’s gone, you can direct the liberated cash flow to the next one, and so on.

6. Know Your Credit Score

A high credit score will make it easier to get loans and credit cards with much more attractive interest rates, which will mean less money spent on interest payments and more money in your pocket. Take advantage of the free credit report that the credit companies must provide you free of charge annually. Make sure that there is no mistake on it. 

7. Pay Yourself First 

Set aside a portion of your paycheck each month to “pay yourself first” and invest in a savings or retirement account. Take advantage of the tax deferral option that come with many retirement plans such as 401(k) or IRAs. If you have just come out of doing your budget, and you don’t know how to do it all, tax deferred retirement accounts actually help you reduce taxes now (it will come due later, but you will have a retirement plan then, right?). Also, think of the matching funds that many employers offer to contribute to your 401(k). This is actually part of your compensation. Don’t leave it. Take it.

In my line of work, people tell me often that they will never retire. The reality is that everyone will retire someday and it is up to you to make sure that you are financially ready. 

8. Check Your Insurance Plans

Lastly, review your insurance coverage. Meet with your certified financial planner and make sure that your policies match the goals in your financial plan. Insurance is a form of emergency fund planning. At times we will have events that a regular emergency fund won’t be able to cover. Then you will be happy to have property or health or disability or long term care or even life insurance. 

If you have any questions or require additional assistance, contact a certified financial planner. They can help you identify your goals and create a financial plan to successfully meet them.

The easy part is starting the financial plan. The hard part is actually implementing. Don’t do it alone, and let me know if I can help.

Mar 03

Roth IRA or Regular IRA?

By Chris Chen CFP | Financial Planning

stockmonkeys.comAs a Financial Planner, I often get asked if people should save money in a Regular IRA or a Roth IRA. In a Regular IRA, we contribute money on a pre-tax basis (i.e. we do not pay taxes on our IRA contributions), we let it grow tax-deferred, and we pay taxes when we withdraw the money in retirement. In a Roth IRA, we contribute after-tax money, we let it grow tax-free and we pay no taxes when we withdraw the money in retirement.

That last point (“we pay no taxes when we withdraw the money in retirement”) is of course the one that gets our attention. We don’t like paying taxes, and the thought that we could have tax free income in retirement is really motivating, so much so, that, sometimes, it can be the only thing we focus on.

However the IRA story is not quite that straightforward.

The reality is that we WILL pay taxes whether it is for a Roth IRA or a Regular IRA. With a Regular IRA, we pay taxes when we withdraw the money. With a Roth IRA, we pay taxes before we contribute the money. At the risk of disappointing many readers, allow me to repeat: the Roth IRA is NOT tax-free.

When you do the math you will find that if you 1) invest in the same way in a Roth IRA and a Regular IRA, and 2) are taxed at the same rate on your Roth IRA contribution today, as on your Regular IRA withdrawals at retirement, you will end up with the exact same amount of money to spend in retirement. Call us: we will show you the math.

So which one is best? The answer is that it depends.

In general it makes sense to invest through a Roth IRA when we think that our tax rate in retirement will be equal to or higher than our current tax rate. If we think that our tax rate in retirement will be lower than our current tax rate it makes better sense to invest through a Regular IRA.

How then should you decide?

It depends on your situation.

For instance, if you are at the peak of your earnings, and you can calculate that your income in retirement will be significantly less than it is today, investing in a regular IRA will save you tax money immediately. Since you expect to be in a lower tax bracket at retirement, you will end up paying less taxes.

If you are currently a low earner, and expect to have higher income in retirement than you have now, contributing to a Roth IRA will cost you relatively little taxes, and you will not pay any more when you retire.

Because there are many phases in our working life, there are times when it makes better sense to invest through a Roth IRA or Roth 401(k), and other times when it makes better sense to invest through a Regular IRA or a Regular 401(k). Conversely, there will be times in our retired life when it will make better sense to withdraw from a Roth IRA, and others when it will make better sense to withdraw from a Regular IRA.

It is about balance and careful financial planning. In the right circumstances, the proper balance between Roth and Regular IRAs could save you a significant tax bill. In my opinion, it justifies a consultation with a professional financial planner.

 


Dec 16

What is Bitcoin, exactly?

By Chris Chen CFP | Financial Planning

What is Bitcoin, exactly?

BitcoinWhat is Bitcoin?

Bitcoin is a cryptographic protocol operating on a peer-to peer network created in 2009. This protocol is utilized in the form of a currency, allowing for direct transactions between individuals. Simply put, and as implied above, Bitcoin is an anonymous digital currency, which circumvents financial intermediaries in transactions.

Bitcoin can be considered in 4 parts:

1. How are Bitcoins created ? Bitcoins are created through a process called “mining”. The fundamental basis Bitcoin is founded upon is an algorithm, which regulates the speed at which Bitcoin can be “mined” and the manner in which it is used or transferred. In terms of speed, essentially, a computer program, accessible to anyone, works to solve an equation. Once it solves the equation, that person is awarded a certain amount of Bitcoins. The time it takes to solve an equation get progressively harder leading to diminishing returns, as the cap of 21 million Bitcoins gets closer (i.e. there is no additional money supply).

2. How does Bitcoin work? Bitcoins have two encryption keys: one public and one private. The public one has a similar role to an account number and the private one has a similar function to a PIN. Anyone can see the public one and the private one is stored in a “wallet” on the user’s computer or mobile device. These wallets store multiple Bitcoin addresses, created at the users’ discretion. To undertake a transaction, the user would simply give (whether directly or through a Bitcoin client) their private key, which can then be verified versus the public key to confirm the legitimacy of the transaction. Transactions are recorded in a public ledger in what are called “block chains”.

3. Why do people use Bitcoin? Bitcoin is used for its comparative advantages over other forms of currency and transaction methods. It is worth noting that one major attraction to Bitcoin, the anonymity factor, has drawn criticism from certain sectors (i.e. the US government). Websites, most infamously Silk Road (which was closed by the FBI in October 2013), use Bitcoin as a safe currency when dealing with illegal transactions (e.g. drugs, arms). Concern is that as Bitcoin becomes more liquid and volumes start increasing, it will become a target for money-launderers. Other comparative advantages which stand out are simply the fact that it is digital – giving it greater flexibility of usage – and that it is not subject to conventional political pressure or externalities. This second point derives from Bitcoin’s decentralisation, making market influences by a central bank (e.g. printing money) or a government (e.g. Cyprus’ proposed tax on bank deposits) irrelevant. Furthermore, the greatest attraction, at least from the financial side, is that Bitcoin is essentially frictionless; the digital currency has virtually no transaction fees, making cross-border transactions a main driver of future growth and monetisation.

Today, Bitcoin has limited usage. There are a number of services allowing individuals to obtain Bitcoins, through an intermediary or directly on the market (BTC China is the largest one at present, with c. 48% of Bitcoin activity). While large retailers do not accept Bitcoin, there are several services for the purchase of gift cards (e.g. Gyft), for example, providing an indirect method of accessing the retail market. Other website and small-scale retail also provide goods and services.

4. Every Bitcoin has two sides. Bitcoin suffers from a number of problems, many of which mirror the currency’s positives. The largest worry people have and the largest hurdle for Bitcoin and digital currencies in general is the lack of regulation and consumer protection. Simply put, what people don’t know, they don’t trust. While government and central bank action is certainly debatable, these institutions provide the authority to back a currency. Similarly, fees for companies such as MasterCard are used to insure users. The result of the lack of regulation, among other reasons, is a volatile and illiquid currency. Consumer confidence would go a long way to solving many of Bitcoin’s problems, with regulation, a potential platform, market penetration and less speculation key factors in controlling this.

From a technical perspective, digital currencies and especially Bitcoin have encountered difficulties of scalability and monetisation, with deflation a potential concern given the technical limit of 21 million Bitcoins. While perhaps simply growing pains, the currency has not gained any meaningful traction concerning scale and monetisation.  While the number of transactions have been increasing on absolute levels, normalised compounded monthly growth rates have been about 10%, compared to a previous rate of 13.6% (since the start of 2012).

(This guest blog was contributed by Patrick Chen, a graduate student in Finance at the Institut des Etudes Politiques, in Paris, France.  Insight Financial Strategists LLC does not provide Bitcoin advice or services.  This is published as an interesting topical topic ).

Sep 30

Seminar: Financial Issues of Divorce

By Chris Chen CFP | Divorce Planning

We are pleased to announce our Fall seminar,  Financial Issues of Divorce.

It will be held on November 6, 2013 from 9AM to 1PM at the Cambridge Savings Bank in Arlington, MA.

The seminar is intended for professionals involved in divorce:  lawyers, mediators, therapists and others.

In this compact half day training, we will cover:

– Divorce Financial Planning

– Tax Issues

– Retirement Planning

– Insurance and Divorce

– Post Divorce Planning

The training is offered by Insight Financial Strategists LLC.

The trainers will be

– Chris Chen, CFP, CDFA

– Diane Pappas, CDFA

– Michael Conti, CPA

Please visit http://divorcefinance.eventbrite.com/ for registration

 

 

Sep 24

How to choose a financial planner

By Chris Chen CFP | Financial Planning

 

How to choose a Financial Planner

How to choose a financial plannerHow to choose a financial planner is a question that vexes many people looking for one, even as a number of online resources address the topic.  For instance, the Financial Planning Association as well as a number of online resources in the financial and popular media offer advice on that.

I was prompted to think about this issue by a question I received recently

Question “Currently I am pulling about 4% on my trading accounts.  These are probably below what is going on in the market, but that’s one of the reasons I am seriously looking at a financial adviser.

Do you have any empirical data (history) on what returns I could expect.  I am a numbers type so that would definitely help me in my decision making process. “

It is a great question.  Clients want results, and Financial Planners want results.  The difficulty with using results to measure effectiveness, and as a benchmark on how to choose a financial planner, is that there are so many moving variables that using historical results to choose a financial planner is not effective. As the saying goes, there are lies, damn lies and then there are statistics.

Hence my answer: Before answering the question “…we would need to work a little more on your objectives and your comfort with risk.  An investment portfolio would have to reflect both.  For instance, if you have a short term goal, you would want the money allocated to that goal to be in a lower risk investment allocation.  If you have a long term goal, you would want the opposite.  Then, could you compare the performance of the two? They would be like apples and oranges, so probably not.

Now if you and I had the same long term goal, should we be invested in the same way?  Only if we have the same attitudes toward risk, ie how we feel when the market goes down.  Depending on our respective comfort with risk, you and I would have different asset allocations.  Could you compare the performance of our two asset allocations?  It would be like comparing a red delicious with a granny apple.  Sort of the same thing, but not quite.

With regard to your results, I assume that they are year to date.  Compared to a S&P 500 return of 19.33% year to date on 9/23/2013, a 4% return year to date would be reflective of a fairly conservative asset allocation with relatively little risk.  In a stock trading situation, your 4% probably came with taking substantial risk.

My job as a financial planner is to understand your goals and your comfort with risk.  Then I can propose an investment allocation and investments that efficiently help you reach your goals with the appropriate amount of risk.

In summary, I could provide you with numbers, but they would not be meaningful without the underlying context of where they came from. Chances are they will be better than some other financial planners’, and worse than some others. In and of itself that would not be meaningful, and, in my opinion, you should not rely on those numbers to decide how to choose a financial planner.”

Sep 16

Long Term Care Considerations for Retirement Planning

By Chris Chen CFP | Financial Planning , Retirement Planning

Long Term Care Considerations for Retirement Planning

Long Term Care is no one’s favorite topic . However, most of us will require some form of long term care at some point in time. Hence, it should be addressed in a financial plan or a retirement plan.

For many of us LTC is the most unpredictable and least planned for expense of  retirement . We just don’t have a very good way to predict how much long term care we will need, when we will need it, and how much it will cost. Paradoxically, this is exactly why planning is needed as part of normal financial or retirement planning.

According to the Federal Government, Long Term Care is the range of services and support you will need to meet health and personal care needs over a long period of time. LTC is not medical care , but rather assistance with the basic personal tasks of everyday life.

According to Genworth, a prominent provider of Long Term Care Insurance, the median annual cost in 2013 for a semi-private room in a nursing home is $75,405 per year. Based on my experience LTC costs in Massachusetts are much higher than that.

Who Pays for Long Term Care?

People often assume that Medicare or Medigap (the supplemental coverage for Medicare), or even regular health insurance will absorb the cost of their Long Term Care expense. Unfortunately, that is not the case.

In general, most people who need Long Term Care pay for it out of their own assets. Once there is no money left, Medicaid will usually take over. Take note that Medicaid is a government welfare program . This approach works best for people who have enough assets to cover any foreseeable circumstance, or people who just don’t have enough assets worth protecting.

Long Term Care Insurance

That’s why Long Term Care insurance is an important part of a financial plan . For those who have it, long term care insurance will pay for your Long Term Care expenses, up to the limit of the policy. This is a way to preserve assets for other purposes, including for your legacy.

From a tax standpoint, it is worth noting that the premiums for most classical LTC policies available today are deductible from taxable income within the limits specified by the IRS. In addition, up to certain limits, benefits are not taxed as income. Take this favorable tax treatment as a sign that Uncle Sam would like to encourage you to be covered!

So, Long Term Care insurance helps pay for long term care expenses , LTC insurance helps preserve your assets and your legacy, and LTC insurance is potentially tax deductible. So why are so many people resistant to traditional Long Term Care insurance?

First, it is expensive. Although, we might point out that the cost of insurance is normally much less than the cost of Long Term Care itself.

Second, the possibility that the insurance policy may not be used, for instance if death happens suddenly, is enough to stop many people from acquiring Long Term Care insurance. The thought of paying premiums for years, and not collecting a benefit would make the insurance a waste. For people who feel like that, there are alternatives.

Don’t Waste the Premiums

There are LTC insurance products that allow you to “not waste the premiums” . They allow you to get Long Term Care coverage if needed, and have an opportunity to get the premium paid back in case the Long Term Care benefit is not used.

Although, the details of these products is beyond the scope of this post, suffice it to say, that these alternatives can provide a lot of flexibility in a financial plan.

These three approaches (pay out of assets, traditional long term care insurance, and “not waste the premium” alternatives) all offer different benefits and should be matched to the correct circumstance and individual preference. If you need to figure out which option works best for you, get help from your financial planner.

Aug 26

Investing in Aggressive Growth Funds

By Chris Chen CFP | Financial Planning , Retirement Planning

Investing in Aggressive Growth Funds

http://upload.wikimedia.org/wikipedia/commons/thumb/d/dd/NYSE_Building.JPG/320px-NYSE_Building.JPG

Chances are your retirement plan offers one or more stock funds to choose from. If it is consistent with your investment objectives and your investment risk tolerance, you may want to consider investing a portion of your plan in an aggressive growth fund.

Risks and Rewards

Aggressive growth funds, as the name indicates, are stock funds that are growth-oriented. Included in aggressive growth funds are several options like “small-cap” funds, “emerging market” funds, as well as various kinds of international funds. Aggressive growth funds tend to invest in smaller, fast-moving companies in developing sectors with the potential for rapid growth (hence the name), such as high-tech or biotechnology. They may also invest in equities that have fallen out of favor on Wall Street, but appear ready for a comeback.

Because they invest in companies that are often less known and not as established as the companies that make up the Dow Jones Industrial Average (DJIA), aggressive growth funds tend to exhibit volatile behavior.  For instance, when the market goes down, an aggressive growth fund may go down more than the DJIA.  Conversely, when the market goes up, aggressive growth funds often go up more. The goal of aggressive growth funds is to achieve higher returns than other stock funds.

Aggressive growth funds are best suited  for long-term investors with the intestinal fortitude to bear the market’s worst downturns while seeking the strongest returns.  For example, an investor may want to allocate some of his or her portfolio to aggressive growth funds to potentially accumulate as much as possible over a long time horizon. These funds may be especially suitable for younger investors with 25, 30, or 35 years until retirement.

Don’t Forget Diversification

Regardless of how aggressively you would like to invest, keep in mind the crucial benefits of allocating your money across investments that behave differently.

If you invest in an aggressive growth fund, you may want to balance its inherent risk with investments that have different risk characteristics such as growth and income funds, bond funds, and money market funds.

A financial planner can help you determine the investment allocation that’s best suited for you and your goals.

Jul 17

Should you buy stocks now?

By Chris Chen CFP | Financial Planning , Retirement Planning

Should you buy stocks now?

buy stocks now or follow your long term financial plan?If you are like many investors, you may have a large chunk of your brokerage account or IRAs in money market or short term treasury, and your 401(k) in a Stable Value Fund. The DJIA and S&P500 have been reaching new highs in the past few weeks, and, naturally, investors are wondering: is it time to get back into the market, is it time to buy stocks now or stock mutual funds?
A recent Dalbar study has shown that the average investor in US stocks and stock mutual funds earned an average return of 4.25% per year over the past 20 years, while the S&P500 stock index generated an average 8.21% return over the same period. In other words the average equity investor underperforms the financial markets by almost 4%. This large difference is mostly due to people trying unsuccessfully to time the market.
A more sensible  approach is to consider the intended use of the money sitting in money market. Is it for a short term purpose, such as next September’s college tuition or buying a car? If so, the funds should probably stay in money market. Is it for a long term goal, such as retirement or saving to buy a house on the beach in 10 years? Then, buying stocks may be something to consider.
As an investor, you should have a long term plan that allocates your money to goals and to investments.  Whether to buy stocks now or not to buy stocks now should not depend upon how well the market is doing. If you need a plan, or you need to update one, speak with your Financial Planner. If you need a planner, contact us or the Financial Planning Association of Massachusetts.