Category Archives for "Retirement Planning"

Apr 22

High-Yield Bonds: Income Potential at a Price

By Chris Chen CFP | Financial Planning , Retirement Planning

High-Yield Bonds: Income Potential at a Price

High-yield bonds have long been a popular source of diversification for long-term investors who seek to maximize yield and/or total return potential outside of stocks.(1)  High-yield issues often move independently from more conservative U.S. government bonds as well as the stock market.

These bonds — sometimes referred to as “junk” bonds — are a class of corporate debt instruments that are considered below investment grade, due to their issuers’ questionable financial situations. These situations can vary widely — from financially distressed firms to highly leveraged new companies simply aiming to pay off debts.

As the name “high yield” suggests, the competitive yields of these issues have helped attract assets. With yields significantly higher than elsewhere in the bond market, many investors have turned to high-yield bonds for both performance and diversification against stock market risks.

These are valid reasons for investing in high-yield bonds, especially long term. But as you read about what these issues could offer your portfolio, it’s also wise to consider how these bonds earned their nicknames.

The Risk-Return Equation

In exchange for their performance potential, high-yield bonds are very sensitive to all the risk factors affecting the general bond market. Here are some of the most common risks.

  • Credit risk: A high-yield bond’s above-average credit risk is reflected in its low credit ratings. This risk — that the bond’s issuer will default on its financial obligations to investors — means you may lose some or all of the principal amount invested, as well as any outstanding income due.
  • Interest rate risk: High-yield bonds often react more dramatically than other types of debt securities to interest rate risk, or the risk that a bond’s price will drop when general interest rates rise, and vice versa.
  • Liquidity risk: This is the risk that buyers will be few if and when a bond must be sold. This type of risk is exceptionally strong in the high-yield market. There’s usually a narrow market for these issues, partly because some institutional investors (such as big pension funds and life insurance companies) normally can’t place more than 5% of their assets in bonds that are below investment grade.
  • Economic risk: High-yield bonds tend to react strongly to changes in the economy. In a recession, bond defaults often rise and credit quality drops, pushing down total returns on high-yield bonds. This economic sensitivity, combined with other risk factors, can trigger dramatic market upsets. For example, in 2008, the well-publicized downfall of Lehman Brothers squeezed the high-yield market’s tight liquidity even more, driving prices down and yields up.

The risk factors associated with high-yield investing make it imperative to carefully research potential purchases. Be sure to talk to your financial professional before adding them to your portfolio.

Note (1): Diversification does not ensure a profit or protect against a loss in a declining market.

© 2013 S&P Capital IQ Financial Communications. All rights reserved.

 

Apr 02

Tax Season Dilemna: Invest Money in a Traditional IRA or a Roth IRA?

By Chris Chen CFP | Financial Planning , Retirement Planning

Invest in a Roth IRA or a Traditional IRA?

This being tax season, you may want to know, should you put your money in a (traditional) IRA or a Roth IRA?

In a traditional IRA, your contribution will be deductible from your taxable income, and will grow tax-deferred .  Income taxes will be paid when you take distributions at retirement.  The immediate benefit is that a contribution will help you reduce your taxable income, and, therefore, your taxes.  (For the 2012 tax year, you have until April 15 to make that contribution.)

For a Roth IRA, your contribution is not tax deductible .  However, it will grow tax free, and distributions in retirement will not be taxable.  Hence, your retirement income from the Roth would be tax-free.

The traditional IRA helps you save on taxes now , and the Roth IRA helps you save on taxes later .  What then should you do: save on taxes now or save on taxes later?

The answer is entirely about what you expect your taxes to be when you retire.  If you expect your tax rate to be lower in retirement than today, you may want to consider a regular IRA.  That is because, you will be saving a relatively large amount in taxes today, and paying at a relatively low rate in retirement.

On the other hand, should you expect your tax rate to be higher in retirement than today, you may want to consider a Roth.  That is because you would be paying at a low tax rate today, and saving even more taxes later on.

So, you might ask, how can you figure out what your tax rate will be in retirement?  That is a different question altogether!

Check out out other retirement posts:

Is the new tax law an opportunity for Roth conversions

Rolling over your 401(k) to an IRA

7 IRA rules that could save you time and money

Doing the Solo 401k or SEP IRA Dance

Roth 401(k) or not Roth 401(k)

 

 

 

Feb 22

Alice in Wonderland and financial planning

By Chris Chen CFP | Divorce Planning , Financial Planning , Retirement Planning

Alice in Wonderland and Financial Planning

Those who have read Alice in Wonderland may know the Cheshire Cat as a mysterious and baffling being.  The Cat often makes some very good points, although rarely in a very helpful way.  One is in the picture below.  Unfortunately,  I took it with my phone, and the  text is a little blurry.  So I re-wrote it.

Financial Planning

“Would you tell me please, which way I ought to go from here”

“That depends a great deal on where you want to go” said the Cat.

“I don’t much care where ___” said Alice.

“Then it doesn’t matter which way you go,” said the Cat

“__ so long as I get somewhere,” Alice added as an explanation.

“Oh, you’re sure to do that,” said  the Cat, “if only you walk long enough.”

If you are reading this blog post, chances are you are interested in financial planning.  Alice has taken the first step: she knows she would like to get somewhere, she realizes that she does not know how to, and she has asked for advice.

Hopefully in real life you won’t have to rely on the Cheshire Cat for advice, or any Cat for that matter!  Do remember though: if you walk long enough, you will eventually get somewhere.

Will it be where you want to?

Jan 04

Inaugural Post

By Chris Chen CFP | Divorce Planning , Financial Planning , Retirement Planning

Welcome to the Insight Financial Strategists LLC blog! As this is our inaugural post, let’s start with the basics. First, an introduction: Our company was created as a knowledge center tailored to helping you assess your specific financial planning needs. This personal approach to financial planning helps us in designing financial plans specific to your needs and financial goals.

All of us know about money and finance, but most of us don’t know it very well. We are often uncertain about how much we need to save for the future, and how we should invest it.

And if that weren’t enough, we often feel overwhelmed by fluctuations in the marketplace, the daily squawk box of financial news, and tax laws that are ever changing. Case in point: as we write this post, we stare at the Fiscal Cliff, we wonder what impact it will have on us, and we sit mesmerized.

Let’s face it: the world is a mess; it’s confusing, even frightening. And would it not be wonderful if we could turn to someone who could guide us through this confusing mess?

At Insight Financial Strategists LLC, our team offers you our deep and focused expertise and insight to guide you in making informed decisions and giving you a solid foundation of understanding on which to plan. Regardless of whether you are looking forward to your retirement years, are in the midst of a long divorce or just need to make sure you are doing the best you can with your current financial planning picture, Insight Financial Strategists can help you navigate confidently through it all.

Our team is small, allowing you to get to know us as we get to know you, without the fear of getting lost in the shuffle of a large corporation. Our services are one-on-one and we know the local landscape. Please feel free to visit the About Us page on our website to learn more about us.

While you are on the site, please sign up for our newsletter to receive the latest news and analysis to help ensure all your financial decisions are informed ones. And, of course, be sure to check back here on our blog. We will provide you with our analysis of financial trends, let you know about upcoming events and feature guest bloggers to offer fresh perspectives on pressing issues.

Every financial situation is unique. Please be sure to contact us so we can provide the most accurate and customized information we can for your personal financial situation.

 

~ The Insight Financial Strategists Team