Top 10 investing tips for 2011

By: Don Taylor

With an economy still on the mend and unemployment stubbornly high, it's important to make the best investing decisions for you and your family. The best strategy blends managing risk while investing to get the most bang for your buck.

Take these baby steps and follow the rest of Bankrate.com's 100 tips for 2011 and you can improve your financial life in the coming year.

Tip 1: Define or refine your life goals

What do you want out of life?

The trend in financial planning is to work with people to help them determine what they want out of life, and then establish financial objectives that will facilitate the client's ability to achieve those life goals. Money becomes the catalyst instead of the goal.

Don't get drawn into the vague generalities of a comfortable retirement, an education for your children or travel abroad. When you know what you're working toward, you'll be more committed to investing for those goals.

Tip 2: Get the big picture of your financial plan

Financial planning is a lot more than just managing your investments. A comprehensive financial plan looks at the big picture. It includes a review of your insurance, employee benefits, income taxes, investments, retirement and estate planning, as well as personal financial statements, your attitudes toward risk, and your goals.

A good planner is the captain of your financial ship. The Certified Financial Planner Board of Standards Inc. has a wealth of consumer-friendly information, including the publication "How to choose a financial planner."

Tip 3: Create an investment policy statement

Whether you do it yourself or work with a financial planner, you should have an investment policy statement that serves as a guide on how you want to invest.

This guide should include the investor's philosophy toward investing, investment objectives, the investor's attitude toward risk, a target asset allocation, guidelines for monitoring portfolio performance and an approach to portfolio rebalancing.

Other items should cover tax considerations, estate planning goals, fees and expenses, and trading costs. It should spell out an approved list of investments, and whether the investor allows trading on margin, short selling and investing in derivative securities. And it should also spell out whether the investor's account allows discretionary trading by the account manager.

Tip 4: Know your risk tolerance

Know how you feel about risk in investing.

The "Investment Risk Tolerance Quiz" offered by Rutgers University's New Jersey Agricultural Experiment Station, can give you a quick read on your risk tolerance. If you find yourself tossing and turning at night and it's not your mattress but rather the markets keeping you awake, then it's time to dial down the risk in your portfolio.

Knowing your risk tolerance will help you decide how to invest your money. Conservative investors may not be comfortable with investing much money in the stock market because of its volatility. Lower volatility means lower potential returns, so a conservative investor will have to save a higher percentage of his income to be on track to meet his financial goals.

Investors have to manage their investments considering twin risks: the risk that their investments lose principal and the risk that their investments lose purchasing power. Conservative investors can protect principal by investing in certificates of deposit insured by the Federal Deposit Insurance Corp., but the FDIC doesn't protect the purchasing power of those deposits. Keep an eye on your purchasing power, too.

Tip 5: Review and rebalance your portfolio

Calendar rebalancing is one approach to adjusting how you've invested. Others include target rebalancing and tactical rebalancing. Calendar rebalancing has you adjust your portfolio on a regular basis. Target rebalancing waits until an asset allocation is above (or below) the maximum (or minimum) target asset allocation. Tactical asset allocation has you reducing or increasing the allocation to an asset class based on your outlook for that asset class.

An active management portfolio strategy rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.

Investment allocations in financial securities are typically split between stocks, bonds and cash. The investment allocation that's right for you will depend on your risk tolerance, investment goals and market outlook. You may decide that an allocation of 50 percent stocks, 30 percent bonds and 20 percent cash is right for you. If this year's stock performance brought your stock allocation up to 60 percent, then rebalancing the portfolio will get you back to your target allocation.

Tax and other considerations like estate planning can influence your desire and ability to rebalance your portfolio.

Tip 6: Establish an emergency fund

Establishing an emergency fund is where most consumers should start investing.

Starting out, it's best for the money to be invested in liquid and safe investments like a money market account or a money market mutual fund.

Financial planners typically suggest the fund hold three to six months' worth in living expenses. The more risk you face in the workplace, the more you should have available.

Counting on cash advances from your credit cards or loans from your 401(k) plan are not viable financial backstops because the credit card companies can raise the interest rates to obscene percentages and a plan loan won't help you if your financial emergency is getting laid off from your job since a 401(k) loan comes due when you leave an employer.

Tip 7: Review your approved list

Your "approved list" is the stocks and bonds you're willing to invest in and the cash you plan to hold. Even within those basic categories you can invest in individual securities, mutual funds or exchange-traded funds, or ETFs.

If your portfolio doesn't have an international component, looking beyond domestic investments can make sense, and not just for stocks.

Expanding the list to include commodities, precious metals and real estate can give your portfolio diversification. Learning how to hedge portfolio risk with options and futures contracts is best left to a discussion between you and your investment professional.

Tip 8: Roth IRA conversions and more

The Internal Revenue Service removed the income limitations for Roth IRA conversions, starting in the 2010 tax year. Unfortunately, there are still income limitations on who can contribute to a Roth IRA. That forces taxpayers with incomes above the contribution limits who want to hold retirement assets in a Roth IRA to perform the intermediate step of contributing to a traditional IRA and then making a converting contribution to a Roth IRA.

If investment returns don't pan out, taxpayers have the ability to recharacterize their Roth IRA contribution as a contribution to a traditional IRA. The taxpayer has this option up until Oct. 15 of the tax year following the conversion year. Converting in January 2011 gives you the flexibility to recharacterize over 21 months. Investors should have a better read on the recovery and tax code changes over that time span.

Work with your tax professional to determine if converting your traditional IRAs to Roth IRAs makes sense.

Tip 9: Estimate your retirement nest egg needs

You need a sense of how big your investment portfolio should be at retirement. The Employee Benefit Research Institute's 2010 Retirement Confidence Survey concluded that only 46 percent of workers or their spouses have attempted to estimate their retirement nest egg needs.

If you construct a household spending plan (or budget), you can use the total annual expenses as a guide to what you might need in retirement.

Financial planner recommendations typically range from 75 percent to 100 percent of your annual expenses while working, but exclude money budgeted for retirement savings. You'll be taking distributions from these accounts, not funding them.

Bankrate's retirement calculators can help you right-size your nest egg by estimating your income needs in retirement, considering how much you have already put aside and deciding on your pre-retirement savings goals.

Tip 10: Capture the match in your retirement plan

If your company's 401(k) or 403(b) plan has your employer matching contributions, then you should contribute up to the limits of the company match. A typical 401(k) matching program has the employer contributing 50 cents for every dollar you contribute up to a limit of 3 percent of salary. You contribute 6 percent, the company contributes 3 percent, and you just made a 50 percent return on your money.

https://news.fidelity.com/news/article.jhtml?guid=/FidelityNewsPage/pages/investing-tips-for-2011&topic=investing

A Social Security Reality Check

by Lisa Smith

Once upon a time, workers were told that Social Security was but one leg of a three-legged stool that would support them during retirement. Private pensions and personal investments would serve as the other two legs. As time passed, most employers eliminated their pension plans. Instead of defined-benefit plans, workers were given access to defined-contribution plans. The three-legged stool then became the two-legged stool.

Looking Back at Social Security Benefits

As time passed and the economy faltered, investment values plummeted; the S&P 500 fell by nearly 40% at one point during the Great Recession, and many actively managed portfolios fell even more than that, wiping out a significant portion of workers' wealth in a single year. Hurt by the economic downturn, many employers stopped funding their defined-contribution plans, further hurting the workers' ability to fund their retirement.

As a result, with severely depleted savings and no pension plans, many workers found themselves sitting on a one-legged stool. Looking to the future, they may see Social Security as their sole source of retirement funding. While it's true that the Social Security program was created to help workers supplement their retirement income, the program was never intended to be the sole means of support for retirees. And worse yet, the program is in trouble.

Looking Ahead at Social Security Payout
In 2010, the future solvency of the Social Security program was in question and the contribution to retirement funding provided by Social Security was expected to decline. The government predicts that by 2037, the Social Security fund would be exhausted according to the 2010 OASDI Trustees Report.

Looking at that scenario in today's dollars, a person retiring at full retirement age would be entitled to a payout of about $2,300 per month and just under $28,000 per year. That number is based on earning the maximum taxable wage base every year of one's career from age 21 through age 66 (which was $106,800 in 2010 and indexed annually). Assuming you make that kind of money, which few people do, that's $2,300 per month.

Of course if you were making $106,800 per year you would probably be able to save some of it for retirement, but what about someone earning the average income, which has been in the $35,000 to $50,000 per year range? Funding a retirement becomes much harder and Social Security payments would amount to even less. Getting a check is likely to become even harder in the future, as the age at which workers become eligible for full benefits is likely to be extended. At some point in the future, age 70 may be the norm for collecting full benefits.

Do the Social Security Math
Investors who are fortunate enough to retire at the tail-end of a stock market bull run and are wise (or lucky) enough to cash out have a good chance of enjoying their golden years. Those unlucky enough to retire during or after a bear market may be forced to delay retirement. For example, the Great Recession of 2008 was a game-changer, erasing a decade’s worth of gains. The outlook for a financially secure retirement presented a troubled vision for a significant number of investors at the time. Few workers can afford a double-digit drop in the size of their nest eggs as they approach retirement age.

What can you do? Start by making a sound assessment of your situation. First, look at your projected income. What is the balance of your retirement savings? What do you realistically project that balance to be when you reach retirement age? Assuming a 4% drawdown rate on your retirement savings, how much income can you anticipate on a monthly basis? How much do you expect to earn from Social Security?

Now look at your expenses. How much do you spend today? What percentage of that do you anticipate spending in retirement? If there is a shortfall between your expected earnings and your expected savings, you'll need to consider your options for closing the gap. Working longer, saving more and downsizing your expectations may all be required.

Retirement Reality Check
If retirement is still on the distant horizon, you may be able to get back on track by increasing the amount you save each month. If retirement is looming but your funding is lacking, a revised spending plan may be in order. If your expected income won't cover your expected expenses, some expense reduction may help you keep your retirement date on track.

The Bottom Line
If no amount of cost cutting will get your income and expenses to line up, it may be time to rethink your retirement. Extending the date at which you plan to retire and taking a part-time job are two options to consider. Even if you remain on track despite the market doldrums, memories of the last bear market are a good reminder to remain vigilant - you never know what the future has in store.

http://www.investopedia.com/articles/retirement/09/retirement-reality-check.asp?partner=ntu1

Ultra-Wealthy Remain Risk-Averse

The ultra-wealthy are still pretty risk averse, according to a recent survey by the Institute for Private Investors, a membership organization for ultra-high-net worth individuals and families. But they may begin increasing allocations to global emerging markets and reducing cash in 2011.

The December survey of 72 IPI members, who have a mean net worth of $100 million, revealed that they believe their own portfolios underperformed the S&P 500’s 15 percent return for the year by about a third. But the funny thing is, they weren’t upset about it, said IPI president Kristi Kuechler.

“I heard over and over again that members were fine with reduced risk and giving up returns,” Kuechler said. “They wanted to feel like they were more in control of their investments and were reducing their expectations.”

Kuechler said she thinks some level of risk aversion and lowered expectations will continue this year among IPI members. “Investors seem to still have reluctance about going out on the risk spectrum,” she said. “There are still a fair number of people who are skeptical of a continued linear market rise.”

Wealth managers say their clients have expressed similar sentiments. “We’re very definitely seeing what the IPI survey shows,” said Stephen Prostano, president and chief operating officer for Boston-based Silver Bridge Advisors. “We have been moving towards goals-based investing and clients do not want to take risk at the expense of capital they need to maintain their lifestyle.”

Matt Cooper, president, private client services for Beacon Pointe Advisors of Newport Beach, Ca. agreed. “The wounds from 2008 are still very raw,” Cooper said. “I think people are seeing that the downside losses in a portfolio are always more important than the upside. And as baby boomers near retirement they see that cash outflows from the portfolio exaggerate the downside, making them more cautious.”

Global Investments Viewed Favorably

And yet, growing interest in global investments by the wealthy suggests the ultra high-net-worth may be willing to be a little bit more adventurous in 2011. Nearly two-thirds of IPI members surveyed said they plan to increase allocations to global long-only equity.

“It’s a sign that things may be shifting, although it’s too early to tell,” Kuechler said. “If you invest in long-only global, you’re going to have to accept a lot of ups and downs.”

According to Eric Bennett, chairman and chief executive of Dallas-based Tolleson Wealth Management, many wealthy investors are enthusiastic about investing abroad because they’ve seen the growth in emerging markets with their own eyes.

“We’re seeing a lot of interest in overseas investment,” Bennett said. “People who come back from countries like China, India and Brazil see what’s going on there and talk about it. I think South American countries will be getting more attention because there are more democracies there.”

Another sign that wealthy investors may be less conservative this year is the IPI survey’s finding that slightly over a third of surveyed members expect to reduce their allocation to cash.

But Kuechler said the “reservoir of skepticism” among very wealthy investors remains high. “They are very skeptical about whether the recovery will last,” she said, noting that the theme of the organization’s upcoming winter forum in San Francisco next month is “Bubble, Bubble, Toil and Trouble.”

Wealth managers around the country echoed those sentiments.

“There is an overhang of concern,” Bennett said. “Clients are concerned about how there can be sustainable growth without job creation and a recovery in housing prices.”

Apprehension that the economy may slump without continued stimulus was also pervasive, wealth managers said.

“People are afraid that growth will stop if the Federal Reserve Board takes its foot off the gas pedal,” said Adrian Conje, chief investment officer at Atlanta-based investment advisory firm Balentine. “At the end of the day, private sector expectations and confidence are more important than government actions for a self-sustained recovery.”

http://registeredrep.com/wealthmanagement/ultra_wealthy_remain_ris_averse/?cid=nl_wm

A Crash Course in Basic Retirement Planning

A recent survey found that seven out of 10 Americans are more concerned with short- and midterm spending, placing long-term savings a distant third place.

The survey further found that about two-thirds of people who unexpectedly retired due to a corporate downsizing or a medical condition indicated they weren't financially prepared. Sixty percent of those still working say they are behind schedule in saving -- regardless of age, income or ethnic background. Seventy percent of those surveyed expect to work at least part time for the first 10 years of retirement to supplement income. More than half of those surveyed expressed an extreme lack of understanding of how to choose financial products to meet their long-term savings needs.

A Comprehensive Approach

To address these shortcomings, it is necessary to understand all of your potential areas for funding your long-term savings plan -- including employer plans, IRAs, Social Security and even annuities.

After reviewing all of these available avenues, the question becomes how to fund the savings plan. How can you free up cash to add to your savings?

Parkinson's Law
Welcome to Parkinson's Law, specifically the Third Principle. For those of you not familiar with this, the Third Principle of Parkinson's Law states that expenses always rise to meet available income, and then some. You may also recognize this statement: "It's always possible to live outside your means."

The good news is that it can work in reverse.

When you voluntarily reduce your expendable income by diverting it into savings, it may be a little awkward and painful at first, but you'll quickly figure out how to bring your day-to-day expenses into equilibrium. As you accomplish this, you can gradually build up the amount you divert to your savings.

Your next concern should be what vehicle to put your savings into. The following order makes sense for most folks:

• 401(k) up to your employer's match
• Roth IRA
• Finish maxing out the 401(k)
• Taxable savings or low-cost annuities

Allocation
The next question is how to allocate your investments. A very general way to look at this is to consider the primary types of investments -- stocks and bonds -- and think about the best way to split your investment across these categories.

Stocks are generally the more risky of the two but provide a possibility of greater returns over the long run. Bonds, on the other hand, are generally less risky, but the yield from bonds, while steady, generally lags that which can be found in the stock market.

For a younger investor, with 30 or more years in their goal horizon, a portfolio consisting largely of stocks (80% to 90%) works very well. It makes the most sense to maintain a fairly high equity or stock position while very young, gradually reducing the risk component until you reach retirement, at which point the transition begins toward the distribution years.

It is necessary for most investors to maintain exposure to the stock market to be able to keep up with inflation. Bonds won't normally provide a hedge against inflation, so a component of stocks is necessary even in retirement.

Summary
To reverse the trends cited at the start of this article (at least for yourself), it's important to do what you can, as early as you can, to increase your rate of savings. Hopefully this crash course has given you some ideas to use for your own situation.

http://www.thestreet.com/story/10961155/2/a-crash-course-in-basic-retirement-planning.html

Tax-filing deadline extended

Taxpayers will get an extra weekend to wrestle with their tax return this year.

The tax-filing deadline is Monday, April 18, thanks to the Emancipation Day holiday celebrated on April 15 in the District of Columbia, the Internal Revenue Service said Tuesday.

Holidays celebrated in Washington have the same effect as federal holidays on the tax-filing deadline, according to the IRS.

While some taxpayers like filing in January so they can get their refund as soon as possible, some of them will have to wait this year thanks to the late-breaking tax law Congress passed on Dec. 17.

Anyone who itemizes their deductions on Schedule A will have to wait until mid- to late February to file, because the IRS must reprogram its processing systems to account for the extension of key provisions, the tax agency said.

For taxpayers who are not affected by the delays, the IRS said it will start accepting e-filed and Free File returns on Jan. 14.

Vote for the 2011 Presidential Cycle

The Presidential Cycle is a four-year U.S. stock-market pattern with surprising consistency, regardless of the president or the party in office. This year is the cycle's crucial third year, after the midterm U.S. elections and prior to the general election, which bodes well for the broad market.

Historically, the third year -- particularly its first six months -- has been the cycle's best, with the S&P 500 gaining 17% on average in the third year of the president's term since 1945, according to S&P. The top sectors in the third year since 1970 have been cyclical, chiefly technology, materials, industrials and consumer discretionary.

"We have never had the market decline in the third year since World War II," reports Sam Stovall, chief investment strategist at Standard & Poor's Equity Research. "The party in power wants to stay in power, so they stoke the engines of the economy in Year 3, which bears fruit by Year 4."

Three New Year's investing resolutions

By Walter Updegrave, Money Magazine — 12/20/10

Resolution #1: Set an actual investment strategy. I'm talking about sitting down and going over your investment goals, how long it will be until you need to tap your investments, thinking about how much risk you're really willing to take and then creating a diversified mix of stock and bond funds that's appropriate for your situation.

If you need to familiarize yourself with fundamental concepts like asset allocation before you do this, fine.

That point is, though, that you want to have a plan. Otherwise, you'll be like someone setting out in a car with no real destination in mind and no map. There's no telling where you'll end up.

Resolution #2: Stifle it! Stifle the impulse to make changes to your portfolio every time you read a story about how to capitalize on rising gold prices, the Fed's quantitative easing program or whatever the investment theme du jour happens to be.

As counterintuitive as it may seem, the more investing moves you make, the more mistakes you're likely to make, the more extra costs you'll probably incur and the lower your returns are likely to be.

Resolution #3: Stick to resolutions #1 and #2. I'm not trying to be cute here. I'm serious.

The fact is that setting a strategy and then standing pat (aside from periodic rebalancing) is hard, especially when every investing pro is telling you that the New Normal requires a new investing strategy or when every fiber of your being is screaming you'll be left behind if you don't move a big chunk of your portfolio into emerging markets funds.

Indeed, it's when something big is afoot -- the market's falling apart or in the midst of a huge surge -- that the temptation to make some move, any move, is greatest.

Of course, those are also the times when it's most crucial that you don't give in to the urge to abandon your strategy, since that's when you're most in danger of selling out at a bottom or buying in as the sizzle is about to fizzle.

So find some way to squelch the all-too-natural impulse to jettison your strategy just when you need it most. If you know that watching TV finance and investing shows leaves you itching to tinker with your portfolio, then don't watch them.

Or maybe some other technique will work, like promising yourself you'll always wait at least a week before making a change in your portfolio. Or vowing that before you add or jettison a holding, you'll find five reasons why this move might not work out.

But come up with some speed bump that will slow you down, so you're less likely to make a rash decision you may later regret. Can I promise that making and sticking to these three resolutions will prevent you from incurring losses or generate the highest possible returns? Of course not.

But I can tell you that by adopting this approach you will at least have a reasonable and rational plan for investing in the face of market uncertainty. And that beats guesswork any time.

https://news.fidelity.com/news/article.jhtml?guid=/FidelityFeeds/pages/three-investing-resolutions&topic=investing