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December 2018 - Park and Elm

Contribute to a 529 before December 31st!

By | December 19th, 2018|College Planning, Markets|

The projected costs for college can be very intimidating…but there are ways to prepare for it. Just knowing the possible sticker price gives you the power to prepare! Without preparation, your retirement plan could be significantly impacted. If you have a future student, YOU MUST START PLANNING NOW! THE DEADLINE TO CONTRIBUTE TO A 529 FOR A 2018 TAX CREDIT IS FAST APPROACHING!

THE IMPORTANCE OF INVESTING NOW

To help reduce the expected costs of funding future college expenses, parents can invest in assets that are expected to grow their savings at a rate of return that outpaces inflation. By doing this, college expenses may ultimately be funded with fewer dollars saved. Because these higher rates of return come with the risk of capital loss, this approach should make use of a robust risk management framework. With a tax-deferred savings vehicle, such as a 529 plan, parents will not pay taxes on the growth of their savings, which can help lower the cost of funding future college expenses.  While there are stipulations as to how the money is spent, many states will give you a tax credit for investing in a 529. Indiana, for instance, offers a 20% tax credit on your deposits up to $5,000. That is a potential for a $1000 credit on your state taxes…an immediate 20% return.

Take a look at these estimates, and the impact a 529 investment plan can have on the price tag:

Estimated Total Cost of College in 18 Years = $190,000

Est. Total Amount Paid For College if Family invests $5,000/Year from birth to Age 18 = $90,000 of Savings + $100,000 of Projected Investment Growth. That is a total of $90,000 Out Of Pocket.

VERSES…

Est. Total Amount Paid if Family saves nothing and finances the total amount = $190,000 Borrowed + $46,000 in Interest. That is a total of $236,000 out of pocket.

If your goal is to fund college for your child, a price tag difference of $146,000 (not including tax credits you can capture along the way) can derail your retirement plans. $146,000 invested over 10 years at 7% is nearly $300,000.

RISK MANAGEMENT AND DIVERSIFICATION

Just as with your retirement portfolio, it’s important to work with a trusted advisor when saving for college expenses. A professional who has a transparent, diversified approach based on sound investment principles, consistency, and trust can help investors identify an appropriate risk management strategy.  When saving for college, risk management assets (e.g., bonds) can help reduce the uncertainty of the level of college expenses a portfolio can support by enrollment time. These types of investments can help one tune out short‑term noise and bring more clarity to the overall investment process. As kids get closer to college age, the right balance of assets is likely to shift from high expected return growth assets to risk management assets.

CONCLUSION

Higher education may come with a high and increasing price tag, so it makes sense to plan well in advance. There are many unknowns involved in education planning, and no “one-size-fits-all” approach can solve the problem. By having a disciplined approach toward saving and investing, however, parents can remove some of the uncertainty from the process. A trusted advisor can help parents craft a plan to address their family’s higher education goals. The deadline for a 529 tax credit is DECEMBER 31st. If you need help with this goal, contact our firm and we can guide you to the right plan.

Park + Elm Investing Principle #10: Focus on What You can Control!

By | December 10th, 2018|Markets|

#10 is HERE!

Download our Ebook Here to get the first 9 principles!!

Financial science and experience show that our investment efforts are best directed toward areas where we can make a difference and away from things we can’t control. We can’t control movements in the market. We can’t control news or financial headlines. No one can reliably forecast the market’s direction or predict which stock or investment manager will outperform.

But each of us can control how much risk we take. We can diversify those risks across different assets, companies, sectors, and countries. We do have a say in the fees we pay. We can influence transaction costs. And we can exercise discipline when our emotional impulses threaten to blow us off-course.

These principles are difficult for most people, because we are programmed to think that if we pay closer attention to the day-to-day noise, we will get better results. Ultimately, we are pushed toward fads that the financial marketing industry decides are sellable, which require us to constantly tinker with our portfolios. The financial media emphasis is often on the excitement induced by constant activity and chasing past returns, rather than on the desired end result.

So what can we control?

  1. Risk – Identify an acceptable level of risk for an acceptable return. We use Riskalyze cutting-edge technology to identify risk tolerance and align your portfolio with your investment goals and expectations. Run stress tests and understand what your risk tolerance means for your portfolio over time.
  2. Expenses – Every investor has a say in the fees they pay. Think of the costs as a percentage of your return that you give away. If you’re invested in a fund that returns 5%, but charges a 1% expense ratio, then you lose 20% of your return to fees.
  3. Diversify your portfolio – Diversification improves the odds of holding the best performers, and by holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.
  4. Minimize the taxes you pay – High turnover strategies can leave you with a big tax bill in the spring. Efficiency in investing is a controllable way to save tax dollars.
  5. Discipline – It never feels good to watch the markets go down, but it’s also part of being an investor. No one can accurately time the highs and lows. Avoid the temptation to make changes to your portfolio in response to ever-changing market conditions.

A financial advisor can create a plan tailored to your personal financial needs while helping you focus on actions that add value. An evaluation of the risk and fees in your portfolio is a perfect first step toward a significantly better investment experience. Contact us if you’d like a free assessment of expenses and risk in your current portfolio.

Why Should You Diversify?

By | December 4th, 2018|Markets|

As 2019 approaches, and with US stocks outperforming non-US stocks in recent years, some investors have again turned their attention towards the role that global diversification plays in their portfolios.

For the five-year period ending October 31, 2018, the S&P 500 Index had an annualized return of 11.34% while the MSCI World ex USA Index returned 1.86%, and the MSCI Emerging Markets Index returned 0.78%. As US stocks have outperformed international and emerging markets stocks over the last several years, some investors might be reconsidering the benefits of investing outside the US.

While there are many reasons why a US-based investor may prefer a degree of home bias in their equity allocation, using return differences over a relatively short period as the sole input into this decision may result in missing opportunities that the global markets offer. While international and emerging markets stocks have delivered disappointing returns relative to the US over the last few years, it is important to remember that:

  1. Non-US stocks help provide valuable diversification benefits.
  2. Recent performance is not a reliable indicator of future returns.

there’s a world of opportunity in equities

The global equity market is large and represents a world of investment opportunities. As shown in Exhibit 1, nearly half of the investment opportunities in global equity markets lie outside the US. Non-US stocks, including developed and emerging markets, account for 48% of world market capitalization and represent thousands of companies in countries all over the world. A portfolio investing solely within the US would not be exposed to the performance of those markets.

Exhibit 1.       World Equity Market Capitalization

As of December 31, 2017. Data provided by Bloomberg. Market cap data is free-float adjusted and meets minimum liquidity and listing requirements. China market capitalization excludes A-shares, which are generally only available to mainland China investors. For educational purposes; should not be used as investment advice.

the lost decade

Exhibit 2.       Global Index Returns, January 2000–December 2009

S&P data © 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. MSCI data © MSCI 2018, all rights reserved. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

pick a country?

Are there systematic ways to identify which countries will outperform others in advance? Exhibit 3 illustrates the randomness in country equity market rankings (from highest to lowest) for 22 different developed market countries over the past 20 years. This graphic conveys how difficult it would be to execute a strategy that relies on picking the best country and the resulting importance of diversification.

Exhibit 3.       Equity Returns of Developed Markets

Source: MSCI country indices (net dividends) for each country listed. Does not include Israel, which MSCI classified as an emerging market prior to May 2010. MSCI data © MSCI 2018, all rights reserved. Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

In addition, concentrating a portfolio in any one country can expose investors to large variations in returns. The difference between the best- and worst‑performing countries can be significant. For example, since 1998, the average return of the best‑performing developed market country was approximately 44%, while the average return of the worst-performing country was approximately –16%. Diversification means an investor’s portfolio is unlikely to be the best or worst performing relative to any individual country, but diversification also provides a means to achieve a more consistent outcome and more importantly helps reduce and manage catastrophic losses that can be associated with investing in just a small number of stocks or a single country.

a diversified approach

Over long periods of time, investors may benefit from consistent exposure in their portfolios to both US and non‑US equities. While both asset classes offer the potential to earn positive expected returns in the long run, they may perform quite differently over short periods. While the performance of different countries and asset classes will vary over time, there is no reliable evidence that this performance can be predicted in advance. An approach to equity investing that uses the global opportunity set available to investors can provide diversification benefits as well as potentially higher expected returns.

At Park + Elm, we have cutting edge technology that can gauge the overall risk of your portfolio (to match your investment risk tolerance), and analyze your asset allocation to measure diversification. If you’d like to discuss your risk and allocation, Contact us TODAY!

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