Financial Planning

Unwanted Tax Consequences

There are three taxable events with a mutual fund: (1) sale of securities within the portfolio, (2) the declaration and payment of dividends and/or interest from the portfolio’s securities, and (3) sale of mutual fund shares. Your clients cannot control whether or not a fund is going to sell one or more securities for a profit or loss. Similarly, they cannot stop the payment of dividends and/or interest. The third event is the only one controllable by the shareholder.

Turnover Ratios and How to Compute Them

All mutual funds buy and sell securities. Securities in an actively managed portfolio may be sold because they are not performing as expected, they no longer fit within the portfolio (e.g., a value stock has appreciated so much it is now considered a growth stock), to free up cash to take advantage of another opportunity or to satisfy shareholder redemptions.

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Expenses Over Time

Expenses Over Time

A fund with high costs must perform better than a low-cost fund to generate the same returns for your clients. Even small differences in fees can translate into large differences in returns over time. For example, if you invested $10,000 in a fund with a 10% annual return before expenses with annual operating expenses of 1.5%, you would have ~ $49,725 after 20 years. But if the fund had expenses of only 0.5%, you would end up with $60,858—a 22.4% difference.

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Rolling Period Returns

Rolling Period Returns

An interesting (and better) way to look at return and risk combined is by seeing how an asset category fared over a number of rolling periods. A rolling period includes two or more continuous years and all such periods over the time frame selected. As an example, over any given 10 years, there are eight 3-year rolling periods (1986–1988, 1987–1989, 1988–1990, 1989–1991, etc.). The advantage of using rolling periods is bad returns cannot be hidden as easily. Rolling periods provide an “apples to apples” form of comparison.

Commodity-Focused Funds

A real estate fund would be our top choice for portfolio diversification using a sector fund, even though commodity funds have gained quite a bit of attention. These funds do not generally buy commodities directly, but rather buy derivatives that give their portfolios exposure to fluctuations in the price of commodities such as oil, wheat, metals, and hogs.

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Growth of $10,000

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Housing Prices vs. REITs

Some Portfolios May Be Too Diversified

Is a U.S. stock/bond mix sufficient for most people to reach their retirement goals? Morningstar has addressed this question by creating seven portfolios, each more diversified than the previous one. Returns for the 20-year period ending June 2014 are shown in the table below. It turns out a simple 70/30 mix (S&P 500 + government bonds) is difficult to beat. Each of the seven portfolios was rebalanced at the end of each calendar year.


Portfolio Annualized Returns [all periods ending 6/30/2014]


Age 50 to 70 ½

Starting at age 50, there are a number of perks available to investors:

Age 50 and older: Catch-up contributions

For 2014, 401(k) and 403(b) contributors can add up to an additional $5,500 per year. IRA contributors can add an additional $1,000 annually.

Age 55+: Penalty-free withdrawals from employer plan

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Lagging Performance

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Stock Dividends

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