The Triple Net Return

Since 1926 U.S. stocks have earned an average of 9.8% (Ibbotson). But what about inflation, expenses and taxes? Jason Zweig (a writer for The Wall Street Journal) calls this the net, net, net return. A recent survey of leading financial advisors found that they projected this long term future rate to be 6% on average.

In order for this to happen, Zweig points out that these advisors will have to deliver returns of 11-13% a year before costs. How likely is this? It’s not.

I am not sure how these advisors think the market will return more than the historical average return of 9.8%. There is a widely-shared view that equity returns are likely to be lower over the next few decades than they have been historically. The arguments for this include the expectation that millions of Boomers will shift from accumulation (buying equities) to distribution (selling equities) as they enter retirement. If there are fewer buyers for stocks, their prices will fall.

Let’s assume that the stock market does deliver 10%. A typical portfolio for a retired investor would be equally allocated to stocks (50%) and bonds (50%). If we assume that bonds earn 4%, then a weighted return would be 7%.

Let’s assume that inflation runs at 4%, expenses are 1%, and taxes are 30%. Depending on our method of calculation, our Triple Net return has become approximately 0%-2%.

This should be a wake-up call for investors approaching retirement.

Protecting Your Most Valuable Asset

What is your most valuable asset? …. Time’s up. … It’s your ability to earn an income.

As such, it should be protected just like all of your valuable assets.

The Wall Street Journal ran an article this week about disability insurance that is a good review of the basics. Here’s the link: http://online.wsj.com/article/SB10001424052748704561004575013073100310794.html?mg=com-wsj#

As a CERTIFIED FINANCIAL PLANNER™, I feel strongly that most people should secure private disability insurance. So, I disagree with the author’s comment that employer-provided insurance is “likely to be a better deal.” Yes, it is likely to cost less.

But it will be inferior in several other ways. (1) It will have a definition of disability that will render it less valuable than a private policy. (2) It will not be portable. So, if you change employers, the group disability insurance will get left behind. (3) If it does pay a claim, the benefit will most likely be far less than you need to maintain your lifestyle.

It may be tempting to think that, if you’re covered by an employer-sponsored group plan, you don’t need to give much thought to disability insurance. I would encourage you to consider carefully if this coverage truly meets your needs.

Exchange Trade Funds Cross $1 Trillion

Exchange traded funds (ETFs) are growing in popularity. Blackrock reported that exchange traded funds held globally now contain in excess of $1 trillion. Blackrock, which bought the iShares business from Barclay’s PLC last year, is the largest provider of ETFs.

Exchange traded funds trade like stocks on major exchanges. The issuance and redemption process for ETFs makes them more tax efficient than conventional mutual funds. The first generation of ETFs was created as index funds and has very low internal costs. We use many ETFs to build client portfolios. … Today there are actively managed ETFs popping up like weeds in the neighborhood park. Unfortunately, the newer ETFs tend be more costly than the first ETFs.

The growth in the use of ETFs has been breathtaking. They grew by 45% in 2009 alone bolstered by the recovery of the financial markets and a movement away from traditional mutual funds. ETFs still lag far behind mutual funds by a large margin. The Investment Company Institute reports that conventional funds held $19 trillion at the end of 2008.

Incidentally, hedge funds hold $1.53 trillion according to Hedge Fund Research and separately managed accounts contain $527 billion according to Cerulli Associates.

The Roth conversion - Read all about it

In case you have not heard, 2010 may be the year to convert your traditional IRA to a Roth IRA. The reason for this is that the requirement that the taxpayer’s modified adjusted gross income is less than $100,000 has been lifted. In addition, for conversions occurring in 2010, taxpayers may report one half of the resulting tax in 2011 and the remaining half in 2012. Taxpayers can, of course, pay all of the tax in 2010. These changes were included in the Tax Increase Prevention and Reconciliation Act of 2005 (signed into law by President George W. Bush on May 17, 2006).

Much has been written on the Roth IRA conversion. The financial services industry has used the changes in the rules as an opportunity to bombard investors with information about conversions. The big financial firms hope to capture assets that may be both converted and moved from one firm to another. However, it is not just investment companies that are pounding the drum about the Roth conversion. Business magazines (Money, Kiplingers, Business Week, Forbes, Fortune), financial journals (The Wall Street Journal, Investor’s Business Daily, and local business journals) and investor web sites (Bank Rate, Money Central, Motley Fool, Market Watch) have all written about the subject. A quick Google search for “Roth IRA conversion” returns 1.54 million results. Even the non-business media have stepped into the debate. I was interviewed last week by The New York Times for an article by Tara Siegel-Barnard “New Rules Ease Roth Conversion, but Benefits Vary.” http://www.nytimes.com/2010/01/09/your-money/individual-retirement-account-iras/09convert.html

So, what should you know? The decision to convert must be weighed by every individual. There are so many variables involved, that there is no clear answer for anyone. If you are considering converting some or all of you Roth, sit down with an expert (CPA, tax attorney or CERTIFIED FINANCIAL PLANNER™ and explore your situation carefully.