Feeling good about stock market highs?

Check in on these five things now?

Over the last four weeks we’ve experienced a mini stock market crash of almost 8 percent. Although 8 percent is not considered “correction” territory, many investors found themselves feeling anxious about the future. Luckily the rebound has been astronomical and not only have we recovered the 8 percent, but the stock market has gone on to set all time new highs. The S&P 500 is currently above 2030, an increase of about 10 percent this year. If these highs and lows or “volatility” continues, and all arguments point to the fact that it could, does it now make sense to take advantage of these times and make changes to your investments? Take a look at these five suggestions to see if they have merit for your qualified and tax deferred plans.

1. Rebalance your portfolio. If you’ve been reading Paula Cashflow blogs, you already know that rebalancing your portfolio is an important investing behavior. Why is now a good time? With all-time highs in the stock market, your asset allocation may be in need of tweaking. For example, a moderate portfolio is considered to be about 60 percent stocks and 40 percent bonds/cash (aka 60/40 split). As the stock market goes up, stock valuations increase relative to bond valuations. Translation: your allocation may now be more like 65/35 or a 65 percent allocation to stocks and a 35 percent allocation to bonds. This is a slight exaggeration to make my point. A 65/35 allocation is riskier than a 60/40 split. By rebalancing now, you sell 5 percent of your stock holdings at the higher price and reinvest those dollars in either bonds or cash to rebalance back down to a moderate mix of stocks and bonds or cash.

Paula Cashflow tip: The challenge here becomes “does selling stocks mean buying more bonds?” If so, then focus on bond duration. Read on.

2. Consider lower duration bonds. If you don’t know anything about bond duration and you currently hold bonds, then do a little research on Google and learn as much as you can. Owning bonds right now is all about managing the duration in my opinion. I’ve been scaling down my duration over the last three years lowering it from about six years down to below four years. Basically, what duration means, is that bond prices are inversely correlated with interest rates. So when interest rates rise (and all indications are that interest rates will begin to rise in the near term), bond prices will fall. In concept, bonds with lower durations will fall less than intermediate or longer term bonds that have higher durations.

Paula Cashflow tip: Focus on investment grade bonds/bond funds. High yields and emerging market bonds can be directly correlated with stocks.

3. Take advantage of index funds when making changes. Does the opportunity to consolidate into an index fund make sense at this time? Index funds are far less costly than non-index funds or what could be called “actively” managed funds. Now might be a good time to increase your  knowledge about the fees that each fund in your portfolio is charging.

Paula Cashflow Tip: Benchmark the fees against the same fund at either Vanguard or Fidelity to compare what you’re paying with these lower cost options.

4. Pay attention to the cash portion of your asset allocation. We are living in a low interest rate environment and will be for some time. Don’t ignore the importance of having cash in your portfolio just because the available options aren’t yielding much in return. This is one fundamental that probably should not be abandoned.

Paula Cashflow tip: Stocks and bonds should be augmented with a small portion of cash or short term investment grade bonds. I’m not talking about cash allocated to an Emergency Fund.

5. Run the numbers to see if you’re on track to achieve your goals. The final exercise should always be about checking to see if you’re on track to achieve the goals you’ve set. There are numerous retirement calculators available online. I use the old fashioned one, Excel to see if my chosen asset allocation is on track.

Paula Cashflow tip: Make sure that this exercise includes both tax deferred and non-qualified assets as well.

Who knows what awaits us next week in the stock/bond markets. Every day on CNBC there are money managers that take opposite sides on the directions of all of our markets. All we can do is get comfortable with our risk tolerance and engage in the behaviors that protect our investments and allow us to sleep at night when the direction moves against us.

What more can we do? Because it’s about life and how you live it.

In the spirit of financial well-being,

Paula Cashflow

5 Go-To Financial Behaviors

5 Go to Financial Behaviors

 For financial freedom

If I could condense twenty or so years of wealth accumulation onto a 3 x 5 index card, and keep it handy as a refresher, this exercise would reinforce good personal finance behaviors.  My mom is a fan of 3 x 5 index cards and has encouraged me to use them for the simplest reminders.  Even in this day of mobile lists, downloading, songs, streams, and tweets, writing down these five behaviors in your own handwriting and referring back to them frequently will result in a larger Personal Financial Statement over time. Continue reading

October Cashflow update

Time to refresh your PFS or Personal Financial Statement.

Back in July, I introduced the concept of quarterly financial updates.  If you choose to work with a financial advisor, chances are they will encourage quarterly meetings.  I usually did with my client base.  Although, I found that my clients after a year of these meetings were comfortable with the relationship and chose to forego the quarterly meeting.  This was actually okay, because I was working behind the scenes keeping close watch over my client’s overall financial picture.  Continue reading

Financial Planning is Healthful

My mother is an avid reader and she’s always giving me newspaper clippings, dog-earred magazines, blurbs, etc. penned with ideas she considers to be valuable information that I MUST read, right this minute.

Her intentions are always good and, most of the time, I do read the bag full of clippings that she sends home with me after our visits.

But this week, Viviane (Paula Cashflow’s mom) nailed it!  Continue reading

Borrowing from your 401k

Whether you’re a spender or a saver, most of us will need to borrow money at some future point in our lives.  It’s inevitable.

Back in the late 1990’s when my income was much less, I borrowed money from my 401k.  In the spirit of full disclosure, I am not a fan of borrowing from 401k funds.  Therefore, I think it is necessary to have a healthy conversation about why 401k loans should not be part of a wealth accumulation strategy. Continue reading

Life Insurance 101: Part One

As Open Enrollment season approaches, you might have the option to choose employer provided life insurance. Generally, most companies offer a no-cost group life insurance option limited to one- or two-times your annual salary. Needless to say, this is not an employee benefit option that anyone should pass up.

Here are some things to consider this open enrollment season when evaluating your benefits plan for 2015. If you are in any of the following categories, you MUST consider electing this coverage: Continue reading

Money Lessons I Have Learned

Over the years most of the money lessons I’ve learned have involved money and some combination of family or friends.  This is a sensitive topic.

Money and family can be a toxic combination, but I’m going to attempt to address some events that can transpire and hopefully not offend any of my readers in the process.

As I take a deep breath, here are a few of my toughest money lessons: Continue reading