President, Wealth Advisor
As Founder and President of Halpern Financial Inc., Ted Halpern is directly involved in developing and implementing wealth management strategies for affluent families and closely held businesses. He serves as Director of the firm's Investment Research Team and oversees the asset allocation process. Ted believes in educating clients toward a logical path of wealth accumulation. Since establishing Halpern Financial 20 years ago, he has worked to develop and implement wealth management strategies for affluent families and closely held businesses. Halpern Financial has offices in Rockville, MD and Ashburn, VA.
Ted founded Halpern Financial on the values of integrity, objectivity, transparency and fiduciary responsibility. To that end, Ted's team focuses on the financial needs of their clients in a manner that eliminates commissions and reduces investment expenses to institutional levels. Financial education is a crucial part of this journey.
Ted holds a degree in Finance from the University of Maryland. He is an SEC Registered Investment Advisor, a NAPFA-Registered Financial Advisor, an Accredited Asset Management Specialist (AAMS), a Chartered Retirement Planning Counselor (CRPC), an Accredited Wealth Management Advisor (AWMA) and a Registered Financial Consultant (RFC). He is a member of the Financial Planning Association, the International Association of Registered Financial Consultants and the National Association of Personal Financial Advisors (NAPFA). Ted is a dedicated husband and father. He and his wife Bethe live in Leesburg with their twins Jack and Lauren and their dog Einstein.
Finance, University of Maryland
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Halpern Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.
You cannot invest directly in an index like the Dow, but you can invest in Exchange Traded Funds (ETFs) or mutual funds that track the index. There are a number of ETFs and mutual funds available that track the Dow, including variations like the “dogs of the Dow” concept. There is always a cost to access investments, but when selecting a Dow index fund or any other fund, make sure you limit the cost as much as possible. That keeps more in your pocket to compound over time.
Look out for:
- The expense ratio: The expense ratio is how managers who select, buy, and sell the stocks and bonds in a Mutual Fund or Exchange Traded Fund are compensated. Expense ratios are included in the price of both types of funds, so often people are unaware of how much they are really paying
- Transaction fee: There are funds that trade with no transaction fee. These funds vary by where your account is held. You can request a list of ‘no transaction fee’ (NTF) mutual funds.
I would need more information to determine what would be a good plan for you individually, but there are potential drawbacks of target-date funds. Unfortunately, they are not the one-stop shop that they are often advertised to be.
- Target-date funds are not specific to your individual situation and there is no consideration of your individual propensity for risk. Two individuals who retire in the same year may have very different risk tolerance levels – the level of volatility that you can personally handle – and the funds make no consideration for this. It is far too simplistic of an approach to assume that each person retiring in the same year should have the same investments in their portfolio. These target funds also naturally have no consideration of your total financial situation – investable assets, real estate, business interests, debts, cash flow issues, etc.
- Tax efficiency is not a consideration in target-date funds. They should not be used in taxable accounts. The fixed income portion can contain taxable income generating instruments, the equity portion can contain taxable income generating stocks and the turnover ratio is not managed with tax-efficiency in mind, causing potential capital gain issues.
- Allocation can be adjusted and shuffled at the fund manager’s will. Again, this increases the potential tax burden. Although there is a stated post-retirement target mix, for example, ‘becoming more conservative until it reaches an allocation of x% equities and y% fixed income; z-years after retirement’, the fund manager is not held to any specific allocation path in the time leading up to this date or once the target retirement date is reached.
- Funds have demonstrated a lack of consistency across the board in ‘glide path’ construction. The glide path relates to the allocation of the funds once the target retirement year is reached. For example, the allocation path of the fund does not know whether the fund will be retained and used to support the retirement income needs of the investor over time, or if the funds will be withdrawn and spent at or near retirement. It is logical that the allocation of a portfolio should be different for an investor who is actively withdrawing from the portfolio, than an investor who has no plans to draw from the portfolio yet these funds make no distinction.
Mutual funds come in a variety of share classes, but I would recommend selecting no-load funds that trade with no transaction fee and have a low expense ratio. Keeping costs low keeps more in your pocket to grow and compound over time.
But to answer your question:
Class A: sales charge when you buy the fund
Class B: Charges higher expenses than A shares for a certain period (often 4 to 8 years). Class B shares also normally impose a contingent deferred sales charge (CDSC), which applies if you sell your shares within a certain number of years.
Class C: ongoing level commission
More details here: http://www.investopedia.com/articles/mutualfund/05/shareclass.asp
But the bottom line is that you don’t have to, and should not, pay any of these fees if you select a no-load fund or ETF with no transaction fee.
“Preferred shares” and “mutual fund share classes” are apples and oranges. Mutual fund share classes have to do with how the person selling you the fund is compensated. Preferred shares have nothing to do with mutual fund share classes.
Rather, preferred shares are a type of security, like stocks or bonds. Just as you can invest in the stock or bond of a particular company, sometimes there is a hybrid option called “preferred shares.” Preferred shares (also known as preferred stocks) have qualities of both stocks and bonds because there is an equity portion and an income portion. Typically, preferred shareholders experience less capital growth than common stock shareholders, but they have the stabilizing factor of income from dividends. If the company was to have financial difficulties, preferred stockholders have the right to be repaid missed dividends, while common stockholders do not. Preferred stockholders typically do not have voting rights, but common stockholders do. Not all companies offer preferred stocks.
You are correct that the election may cause some short-term volatility. In fact, I would say that we’re heading into a stretch of the year that may provide the third big event of volatility. Uncertainty over the Fed and the election will only increase the probability of heightened volatility until these issues are resolved by the end of the year. However, I would not recommend allowing these short-term movements to derail your long-term strategy—as you mention, you don’t need the cash now and there could be a tax liability.
While putting all your investments in cash may “feel” safe, it is actually a risky market-timing strategy. When will you feel confident enough to re-invest? After 2008, so many investors sold to cash and waited on the sidelines for years, earning nothing for their savings while stocks recovered and rebounded well past pre-2008 levels. That missed opportunity is a risk you may not be considering.
Vanguard has a neat sliding tool to show exactly what the impact of selling to cash would be at different levels:
If it just makes you too anxious to see your account fluctuate, the solution may be a different investment allocation that allows you to sleep at night. Not everyone needs or can handle an aggressive allocation. Perhaps something more moderate would be appropriate for you. A reputable fee-only financial advisor can help you to determine what is an appropriate allocation based on your future financial goals, stage of life and risk propensity.
Diversification is important because it smoothens out the effects of highs and lows in different types of investments. You can’t expect 10% returns every year— even if that has occurred in the past. As they say in every mutual fund’s prospectus documents, “past performance is no predictor of future results.” This may prove especially true in the slow-growth, low-yielding environment of our economy today. To compensate for future years where stocks may under-perform, it is a good idea to have a diversified investment allocation suitable to your goals and life stage.
Research from industry giants like Fidelity and Vanguard supports diversification’s long-term effectiveness, and diversification’s effect of smoothing the ups and downs of volatility can actually lead to better returns than a more volatile portfolio. It sounds counterintuitive, but it works. In fact, the “volatility anomaly” concept shows that for 2 portfolios with the same average rate of return, the one with the lower volatility will have a higher compound yield. Therefore – it is more important to avoid full participation in declines than it is to hit the highs when things are good.
Here are a few resources you may find helpful: