Northwest Criterion Asset Management
Joe Arns, CFA was an equity research analyst with a wealth management firm outside of Philadelphia in the fall of 2008. He was amazed to see clients jumping out of the stock market at or near the bottom, permanently destroying a good proportion of their wealth. Even though the firm "knew its clients", the tools used to assess risk preferences failed miserably.
Joe set out to build a better way to evaluate a client's risk appetite and ensure that every investor had their BEST portfolio. A small survey of investors turned into a large commissioned study of a few thousand investors, and the knowledge base from that proprietary study became the foundation of an investment platform that combines a rich dataset of human behavior with algorithms and human expertise that continually evaluates the investment landscape to ensure each investor's portfolio offers the best return potential for a level of risk that is just right for them.
BS, Economics, Wharton School at the University of Pennsylvania
Assets Under Management:
I'll answer your last question first. Yes, you can still invest in bonds. The Federal Reserve is slowly removing its "easy money" policy, and short-term interest rates likely will rise another percentage point or so. However, bond markets already expect this, so longer rates won't move up in lock-step with changes to the Fed Funds rate.
I am less enthusiastic about international bonds. In developed international markets, you are getting paid very little to assume currency risk, and handicapping credit risk in developing market bonds is extraordinarily difficult. I suspect this has been the weakest part of your bond portfolio recently and is an area where you might consider reducing your exposure.
In general, we believe the optimal bond portfolio righ now will have relatively short-average maturities, modest exposure to corporate credit risk and a dollop of treasury-inflation protected securities. Such a portfolio can be accomplished with a handful of ETFs.
Twenty four plus funds is likely far too many. If I were to review your portfolio, I'd likely see a lot of duplicative positions — same companies, same industries, same geographies, same bond maturities, etc. This is called the pu pu platter approach, and it is common among advisors or firms that don't express any real opinion on the markets. However, your return so far this year is actually pretty good and raises another alarm in my head. I suspect you have a lot of large-cap U.S. equity spread out among several different funds. So while you have a great many funds, I wonder if your portfolio is actually very diversified after all.
In part. Selling the employer stock is a fantastic idea. Even if you were optimistic about the company's prospects, it wouldn't make sense to have all of your savings in one stock — investors can diversify some of their risk by holding a portfolio of companies, so if you hold only one stock you are effectively taking risks you are not getting paid to assume!
Paying off your mortgage may make sense too. There are psychic benefits from owning your home free and clear, and the rate on your mortgage is likely higher than what you would receive in a money market or savings account. However, going from investing a lot of your savings in one company to having zero in stocks strikes me as too extreme — even with today's high stock prices. If you were able to tolerate the risk of investing in one company, you likely have the stomach to invest in a broad-based fund that includes hundreds of companies. I would consider a less extreme approach that places a portion of the money leftover after paying off your mortgage in low-cost stock ETFs and some in bond ETFs and a money market account.
What is your investment risk tolerance? It sounds like you have the ability to assume a good deal of investment risk, but the first step in advising you on the right type of investments starts with a better understanding of your willingness to risk losing money in search of higher returns than you can earn in the bank.
Real estate investing is not limited to owning your own residence or renting one out. You also could consider investing in real estate investment trusts (REITs) through a brokerage account. REITs invest in all different types of property, not just residential real estate, and tend to provide a high level of current income. Such an investment might be appropriate for your IRA.
Yes, this is a valid approach if you don't want to take any principal risk. I would recommend a Treasury money-market fund and/or Treasury bills and notes out to 2 years. Multi-year bank CDs are a bad bet right now given rising short-term rates.
However, please be aware that avoiding market volatility and minimizing risk are not the same thing. If all of your money is in bank assets or bonds, you are assuming some inflation risk. And you state you probably don't have enough money to retire. So your longevity risk is probably substantial and is aggravated by the low-return profile of your portfolio — which argues for some allocation to higher-returning assets like stocks. Hopefully, your advisor has weighed these different forms of risk with you and has put a plan in place.