Winning the Indy 500 of Investing Means Going the Distance -

Long-term investing is a bit like driving in the fastest car race in the world — the Indianapolis 500. Instead of a 650-horsepower Indy car, you’re going the distance with your investment portfolio to reach your investing goals. For most investors, the checkered flag is retirement. Whether you win this race by reaching your goals depends on your strategy, how well you’ve designed your portfolio car, how you drive it and how you adjust it in critical pit stops. The performance of your investment portfolio is a result of its design. To win the race — to reach your goals – your portfolio must be designed accordingly. The most important design decisions you face when building your portfolio are those concerning asset allocation – deciding what types of investments to own, and in what proportions, to control for risk within the limits of your particular tolerance. With a portfolio designed and built to your specifications (for your goals and risk tolerance), you start the marathon race for capital appreciation. Then, even with a superb design, you must maintain your asset allocation by taking pit stops to rebalance your portfolio. Rebalancing is done to restore proportions of different types of investments to the original design. These proportions get out of whack when one type of investment (or stock) goes up or down more than others. If your original design calls for having only 20 percent in large company stocks and this percentage grows to 40 percent, you’re now over-represented in that slice of the market. So you want to rebalance this back to the intended proportion. The best way to do this is to get rid of investments that have consistently lagged behind their peers. Take the money and look for good values — stocks or funds in sectors that haven’t done well and thus are priced low, but show potential for growth. It’s usually a good idea to rebalance your portfolio once a year. Beyond just restoring the original asset allocation to maintain your portfolio’s design, rebalancing is also an opportunity to make more subtle adjustments based on changing performance scenarios. While it’s usually a good idea to own stocks that consistently pay good dividends, if some in this category have been lagging of late, it might be time to reduce your investment in these so-called dividend stocks. For example, manufacturers of consumer staples like Proctor & Gamble and Kimberly Clark haven’t done well lately because of lower global consumer spending and foreign exchange issues. So, depending on your goals, you might decide to replace them with stocks that, though they haven’t posted great earnings lately (which suppresses price), nevertheless hold potential for growth, according to a consensus of analysts’ projections. But don’t throw the baby out with the bathwater: Hang onto the lion’s share of your dividend stocks even if they haven’t shown much growth lately. During the long investing race, it’s critical to make adjustments to lessen the risk of crashing your portfolio. Many investors hit the wall by failing to adjust for changing market or economic conditions. One of the most perilous of these involves rising interest rates. Interest rate rises can affect just about any investment market, but they are particularly dangerous to bond holders. If you own 30-year bonds and interest rates rise significantly, the yields paid on new bonds will go up, posing two inevitable negative outcomes: 1) If you keep your long-term bonds until maturity, the buying power of the money invested (plus in the return on it, in some cases) may be reduced by inflation to the point where you’ve lost money on the investment and 2) If you sell before maturity, the higher yields of new bonds being offered mean your bonds will be worth less than they were before interest rates increased. Interest rates have been historically quite low for many years, so if they change, the direction will be upward. Lately, there’s been a lot of talk about a likely rise in interest rates. Much of this attention stems from expectations that the Federal Reserve board will, in the next few months, increase the rate on overnight loans it makes to banks. This, in turn, would affect overall rates. However, interest rates can go up from market forces alone – without a rate increase by the Fed. Regardless, this is a time when you want keep your bond maturities quite short. This means dumping long-term bonds. The more sensitive a bond is to interest rate increases, the better a candidate it is for dumping. Focus on your bonds’ duration – a measure of this sensitivity. Duration can give you an approximate measure of how much changes in market interest rates will affect a bond’s value. If a bond’s duration is 7, this means that if interest rates go up 1 percent, the bond’s value will decrease about 7 percent. If you own individual bonds, your broker can run the calculations to determine durations. If you own shares in a bond fund, you need to know the average duration of the bonds the fund owns. You can determine this using the duration calculator on Morningstar.com. Insert the fund’s ticker symbol, click on “portfolio,” and to the right, under “Bond Statistics” the “Average Effective Duration” is shown. For example, the huge bond fund, Pimco Total Return, PTTAX, has a duration of 4.87. So if rates rise by 1 percentage point, PTTAX will drop about 5 percent. By effectively tweaking your portfolio against risk, you can assure that it will perform better for the long haul, helping you win the race to your financial goals.

Read More >

5 Identity Theft Facts That Will Terrify You -

5 Identity Theft Facts That Will Terrify You  Identity theft was the number one consumer complaint at the Federal Trade Commission last year. So far in 2015, the data breach problem that drives so many identity-related crimes has gotten worse. The massive compromises at Anthem and Premera alone put a combined 91 million records in harm’s way. With more information “out there” than we can possibly know, identity theft has become the third certainty in life, right behind death and taxes. And because so many major compromises include Social Security numbers — the skeleton key to not only your financial life, but also your health care and many other aspects of daily life—the damage can be life-changing. The bottom line: Be afraid, be very afraid.

Read More >