Reuters Money

Zap zombie funds within your portfolio

Do you have zombie index funds within your portfolio?

Instead of eating up your brains, they devour your nest egg with high expenses and walking dead performance. They may be lurking within your 401(k)-type plan or individual retirement account.

I like index funds because they generally can track nearly any kind of asset class. As such, they are the white bread of investing and should cost about the same from fund to fund. The cheaper the better. Why pay Nieman-Marcus prices for the same thing you can get at Costco or Sam’s Club for less?

You can vanquish these funds without overtly violent acts, but first you have to identify them. Unfortunately, mandated fee disclosure is still pending, so you have to take the initiative.

So how do you identify a zombie fund? First you need a reliable benchmark for comparison purposes. The easiest way is to look at the index that the fund is supposed to be tracking. A good proxy for the U.S. bond market, for example, is the Barclays Capital Aggregate Bond Index. It’s a basket of listed bonds. If a fund tracks the index return within 0.20 percentage points or less, then that’s pretty good and not expensive.

A low-cost bond index fund would look like the Fidelity Spartan Intermediate Term Bond Index investor class fund, with a 0.20 percent expense ratio. You’d need at least $10,000 to get into this fund, though.

You want to pay a manager more to get less return on bonds? The ING US Bond Index portfolio charges a hefty 0.95 percent annually, meaning it will lag the index by nearly a full percentage point every year.

Target date funds get better and bigger, report finds

Target date funds are getting better – and that’s good news, because they’re also becoming the 800-pound gorilla of the workplace retirement saving scene.

The use of these funds, which invest in a mix of assets with the aim of reducing equity exposure as participants approach retirement, has accelerated sharply in recent years, due in large measure to the growth of auto-enrollment options in workplace plans.

Brightscope/Target Date Analytics reports that the TDFs account for 10 percent of total invested assets in retirement plans, a figure that is expected to hit over 28 percent by 2020. And Vanguard reported recently that 79 percent of the plans it administers offered TDFs last year, up from 13 percent as recently as 2004. Likewise, 42 percent of Vanguard plan participants used TDFs last year, up from just 2 percent in 2004.

But they’ve been criticized for maintaining levels of equity exposure too high for older investors, and for steep fees. Yet a study released Tuesday by Brightscope and Target Date Analytics reveals target date funds are improving their performance in both of those areas.

The study finds that the industry is moving toward a more conservative posture on the critical issue of fund series glidepaths – that is, the year targeted for the lowest exposure to equities. “Funds can take very different approaches to the glidepath,” explained Brooks Herman, Brightscope’s head of research. “Sometimes the landing date can be many years past the target date in the fund name.”

The Brightscope/Target Data Analytics study finds that 40 percent of TDFs are now using a “to versus through” approach to glidepath, up from 30 percent as recently as 2007. That means the most conservative asset allocation is reached in the year of the fund series name. “We like that, because it’s truth in advertising,” Herman said. “As an investor, I know what I’m getting.”

The study’s glidepath findings are consistent with an analysis by Morningstar for Reuters Money back in August, which found that losses during the summer market meltdown were far less severe for 2010 and 2015 TDF series than losses were for those funds in 2008.

Tactical asset allocation might become your new normal

Market volatility is like a headache that hangs on. The cure may lie in shifting your mind from keenly focusing on risk instead of returns.

For many, this is an obvious no brainer, but it involves much more than simply shifting into cash, bonds or gold. What if you don’t want to exit stocks entirely? Then you may need what money managers call tactical asset allocation.

Instead of a long-only, hold-on-for-dear life approach of traditional investing, tactical planning involves shifting in and out of assets as market conditions dictate. In a turbulent market, there are several asset classes that can buffer stock downturns that can be found in several off-the-shelf mutual funds.

The linchpin of tactical investing is flexibility. It’s the opposite of the 60-percent stocks, 40-percent bonds fixed template. As a dynamic model, tactical portfolios are often open to moving into non-financial assets such as gold, real estate and commodities.

What I like best about tactical allocation is that it doesn’t go whole hog on any one asset class. Instead of loading up in the usual suspects in a bearish stock market — such as U.S. Treasuries or gold — it’s open to opportunities around the world. This can avoid big timing blunders and the prospect of being stuck in the wrong asset when markets turn.

It may be a while before the stock market turns bullish again when it’s being pulled in a number of negative directions. European debt woes, a sluggish U.S. economy and the prospect of a global recession are a menacing “lethal trifecta,” as Mohamed El-Erian, Chief Executive of PIMCO, noted recently.

“I worry that, absent a dramatic change in policies in America and Europe,” El-Erian wrote, “things will get worse before they get better. I fear that, given this possibility, it would then take years, if not decades, to repair the underlying damage done to economies, jobs and people’s lives around the globe.”

Your retirement rollover decision could save you thousands

In the two decades that I’ve been covering personal finance, I’ve worked for three big companies. I like to practice what I preach, like in the video above, where I explain some simple ways that you can manage your 401(k) when you change jobs and potentially save yourself more than $60,000 in about 30 minutes.

The backstory that you don’t catch above is this:

I’ve participated in the 401(k) at each employer I’ve worked at over the years, contributing the most money I could afford and always meeting the threshold to get the prized company match.

But on my way out the door, I’ve always taken my money with me, rolling over my hard-earned retirement funds into another qualified investment opportunity.

Workers have some choices when they leave a job. They typically can leave assets with the former employer, move it to an IRA or roll it into a 401(k) plan at their new job. (They also could cash it out – something I don’t recommend because of the tax penalties and it’s supposed to be there for retirement.)

When I left my last job, I rolled my retirement funds into the Thomson Reuters 401(k). There are a few reasons why: For one thing, I like the control you get when you move your money around. A previous employer offered weak investment choices, most of which were actively managed funds that lagged their peers.

Balancing your portfolio in a bonkers market

Balance is a rare bird these days. Jobs, housing, stocks, European debt: All seem to be in a spasmodic tailspin.

There is some consolation that a balanced portfolio can help smooth out the jagged curves of a bipolar market economy. But balance is rarely what we think it is, and it needs constant monitoring.

When most investment advisers tout a balanced portfolio, it typically means one thing: About 60 percent would be invested in a U.S. all-stock fund and the remainder in bonds.

A good proxy for the stock component would be the index exchange-traded fund SPDR S&P 500 fund. U.S. bonds could be ably represented by the SPDR Barclays Aggregate Bond ETF.  Both funds are low cost, diversified ways of owning the lion’s share of each market. Here’s how the returns break out, according to Craig Israelsen, professor of finance at Brigham Young University, who analyzed the underlying indexes:

A balanced portfolio is roughly half as risky as an all-stock mix. If you looked at August’s returns, you would have only lost 2.75 percent in the 60/40 portfolio, compared to a 5.5 percent loss in the all-stock portfolio or a 1.37 percent gain in the much safer all-bond portfolio. No surprises there because bonds are safe havens when investors flee stocks as they did during last month’s volatility — and may continue to do so in a broad-based pullback.

Let’s look back even deeper into the past decade, which included two recessions, 9/11, the 2008 meltdown and the dot-com blow-out of 2001. Bonds are again the best performers as a buffer against stocks — returning 5.5 percent vs. 2.59 percent for 100 percent stocks. Between those two extremes was the balanced portfolio, with a 4.1 percent return through August 31.

In an even more volatile period — going back only five years to include the 2008 meltdown, recession and recovery — bonds again came out on top with a 6.26 percent return, compared to 0.74 percent return for all stocks and 3.3 percent for the balanced mix.

Hedging can end your retirement panic now

Even with the most recent market agita, there’s no reason for you to worry long-term about your retirement funds.

Is my head in the clouds? As darkly volatile as this moment in personal investing may seem, it’s actually a golden age for portfolio insurance. Retirement worries as we know it can come to an end — if you know how to hedge properly. There are plenty of retail tools available to that end.

Part of my optimism is based on the availability of off-the-shelf portfolio insurance for everyone. If you hedge your holdings the way the big institutions do, big dips will do no harm and you can even make money when the market’s down.

The three most powerful hedging devices come in the form of exchange-traded funds (ETF), which are pooled portfolios based on securities and indexes traded on stock exchanges. You can buy them from any deep-discount broker and leave them in place.

Hedge inflation A rising cost of living generally hurts bond prices. Unlike most bonds, when inflation climbs, Treasury Inflation-Protected Securities gain value. One suggestion is the iShares Barclays TIPS bond fund.

Hedge your stocks Inverse ETFs such as the ProShares Short S&P 500 ETF, move in the opposite direction of the popular stock index.

Hedge your bond position You can short a broad-market bond index through the Direxion Daily Total Bond Market Bear 1X Share or similar ETFs. This is a good hedge if your portfolio is heavy in bonds and interest rates are rising.

How much stock should older investors hold?

Jim Dundee’s business is doing well — he’s an optician and owns his own retail optical store near Tampa, Florida. But Dundee started to get nervous about the economy and stock market a couple months ago.

“Even though business has been great here, you could just tell by listening to customers. We serve a pretty savvy clientele, and they were all saying something was brewing and that stocks would take a hit.”

Dundee, who is 57, decided to reduce the exposure to stocks in his retirement portfolio. Working with his broker at Raymond James, he cut equities from 70 percent to 50 percent, with another 35 percent in cash; the remainder is in bonds and gold. He hopes to be “semi-retired” by 62 by scaling back time spent on his business. “I’m asking myself, how little risk can I get away with?”

Dundee is hardly alone. The percentage of U.S. households willing to take “above-average or substantial risk” to meet their financial goals has plunged among all groups according to to survey data from the Investment Company Institute (see chart, below). The decline has been sharp across all age groups, but is especially dramatic among older baby boomers.

And the market’s recent volatility has put new focus on a key question older investors have been asking themselves since the 2008 crash: what is the correct retirement portfolio equity exposure for investors close to retirement, or who already are retired?

Ask the experts, and you’ll get answers that are all over the map. The Putnam Institute recently surveyed target date funds and found that retirement date equity allocations ranged from 65 percent to just 35 percent. And Putnam’s own experts concluded that retirees should have no more than 25 percent of their money in stocks.

Meanwhile, T. Rowe Price advises retirees at age 65 to keep 55 percent of their money in equities, 35 percent in bonds and 10 percent in cash.

“Sleep Well” funds: Where to invest for a good night’s rest

The following is a guest post by Lawrence Carrel, author of “ETFs for the Long Run” and “Dividend Stocks for Dummies.” The opinions expressed are his own.

Actively-managed mutual funds took a big hit in the stock market’s 2008 crash. The average equity fund plunged 39.5 percent compared with the 37 percent drop in the S&P 500 Index.

Many investors concluded, “if my active fund is going to fall more than a cheaper index fund, what am I actually paying for?”

Not much, it appears. But what if you could find a mutual fund that managed risk by significantly reducing losses in a down market, that could also capture profits when the market rallied? Now, that would be an expense worth paying.

After last week’s wild market roller coaster, a familiar refrain heard among investors was “where do I put my money now?” Wherever it goes, you can’t afford to stay awake all night worrying about your portfolio. That’s why we went searching for what we like to call “Sleep Well” funds.  These are funds that can weather market volatility, give you peace of mind and let you get a good night’s rest.

For low risk, we looked at funds with high Lipper Leader ratings for capital preservation and consistent returns. Then we narrowed the list down to only those funds that beat the S&P 500’s total return over the past three years and over five sessions ending Thursday, Aug. 11. While a lot of funds don’t have a five-year record, it was mandatory that the fund lived through 2008 so we could see how well it fared during the market’s worst decline in the past decade. Finally, the fund couldn’t charge a load.

The Sierra Core Retirement Fund tops the list with a three-year annualized return of 11.93 percent vs. the S&P 500’s return of negative 1.03 percent, according to Lipper, which is a Thomson Reuters company. It tops this group by both falling the least in 2008 (2.95 percent) and rising the most in 2009 (30.44 percent vs. the S&P’s 26.46 percent surge), according to Morningstar.

Target date funds faring better in this market meltdown

After the 2008 market crash, target date funds came under heavy fire for failing to protect older retirement investors. This time around, TDFs are faring much better – thanks to lessons learned a few years ago.

The basic idea of TDFs — to invest in a mix of assets with the aim of reducing equity exposure as participants approach retirement – is sound, since many investors don’t rebalance or pay attention to reducing risk as retirement approaches.

But many retirement investors don’t really understand how TDFs are allocated between equities and fixed income. Fees can be high, and some critics don’t think TDFs are structured to select the best-in-class funds for all asset groups.

Many TDF investors near retirement age suffered dramatic losses in the 2008 market crash. But an analysis prepared for Reuters Money by Morningstar shows that losses during the recent market meltdown have been far less severe this time for 2010 and 2015 TDF series. Morningstar compared these TDF series against the S&P 500 by measuring from the market’s 2011 peak (April 29th) to the trough (thus far) on Tuesday, August 8.

Morningstar calculated the percentage of the S&P 500 loss sustained by both TDF series, creating a comparative loss ratio that effectively measures how much of the overall market loss was absorbed by the target date funds.

The results point clearly to improvement in managing equity exposure for investors close to retirement:

• The 2010 fund series had a loss ratio of 43 percent this year, compared with 60 percent in 2008.
• The 2015 fund series had a loss ratio of 55 percent, compared with 74 percent in 2008.

Debt ceiling: 10 reasons not to move your money now

Reuters Money reached out to members of the financial community to see how they’re calming the folks they advise. An overwhelming majority expressed faith that lawmakers would broker a deal by the deadline, and markets would adjust regardless.

Here are 10 reasons they give not to juggle your investments right now.

1. A short-term crisis demands long-term thinking.

While it’s true a debt ceiling crash might resemble the sky falling, no one knows if that’s going to happen. Markets reward investors who stick to sensible strategies over time. “Rather than obsessing about the debt debate, we are telling clients to get engaged in a long-term conversation about risk management,” said Michael Gault, senior portfolio strategist at Weiser Capital Management. Gault, who manages $200 million, stressed that the last few months on Wall Street have been good ones. “The concept of ‘risk’ has taken a back seat as the markets’ recovery has been in a relatively smooth upward trajectory. We think there’s tremendous value in rebalancing here.”

2.  Smart investors adjust to market fluctuations, not political grandstanding.

“We’re telling clients that what is happening in D.C. is primarily political positioning,” said Mackey McNeill, CPA, PFS, and the principal of Mackey Advisors in Covington, Kentucky. McNeill manages $45 million, “mostly with Boomers,” and noted, “We continue to hold asset allocations based in the client’s plan. As asset classes respond to the market, we will take advantage and rebalance. We believe and have seen that trying to time the market in any environment puts clients money at undue risk.” The reckless ones, he thinks, are those gambling with political capital: “We also have encouraged via social media that this is a call for election reform.”

3. Cash reserves make for a strong defense.