Year-End Money Moves to Consider

(Inspired by our friends at Fidelity Investments)

Portfolio Diversification
Review your risk tolerance, then rebalance your portfolio to the right mix.

Tax-loss Harvesting
In taxable accounts, sell losing investments if you don't love them.

Charity
Tax-deductible charitable donations help others while reducing your tax burden.

Retirement Plan Top-Off
Make sure you have contributed the minimum necessary to get the maximum free money from your employer, then max-out your Roth IRA or do a Roth Conversion, and then finish maxing-out your retirement plan at work.

Flexible Spending
Use it or lose it?  Use it!  Carry-over?  Double-check and make sure that's offered.

Beneficiaries
Your IRAs, 401(k), TSP, and insurance policies rule.  Whatever your Will or Trust says about who gets your money is trumped by what is designated on your actual accounts and policies.  Make sure it's all in sync.

RMD
Required Minimum Distribution from your IRA, inherited IRA, or employer-sponsored retirement plan.  DO NOT forget this--it will cost a 50% of the RMD in penalties, in addition to the taxes you already have to pay on the RMD.

Open Enrollment
If you have healthcare and other benefits at work, now may be the time to update/confirm your selections for the coming year.

College Savings
Review your 529, ESA, UGMA/UTMA accounts and make sure you know which to contribute to before year-end and in the coming year.

Financial Check-up
Review your investment/financial plan.  Are you on-track to meet long-term goals?  If not, what changes can you make now to help things work better down the road?

Strategic and Flex Model Performance Through May 2015

US and Foreign Indexes		3 mo	1 yr	3 yr	5 yr	10 yr	2008
Stock Markets (50-40-10)		1.4%	5.4%	16.5%	12.6%	7.2%	-39.7%
S&P 500		0.6%	11.7%	19.5%	16.4%	8.0%	-37.0%
MSCI EAFE		2.0%	-0.6%	15.5%	9.8%	5.5%	-43.4%
US OE Diversified Emg Mkts		1.3%	-2.1%	5.9%	3.9%	7.8%	-54.4%
Barclays Agg Bond--US		-0.1%	3.0%	2.2%	3.8%	4.5%	5.2%
Barclays Agg Bond--Global		-1.7%	-6.0%	-0.5%	2.5%	3.5%	4.8%
Ibbotson Aggressive		0.9%	7.0%	16.7%	13.4%	7.2%	-35.5%
Aggressive		1.2%	5.0%	15.9%	12.2%	6.7%	-36.3%
95 Flex V		-0.4%	3.0%	12.1%	10.0%	9.0%	-19.1%
95 Strategic II		0.2%	5.5%	17.2%	14.2%	9.6%	-35.9%
95 Schwab index		1.5%	6.9%	17.6%	13.6%	7.6%	-37.2%
WealthFront 9		0.9%	4.0%	13.3%	10.7%	7.5%	-38.0%
Ibbotson Moderately Aggressive		0.7%	6.0%	13.8%	11.8%	6.8%	-28.5%
Moderately Aggressive		0.9%	4.2%	14.1%	11.3%	6.6%	-32.0%
80 Flex V		-0.2%	2.9%	11.5%	9.7%	8.9%	-16.9%
80 Strategic II		0.1%	4.2%	14.5%	12.2%	8.8%	-30.0%
80 Schwab index		1.2%	6.2%	14.8%	11.9%	7.0%	-32.1%
Ibbotson Moderate		0.5%	5.1%	11.0%	9.9%	6.3%	-21.2%
Moderate		0.4%	2.8%	10.5%	9.3%	6.1%	-23.1%
60 Flex V		0.2%	2.7%	10.6%	9.2%	8.9%	-13.1%
60 Strategic II		0.0%	3.5%	11.7%	10.5%	8.2%	-23.9%
60 Schwab index		0.8%	5.7%	11.6%	10.0%	6.2%	-25.6%
Goldman Sachs Income Builder		0.8%	2.9%	11.0%	10.5%	6.6%	-23.3%
American Funds Balanced Port		0.5%	6.0%	12.8%	11.3%	7.1%	-28.2%
Moderately Conservative		0.0%	1.3%	7.1%	7.2%	5.4%	-13.3%
40 Flex V		0.3%	2.6%	10.0%	9.0%	8.9%	-13.3%
40 Strategic II		0.0%	3.8%	10.8%	9.5%	7.7%	-17.7%
40 Schwab Index		0.5%	4.8%	8.3%	7.9%	5.3%	-18.8%
Conservative		-0.4%	-0.1%	3.6%	5.1%	4.7%	-2.5%
20 Flex V		0.8%	2.4%	8.8%	8.3%	8.6%	-5.2%
20 Strategic II		-0.2%	2.9%	8.1%	7.4%	6.7%	-10.5%
20 Schwab index		0.2%	3.7%	5.1%	5.7%	4.2%	-11.7%
NOTE 1:  Past performance is no guarantee of specific future results.  This data is presented by Potomac Wealth Strategies, LLC.  This data is from Morningstar and should be accurate, but it has not been independently verified.
NOTE 2:  "Flex", "Strategic", and "Index" models are crafted/run by Potomac Wealth Strategies.  They show history of better returns, lower volatility, or both--or, with the Index models, closer tracking--vs benchmarks and competitors.
NOTE 3:  "XX Schwab index" models are low-cost portfolios.  They are comprised of index funds available free of transaction charges to my clients at Schwab.  This is what many might recommend due to low-costs and portfolio efficiency.
NOTE 4:  Nothing on this blog post represents investment advice to any individual or organization.  If the information hereon is of interest to you, please contact me at Garo.Partoyan@PotomacWealthStrategies.com for a consultation.

Mutual Fund Fees

Here is an important way to look at "mutual fund fees"...

 

Every mutual fund and exchange-traded fund has an "internal fee".  There is no escaping that.  It is how the fund companies get paid.  It is usually called the "expense ratio" or the "management fee".

 

This cost is added to losses or deducted from gains experienced by the fund's portfolio.  The internal fee is supposed to be included in the performance data published by the fund company, so you need not calculate it yourself when comparing two funds.

 

For example:

• If a fund has a 1.25% internal fee and the fund had a 10.00% return last year, that means the fund's portfolio gained 11.25% and 1.25% was kept by the fund company.
• Or, if that fund was down -8.75% last year, that means the fund's portfolio lost 7.50% and 1.25% more was taken out by the fund company.
• This is all normal and expected, just not always understood by investors.

 

Sure, we want to avoid over-paying for services, so we hear a lot about "low-cost" funds.  But the bottom-line is cost-justification.  A fund with an average annual return of 8.50% over the past 10 years (net of internal fees) was the better choice than a lower-cost fund that had, bottom-line, a lower return.

 

But it is hard to find funds that beat their benchmarks regularly and over the long-haul.  So low-cost benchmark replicator funds (index funds and ETFs, for example) are popular.

 

I make it my business to find cost-justifying benchmark-beating mutual funds for my clients.

Flex Portfolio Performance Through November 2012

With the creation of the new Flex IV portfolios, most clients will be moved out of Flex II and Flex III portfolios.  The Flex portfolios are designed to provide nimble tactical management even while my clients and I aim to keep the strategic allocation in place during various market conditions.

Strategic:  diversified portfolios consistent with Nobel Prize-winning methodology to optimize the balance between risk and reward; best to maintain the portfolio in targeted strategy, so we remain invested fully in the mutual funds comprising the Flex portfolios.

Tactical:  what, if anything, should be done within the portfolios under various market conditions; we leave this up to the managers of each fund in the Flex portfolios.

The Flex portfolios continue to demonstrate excellent risk-management while participating very well in the markets in the near-term; they show significant out-performance in the intermediate- and long-term periods.

Below are the through-November performance numbers for the key Flex portfolios and their index fund-comprised low-cost alternatives:

US and Foreign Indexes	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	1.4%	3.7%	13.9%	13.9%	7.0%	6.8%	-1.7%	7.4%
S&P 500	0.6%	1.3%	15.0%	16.1%	11.9%	11.3%	1.3%	6.4%
MSCI EAFE	2.4%	6.3%	13.6%	12.5%	3.8%	2.9%	-4.8%	7.4%
Barclays Agg Bond--US	0.2%	0.5%	4.4%	5.5%	5.5%	5.7%	6.0%	5.4%
Barclays Agg Bond--Global	0.0%	1.1%	4.7%	5.4%	5.8%	4.0%	5.5%	6.4%
Moderately Aggressive	1.2%	3.1%	11.8%	12.1%	7.1%	6.2%	-0.7%	6.4%
80 Flex IV	0.9%	2.6%	9.9%	8.7%	6.6%	7.9%	6.1%	10.0%
80 Flex III	1.0%	2.0%	9.2%	7.7%	5.3%	6.6%
80 Fidelity	1.3%	3.2%	11.9%	11.5%	6.7%	6.4%	-0.7%	6.4%
Moderate	1.0%	2.5%	9.6%	10.0%	6.5%	5.6%	0.6%	6.1%
60 Flex IV	1.0%	3.1%	11.3%	10.2%	6.9%	8.2%	6.6%	10.1%
60 Flex III	1.0%	2.3%	9.7%	8.8%	5.5%	6.7%
60 Fidelity	1.0%	2.4%	9.5%	9.5%	5.8%	5.7%	0.3%	5.8%
Moderately Conservative	0.8%	1.8%	7.4%	8.0%	6.1%	5.1%	2.0%	5.9%
40 Flex IV	1.0%	3.3%	12.0%	11.6%	7.3%	8.6%	7.4%	9.7%
40 Fidelity	0.7%	1.7%	7.5%	7.8%	5.4%	5.3%	1.8%	5.3%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex IV	25%	44%	21%	10%
60 Flex IV	22%	39%	30%	9%
40 Flex IV	24%	26%	43%	7%

Flex Portfolio Performance Through October 2012

With the U.S. stock market doing relatively well for most of this year, short-term performance of Flex portfolios had been lagging thanks to their significant diversification.  The stock market has declined recently, though, and the Flex portfolios have been helpful in that time, with the short-term performance gap closing considerably.

For long-term investors, I believe the Flex portfolios remain the best way to both implement long-term strategy and maintain short-term flexibility.  Put another way, the ability provided by the Flex portfolios to have a strategic asset allocation that can make tactical adjustments is beneficial to investors.

NOTE:  Flex portfolio data shown on this blog is for the models, not for any specific client accounts, and such data is in no way a prediction or promise of any specific future performance or trends.

Here is the data through October 31, 2012:

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	-0.7%	4.6%	12.6%	9.6%	5.4%	8.1%	-2.4%	8.1%
S&P 500	-1.9%	3.0%	14.3%	15.2%	11.6%	13.2%	0.4%	6.9%
MSCI EAFE	0.8%	6.6%	11.0%	4.6%	0.2%	2.8%	-5.8%	7.7%
Barclays Agg Bond--US	0.2%	0.4%	4.2%	5.3%	5.1%	6.1%	6.4%	5.4%
Barclays Agg Bond--Global	-0.1%	2.0%	4.7%	3.5%	3.8%	4.8%	5.9%	6.5%
Moderately Aggressive	-0.4%	4.0%	10.9%	8.8%	5.7%	7.7%	-0.6%	7.3%
80 Flex II	-0.6%	3.7%	9.3%	6.4%	6.1%	8.8%	5.9%	11.0%
80 Flex IV	-0.6%	3.6%	9.2%	6.8%	6.3%	9.1%	6.3%	10.7%
80 Flex III	-0.9%	2.8%	8.4%	6.2%	5.1%	8.1%
80 Fidelity	-0.3%	4.2%	11.0%	9.2%	5.6%	7.9%	-0.7%	7.3%
Moderate	-0.4%	3.1%	9.1%	7.6%	5.5%	7.2%	1.2%	7.1%
60 Flex II	-0.3%	3.4%	9.7%	7.1%	5.9%	8.5%	6.6%	10.4%
60 Flex IV	-0.3%	3.9%	10.5%	8.2%	6.7%	9.4%	6.9%	10.9%
60 Flex III	-0.5%	2.7%	9.0%	6.9%	5.2%	8.0%	5.5%	9.5%
60 Fidelity	-0.2%	3.2%	9.1%	7.9%	5.3%	7.3%	0.9%	6.8%
Moderately Conservative	-0.3%	2.3%	7.2%	6.3%	5.2%	6.7%	3.0%	6.7%
40 Flex II	0.0%	3.2%	10.0%	7.8%	5.8%	8.2%	7.3%	9.9%
40 Flex IV	0.0%	3.8%	11.2%	9.4%	6.9%	9.5%	7.7%
40 Flex III	-0.1%	2.7%	9.5%	7.7%	5.3%	7.9%
40 Fidelity	-0.1%	2.2%	7.4%	6.8%	5.2%	6.8%	2.6%	6.3%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	22%	52%	15%	11%
80 Flex IV	26%	45%	20%	9%
60 Flex II	26%	39%	27%	8%
60 Flex IV	23%	39%	30%	8%
40 Flex II	30%	26%	38%	6%
40 Flex IV	25%	26%	43%	6%

Flex Portfolio Performance Through September 2012

Here are the performance data for the most commonly-used Flex portfolios in my practice.

The data is for the portfolio models, NOT for any actual client accounts.  Past performance is not a promise of specific future results.  But I use these data to get a sense of how well the Flex portfolios have performed in various time-periods.

My commitment to my clients is that the portfolios I use for them demonstrate consistent cost-justification of my advisory fee compared to the customized benchmark assigned to each Flex portfolio model.  Specifically, I aim to have each Flex portfolio show 10-, 5- and 3-year average annual returns that are outperform their benchmark by 1.25 percentage point (the fee I charge for most clients).

So far, so good.  (Clients:  YOUR specific results likely will differ based on a variety of factors.  Please contact me with any questions.)

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	3.1%	6.7%	13.4%	22.0%	7.7%	7.8%	-1.7%	8.9%
S&P 500	2.6%	6.4%	16.4%	30.2%	14.8%	13.2%	1.1%	8.0%
MSCI EAFE	3.0%	6.9%	10.1%	13.8%	1.5%	2.1%	-5.4%	8.2%
Barclays Agg Bond--US	0.1%	1.6%	4.0%	5.2%	5.2%	6.2%	6.5%	5.3%
Barclays Agg Bond--Global	1.2%	3.3%	4.8%	5.1%	4.5%	5.0%	6.2%	6.5%
Moderately Aggressive	2.3%	5.7%	11.4%	18.3%	7.6%	7.4%	-0.1%	7.9%
80 Flex II	2.4%	5.0%	10.0%	14.6%	7.8%	8.7%	6.8%	11.3%
80 Fidelity	2.2%	5.3%	11.3%	18.6%	7.4%	7.4%	-0.1%	7.9%
80 Flex III	1.9%	4.3%	9.4%	13.9%	7.0%	8.1%
Moderate	1.9%	4.7%	9.5%	14.8%	7.0%	7.1%	1.8%	7.5%
60 Flex II	2.2%	4.8%	10.0%	13.9%	7.2%	8.4%	7.3%	10.7%
60 Flex IIi	2.4%	5.2%	10.8%	14.7%	8.1%	9.4%	7.6%
60 Fidelity	1.7%	4.3%	9.3%	14.9%	6.7%	6.9%	1.4%	7.2%
60 Flex III	1.8%	4.3%	9.5%	13.3%	6.6%	8.0%
Moderately Conservative	1.4%	3.8%	7.5%	11.2%	6.3%	6.6%	3.4%	7.0%
40 Flex II	2.0%	4.5%	10.0%	13.1%	6.6%	8.1%	7.8%	10.0%
40 Flex IIi	2.3%	5.2%	11.3%	14.4%	8.0%	9.7%	8.3%
40 Fidelity	1.1%	3.3%	7.5%	11.5%	6.1%	6.5%	3.0%	6.5%
40 Flex III	1.7%	4.2%	9.6%	12.8%	6.2%	7.8%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	20%	54%	16%	10%
60 Flex II	24%	40%	28%	8%
40 Flex II	28%	27%	39%	6%

Flex Portfolio Performance Through August 2012

The Flex portfolios continue to outperform their benchmarks in the 3-, 5- and 10-year periods by significant amounts.  This is the objective.  If you are in a portfolio consisting of index funds or exchange-traded funds blended to meet a Moderately Conservative, Moderate, or Moderately Aggressive risk profile, you are very likely underperforming in those important time periods.  Same if you are using "actively managed" funds of the highest quality.  It is important to maintain a long-term strategy consistent with the asset allocations guided by Modern Portfolio Theory--it's how we strike the optimal balance of risk and reward over the long-haul--but I have determined that the use of global and/or flexible mutual funds, that can bring additional diversification and/or tactical adjustments to the portfolio, reduces risk and increases performance.

My commitment to clients is to self-police the Flex strategy.  If I find a trend away from benchmark-beating performance, I will make adjustments.  Thusfar, Flex remains the best way I have found to run a long-term portfolio.

Here are the #s through August of 2012:

US and Foreign Stocks/Bonds	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	1.1%	11.0%	9.7%	10.8%	8.3%	8.4%	-1.5%	7.7%
S&P 500	1.2%	10.5%	13.4%	22.4%	15.2%	13.7%	1.0%	6.8%
MSCI EAFE	1.3%	12.4%	6.2%	1.6%	2.4%	2.8%	-0.5%	7.0%
Barclays Agg Bond--US	0.3%	1.4%	3.8%	5.0%	5.5%	6.5%	6.7%	5.4%
Barclays Agg Bond--Global	1.0%	2.3%	3.5%	1.3%	5.3%	5.4%	6.5%	6.3%
Moderately Aggressive	1.1%	9.4%	8.6%	10.1%	8.2%	8.0%	0.1%	7.0%
80 Flex II	1.4%	6.4%	7.3%	4.5%	7.9%	9.2%	7.1%	10.8%
80 Fidelity	1.0%	9.3%	8.6%	10.5%	7.9%	7.8%	0.0%	7.0%
80 Flex III	1.1%	6.9%	7.3%	3.3%	7.4%	8.7%
Moderate	1.0%	7.3%	7.2%	8.4%	7.7%	7.6%	1.9%	6.9%
60 Flex II	1.1%	6.0%	7.5%	4.6%	7.3%	8.8%	7.6%	10.2%
60 Fidelity	0.8%	7.2%	7.3%	9.0%	7.2%	7.3%	1.5%	6.5%
60 Flex III	0.9%	6.4%	7.5%	3.7%	6.9%	8.5%
Moderately Conservative	0.9%	5.3%	5.9%	6.6%	7.0%	7.1%	3.6%	6.6%
40 Flex II	0.8%	5.7%	7.7%	4.7%	6.7%	8.4%	8.1%	9.7%
40 Fidelity	0.7%	5.2%	6.1%	7.6%	6.5%	6.9%	3.1%	6.1%
40 Flex III	0.6%	5.9%	7.7%	4.1%	6.4%	8.2%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	20%	54%	16%	10%
60 Flex II	24%	41%	27%	8%
40 Flex II	29%	27%	38%	6%

Flex Fund Performance through July 2012

The stock markets have been moving up, albeit on low-volume and despite several major economic and geopolitical risks.  My Flex portfolios have lagged their benchmarks in the past year because of relatively strong stock market performance.  They have pretty much kept pace over the 2-yr period.  They have outperformed in the 3-, 5- and 10-yr periods (massively so in the latter two).

Given the potential for further solvency issues in the Eurozone, China's slowdown, and stubbornly slow growth in the USA, as well as increasing potential for military flare-ups, or even war, in the Middle East, I believe it is important to remain flexible and diversified.  The stock markets will hopefully continue to rise, but a correction (dropping 10% or more), or even another bear market (dropping 20% or more), can happen suddenly.

My Flex portfolios have been much less volatile than standard portfolios and the stock markets.  When we have had pullbacks, corrections, and bear markets, Flex portfolios have protected us relatively--but significantly.  For example, a moderately-aggressive investor using a portfolio of popular index funds from Fidelity during the worst 12-month period of the 2007-9 economic/market crisis would have been down 39%, compared to only down 22% if using 80 Flex II.  Someone using just the S&P 500 (SPY, or the TSP's C-Fund, for example) would have been down 43%.  Despite providing that relative protection, 80 Flex II still delivered better overall results--6.7% average annual gains in the 5-yr period, compared to -0.2% per year for 80 Fidelity and just 1.1% per year for the S&P 500.

Each quarter, I spend a great deal of time evaluating and tweaking my Flex portfolios, as well as designing and testing new ones to possibly replace them.  But the risk-reward balance still appears to be best with the current line-up.

If you want to invest money for the long-term, not have to worry about making adjustments yourself, but also know the portfolio is being tactically adjusted by several professionals working for us, the Flex portfolios are a prudent solution.

US and Foreign Stocks	1 mo	3 mo	YTD	1 yr	2 yr	3 yr	5 yr	10 yr
Stock Markets (50-40-10)	1.3%	-2.7%	7.7%	-1.9%	7.7%	8.8%	-1.7%	7.2%
S&P 500	1.4%	-0.8%	11.0%	9.1%	14.3%	14.1%	1.1%	6.3%
MSCI EAFE	1.1%	-4.2%	4.1%	-11.5%	1.8%	3.2%	-5.7%	6.2%
Barclays Agg Bond--US	1.4%	2.3%	3.8%	7.3%	5.8%	6.9%	6.9%	5.7%
Barclays Agg Bond--Global	1.2%	0.6%	2.7%	1.8%	5.4%	5.7%	6.5%	6.5%
Moderately Aggressive	1.2%	-1.6%	6.7%	-0.1%	7.8%	8.4%	-0.1%	6.6%
80 Flex II	0.6%	-2.0%	5.4%	-1.1%	7.8%	9.5%	6.7%	10.9%
80 Fidelity	0.9%	-1.9%	6.6%	-0.6%	7.4%	8.2%	-0.2%	6.6%
80 Flex III	0.7%	-1.6%	5.5%	-2.0%	7.5%	9.0%
Moderate	1.2%	-0.8%	5.8%	1.5%	7.4%	8.0%	1.8%	6.6%
60 Flex II	1.0%	-0.9%	6.0%	0.1%	7.3%	9.1%	7.3%	10.4%
60 Fidelity	0.9%	-0.9%	5.7%	1.1%	6.8%	7.6%	1.4%	6.3%
60 Flex III	1.0%	-0.7%	6.1%	-0.6%	7.1%	8.8%
Moderately Conservative	1.2%	0.0%	4.8%	2.9%	7.0%	7.4%	3.6%	6.5%
40 Flex II	1.3%	0.1%	6.6%	1.3%	6.8%	8.7%	7.9%	9.9%
40 Fidelity	1.0%	0.2%	5.0%	3.1%	6.4%	7.2%	3.0%	6.0%
40 Flex III	1.4%	0.3%	6.6%	0.8%	6.6%	8.5%
Asset Allocation	Cash	Stock	Bond	Other
80 Flex II	20%	54%	16%	10%
60 Flex II	24%	41%	27%	8%
40 Flex II	29%	27%	38%	6%