,

Schwab Index Fund Changes

Many of our clients will be receiving a notice from Charles Schwab regarding a recent change in investment policy for two funds that we use in portfolios.  The Schwab Small Cap Index Fund (SWSSX) and the Schwab International Index Fund (SWISX) are affected.

Here is the communication from Schwab to advisors:

We want to make you aware that the indices for the Schwab Small-Cap Index Fund® (SWSSX) and the Schwab International Index Fund® (SWISX) will be converted from Schwab’s propriety indices to the Russell 2000® Index and the MSCI EAFE Index, respectively. Although these conversions will not happen until December 14, 2011 and December 20, 2011, we are required to mail a 60-day notification to your clients invested in either fund as of October 14, 2011. Additionally, as of November 1, 2011, the Schwab Small-Cap Index Fund’s expense ratio will decrease from 19 basis points (bps) to 17 bps. You may review a copy of the prospectus supplements here and here.

The Russell 2000 Index is an established index that measures the performance of the small-cap sector of the U.S. equity market. The Russell 2000 is a subset of the Russell 3000, representing approximately the 2000 smallest issues and approximately 10% of the total market capitalization of the Russell 3000.1 The MSCI EAFE Index is an industry-recognized index composed of MSCI country indices representing developed markets outside of North America—Europe, Australasia, and the Far East.

Converting to these indices from Schwab’s proprietary indices offers more transparent fund management for all segments of investors, plus better tracking and comparison data from third-party providers. Lowering the expense ratio of the Schwab Small-Cap Index Fund offers a better investment value for your clients.

 

Both funds have performed as expected against their respective benchmarks in the past.  We believe these are positive changes and both funds will  continue to be excellent representatives of their respective market segments.

Please give us a call if you have any questions or concerns about the changes.

/0 Comments/by
,

Don’t Sweat the Small Stuff . . . Well Maybe Sometimes

In the world we live in today, we are constantly reminded not to sweat the small stuff.  We are told to not let the little things get in the way of living our lives and pursuing our dreams!  That is so true and why we shouldn’t worry about the gossip being spread around at work, what our neighbor might think if we can’t get to mowing our lawn today, those stubborn few pounds we just can’t seem to lose, and what outfit we should wear to the company’s holiday party this year.  All of these things clutter our mind on a daily basis and keep us from focusing on what’s truly important.  What about the costs associated with your investment portfolio?  Your advisor may try to categorize these as “small stuff” as well, but should they?

Rockbridge Investment Management is a firm that prides itself on controlling the controllable when it comes to investing, thus addressing the issue of investment costs is something we don’t take lightly.  The average cost to invest in mutual funds with the typical brokerage firm is 1.5%, while here at Rockbridge the typical client pays around 0.25%.  Are we just sweating the small stuff? Let’s find out!

Let’s take a look at an American family with a combined income of $75,000 who is saving 10% a year for forty years and is getting a fixed rate of return.  Can an extra 1.25% in expenses make that much difference in their standard of living during retirement?  The graph below shows the impact that fees can have on a portfolio – the results are staggering!  The family with the low cost portfolio retired with over $2,000,000, which should allow them to comfortably draw around $100,000 from their portfolio each year during retirement!  On the other hand, the couple who had higher portfolio expenses only accumulated $1,500,000 at retirement, giving them only a $55,000 draw from their account on an annual basis, after taking into account the lower balance and the higher continuing expenses.

 

 

 

 

 

 

 

 

(Assumptions:  A couple saving $7,500 annually for 40 years with an 8% fixed rate of return.  To make withdrawal rates equal in retirement, I used a 5% withdrawal rate for the low cost portfolio and reduced the other portfolio’s rate by the difference in fees.)

The notion of not sweating the small stuff is very important; it helps cancel out the everyday noise in our lives, allowing us to focus on living and pursuing our dreams.  However, most of our dreams include a comfortable and fulfilling retirement, and a nearly fifty percent reduction in retirement spending may be a factor in that dream being reached.  But I will let you be the judge of that!

/0 Comments/by
,

Planning for Medicare – Part Deux

The new 2012 Medicare & You booklets have been mailed and Medicare eligibles are receiving mailings from insurers daily about their products.  This booklet contains over 150 pages of details about Medicare and the related Medigap and  Medicare Advantage plans.

Here are some of the key things to consider when choosing coverage for 2012:

  1. Medicare Parts A & B provide basic adequate hospital and medical coverage.  There is no requirement for additional insurance.  Many people are satisfied with only Medicare A & B and no additional coverages.
  2. If you are newly eligible for Medicare, make sure you contact Social Security and discuss your options to enroll.  Medicare coverage is too important financially to pass up.
  3. Everyone’s health situation is unique, so no one plan or option “fits all”.  Choosing or rejecting additional coverage beyond Medicare depends on each person’s age, health, physicians, prescriptions, budget, etc.  A married couple might have two very different health plans because their needs dictate it.
  4. The Medigap and Medicare Advantage plans are sold by insurers.  By this I mean that an individual can’t just buy one on the internet without discussing it with a representative.  This is valuable for the consumer, because there are so many important factors to consider.
  5. Insurers are holding seminars to discuss what their products cover and what they cost.  If you have any doubts about what you need, attend one or more of these seminars and get the benefit of a large group discussion with others who may have the same questions as you.
  6. Take a friend or relative with you, someone who is familiar with your financial and/or health situations.  Two heads are better than one.

Don’t procrastinate or just assume that your current coverage is best for you.  The older we get, the less likely we are to risk a change, even though it might be a substantial financial saving.  Inertia is the easy way out, though not necessarily the best.

A few years ago, when I no longer had coverage through my employer, a friend suggested a Medicare Advantage Plan, something I had never heard of.  They said they were paying no premiums and had very good coverage.  I didn’t believe them, assuming they weren’t giving me the whole story.  My wife and I and several good friends met with their plan representative and I became convinced that this type of plan was best for me.  For various personal and health reasons it was not best for some of the others, but I switched to a Medicare Advantage Plan and still am covered with the same company, under a similar plan, pay $0.00 premiums, and am saving hundreds of dollars every year.  My wife has a slightly different plan with the same company because her health needs are different.  But her premiums, like mine, are $0.00. There are also plans that include premiums and offer a higher level of coverage on certain items.

There is a medical plan out there that is best for every situation.  You just have to find it.  I am not recommending any specific plan type or insurance company, just advising each person to do what is best for them.  In my next post I will try to be specific about what questions to ask and how to find the plan that is right for you.

/0 Comments/by
,

Social Security and Medicare Decisions on the Horizon for Baby Boomers

Two of the biggest concerns for aging baby boomers are longevity risk (i.e., not outliving your money) and rising healthcare costs.  Social Security and Medicare are programs that we all pay into and expect to partially address these concerns.  Social Security is often a cornerstone of a well thought-out retirement plan.  It is adjusted for inflation, is tax-advantaged, will continue as long as you live and is backed by a government promise.

Social Security
Deciding when to start Social Security benefits is one of the most important decisions aging baby boomers will make.  The Social Security Administration www.ssa.gov/ has a wealth of resources available online.  And the local office representatives can provide the facts given your own personal circumstances.  However, they will not give you advice on when to start taking Social Security.  Our firm took a look at the options and summarized the information in a recent blog post on our website www.rockbridgeinvest.com/medicare-etc-cost-emphasis/.  While we are not experts on all aspects of Social Security, we can help evaluate your options and provide excellent resources to assist you with making this very important decision.

Medicare
Retiree healthcare costs are also a major growing concern for baby boomers.  Many will delay retiring to age 65 when they become eligible for Medicare health benefits.  Our resident expert, Dick Schlote, has been navigating the Medicare maze for the past few years and has agreed to write a series of blog posts on the subject.  You can find his first Medicare blog post on our website www.rockbridgeinvest.com/medicare-etc-cost-emphasis/.

Our main job at Rockbridge is to prudently manage our clients’ investment portfolios.  We also strive to expand our knowledge in other important areas of financial planning, such as Social Security and Medicare.  We continue to develop our website into an excellent resource for our clients and friends of the firm.

/0 Comments/by
,

Five Reasons You Should Not Panic in the Face of Market Volatility

1.  It is not really “different this time.”  Vanguard, in a recent study entitled “Stock Market Volatility:  Extraordinary or ‘Ordinary’?”, concludes that recent volatility appears extraordinary compared to the relative calm of the markets in 2010, but is in fact “ordinary” when compared to similar periods characterized by major global macro events – they cite the Asian currency crisis of 1997, the Russian debt default and bailout of Long-term Capital Management in 1998, the tech market bubble (2000-2002), and of course the financial crisis of 2008-2009.  Market volatility spiked in similar ways during each of these events as markets tried to re-price risk in the face of startling new information.  This time it is political paralysis and the European sovereign debt crisis.  So the reason is different, but the market reacts to crisis in similar fashion, over and over again.

2.  Diversification provides a remarkable amount of protection from volatility.  Information in the charts below is taken from the same Vanguard study mentioned above.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.   The only way to fully participate in the up days is to be able to withstand the down days.  Volatility refers to moves in both directions.

4.   Remember that you are investing and not trading.  “Sitting out” the current volatility is an appealing notion, but timing the market is something better left to speculators and traders.  Trying to benefit from correct predictions of short-term moves in the market is not a long-term investment strategy.

5.   “The market has been volatile and just dropped dramatically – what do I do now?”  This is a bad question and bad questions do not lead to good investment decisions.  A better question would be, “Am I still taking an appropriate amount of risk considering my goals and time horizon?”

Sticking to your disciplined investment strategy is a better response than panic.  When stock prices tumble and bond prices soar, it provides an opportunity to rebalance your portfolio by taking some profits from the bonds and buying stocks at reduced prices.

/0 Comments/by
,

Market Analysis

Renewed fears of a double-dip recession, policy paralysis across the U.S. and Europe, and the looming threat of a financial crisis in the euro zone combined to create very volatile markets and a devastating quarter for equities.

Equity Markets
The third quarter of 2011 saw the value of small stocks and international stocks fall more than 20%, which is generally considered a bear market correction.  Large domestic stocks (S&P 500) did a bit better but fell nearly 14% in the quarter, dropping into negative territory for the year at -8.7%.

Fixed Income
Government bonds, on the other hand, had a stellar quarter, defying logic and many experts’ expectations, by rising in value after S&P downgraded the U.S. Government debt rating.  The broad bond market index, which is dominated by government securities, rose 4.7%.  The value of TIPS (Treasury Inflation Protected Securities) rose even more than the general bond market, as hope for economic recovery diminished, and action by the Federal Reserve drove expectations for real interest rates further into negative territory.  Based on the pricing of Treasury securities, and TIPS, the market now expects inflation to average less than 1.8% over the next ten years with ten-year government bonds providing a return above inflation of a meager 0.20% on average.  Government bonds of shorter maturities are expected to provide returns less than inflation, so investors’ purchasing power will diminish.

Return Expectations
We cannot predict future returns, but it can be instructive to examine assumptions built into current market pricing.  As mentioned above, the expected return on ten-year government bonds is barely above the expected rate of inflation, driven by dismal expectations for economic recovery, extremely accommodative monetary policy, and fear of another financial crisis coming out of the euro zone.  This is well below the long-term average, which is about 2% above inflation.

Stocks on the other hand appear priced to provide future returns more consistent with their long-term risk premium of 6-8% above inflation.  The S&P 500 index is at a price level first achieved in 1998, but since that time the Price/Earnings Ratio for the index (price paid per dollar of expected earnings) has fallen dramatically.  So today’s price reflects a lower, and perhaps more realistic, assumption of growth in dividends and earnings.

/0 Comments/by