Category : investing behavior

The Right Small Steps in the New Year Can Make a Big Impact

Have you ever noticed how a lot of financial blog headlines read like they’re introducing the latest diet trend?

“Ditch the Starbucks and Retire Ten Years Earlier!”

The premise of this kind of financial advice always boils down to the same basic principle: in order to grow your money, you need to spend the money you already have more wisely. Makes sense, right? Especially around this time of year, it may even sound like a pretty good New Year’s resolution. And yet,somehow, it is simultaneously unattainable.

“Abandon your morning latte fix and you’ll become rich”, they say.

“That’s easy! I can do that!”, we say. But for a lot of us, we can’t seem to make it work.

Starting in February, there might be an attainable way to save more without sacrificing anything. Some people will see their take home pay increase due to the new tax code. This could be money you can invest into your retirement and still keep drinking those lattes guilt-free.

Sidenote: Want to know how the tax rate will affect your paycheck? There are many options, but this is one we found that’s easy to use.

The problem with saving money, whether it’s on ditching lattes or getting a little more in your paycheck, is that unless you’re taking the money and putting it directly into your piggy bank, you’re likely just spending it on other things throughout your day or rest of your week, so none of it ever actually makes it back into your savings or retirement account. It’s all of the sacrifice with none of the reward.

How I learned to stop worrying and love automation

So what’s the solution? In today’s technologically-driven world, the trick may lie in automation. The old adage to ‘pay yourself first’ becomes surprisingly easy if you can set it up once and then forget it. There are a growing number of tools to help you do just that.

Many banks have round up programs to automatically save your change – i.e if you buy that latte for $3.81, your account rounds up to $4.00 and automatically saves $0.19 into your account. Or if you’d rather route your money to the market instead of bank account, you can sign up for a penny stock provider like Acorns. It may not seem like a lot, but think of how many purchases you make in a day, in a week, in a month. It adds up!

Let your paycheck do the work

Additionally, you might be surprised by the programs offered through your workplace. If you’re not already contributing to your employer-sponsored retirement plan (401k, 403b, or similar), start contributing a percentage of your paycheck. Most employers will match your contributions with some of their own. Some employers also offer other types of savings plans, or will allow you to split your paycheck among multiple accounts, so that a portion could be directly deposited into your savings account.

But maybe the most powerful automation you can make is the annual contribution increase in your retirement plan. The chart below illustrates the difference between steadily saving 5% of income, and starting at 5% but increasing contributions by 1% annually until the recommended goal of 15% of income. As you can see, the amount saved with small incremental savings is more than 2× that with no increase. While you may initially notice the difference in your wallet for the first couple of months (or if you’re lucky you won’t, depending on how the new tax code affects you), after that, it will just become the new normal.

So if your New Year’s resolution is for better financial health in the coming year, make sure you’re doing the things that will really make a difference. That way, you can buy your morning latte with a clear conscience (and maybe a little extra whipped cream), knowing you’ve already taken care of your savings goals.

 

Please note: Blooom does not provide tax advice. Consult a tax expert for tax-specific questions.

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Beware the Bull in Retirement Yellow Brick Road

How to Travel Safely Down Retirement Yellow Brick Road

The past few years, we’ve seen a lot of people happily talking about the gains they have been seeing in their 401k accounts. They’re sharing return numbers with others online and in the grocery store. It would seem like the kind of talk you’d want to hear.

Please don’t get me wrong. It’s great to see so many people happy that their retirement accounts are increasing in value. But there is a very important message to convey concerning these high returns.

Like the Lollipop Guild in the Wizard of Oz – IT AIN’T ALWAYS GONNA BE THIS GOOD!

The Facts About Returns Since blooom’s launch

Blooom launched its 401k management service in late-September of 2014. Since that time, the stock market (as measured by the S&P 500*) has had a cumulative return of roughly 28% and has averaged almost 10% per year.  In addition, the Vanguard Total World Stock ETF – a better proxy for blooom clients given its allocation to global equities – is up over 15% year-to-date! The point here is that these past three years have been a good time to be a stock market investor. Hell, it has been a GREAT time to be a stock market investor since the Great Recession (stock market collapse) of 2008-2009.

With all of these happy people, we want to make sure everyone understands that this is not always how things will go. In reality, the market will go down periodically.  In fact – It NEEDS to go down periodically. That is precisely why investing in the market carries risk and this same risk is exactly why investors who have stayed in the market for long periods of time and weathered this risk have been rewarded with much higher returns than “risk-free” investments like CDs, Government Bonds, and money market funds have produced.

4 Key Characteristics of a blooom-managed 401k

If you’re a blooom client, your managed 401k has four key characteristics that other 401k investors may not receive:

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When Market Tanks ... Do These 3 Things

3 Things You Should Do With Your 401k When The Market Tanks

Disclaimer:  I am not predicting the market tanks tomorrow, next week, next month or even next year. Contrary to what the media or “pundits” try to convince you — it is impossible to predict when the market will drop or what will ultimately cause it. That said, I am 100% convinced that the market will drop at some point.

In fact, at blooom – we guarantee that it will drop at some point in the future. In reality, it isn’t IF the market will drop. It is WHEN and how many times over your investing lifetime will it occur. We try to inform our clients about this as often as possible and set the expectation that market drops – although painful at the time – are perfectly normal.

The mistake average investors make most often is they take the assumption that something is wrong with the market or their portfolio and they bail out of their investments right in the midst of the market decline. They do this thinking that they are doing the “safe” thing but it is often the absolute worst thing you can do. It is a huge reason why average investors perform so horribly when left to their own devices.

So what can you do the next time the market tanks?  At blooom, we advocate that our clients do these 3 things.

1. Set Your Expectations Ahead of Time

Just knowing that it is perfectly normal for the market and the value of your account to decline from time to time is half the battle.

History has repeatedly shown that the right thing to do — regardless of the circumstances causing the market decline — is to not panic, sit tight and just get through it. You probably know that the average rate of return over the stock market over the past 30, 50 whatever years is something close to 10%. Guess what, the 10% rate of return was calculated by STAYING in the market 100% of the time. Even in the last 20 years (1997-2016), the average investor return – 2.29% — has paled to that of the S&P’s 7.68% 1.

Achieving the S&P historical numbers does NOT assume that an investor had a fully functioning crystal ball. They weren’t hopping out of the market before a decline and back into the market right before it turned upwards. That rate of return assumes you left your investment the heck alone!

Start prepping your mind today — when the waters are fairly calm — for the fact that your 401k will decline in value when the market drops. This does not mean anything is wrong with your 401k, the investments, or blooom!  I promise you — after 22 years of experience working with clients to help them save for retirement — if you can come to grips and expect the market and your portfolio to drop from time to time, you will put yourself in a much better position for investing success.

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Eggs Need Diversification Beyond One Basket

Why Diversification Matters in 401k Management

“In the world of investing nothing is as dependable as cycles” – Howard Marks, Oaktree Capital chairman

We want to illustrate the randomness of markets and why diversifying is a good idea.

We put together the following chart to do just that. It shows the performance of several of the major asset classes over the last 10 calendar years updated through 12/31/2016.

Diversification - Asset Category Performance

A Few Things About Diversification Jump Out

While US markets have rebounded strongly since the global financial crisis in 2007-2008, international markets have lagged for the most part. Unfortunately, this is causing a lot of investors to abandon their international funds or avoid them altogether. If we extended this chart back a few years further, the opposite would have been true. Another reminder that markets are cyclical. Nothing new to see here.

Poor commodities. They had their first positive year of the past six years in 2016. Even after that gain, the asset class is down around 50% since the beginning of 2011. Commodities still have a place in a diversified portfolio, but if you have been banking on the return of the gold standard, you have likely been disappointed.

Looking only at this chart, bonds seem to be a dependable source of a decent return. However, like all history, context is everything. We’ve seen a 30-plus year bull market in bonds where the 10-year treasury yield went from over 15% in the early 1980’s to around 2.5% at the end of 2016. Falling interest rates are a positive for bond prices, but they can only fall so far. The next decade will likely look different for bonds.

The Diversification Chart Teaches Valuable Investing Lessons

First, there will be up years and down years. Chasing the best performing asset class of the previous year won’t yield great results. Oftentimes, the top performing asset class one year will be near the bottom of the pack the next year, and vice versa. Other times, an asset class’ relative performance will persist (see: commodities from 2011-2015 or US large cap from 2013-2016). The point is, the future is unknowable.

If you’re relying on your (or anyone else’s) ability to time the market, you’re doing it wrong.

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Savings Crafts For Pinterest

How to Get Savings Crafty With Your BFFF

Your BFFF of 401k savings here (go figure that the company with three OOOs would throw an extra F in the BFF).

Okay. Full disclosure: I’m probably doing this in the reverse order of what I should … but you really should stick around for the fun.

So … a fear fact, a friend to help and then like good friends do … we’re going to go out for some fun.

Fear Fact: We’re Not Saving Enough. Period.

First, the savings fear fact. According to The Associated Press – NORC Center for Public Affairs Research, 66% of Americans would struggle to pull together $1,000 to cover an emergency.

If you’re a homeowner, it’s not hard to imagine $1,000 bill of any kind. And, apparently, this statistic is not isolated to people making less than $50,000 year. Even America’s wealthiest households would be challenged to collect the money without selling something or borrowing it. Of the households earning more than $100,000 a year, 38% say they would have some difficulty coming up with $1,000. 1. 

And this saving struggle affects people’s ability to save for retirement. Our wheelhouse, for sure. When the same Associated Press poll asked people if they will have enough money to retire on time, 54% called the likelihood … dubious.

Why We Care? We’re Your 401ks Best Friend

We know every dollar counts. That’s why we provide education on all manner of savings approaches, not just getting mooola into your 401k.

If you’re a saddled with debt, we outline the common question of whether it’s better to pay off the debt (the student loan variety in this example) or investing in your 401k .

Or, if you have no debt and are eager for a saving strategy, we implore you to try the 10% Savings Trick for retirement and an emergency fund.

But friends should not only be about lending advice but also ready to have some fun.

Some Saving Crafts Fun: The New Piggy Bank

A couple months back, I go into get a haircut and Lauren (she, Michelle or Parker generally cut my hair – I like to diversify) and I get to talking. At first, it’s the typical stylist/client small talk.

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