Michele Clark
Clark Hourly Financial Planning - Chesterfield, MO Advisor
1415 Elbridge Payne Road, Suite 255
Chesterfield, MO 63017 USA
Work 636.264.0732
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Bonds: How do they work

June 29th, 2017

Investing in Bonds

Bonds may not be as glamorous as stocks or commodities, but they are a significant component of most investment portfolios. Bonds are traded in huge volumes every day, but their full usefulness is often underappreciated and underestimated.

Why invest in bonds?

Bonds can help diversify your investment portfolio. Interest payments from bonds can act as a hedge against the relative volatility of stocks, real estate, or precious metals. Those interest payments also can provide you with a steady stream of income.  Additionally, because individual bonds have a face value and maturity date, investors like knowing how much and when to expect their investment.

Bonds as Part of Your Overall Portfolio Strategy

Bonds play an important role in your overall portfolio strategy, AKA investment mix.  As interest rates rise and bond prices are impacted, your overall portfolio allocation will be impacted as well.

For those of you who are managing a portfolio on your own and read this blog for education, or are hourly/project based clients, that will mean that you will need to monitor your portfolio and rebalance the allocation back to your original allocation/investment mix.  If you do not, then the amount of risk/projected return in the portfolio will not match the amount of risk/return you wanted in the portfolio.

For those of you who work with us on an ongoing basis for investment management/partnership based clients, we set up “target bands” according to your allocation/investment mix and make changes when your portfolio deviates from those bands.  So we do not wait until a certain time of year, we make changes as needed and only if needed.

I wrote earlier about the importance of rebalancing a portfolio and how rebalancing works.

How bonds work

When you buy a bond, you are essentially loaning money to a bond issuer in need of cash to finance a venture or fund a program, such as a corporation or government agency. In return for your investment, you receive interest payments at regular intervals, usually based on a fixed annual rate (coupon rate). You are also paid the bond’s full face amount at its stated maturity date.

You can purchase bonds in denominations as low as $100, and often in increments of $1,000 (though individual brokers may have a higher minimum purchase). Some are backed by tangible assets, such as mortgage contracts, buildings, or equipment. In many other cases, you simply rely on the issuer’s ability to pay. You can buy or sell bonds in the open market in the same manner as stocks and other securities. Therefore, bonds fluctuate in price, selling at a premium (above) or discount (below) to the face value (par value). Generally, the longer a bond’s duration to maturity, the more volatile its price swings. These factors expose bonds to certain inherent risks.

You can buy or sell bonds in the open market in the same manner as stocks and other securities. Therefore, bonds fluctuate in price, selling at a premium (above) or discount (below) to the face value (par value). Generally, the longer a bond’s duration to maturity, the more volatile its price swings. These factors expose bonds to certain inherent risks.

Bond risk factors

Although many bonds are conservative, lower-risk investments, some others are not, and all carry some risk. Because bonds are traded in the securities markets, there is always the chance that your bonds can lose favor and drop in price due to market risk; as a result, a bond redeemed prior to maturity may be worth more or less than its original cost. Much of this volatility in price is tied to interest-rate fluctuations. For example, if you pay $1,000 for a 5 percent bond, that same $1,000 might buy you a 6 percent bond the following month, if interest rates rise. Consequently, your old 5 percent bond may be worth less than $1,000 to current investors.

Since bonds typically pay a fixed rate of interest, they are open to inflation risk. As consumer prices generally rise, the purchasing power of all fixed investments is reduced. Also, there is a chance that the issuer will be unable to make its interest payments or to repay its bonds’ face value at maturity. This is known as credit or financial risk. To help minimize this risk, compare the relative strength of companies or bonds through a ratings service such as Moody’s, Standard & Poor’s, A. M. Best, or Fitch. Finally, bonds also involve reinvestment risk: the risk that when a bond matures, you may not be able to get the same return when you reinvest that money.

Corporate bonds

Bonds issued by private corporations vary in risk from typically steady utility bonds to highly volatile, high-interest junk bonds. Also, many corporate bonds are callable, meaning that the debt can be paid off by the issuing company and redeemed on a predeterminded fixed date. The company pays back your principal along with accrued interest, plus an additional amount for calling the bond before maturity.

Some corporate bonds are convertible and can be exchanged for shares of the company’s stock on a fixed date. You can also purchase zero-coupon bonds, which are issued at a discount to (below) face value. No interest is paid, but at

You can also purchase zero-coupon bonds, which are issued at a discount to (below) face value. No interest is paid, but at maturity you receive the face value of the bond. For example, you pay $600 for a 5-year, $1,000 zero-coupon bond. At the end of 5 years, you receive $1,000. Corporate bonds have maturity dates ranging from one day to 40 years or more and

Corporate bonds have maturity dates ranging from one day to 40 years or more and generally make fixed interest payments every six months.

U.S. government securities

The securities backed by the full faith and credit of the U.S. government carry minimal risk. United States Treasury bills (T-bills) are issued for terms from a few days to 52 weeks. They are sold at a discount and are redeemed

United States Treasury bills (T-bills) are issued for terms from a few days to 52 weeks. They are sold at a discount and are redeemed for their full face value at maturity. Other Treasury securities include Treasury notes, which have terms from 2 to 10 years, Treasury Inflation Protected Securities (TIPS), which have terms from 5 to 30 years, and Treasury bonds, which have a term of 30 years. Although the interest earned on these securities is subject to federal taxation, it is not subject to state or local taxes.

Other Treasury securities include Treasury notes, which have terms from 2 to 10 years, Treasury Inflation Protected Securities (TIPS), which have terms from 5 to 30 years, and Treasury bonds, which have a term of 30 years. Although the interest earned on these securities is subject to federal taxation, it is not subject to state or local taxes.

Various federal agencies also issue bonds. As with any investment, these bonds carry some risk. However, because the U.S. government guarantees timely payment of principal and interest on them, they are considered very safe. Some of these bonds use mortgages as collateral. Most mortgage-backed securities pay monthly interest to bondholders.

Municipal bonds

Municipal bonds (munis) are issued by states, counties, or municipalities, and are generally free from federal taxation (with some exceptions). Some may be completely tax free if you are a resident of the state, county, or municipality of issuance. Though municipal bonds generally offer lower interest payments compared with taxable bonds, their overall return may be higher because of their tax-reduced (or tax-free) status. Some municipal bond interest also could be subject to the alternative minimum tax. You must select bonds carefully to ensure

Though municipal bonds generally offer lower interest payments compared with taxable bonds, their overall return may be higher because of their tax-reduced (or tax-free) status. Some municipal bond interest also could be subject to the alternative minimum tax. You must select bonds carefully to ensure

You must select bonds carefully to ensure a worthwhile tax savings. Because municipal bonds tend to have lower yields than other bonds, the tax benefits tend to accrue to individuals with the highest tax burden.

Munis come in two types: general obligation (GO) bonds and revenue bonds. GO bonds are backed by the taxing authority of the issuing state or local government. For this reason, they are considered less risky but have a lower coupon rate. Revenue bonds are supported by money raised from the bridge, toll road, or other facility that the bonds were issued to fund. They pay a higher interest rate and are considered riskier. Therefore, research the project being funded to the extent possible before you invest, to make sure that it will generate sufficient income to make payments.

Monitoring your bond portfolio

Of course, you’ll want to keep an eye on your bond portfolio, as you should with all of your investments. Although other factors may affect them, bond prices are often closely tied to interest rates. When rates go up, the market price of your bonds tend to go down; when interest rates fall, your bonds generally rise in value.

Interest rates also tend to affect a bond’s current yield, which measures the coupon rate of your bond in relation to its current price. The current yield rises with a corresponding drop in the price of a bond, and vice versa. In addition, inflation, corporate finances, and government fiscal policy can affect bond prices.

The major bond-rating services offer letter grades regarding the relative strength of a corporation or bond.  Your brokerage statement or brokerage account website will often have the credit rating for your bonds.  Keep an eye on the credit rating to make sure that it is still in investment grade range which for Standard and Poor’s is BBB- or higher and Moody’s is Baa3 or higher.

Portions of this blog post are from an article prepared by Broadridge Investor Communications Solutions, Inc. Copyright 2017  But, I just had to add my own two cents!

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Coffee with Michele Clark, CFP® and Jan July 2017

June 19th, 2017

Come to the Community Room at Kaldi’s in Chesterfield, MO with your financial planning and tax questions and enjoy a cup of coffee with Michele Clark CERTIFIED FINANCIAL PLANNERTM professional in St. Louis and Jan Roberg Enrolled Agent.

Financial Planning and Tax Planning Questions Answered

There is no prepared presentation, just a casual conversation in a small group environment; your opportunity to pick our brains.  Feel free to invite family or friends who could benefit from an hour with us.  Open to registered attendees only, due to the size of the room.

Coffee with Michele Clark and Jan Roberg

Kaldi’s Coffee Chesterfield, MO
Wednesday, July 12, 2017
10:30 am to 11:30 am

RSVP Information
RSVP online Clark Hourly Financial Planning and Investment Management RSVP or call 636-264-0732.
Space is limited.  Coffee and pastries are complimentary.

Kaldi’s Coffee Chesterfield address and map
The Community Room is an enclosed room in the back of the coffee shop.

We hope you can join us!

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Long Term Care Planning: More than just insurance

May 3rd, 2017

My financial planning engagements are very detailed, especially for clients that are nearing retirement.  I find when talking with colleagues at conferences and continuing education meetings that many of them do not discuss how Medicare works, the potential cost of healthcare in retirement, or even potential Long Term Care needs.  I know that the clients who come to me, often come to me with misconceptions about these items.  Which is understandable, since they have never encountered these situations before.  I feel good about introducing them to these topics so that they can prepare.

One of the most common misconceptions that I see is, if someone needs to move into a nursing home that Medicare will cover the cost.  While Medicare will cover medical care for skilled nursing care for 100 days, they do not cover custodial care.  What I tell people is Medicare is health insurance, and if you are being rehabilitated and your health is expected to improve then that is health insurance and you are covered.  But if you are not expected to improve, and you are needing coverage to pay for Activities of Daily Living to care for you like  eating, bathing, dressing, toileting, walking/moving from the bed to a chair, then that is not health insurance, that is Long Term Care and that is covered by:

1) your savings or
2) Long Term Care insurance or
3) government benefits after you have spent your assets down (Medicaid or VA benefits.)

This information is eye opening for a lot of people who come to me.

I mention this so that you consider learning all that you can about Long Term Care.  It is more than just buying Long Term Care insurance.  It is thinking about all of your preferences and discussing them with your family.  It is preparing your home for successfully aging in place, learning about your housing options should you decide you no longer want to live at home, learning about how you can take care of yourself to prevent falls and other action steps that you can take so that you have a long and enjoyable retirement.  Planning in advance gives you control and confidence versus making hurried decisions in a crisis.  A terrific resource for learning about Long Term Care is www.LongTermCare.gov.

The information below is copied and pasted from an educational resource that I have access to called Forefield Broadridge, I hope you find it helpful.

Housing Options for Older Individuals

What is it?

As you grow older, your housing needs may change. Maybe you’ll get tired of raking leaves from the lawn of the house you bought 30 years ago because you liked its huge, shady backyard. You might want to retire in sunny Florida or live close to your grandchildren in Illinois. Perhaps you will need to live in a nursing home or an assisted-living facility. Sometimes, after considering your options, you may even decide to stay where you are. Deciding where to live is never easy, but if you evaluate your options carefully, you’ll find it easier to live with your decision.

Staying where you are: when there’s no place like home

Physical considerations

Are you able to take care of your home by yourself? If your answer is no, that doesn’t necessarily mean it’s time to move. Maybe a family member can help you, or maybe you can hire someone to clean your house, mow your lawn, or help you with personal care. Perhaps staying in your home is simply a matter of making it more accessible by installing wheelchair ramps, safety lighting, or new bathroom fixtures. To evaluate whether you can stay in your home or if it’s time to move, consider the following questions:

  • If you need help (or might need it in the future), how willing are you to let someone else help you?
  • Can you afford to hire help, or will you need to rely on friends, relatives, or volunteers?
  • How far do you live from family and/or friends?
  • How close do you live to public transportation?
  • How easily can you renovate your home to address your physical needs?

Emotional considerations

You may want to stay in your home because you have memories of raising your family there. However, if you are widowed or lonely, those memories may be the very reason you want to leave. Moving from a cherished house is never easy, and it might be even harder when you’re moving to a new town or a smaller place. Conversely, you might find that change is just what you need to get a new perspective on life, or to be able to relax and enjoy retirement. To evaluate the emotional impact of moving, consider the following questions:

  • How easily do you adjust to change?
  • How easily do you make new friends?
  • How does your family feel about your move? (This is important if you’re moving closer to them or further away from them.)
  • How does your spouse feel about moving?

Financial considerations

You might think you can’t afford to live in the same home after retirement and want to generate retirement income by selling it. However, selling your home is not the only way you can get income from it. Two other options you might consider if you own your own home and need more income are home equity loans and reverse mortgages.

  • Home Equity Loans or Lines of Credit–If you’re thinking about selling your house because you need more retirement income but you don’t really want to move, consider applying for a home equity loan or line of credit. You put your home up as collateral, and your bank (or other lender) provides you with a term installment loan that will give you a certain sum of money you need up front or a revolving line of credit that you can access when you need cash. When you apply for the loan you’ll probably be asked how you intend to use the money. One way to use it is to finance home improvements that will make your home safer and more accessible, so that you can stay in it instead of moving to an assisted-living facility or nursing home.
  • Reverse Mortgages–A reverse mortgage might enable you to obtain needed retirement income and remain in your home. There are many types of reverse mortgages, but here’s how one usually works. You take out a mortgage on your home, and in return the bank or person who holds the mortgage gives you a lump sum of cash or pays you a predetermined monthly amount for a set number of years (sometimes tied to your life expectancy). At the end of that period, you will owe the bank or mortgage holder the principal and interest due on the house. In order to repay the loan at that time, you (or your estate) may have to sell the house or turn it over to the mortgage holder. For more information on what to consider when choosing a reverse mortgage, visit the Federal Trade Commission website at .

After Hal retired, he found that he couldn’t live off his Social Security benefit and pension income, so he considered selling his house to raise cash. However, he didn’t really want to move, so he decided instead to take out a reverse mortgage. He found a bank that was willing to pay him $650 a month, more than enough to supplement his retirement income. In addition, Hal was allowed to live in the house for the rest of his life. After he died, the bank sold the house to pay off the mortgage.

Pulling up stakes: moving in with (or near) your child

Living arrangements

Moving in with (or near) your child may mean living in your own nearby apartment, living in a room in your child’s house, or living in an accessory apartment. Accessory apartments are either apartments within your child’s house (also known as in-law suites) or cottages that are set up on the premises of your child’s home (also known as Granny flats or Elderly Cottage Housing Opportunity).

Granny flats have become increasingly popular and can be purchased as prefabricated housing. However, since Granny flats are subject to zoning restrictions, check the local zoning laws before you decide to move into your child’s backyard.

Staying independent

You may worry that if you move in with (or near) your child, you’ll lose your much-valued independence. That’s a valid concern, but not necessarily an inevitable one. There are many ways you can move closer to your child without sacrificing your independence. For example, if you move in with (or near) your child, you can maintain your independence if your living area is accessible to public transportation or other facilities such as grocery stores and shopping centers. If you need it, look into hiring part-time help so that you don’t feel that you’re overburdening your son or daughter, or join a senior center or church group that provides activities and transportation for its members.

Physical considerations

If you are moving in with your child, will you have adequate privacy? Will you be able to move around your child’s home easily? If not, you might ask him or her to install devices that will make your life easier (such as tub or shower grab bars and easy-to-open handles on doors).

Sue wanted to live with her son John, but after only a few days at his house, Sue was ready to move out. She just couldn’t get up the stairs by herself, and she didn’t like asking John for help all the time. Fortunately, she saw an advertisement on television for a motorized chair that could be attached to John’s staircase and could easily move her up and down. She bought the chair, John installed it, and Sue was able to live with John after all.

Emotional considerations

When deciding whether or not to move closer to your child, ask yourself how you expect to benefit from the move, and how your son or daughter will likely respond. If you move closer to your child, will you expect him or her to take you shopping? Will you expect to be included in any party your son throws or in every dinner he eats at a restaurant? Even if you make your own friends, will you still want to be best friends with your daughter? Will you feel in the way? Will he or she expect you to help with cooking, cleaning, and baby-sitting, or, on the other hand, expect you to do little or nothing? Discussing your concerns before you move will help you avoid conflicts later.

Financial considerations

Money is an uncomfortable issue for many people, but one that needs to be discussed rationally. Before you move in with your child, consider the following questions: Will he or she expect you to contribute money towards household expenses? If you don’t, will you feel guilty? Will you feel the need to critique his or her spending habits, or are you afraid that he or she will critique yours? Can he or she afford to remodel his or her home to fit your needs? Do you have enough money to support yourself during retirement, and if you don’t, how do you feel about your child supporting you financially? Talking about money with your child before you move in will help avoid any conflicts or hurt feelings later.

When Jane moved in with her daughter Liz, she expected to pay for her part of the grocery bill but Liz wouldn’t hear of it. Consequently, Jane felt guilty about asking Liz to buy her favorite items at the store since she wasn’t paying for them. She grew more and more resentful toward Liz, even though Liz had no idea what was going on. When they finally had an argument one day, Liz realized how important it was for her mother to help pay her own way, and she gladly let her mother pay part of the grocery bill.

Setting out for greener pastures: independent living options

What is independent living?

Independent living communities are often apartments or townhouses that can be rented or owned as condominiums. The common areas are maintained for a fee, and the complex provides security, transportation, activities, and dining facilities.

Physical considerations

Not all independent living communities are alike, and each is governed by different rules. For example, some communities allow your guests to use the facilities, while others do not. Some may allow your grandchildren to spend a week with you, but some may not. Read the rental or sales contract carefully, and find out whether you object to the community’s rules before you decide to lease or purchase a unit in an independent living community complex.

When you need a little more help: assisted living options

What is assisted living?

The wide number of assisted-living options available makes defining the term difficult. Generally, however, assisted-living facilities offer rental rooms or apartments, housekeeping services, meals, social activities, and transportation. Their primary focus is social, not medical, but some do provide limited medical care. Assisted-living facilities can be state-licensed or unlicensed and primarily serve senior citizens who need more help than those who live in independent living communities. Other terms used to describe assisted-living arrangements are board and care homes, rest homes, and community residences. Continuing care retirement communities (CCRCs), also called life care communities, also fit loosely into this category, although they provide what other assisted-living facilities do not: long-term nursing care and guaranteed lifetime services.

How to choose an assisted-living facility

Choosing an assisted-living facility can be difficult because you may not know what kind of help you will need in the future. However, there are certain things you can consider in order to narrow down your choices. Some of the factors you should evaluate when choosing a facility are described in the following sections.

Physical considerations

Before entering an assisted-living facility, you should carefully read the contract and tour the facility. Some facilities are big, caring for over 1,000 people. Others are small, caring for fewer than 5 people. Consider whether the facility meets your needs. Do you have enough privacy? How much personal care is provided? What happens if you get sick? Can you be asked to leave the facility if your physical or mental health deteriorates? Is the facility licensed or unlicensed? Who is in charge of health and safety? Reading the fine print on the contract may save you a lot of time and money later if any conflict over services or care arises.

Before she entered Mayfield Community Retirement Village, Helen researched the facility. She was pleased with the grounds and the decor, and the staff seemed friendly. However, when she read the contract she was required to sign, she was uncomfortable. She saw that if her mental health deteriorated, she would be asked to leave, but the terms were vague, so Helen decided to go over the contract with her lawyer before she signed it.

Emotional considerations

When you move into an assisted-care facility, you may feel that you have given up a measure of independence. You may think that the staff is intrusive, or that you have less choice when it comes to what you eat and who you see every day. In addition, the facility you choose may have rules that you do not like. For example, you may not be allowed to have house guests (especially children) stay overnight, or your guests may not be allowed to use facilities such as the dining rooms and the swimming pools. Because assisted-care facilities vary widely, it’s very important to make sure you can live with the emotional implications before you sign a contract.

Financial considerations

Some housing units at assisted-living facilities are more expensive than regular residential apartments, but not all are. There is a wide range of care available at a wide range of prices. CCRCs are significantly more expensive than other assisted-living options, for example, and usually require an entrance fee above $50,000, in addition to a monthly rental fee. In addition, don’t expect Medicare to cover your expenses at these facilities, unless those expenses are health care related and the facility is licensed to provide medical care.

When you need a lot more help: nursing homes

What are nursing homes?

Nursing homes are licensed facilities offering 24-hour access to medical care. They provide care at three levels: skilled nursing care, intermediate care, and custodial care. Skilled nursing care may be provided to individuals who need intensive medical care but not hospitalization. Intermediate care may be provided to individuals who need some medical care in addition to custodial care. Custodial care is provided to individuals who need some help eating, bathing, dressing, or taking medications due to physical or mental deterioration. Individuals in nursing homes generally cannot live by themselves or without a great deal of assistance.

Physical considerations

Privacy in a nursing home may be very limited. Private rooms may be available, but rooms more commonly are shared. There is a great deal of variation in quality and atmosphere, depending upon the facility selected. A nursing home may be hospital-like or home-like. When you choose a nursing home, pay close attention to the quality of the facility.

Emotional considerations

Due to the high cost of nursing home care and media reports of mistreated nursing home residents, you might fear entering a nursing home. However, the quality of life in nursing homes varies widely. To allay your fears about nursing homes, select one before you need care. Visit several facilities in your area, and talk to your family about your needs and wishes regarding nursing home care. In addition, remember that most people don’t live their lives in a nursing home. If your physical or mental condition improves, you may be able to return home or move to a different type of facility.

Financial considerations

Nursing homes are expensive. If you need nursing home care in the future, do you know how you will pay for it? Will you use private savings, or will you rely on Medicaid to pay for your care? If you have time to plan, consider purchasing long-term care (LTC) insurance to pay for your nursing home care.

Will care be there when you need it?

Nursing homes and assisted-living facilities often have long waiting lists. In addition, many nursing homes do not accept Medicaid right away from a resident; using private funds or LTC insurance may help you get into a nursing home. Many people don’t plan for long-term care because they don’t think they will ever need it. However, you will grow old, and as you do, your health challenges will increase. You may never need long-term care, but if you plan ahead for it, you’ll be much better off physically, emotionally, and financially.

Questions & Answers

Will Medicare pay for nursing home care?

Medicare will pay, in part, for the medical care you need, but not for custodial care. If you need skilled nursing care, Medicare will pay for it (with certain limits) up to 100 days. Before you rely on Medicare coverage to pay your nursing home bills, however, research your coverage.

What if you move into a retirement community and don’t like it?

The first move you make after you retire probably won’t be your last. If you live 20 years past retirement, you may even make several moves. Despite the fear some people have that once they move into a retirement facility they will be lost and forgotten, this is usually not the case. Decisions to move are not permanent. However, because of waiting lists, you may, for example, find it difficult to move from one nursing home to another, or you may have difficulty getting out of a CCRC once you enter it, due to the large sum of money you paid up front. Before you move into any retirement facility, research the facility thoroughly and go over the contract with an attorney.

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Coffee with Michele Clark, CFP ® and Friends March 2017

February 24th, 2017

Come to the Community Room at Kaldi’s in Chesterfield, MO with your financial planning and health insurance questions and enjoy a cup of coffee with CERTIFIED FINANCIAL PLANNER™ professional Michele Clark and Diana Wilson health insurance professional.

There is no prepared presentation, just a casual conversation in a small group environment; your opportunity to pick our brains.  Feel free to invite family or friends who could benefit from an hour with us.  Open to registered attendees only, due to the size of the room.  RSVP at our website Clark Hourly Financial Planning and Investment Management RSVP or call 636-264-0732.

You may have health insurance questions like:

  • What is the difference between private insurance and the marketplace?
  • What is Medicare Part A, B, and D and what does it cover?
  • How does a Medicare supplement work?
  • What is Medicare Advantage?
  • What is the donut hole I hear about?
  • How does COBRA play a part in this?
  • How does the ACA tax credit work?

Or maybe you just really like pastries and coffee.  We would love to see you.

Financial Planning and Health Insurance Questions Answered

Coffee with Michele and Friends
Kaldi’s Coffee Chesterfield, MO
Wednesday, March 8, 2017
10:30 am to 11:30 am

RSVP Information

RSVP at our website Clark Hourly Financial Planning and Investment Management RSVP or call 636-264-0732.

Kaldi’s Coffee Chesterfield, MO address and map

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Asset Allocation: Rebalancing a Portfolio in an Appreciated Market

February 22nd, 2017

You probably already know you need to monitor your investment portfolio and update it periodically. Even if you’ve chosen an asset allocation, market forces may quickly begin to tweak it.

For example, if stock prices go up, you may eventually find yourself with a greater percentage of stocks in your portfolio than you want, and therefore a more aggressive portfolio than you originally intended. If the market corrects, your portfolio will go down more than you originally felt comfortable with, because you had more in stock than you originally intended, due to stock market appreciation.

Do you have a strategy for dealing with those changes? You’ll probably want to take a look at your individual investments, but you’ll also want to think about your asset allocation.

How rebalancing works

To bring your asset allocation back to the original percentages you set for each type of investment, you’ll need to do something that may feel counterintuitive: sell some of what’s working well and use that money to buy investments in other areas that now represent less of your portfolio.

Typically, you’d buy enough to bring your percentages back into alignment. This keeps what’s called a “constant weighting” of the relative types of investments.

Let’s look at a hypothetical illustration. If stocks have risen, a portfolio that originally included only 60% in stocks might now have 70% in equities. Rebalancing would involve selling some of the stock and using the proceeds to buy enough of other asset classes to bring the percentage of stock in the portfolio back to 60%. This example doesn’t represent actual returns; it merely demonstrates how rebalancing works. Maintaining those relative percentages not only reminds you to take profits when a given asset class is doing well, but it also keeps your portfolio in line with your original risk tolerance.

Methods for Rebalancing your Portfolio

Knowing that the market can be volatile and that rebalancing is a disciplined process that helps offset the risk of volatility, how do you know when to rebalance your portfolio? There are a couple of methods for rebalancing.

Target Bands

One common rule of thumb is to rebalance your portfolio whenever one type of investment gets more than a certain percentage out of line, say, 5 to 10%. This type of monitoring typically requires sophisticated software and an alert system to send you an automated alert whenever your portfolio is outside of acceptable balance range.

Otherwise it would be a daily manual exercise of updating the value of each investment and the relative value of the asset classes of the overall portfolio. This is a daily disciplined practice that most investors would not maintain on a sustained basis over years, which would be required.  When we work with clients on an investment management basis, we use Target Bands as our method of rebalancing. We can do this because we have daily access to their account information and the software to monitor the accounts versus our target allocation.

Annual Rebalancing

You could also set a regular date for rebalancing. To stick to this strategy, you’ll need to be comfortable with the fact that investing is cyclical and all investments generally go up and down in value from time to time. When we work with clients on an hourly basis, we encourage them to come back to us on an annual basis for portfolio rebalancing. Because we do not have access to their accounts, we rely on investment statements that they provide us. In this situation, this is a good way to rebalance the portfolio back to the target allocation. The concern comes when too much time elapses between rebalancing periods and due to market fluctuation the portfolio can become an allocation that is not in line with their risk tolerance.

Our example has been about an appreciated stock market, because that is the market that we are experiencing. However, in a depressed market you would also want to rebalance. If stock prices go down, you might worry that you won’t be able to reach your financial goals because you no longer have the stocks needed to hedge against inflation, so you would want to rebalance back to your original asset allocation model. The same is true for bonds and other investments.

Balance the costs against the benefits of rebalancing

Don’t forget that too-frequent rebalancing can have adverse tax consequences for taxable accounts. Since you’ll be paying capital gains taxes if you sell a stock that has appreciated, you’ll want to check on whether you’ve held it for at least one year. If not, you may want to consider whether the benefits of selling immediately will outweigh the higher tax rate you’ll pay on short-term gains. This doesn’t affect accounts such as 401(k)s or IRAs, of course.

In taxable accounts, you can avoid or minimize taxes in another way. Instead of selling your portfolio winners, simply invest additional money in the asset classes that are underweighted in your portfolio. Doing so can return your portfolio to its original mix.

Sometimes rebalancing can be done in the tax deferred or tax free accounts, which will minimize the changes that need to be made in the taxable accounts, to minimize tax consequences.

You’ll also want to think about transaction costs; make sure any changes are cost-effective.

Also, look out for the impact that a sale in the taxable accounts can have in other areas of your financial plan. If your income goes up will it impact your FAFSA/college financial aid, Medicare means testing, Social Security benefit be taxed at a higher rate, put you in a higher income tax rate, etc.

No matter what your strategy, work with your financial professional to keep your portfolio on track.

Portions of this blog post are from an article prepared by Broadridge Investor Communications Solutions, Inc. Copyright 2017  But, I just had to add my own two cents!

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