The Golden Rule of Investing

Guest post by Contributing Editor, Lowell Herr, ITA Wealth Management. Lowell is a subscriber to the Portfolioist and his investment philosophy is similar to ours.  Enjoy.

The Golden Rule of Investing is simply, “Save as much as you can as early as you can.” The operative word is early. William J. Bernstein lays it out in stark language in his book, “The Investor’s Manifesto“ when he writes, “Each dollar you do not save at 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble. Since a 25-year-old should be saving at least 10 percent of his or her salary, this means that a 45-year-old will need to save nearly half of his or her salary. Most 45-year-olds will find this nearly impossible, if for no other reason than the necessity of paying living expenses, payroll taxes, and income taxes.”

The Challenge of Long-Term Income: Part 1

Portfolio Income: The Trouble With Treasury Bonds

The current economic environment is making it very hard for investors to generate reasonable levels of income through traditional means such as bond ladders.  While it is always dangerous to suggest that ‘it’s different this time,’ I believe that we are facing some unprecedented conditions that require new approaches.  Income-seeking investors with low risk tolerance—those who have traditionally favored government bonds—are in the most difficult situation.

The problem of low savings and investment rates in the U.S. is huge.  I have written about this in the past, along with many others.  Every study on retirement savings notes that Americans need to save more.  Having the ability to support yourself from a portfolio of savings is not, however, just about the amount that you save.  There is also the issue of how much income you can derive from each dollar in your portfolio.  Today, with historically low yields on government bonds, retirees and others seeking to live on the income from low-risk investments are faced with an enormous challenge that compounds the savings rate problem.  To be able to live on the income provided by very low-risk investments, the necessary savings rates increase dramatically relative to savings rates when investors are willing to bear some risk.

Sector Watch: Spotlight on Utilities

Utility companies are expected to provide fairly stable performance, without too much downside risk.  Utilities are also typically expected to provide lower average returns than the broader market.  In the last decade, however, utilities have out-performed the broader stock market as investors have become increasingly risk-averse and worried about the prospects for sectors that depend largely on robust economic growth in order to meet their earnings targets.

Tax Loss Harvesting: Five Tips to Keep More of What’s Yours

Here at the Portfolioist, we frequently turn to Steve Thorpe, founder of Pragmatic Portfolios, LLC to share his insights on the topic of Tax Loss Harvesting. Here are 5 of his Tax Loss Harvesting Tips to help keep more of your money when tax time rolls around.

It’s impossible to reliably predict future changes within the investment markets, however there are numerous ways for investors to favorably influence their own results. Important areas to focus on include developing an investment plan, saving regularly, diversifying widely, adhering to an appropriate asset allocation, and paying attention to all forms of costs – including taxes. For many investors, tax loss harvesting can improve their after-tax bottom line, sometimes to the tune of thousands of dollars per year.

Financial Products are Sold, Not Bought

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

Critics of the financial services industry (often with good reason) frequently remind consumers that financial products are typically “sold” rather than “bought” and implore them not to fall into that trap.  The concept here is that financial products are “sold” — pushed upon a consuming public that doesn’t understand them or perhaps even want or need them.  Instead, the alleged basis for their continued vibrancy and ongoing sales is that advisors get paid big bucks to sell them.

The End of ‘The Cult of Equity’?

One of the defining features of the last twenty years has been a persistent and fairly continuous belief that investing in the stock market was something of a sure road to wealth.  The downturns in the stock market in the aftermath of the Tech bubble and, more recently, in the financial crisis, have shaken investors’ faith in the maxim that stocks are inevitably a good bet.  The tendency of people to take it as an article of faith that equities will, ultimately, deliver high returns has been referred to as ‘the cult of equity.’  Two recent articles by experts that I respect propose that this phenomenon is dead or dying.

The Power of Effective Diversification: Part II

Last week, I posted an article discussing how diversification is one of the most misunderstood concepts in investing. In today’s post I continue with the second half of this two-part series titled, “The Power of Effective Diversification.”

In Part I of this article, I discussed the difference between naive diversification (holding lots of stuff in a portfolio) and real diversification (combining assets in a portfolio to create risk offsets).  I also showed how a well-diversified portfolio can maintain the ability to participate in market rallies while still mitigating risk.  In Part II, we will explore what an effectively diversified portfolio looks like today.

Tax Loss Harvesting: Share Your Pain with Uncle Sam

Summer is winding down. And believe it or not, 2012 is more than half way over, which means it’s a good time for investors to start thinking about the year-end tax implications of their portfolios.

We invited Steve Thorpe, Founder of Pragmatic Portfolios, LLC to share some insights on Tax Loss Harvesting. Enjoy.

Tax Loss Harvesting: Why Should You Care?

Would you invest a few hours to reduce this year’s taxes by $1,000 or more?

For investors with taxable investment accounts, this is often possible by taking advantage of tax loss harvesting (TLH). This perfectly legal strategy makes lemonade from lemons, allowing Uncle Sam to share part of the pain of the losses inevitably experienced by investors at some points during their investing career.

Between now and

Tried and True Money Advice from Warren Buffett

Guest post by Contributing Editor, Janet Al-Saad, Mint.com.

When it comes to financial wisdom, few people merit as much attention as Warren Buffett. The man renowned as the “Sage of Omaha” built a billion-dollar empire from scratch, all the while maintaining modest spending habits that are the envy of every frugal person everywhere. Liz Claman of the Fox Business Network spoke with Buffett recently, and shares some of his wisdom with Mint Life:

The Power of Effective Diversification

Diversification is one of the most misunderstood concepts in investing.

If you read a good explanation of the strategy, you’ll learn that the goal of diversification is to combine different investments that tend not to be driven by the same factors in the economy. So when one investment lags, the others in the portfolio gain ground (or at least will be unaffected)

For example: Combining gasoline stocks with bicycle manufacturers in your portfolio. When gasoline is cheap, people drive more and bike less. When gasoline prices start to rise, people usually cut back on their driving and start biking to work. Either way, your portfolio is now less exposed to the risk of a downturn in demand for either bicycles or gasoline.