Preparing Your Portfolio for Greater Volatility

portfolio investing financial planning asset allocation The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

If the recent volatility in the stock market has you concerned, that’s probably not a bad thing. After all, equity investments are not fixed investments, which means they can go down as well as up. Every now and again, we need to be reminded of exactly that. But the proper response is not to panic, but rather to prepare your portfolio for greater volatility.

There are various ways to do that, but it’s important that you take steps while things are relatively calm. Should the market decline in a major way, there won’t be time to react once it does.

Here are five ways that you can prepare your portfolio for greater volatility.

 

You Don’t Need to Sell Everything

Unless you are concerned about a complete market collapse (something along the lines of 1929), you don’t need to do a complete liquidation of your stock portfolio. A better approach may be to simply reduce your exposure to the market.

There are several ways to do this, short of selling off everything that you have:

  • Stop putting fresh investment capital into stocks, at least until the market settles down
  • Sell off positions that are making you especially nervous – if an investment has not reaped rewards in one of the biggest bull markets in history, you could be in for a rough ride in a bear market
  • Move some of the capital from your sales into stocks and funds that you believe will better weather a decline
  • Don’t make a complete exit out of stocks – you never know exactly when a new bull market will begin

You don’t need to exit stocks entirely, but you may need to lower the temperature a bit.

 

Accumulate Cash

Rather than selling off stocks, you could simply accumulate cash from any new investment proceeds that you put your portfolio. This will not only prevent you from increasing your exposure to stocks, but it will also allow you to build up a cash reserves so that you can begin buying stocks when the market bottoms out.

This will be a critical component of your overall investment strategy should a volatile market turn into a certified bear market. The best time to buy stocks is usually after a major sell off. That’s when stocks “go on sale”, and can be purchased for a fraction of what you would’ve paid at the top of the market.

Eventually, all bear markets turn into bull markets, and when that happens the stocks that you bought at the bottom are likely to be your best performers.

You can’t know when the market will bottom out, but if you have sufficient cash reserves, you’ll be prepared for when the moment does come. In a real way, accumulating cash is a way of preparing for the next bull market.

 

Invest for Income

This is a tough maneuver in an environment where it’s difficult to get much more than 1% on your money, especially in short-term investments. But there are certain stocks, mutual funds, and exchange traded funds that do provide above average dividend income. Since dividend stocks tend to weather market volatility better than pure growth stocks, you could favor these among your new stock purchases, or shift some of your money out of growth and into income.

The safe play of course is fixed income securities. Even though the rate of return on money market funds, certificates of deposit, and US Treasury bills is pathetically low, the principal values are fixed. That’s the best kind of protection in a volatile market environment.

When equity markets become volatile, the emphasis should shift from making money to preserving capital. Not only will that minimize the amount of losses you will sustain in a down market, but it will also provide you with the investment capital that you will need to invest in stocks later on.

 

Look Into Alternative Investments

You might also take a look at alternative investments. This can include real estate (particularly real estate investment trusts), commodities, and even precious metals.

The factors that cause stocks to fall could have the opposite effect on alternative investments. This is particularly true if market volatility is caused by or creates economic or financial disruption.

You don’t necessarily want to load up on alternative investments, but a small position could offset declines elsewhere in your investment portfolio.

 

Stay On Top of Your Career!

I just touched on how stock market volatility could result in economic or financial instability. This often happens because market volatility makes it difficult for public companies to raise capital, which can either end expansion plans or cause them to scale back operations.

This will have a material effect on the job market. For that reason, market volatility is an excellent time to sharpen your career skills and get more involved in your job than you’ve ever been. The idea is to increase your value at a time of increased competition for fewer jobs.

Though few people think of it this way, your occupation is actually one of your biggest investment diversification’s. It will provide you with income and capital at a time when your portfolio doesn’t. Market volatility should be viewed as a wake up call to refocus on your career.

How about you all? In this suddenly more volatile market, are you making any changes to prepare yourself and your portfolio for a less predictable environment?

Share your experiences by commenting below! 

***PHOTO: https://www.flickr.com/photos/psycho-pics/2952050268/sizes/n/

Pay Yourself First – Action Plan

saving money pay yourself first financial planning financial goals This following is a post by MPFJ staff writer, Jeff. Jeff writes about sustainable living and finances at his website, Sustainable Life Blog. Jeff really enjoys traveling with his wife as much as he can, to wherever he can.

Have you ever heard the saying “pay yourself first”?

If you’ve ever had a job, I’m sure that you have. I’ve been having that information pounded into my head for about 15 years now, ever since I got my first job as a lifeguard. My parents said it to me, and so did relatives that were older and trying to steer me towards good habits. I appreciated the advice and I took it heart, building up a nice savings before going off to college (which I promptly spent most of).

15 years later though, even after I’ve set up automatic withdraws from my checking to my savings account on every payday, I look at my check and notice that I’m still not being paid first. If you’re not sure what I’m talking about, grab your most recent pay stub and have a look at it and you’ll see what I’m talking about.

(I’ll use some made up numbers here, but the picture is the same). Lets say that I make $65,000 per year, and get paid monthly. Here are the people that get paid before I even have a chance to pay myself first. For this, lets assume I’m a single male living in a state with no income tax (All numbers monthly).
  • I pay federal income taxes of $987.52
  • I pay medicare taxes of $78.54
  • I pay Social Security Taxes of $227.50
  • I’m single, so my employer pays for my share of the health insurance. If I wasn’t, a percentage of my check would be going to cover my health insurance premiums.
  • This totals up to $1,293.56

Despite taking the advice I was given, there are 3 (or 4) people getting paid out of my wages before I do. Since I would rather keep more of my money than let them have it, I’ve been trying to figure out ways to put my name ahead of all those other groups siphoning money from my check. If you’re interested in that as well, here’s what you can do.

 

How to Pay Yourself First

The first (and probably most important thing you can do is contribute to a pre-tax retirement account, such as a 401k or a Traditional IRA. Most employers have a 401k option, and you can contribute to that account to the tune of $17,500 in 2014, or $18,000 in 2015 and beyond.

Even if you can’t fully fund your 401k each year, every dollar that you set aside will be a dollar that is truly going to you first. Once your 401k deduction gets taken out, then your taxes will follow (SSA, Medicare and Federal Income Taxes), but the taxes will be computed on a lower income. Using the above example, and assuming we will begin contributing the maximum to our 401k in 2015, here’s what it would look like. Your income would drop from 65,000 per year down to 47,000 per year, which would then be the basis for calculating the above taxes. Here’s how it would shake out:

  • Federal income taxes will be $636.98
  • Medicare & Social Security Taxes of 299.66
  • Total is 936.64, less than just the income tax rate in the above scenario

The income tax is a lot lower because it is based in a sliding scale, while medicare and social security taxes are at a fixed rate. In this situation, we are truly paying ourselves first, instead of paying the government first and paying ourselves second. Now, if you’re already maximizing your 401k contributions and are looking for more ways to pay yourself first, there are a few other options, but you’ll have to check with your employer. If you don’t have the opportunity to have a 401k with your employer, a 457 or a 403b plan will serve the same purpose. If none of those are available to you, then you’ll be able to use a traditional IRA, though the limits are much lower ($5,500, or 6,500 if you’re over 50).

 

Other Ways to Pay Yourself First

There are a few different ways to keep the good times rolling, and they may (or may not be) offered by your employer.

In addition to retirement benefits, you may also be able to pay for a few more things with pre-tax dollars, lowering your tax liability even further. In IRS terms, these are called Section 125 plans, but are more commonly called cafeteria plans. You may be able to deduct expenses related to some (or all) of the following things:

  • Health insurance expenses
  • Commuting or Parking (if you’re traveling on public transit)
  • Dependent care (day care)
  • Adoption (expenses related to adopting a child)
  • Group term life coverage
  • Health Savings Accounts

Obviously, not all of these will be useful to you, but if your employer offers them all and you’re already paying for things such as day care and commuting, it’s in your best interest to pay for those with tax free dollars so that you can lower your tax liability.

Even though we are paying for everything with pre-tax dollars, it’s still wise to pay yourself after the government takes their cut because of early withdraw rules for 401k’s and other retirement plans.

How about you all? How much do you pay for with pre-tax dollars vs post-tax?

Share your experiences by commenting below! 

***Photo courtesy of http://www.flickr.com/photos/76657755@N04/6881508144/in/

Improving Business Functionality

The following post is by Derek Boser. Enjoy!

Functionality is your business’s ability to perform well according to its intended purpose. There are two ways to help your small business increase functionality. Either you need to have more employees who are working longer hours to get more done, or they must find better ways of doing the job. For most small businesses, hiring more employees or extending employee hours is not a practical option. It increases business expenses and those costs may outweigh the overall benefits, particularly when functionality is already strained. If your profit margin is shrinking, it may seem counterintuitive to spend more money. However, by investing in high-quality barcode scanners and a system to organize them, you can greatly increase efficiency in several areas of business. Startup costs are low and you can see a return on your investment relatively quickly.

Barcode Scanners in the Shipping and Receiving Area

Barcodes can help with new shipments upon arrival before they are placed in storage, as well as organizing outgoing shipments to e-commerce customers. “Laser barcode scanning is a simple, easy-to-use and affordable process that offers a large scanning area and working range,” points out Material Handling and Logistics news writer Jorge Schuster. He recommends using the latest technology for the most accuracy in scanning. It may cost slightly more, but it will save time messing with sloppy machines.

When new shipments of product come in, they can be immediately scanned and added to inventory. This means they can also be distributed quickly, rather than waiting or becoming misplaced in a quick “out of the way” area. Likewise, the barcodes on items can be scanned before shipping to keep track of what has left the facility and what has not. For businesses that hold inventory for both in-store and online sales, this is important. Tracking sales in both areas means that inventory needs to be accurate for both as well. Having a high-quality barcode printer at your facility means that you can quickly and efficiently print new barcodes as needed.

Barcode Scanners in the Warehouse

Barcodes make a big difference in organization for warehouses and storage areas. Unless your business includes only a few products, keeping an accurate count of what you have requires attention to detail. Many small businesses still use spreadsheets to track inventory. However, a barcode system can simplify this process and help guarantee that those number are accurate up to the minute. When a warehouse barcode system is coordinated with point-of-sale registers, the result is a constantly accurate evaluation of real data.

When you are conducting an annual audit, the process can be time-consuming and require many employees. An example provided by Measurement Equipment Corporation showed that a business which typically required 25 employees over a weekend could perform the same task using barcode scanners with just four employees in only five hours. For all businesses, time is money. When a barcode system can cut your time to a fraction, the overall savings are significant.

Barcode Scanners at the POS Checkout

Utilizing a barcode scanner at the checkout can improve your point-of-sale activity in multiple ways. First, a barcode ensures that the price on the product is accurate. There is no need to price check an item or key in the price by hand when a simple scan puts all the relevant information at your fingertips.Inevitably, when an individual is responsible for accuracy, mistakes are going to be made. Most barcode scanners are easy to use and require only minimal training. When the checkout moves smoothly, customers are happy and more likely to return.

Second, a barcode scanner can help track sales information and calculate taxes. According to Entrepreneur.com, “Perhaps the most valuable way POS systems help you gain better control of your business is through their reporting features.” The  POS system can be synchronized with QuickBooks to maintain accounting records. Each sale is tracked using the software, giving users access to daily sales totals and at-a-glance tax amounts. Use this to analyze the most popular products, compare in-store sales with online sales, and see which payment methods are preferred.

Choosing the Right Barcode Scanner

For small businesses owners, a barcode scanner needs to be fairly inexpensive, simple to use, and compatible with existing hardware. The point-of-sale system by Shopify offers an all-in-one solution for upgrading all technology at once. It requires only a single iPod to coordinate and barcode technology uses the most up-to-date scanning capabilities. The Socket Mobile 1D barcode scanner is wireless, connects with your computer using Bluetooth technology, and has a battery life of up to 19 hours. Get more done throughout your shop every day. This sleek and efficient device offers a lot of benefits in a little package. It is also compatible with most other hardware, including both PC and Mac Computers.

Are You Two Financially Compatible?

relationships financial planning The following is a post by MPFJ staff writer, Derek Sall. Derek is the owner of the blog, LifeAndMyFinances.com, where he teaches people how to get out of debt, save money, and become wealthy.

It was about 6 years ago now that my fiancé and I attended a class and took a test to see if we were compatible. Basically, the test told us that we were not all that compatible and should reconsider our marriage to one another. I brushed off the test as a faulty result because we were most certainly in love and there was nothing that was going to break us apart.

After getting married, I soon realized that the test may have had more validity than I thought. We constantly had arguments about trust, respect, and of course, money. She was a spender and I was a saver, and the difference in our financial personalities was driving us apart. And, indeed, it did end up killing our relationship. We should have seen the signs and taken them more seriously.

 

How Do You Know If You Are Financially Compatible?

So how do you know if you and your girlfriend/boyfriend are financially compatible? What questions should you be asking yourself as you try to objectively study your relationship? Start out with the basics. Ask yourself these questions:

  1. Would I rather have money in the bank or would I rather spend my money as I receive it?
  2. Does my partner tend to buy things for short term happiness or do they like to stock money away for emergencies or investments?
  3. When talking about money with your partner, are you typically talking about what you can buy today, or how you should handle the money for the long-term?
  4. Do either of you typically have money in your bank accounts? Or do you tend to spend everything you make?

When I started college, I had $6,000 in the bank, owned my own vehicle, and already covered all of my own expenses like insurance, food, my cell phone bill, and gas for my car. My partner often had about $10 (or less) in her bank account, drove a car given to her by her mom and dad, and basically had no expenses because they were covered by her parents. She enjoyed eating out, buying clothes, and having fun at the bar. I enjoyed earning money through my side business, learning how to invest, and dreamt about how compound interest would grow my money in the future years. I don’t think we could have been any different financially, and it hurt us dearly. I thought my way of handling money was right, she thought her way of handling money was right, and we often fought about it. Don’t let this happen to you.

Are you a saver, but your partner is a spender? Before making that life-long commitment, talk with him/her about money and review how you both tend to save and spend. As awkward as it may be, look at each other’s bank accounts together and go over different transactions. If you think your partner is wasting money, talk with them about it. It’s better that you discuss these differences now than when it’s too late.

My friend Kevin was engaged to a beautiful woman a few years ago and she was fed up with her old car. She wanted a new one and was willing to finance it. Kevin believed that vehicles should never be financed and told her that if she went through with this purchase, he would likely break up with her (since it basically meant that they were financially incompatible). She did not take him seriously and went ahead with her $25,000 purchase, even though she only had about $500 to her name. He was disappointed because he liked her very much, but still went through with the break-up. As difficult as that was, I was proud of Kevin and very impressed with his decision. Today, Kevin is married to a woman that shares many of his beliefs (including financial) and they are incredibly happy together.

If you are in a situation where your partner is your financial opposite, you have a difficult decision to make. Either you believe that they will change (which often doesn’t happen – not for the long term anyway), or you should make a clean break because your future is destined to have a lifetime of financial arguments. Choose your mate carefully and be sure that many of your major beliefs align. If they do, you will likely have a very happy and rewarding life together.

How about you all? Are you and your partner financial opposites? Do you plan on continuing the relationship?

Share your experiences by commenting below.

***Photo courtesy of http://www.flickr.com/photos/26023255@N03/8612002388/

Setting Goals for Financial Success

money financial planning financial goals The following post is by Kevin Fullerton. Enjoy!

America is a country in debt. More than 160 million Americans have credit cards, and the average cardholder is $15,000 in debt. Fortunately, it’s never too late to turn around and start making wise financial decisions. Follow these five tips to start getting out of debt, find ways to save for the future, and get on the path to financial success.

 

Start With Small Changes

You don’t have to completely give up your way of life in order achieve financial stability. Set a goal to save $100 a month on groceries or stay in one night a week instead of going out. You really only need to save $20-$25 per grocery trip to reach $100, and staying in instead of eating out or going to the bar will save at least $10-20 per instance.

Time crunched the numbers found that bringing lunch to work at least one day a week instead of buying can save you $500 annually, and bringing food three days a week instead of buying saves $2,500. The same financial gains come with replacing a Starbucks latte with home-brewed or office coffee. Start small by bringing your own coffee and lunch once a week, and then challenge yourself to do it twice a week next month. Soon the savings will add up.

 

Cut Unnecessary Spending

Track your spending to get a clear picture of where your money is going. You would be surprised how many hidden charges and “convenience fees,” are added to Internet purchases and other bills. There are plenty of ways to cut back on these unnecessary fees. You could consider switching banks to one with better locations if you’re hit with ATM fees, and you can start using Ria Money Transfer as a cheap option to send money.

Spenders looking to cut back on their budgets might also need to make some tough cuts in order to save in the short run. Consider breaking up with your cable provider if you already subscribe to Hulu, Netflix, and Amazon Prime. Also, cutting just one of those streaming services can save you $100 annually, so end your service with the one you use the least often.

 

Start Paying With Cash

Psychologists have identified an occurrence called “coupling,” where consumers feel both happiness and loss when they make a purchase. The brain feels happy about the new item, but it also feels bad about losing money. Unfortunately, “de-coupling” occurs when we pay with credit cards, meaning the brain experiences the pleasure of a purchase without any of the pain. De-coupling also occurs with one-click and in-app purchases, where people buy items online without having to think about it.

To avoid credit card debt, pay in cash as often as possible. This way you only buy what you can afford at the moment, and you experience the pain and pleasure that comes with coupling.

 

Save to Make Purchases in Full

It may be tempting to buy a new car or finance furniture to redecorate your new home, especially when stores and car lots offer seemingly cheap deals. They may say you won’t pay interest for the first couple of years, but you’ll make up for it after the interest kicks in. Buying upfront will keep you out of debt and save you hundreds, or even thousands, in the long run when you don’t have to pay interest. Yes, it means you’re not driving a nice car for a while, but your credit and bank accounts will thank you.

 

Saving is a Marathon, Not a Sprint

One thing to remember as you start out on this journey to financial stability is that saving and climbing out of debt is a process. Bringing your lunch once a week adds up over time, not overnight. Saving to avoid financing your furniture will take months, and you might not see the results for years. Instead of following a couple quick tips to save, change your spending habits to make better decisions in the long run.

Different saving tips work for different people. Some can’t live without their lattes, while others need Netflix. Find what works for you and get on the path to financial stability today.

***Image via Flickr by 401(K) 2013