Dollar Cost Averaging…The Discussion Continues

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This week Brian and Bo dig into the dollar cost averaging discussion, and illustrate the pros and cons that DCA presents. The Dollar Cost Averaging strategy is fairly simple, it boils down to having systematic entry points into the market.

Investopedia defines dollar cost averaging as a technique of buying a fixes dollar amount of a particular investment on regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are purchased when prices are high.

While domestic equity markets are consistently reaching higher highs and setting higher lows people are asking what our strategy is moving forward. The answer is still the same: make a plan, keep it simple, and make it automatic. Dollar Cost Averaging helps address these concerns in up and down markets. Additionally, dollar cost averaging is a great technique to use to stick to your plan so that you stay in game during bad markets when dollars are most valuable. It works especially well in markets that are a little more volatile, but that is not to say go and throw all your money in micro-cap emerging market holdings. You must keep transaction costs, diversification, asset allocation, and asset location in mind when executing this strategy.

Conversely, there have been more than a few research papers written on this topic, about as many people seem to like DCA as the amount of people that do not. Vanguard jumped on the train in 2012 with their research report, Dollar-cost averaging just means taking risks later. Their research is based around the fact that, historically, markets increase 2/3 to 3/4 of the time and they go on to use this data to convey that lump sum investing should outperform DCA during the same amount of time. Vanguard’s research also illustrates that lump sum investing outperforms DCA on an average of 2.3% on average over every 10 year cycle they included in their study.

If 2.3% less in returns on a 10 year basis is the cost of taking a portion of your portfolio off the table for the 1/3 to 1/4 of the bad time, it does not seem like too big of a price to pay. We like to think of it as insurance against down markets, specifically when markets are in their current condition. A New York Times article by Paul Sullivan in 2011 used a few lines to portray the biggest benefits of DCA, that the person who put money in slowly was still better off than the person who tried to guess the direction of the market.

Broken Dreams: What’s Going on in Housing?

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Have you been waiting to buy or sell a house? Are you tired of renting and have been waiting to purchase your dream home? Brian and Bo give you their thoughts on the housing market so you can make sense of the current housing environment.

The guys first look at few explanations for the suppressed housing market we have experienced the past few years by analyzing an article by Paula Pant, 5 Stats You Need To Know About The Housing Recovery.

  1. New Construction Starts Are Apartment-Centric
  2. Unemployment For Young People Is Still High
  3. Sales of Existing Homes Are Bumpy
  4. Delinquencies and Foreclosures Are Returning to Normal
  5. Homes Are Still Undervalued, But Improving

Brian and Bo also look into an article from Tim Manni simply titled, Why Aren’t More Young People Buying Homes? Here is what they found:

  • A large portion of the buying audience is still absent – young, first time buyers.
  •  Young American’s are still in favor of home ownership. However, there are far fewer young buyers in today’s market than there were post-war baby boomers.
  •  In today’s market, purchasing a home requires substantial savings, long-term job income, a decent down payment, and limited debt.
  •  The trend is also different today than in years past as young buyers are coming to the table with more money and looking for smaller homes on smaller lots. Additionally, in recent years, townhomes have become very acceptable alternatives to single family homes.
  •  The demographic in personal decision making has changed with younger people, who are now mainly looking for ownership after starting a family and having children. A trait contrary to the baby boomers, which would opt for a small starter home at a younger age.
  •  Most young people today may not see a first home come into the picture until they are between 33-35 years old.
  •  Homes have become less of a financial investment in recent years and more of a use asset.

Up to this point, the guys only discussed the symptoms of the market. They continue by giving their thoughts on future interest rate environments and forecast how interest rates may affect the housing market moving forward. They look into the article, Why interest rates may stay very low for a lot longer, written by Tom Petruno.

The article touches on the world debt crisis and how it contributes to lower domestic interest rates. The author even mentions PIMCO co-founder Bill Gross’ estimate of the Fed’s rate being no higher than 2% through the end of the decade! It seems that the Fed is still gunning for major economic growth and willing to maintain suppressed rates if they see any sign of an economic slowdown. Additionally, the overseas central banks comprised specifically of the EBC and Bank of Japan have shown no signs of increased rates.

So, what did this mean for the future of domestic housing prices and interest rates? With no foreign pressure to increase domestic rates on the Fed, we should see the current trend continue, and we could expect thirty year mortgage rates from 4% to 5% for years to come, if all else holds equal. This means the marketplace for new loans could remain very affordable going forward, which would drive even more buyers to the market.

Check back next week, that’s right, next week, for a follow up on this topic as well as further discussion on strategies for entering and exiting the marketplace and how to make home ownership as affordable as possible.

 

Knowing When to Go Pro

Hiring a professional financial planner could possibly be the key that unlocks the door to your financial success.  At the same time, choosing the right advisor to work with is an important decision that can often seem overwhelming.  In today’s show, we discuss the services that planners will and will not provide as well as key things to look for when hiring a pro.

In the March edition of MoneyAdviser, Consumer Reports outlined what typical fee-only planners will and won’t do for their clients:

What they will do:

  • Help you figure your net worth:  Typically, a planner will have the client gather the necessary data and then create a statement to uncover other planning opportunities, such as insurance analysis or estate planning.  (Do-it-yourself tip:  Collect current statements for all assets and liabilities and use an online net worth calculator, such as Mint or Yodlee, to determine your net worth each year.)
  • Advise you on 401(k) investments:  Your planner should be looking at all the pieces of your financial puzzle, including your 401(k) to ensure that your saving and investing goals line up across the board.  (Do-it-yourself tip:  See if your 401(k) plan sponsor offers access to investment guidance or check out the online retirement-planning program, Financial Engines, for additional support.)
  • Help you invest a lump sum:  A planner should be able to offer tax-efficient investment advice to their clients, as this is a core activity of financial planning.  (Do-it-yourself tip:  Use Morningstar software to research mutual funds and stocks for your portfolio.  Also, check out Bo’s Money-Minute about investing in a lump sum vs. dollar cost averaging.)
  • Determine if you’re properly insured:  Your planner should be able to evaluate your insurance needs, as well as refer you to an agent that can provide the coverage.  (Do-it-yourself tip:  Do as much research as possible and shop around for the best rates.)
  • Assess if you’ve got enough to retire:  A planner can determine whether you are on track for retirement or if you need to explore other options, such as working longer or changing your lifestyle.  (Do-it-yourself tip:  Assess your potential income sources, including Social Security, and use an online tool to calculate where you stand.  Consumer Reports recommends T. Rowe Price’s Retirement Income Calculator and Analyze Now’s Free Retirement Planner.)
  • Coordinate your retirement income:  Planners can determine the best method for drawing funds from your various retirement accounts, while considering tax consequences.  (Do-it-yourself tip:  Consumer Reports advises that unless your retirements consists entirely of Social Security and a pension, you might want to consult a professional on this one.)
  • Help you plan for college funding:  A planner can guide you on the best ways to finance your child’s education.  (Do-it-yourself tip:  Visit www.collegeboard.com, www.savingforcollege.com, and www.finaid.com for additional resources.)

What they won’t do:

  • Help you pay down debt:  As a general rule, fee-only financial planners refer such clients to a debt counselor or a bankruptcy attorney.  (Do-it-yourself tip:  Contact the National Foundation for Credit Counseling if you need help with debt.)

The gray area:

  • Help you control your spending:  While many planners recommend following a budget, it’s not cost effective for you or the planner to spend hours together developing a detailed budget.  Most planners are interested in overall cash flow and will recommend cutting back if needed.  (Do-it-yourself tip:  Create a spreadsheet or utilize budgeting software like Quicken, Yodlee, or Mint.)
  • Create an estate plan for you:  Planners can help you decide the structure and tax efficiency of your estate, but an estate-planning attorney will be needed to draw up wills, trusts, and end-of-life documents.  (Do-it-yourself tip:  Contact an attorney to prepare or review your documents.)

If you decide that hiring a financial planning professional would be beneficial for you, the following credentials should stand out to you:

  • Certified Financial Planner (CFP):  holder has passed a 10-hour exam, has at least three years’ financial planning experience, and has completed an approved course of study.
  • Chartered Financial Consultant (ChFC):  requires eight college-level courses in financial planning and 30 hours of continuing education every two years.
  • Certified Public Accountant/Personal Financial Specialist (CPA/PFS):  CPA with specialized training in personal finance.
  • NAPFA – Registered Advisors:  holder meets strict education and professional requirements for membership in the National Association of Personal Financial Advisors, for fee-only planners.
  • Chartered Financial Analyst (CFA):  holder completes a series of three six hour exams and has four years of qualified work experience.

Hopefully this information will be helpful if you are considering hiring a professional to guide your finances.  Check us out on Facebook, YouTube, and please leave any questions or comments below!

 

Links to other things mentioned in today’s show:

Is This the End of Popping Vitamins?
On the Job, Beauty Is More Than Skin-Deep