Diversification: It’s A Big Deal!

With the major stock indexes hitting all-time highs and bond yields near all-time lows, it seems like a good time to talk about one of my favorite investing topics—diversification. It’s an important subject. Because when we think about building multi-asset portfolios, one of the things we try to do is reduce the effect of market volatility (those inevitable and sometimes dramatic ups and downs).

One of the best ways to do that is to build as much diversification as possible into the portfolio. This way, whatever the markets may do in the short- term, you’ll have a better chance of staying invested over the long haul, increasing the likelihood of reaching your goals. Now let’s consider some real world examples.

If you’ve been watching financial TV or reading the newspapers, you may have noticed the verbal drubbing bonds have been enduring lately. Indeed, the demise of bonds is a hot topic today. It’s actually a dramatic turn of events because as recently as February 2013,  clients wanted to “reduce risk” in their portfolios in 2012 by moving to bonds.

How quickly things change. When I speak to investors these days, many ask why they should own any bonds at all? Even Warren Buffett got into the act in early May when he declared “Bonds are a terrible investment right now.” I’m not one to argue with Mr. Buffett, but , we believe bonds will continue to play an important diversifying role in balanced portfolios.

Now we’re not saying that you should buy and hold a portfolio full of 30-year Treasuries which as of this writing on May 28, 2013, were yielding 3.31%. But we believe owning an actively managed global bond portfolio makes sense today. As Jeff Hussey, Russell’s chief investment officer of fixed income, recently wrote, “skilled active managers have the opportunity to build yield into bond portfolios if rates rise gradually (as the Fed has indicated it aims to achieve) in ways that don’t jeopardize the traditional role of the bond component of an overall portfolio: moderating equity volatility and providing income.”

What’s more, economist, Mike Dueker (who worked as an economist for the St. Louis Fed for 17 years before joining Russell in 2008) believes the Fed will hold interest rates at extraordinarily low levels until 2015. The Fed has said it won’t consider raising rates until real inflation reaches 2.5% and the unemployment rate hits 6.5%.3 If Mike’s view is correct, we do indeed have some distance to go before unemployment falls to that level, which is why we don’t see short-term interest rates rising in the near-term.

In regard to longer term interest rates, most economists are looking at the yield of the 10-year Treasury to be around 2.3% by year-end. That projection is a modest increase from where that rate is today—2.15%. So we are looking at short-term rates to stay at or near zero and the yield on the 10-year Treasury to modestly increase by year-end.

We don’t believe it’s a good time to give up on bonds. Nor do we think it’s a good time to reach for yield. If you find a bond with a yield that sounds too good to be true, it probably is. The best thing investors can do right now is to understand the role bonds play in a globally diversified portfolio.

Recent headlines about the U.S. equity markets continuing to hit and surpass their previous highs have led many investors to question what’s going on with their diversified portfolios.4 Why haven’t they kept pace with the markets? Investors naturally want all of the pieces of their portfolio to move upwards—preferably all the time—but that is not always the case.

In fact, when diversification is at its best, there will always be parts of an overall portfolio that lag while other parts excel (see Chart A). That’s because diversification, although it doesn’t assure profit or protect against loss in declining markets, is designed to be a powerful response to the fact that nobody has perfect knowledge of what tomorrow will bring.

Those investors who knew on January 1, 2013, that U.S. stocks would be the leading asset class through the first quarter of the year could have positioned their portfolio accordingly. But those hypothetical investors with flawless foresight don’t exist.

To address this uncertainty, a diversified portfolio may include modest allocations to asset classes that have historically moved in different patterns. So you might construct a portfolio that had quite a bit more than just U.S. stocks. For instance, you’d also want to include non-U.S. stocks (developed and emerging), fixed income (U.S. and non-U.S.), real estate, commodities, etc. Such combinations are meant to help create a performance experience that is ideally directionally correct and never spectacularly wrong

Regarding the fact that many U.S. equity indexes have touched and passed their previous highs (as of this writing!), let’s take a longer-term view of how diversification has performed from the prior highs of these indexes. In the exhibit below (Chart B), note that a hypothetical diversified index portfolio has seen quite a strong return path from its prior high of October 2007.

What’s more, the same factors that worked against a diversified portfolio in the first quarter of 2013 were additive over this longer time period. As Erik Ristuben, Russell’s chief investment strategist, stated the other day, “You know your portfolio is diversified when three of your 11 holdings are disappointments in a given period.”

Need more convincing? The late, great investor and author Peter Bernstein used to say,

“You’re not really diversified unless you own something you’re uncomfortable with.”

It’s something to keep in mind the next time you’re cursing those underperforming asset classes in your portfolio.

When A Relative Dies…A checklist: What To Do

When a loved one dies, the details that need to be taken care of by survivors may be particularly overwhelming during such an emotional time. This checklist is intended to help survivors handle the situations that need tending to, both at the time of death and afterward, as efficiently as possible.

Immediately…

There are tasks that family members will need to take care of very soon after the relative’s death.

◊ Arrange for a funeral or memorial service

• Find out what the decedent’s wishes were regarding their funeral or memorial service.

• Contact a funeral home or memorial society.

• Tell friends and family what the plans are. Ask them to help you contact people.

• Determine if all or part of the decedent’s funeral costs have been prepaid. (You can refer to agreement documents the deceased may have kept or ask at the funeral home. Also check with the cemetery to see if the deceased had a prepaid plot and/or burial insurance.)

• Veterans, service members, and their dependents can be buried in a national cemetery for free. If buried elsewhere, veterans who at the time of death were entitled to receive VA disability payments can receive an allowance toward burial and funeral expenses. This allowance may be greater if the death was related to military service or if it occurred in a Veterans Affairs (VA) hospital. Other benefits may include a ceremonial American flag, a headstone, and Presidential memorial certificate.

• Submit an obituary to the decedent’s local paper(s). Make sure you include a charitable organization for donations if that is preferred over flowers.

• Keep track of all donations, flowers, and cards received. Purchase sympathy acknowledgement cards, or use those sometimes supplied by the funeral home, and send to the list.

◊ Secure the decedent’s tangible property, such as silverware, dishes, furniture, or artwork.

Later on, you and the executor will need to have these items appraised and distributed according to the decedent’s wishes. This may be a difficult task if the property has already been distributed to various family members. The executor is responsible for filing an inventory and appraisal of the decedent’s assets with the probate court within 90 days following the death.

After The Funeral

There are several financial matters that need to be taken care of when a relative dies. However, you do not need to take these steps immediately. You and your family will need time to grieve. Most financial consultants recommend that you do not make any changes or long-term decisions about finances for at least six months to a year after your loved one’s death. But when you are ready to tackle the administrative details, there are some steps you’ll need to take.

◊ Notify the decedent’s attorney about the death.

◊ File the will and petition at the probate court in order to be appointed executor or personal representative.

◊ Contact witnesses to the wills and the executor of the estate, if someone else has been appointed to that role.

◊ Organize a meeting to review the will and handle the estate settlement.

If interested parties are unable to attend, they can obtain copies of the will.

◊ Ask the executor to determine the contents of the decedent’s safe deposit box and acquire permission to remove the contents.

◊ Meet with the attorney (or your own attorney) to review the steps necessary to administer the decedent’s estate (the probate process).

Bring as much information as possible about finances, taxes, and debts. Don’t worry about putting the papers in order first; the lawyer will have experience in organizing
and understanding complex financial statements.

Documents you should bring include:

• the will — The attorney of the deceased should be able to provide you with the will. Also check the decedent’s safe deposit box. (The safe deposit box, however, is not a good place to keep a will. The bank may seal the box upon notification of the box holder’s death.)
• copies of the death certificate — You can get these from the funeral director, and it’s a good idea to get at least 10 to 20 copies.
• a copy of the decedent’s birth certificate (and your marriage license if the deceased is your spouse)
• financial statements, including those from banks, brokerage houses, and insurance agencies
• other financial documents, including tax forms from prior years, unpaid credit and utility bills, and mortgage payments
• the decedent’s Social Security number and Veterans Affairs identification number, if applicable

◊ Find a financial institution (i.e., a bank or credit union) in your area who can provide you with signature guarantees for certain documents if necessary.

◊ Notify the decedent’s creditors. Close any credit card accounts.

◊ Bills and bequests should be paid from a single checking account, either one you establish or one set up by your attorney, so that you can keep track of all expenditures.

However, don’t pay off the decedent’s debts from your own funds. The estate is responsible for any debts of the decedent. Paying off the debts only increases the net value of the estate, which may mean you’d then have to pay higher inheritance taxes.

◊ Distribute property to heirs and legatees.

Generally, executors do not pay out all of the estate assets until the period runs out for creditors to make claims, which can be as long as a year after the date of death. But once the executor understands the estate and the likely claims, he or she can distribute most of the assets, retaining a reserve for unanticipated claims and the costs of closing out the estate.

◊ The executor must file an account with the probate court listing any income to the estate since the date of death and all expenses and estate distributions.

Once the court approves this fi nal account, the executor can distribute whatever is left in the closing reserve and finish his or her work.

◊ Make sure any homeowner’s or auto insurance policies offer coverage during the probate process.

◊ Restructure any homeowner, casualty, and life insurance policies, as necessary.

◊ Change the registration of investment securities by contacting the decedent’s investment professional or the brokerage firm. Also make sure that if the deceased placed any orders, they are immediately suspended.

◊ Change the title on any property (including real estate and automobiles) owned by the deceased.

◊ Contact fi nancial institutions to determine what information they need and in what format to change registration on any accounts the decedent may have had. If you have any joint bank accounts with the deceased, have the latter’s name removed.

◊ Review your own estate plan, including insurance policies, legal documents, investment plans, etc., and revise as necessary.

◊ File a federal estate tax return within nine months after the death if the estate exceeds $2.0 million in 2005.

(The Applicable Credit will be $2 million for 2006 – 2008, $3.5 million in 2009, and then will be fully phased out in 2010. After 2010, these provisions return to 2001 levels unless new legislation is passed. This presents challenges. It is essential to seek advice by consulting with an experienced estate planning professional.)

◊ Contact the employee benefi ts department of the decedent’s employer.

Ask for a list of death benefits and how they are paid. You will need to provide several certified copies of the death certificate as well as other documentation requested.

◊ Determine how to arrange for any income you may be getting from the decedent’s retirement plan benefits, union survivor benefits, Social Security, Veterans’ benefits, and life insurance policies.

Social Security Benefits

You will need to go to your local Social Security offi ce in person. Bring the decedent’s Social Security number, death certifi cate (a certifi ed copy), and proof of relationship (such as a marriage license and your spouse’s birth certifi cate). You should receive your benefi ts after the 60-day processing period. A spouse or any minor children who were living with the deceased at the time of death receive a one-time Social Security payment. A widow or widower can also receive monthly benefi ts at age 65 or at any age if he or she is caring for an eligible minor (under age 16 or disabled). Minor children (under age 18, or 19 if they are still attending school) receive monthly Social Security benefi ts. If you are divorced from the deceased after a marriage of at least ten years, you may be eligible for Social Security payments. Call the Social Security Administration at 1-800-772-1213 Monday – Friday from 7 a.m. to 7 p.m. Eastern time for more information on benefi ts for which you may be eligible.

Veterans’ benefits

Call the Offi ce of Veterans Affairs at 1-800-827-1000 to find the offi ce nearest you. You should go to the offi ce in person and bring the decedent’s birth certificate, Social Security number, death certificate, and Veterans Affairs records. Benefi ts to a spouse and heirs may include pension payments and fi nancial aid for education costs.

Insurance benefits

There are several types of policies. You should review the decedent’s policy carefully to determine the benefi ts you should receive. Policies specify that the payments are made either one time only, monthly for a fi xed period, or monthly for life. Some policies have different payment stipulations in the event of suicide or accidental death. Contact the insurance company or agent to obtain the death claim forms you will need to complete and submit. With the forms, you’ll need to include a certifi ed copy of the death certifi cate and copy of the insurance policy.

Retirement plan and pension benefits

Call the employee benefi ts department of the company that sponsors the plan. Some plans offer payment to a spouse and children over a set period. Other plans might have required the deceased to designate a benefi ciary who would receive a lump-sum payment or make the payment simply to the estate.

DOWN THE ROAD…

The probate process can be lengthy, sometimes stretching two to three years or longer. In some instances, however, probate may be avoided completely, such as when an estate consists of trust assets. The executor should be able to anticipate how long settlement of the estate will take. There is no quick fi x for the overwhelming grief and stress undoubtedly experienced after the death of a loved one. Survivors should consider putting off making any extraordinary changes in their lives, such as moving right away, reinvesting assets, selling the family home, remarrying, etc. Making rash decisions now could mean having great regrets later. Instead, it’s best to take time to grieve and heal from one of life’s inevitable, but most traumatic, experiences.

When Divorce Happens

Divorce can impact your life immensely. No one can ever be fully prepared to deal with the feelings of grief, anger, and sadness that follow — and few are prepared to face life alone once again. If you have children, the situation gets even more complicated and you must consider their prospect of being brought up in a single-parent household. The realization of being single again can be emotionally draining. The last thing you want to do is think about your finances, but it’s an important issue that you can’t afford to overlook. Money often becomes a point of contention in the battle between you and your spouse, and your own personal financial situation can be thrown into disarray. We have provided information that can help you with concerns you may face after your divorce.

Managing A Divorce

More than a million times each year in this country, couples call it quits. The price can be high. Emotionally, divorce turns lives topsy turvy, as the lives of everyone involved — wife, husband, children, other family members, even friends — can change dramatically. Even in the most amicable break-up, it is not uncommon for the wounds to take years to heal. On top of the emotional distress that can accompany the end of a marriage, finances are often thrown into disarray. If you have just gone through a divorce, there are some important issues you need to address. Unfortunately, it is not uncommon for at least one exspouse
to delay or ignore taking action…either because of the emotional pain involved or a desire to retain some tie with his or her ex spouse. To protect yourself and begin building financial security for the future, you should do the following:

• Revise your Will. Relationships and responsibilities have changed. Your Will usually determines how your estate is to be distributed at your death. Review it immediately to make sure it reflects your new situation and objectives so that, in the event of your death,
your assets can go to the people you designate. Talk to your attorney about your options.

• Sever all unnecessary financial ties with your ex-spouse. Your divorce decree may mandate child support, alimony, or life insurance on one of your lives for the benefit of the other or for your children. Other than these requirements, it is generally a good idea to disentangle yourself financially to reduce your liability. Start by contacting lenders and making sure all joint credit cards have been canceled and new ones have been issued in your name only. Otherwise, in many states, your liability for your ex-spouse’s bills will continue.

• Update your retirement plan beneficiary designations. As with life insurance, survivor benefits will be paid to the person you named in your qualified and nonqualified plans. Even if you obtain title to the funds as part of the divorce, this does not automatically change the beneficiary. Since the beneficiary is almost always a spouse, review your named plan beneficiary to make sure it reflects the changes in your life. Talk to your investment
professional for help or contact retirement plan administrators directly.

• Review your overall retirement situation. Divorce can scramble your retirement nest egg, separating you from assets that may have taken years to accumulate. You may want to start “powersaving,” or accelerating the amount of income you put aside, if you hope to retire on schedule. If you are not already doing so, this may also be a good time to start making maximum contributions to your employer sponsored 401(k) plan and your own IRA. You may want to consider supplementing these with annuities.

• Review your life insurance, especially ownership (if not addressed as part of the divorce) and beneficiary designations on your existing coverage. Beneficiaries cannot be changed by
your Will, so you should complete a change-of-beneficiary form with the insurance company. It is common for people to neglect this task; then, decades later, the “wrong” spouse receives life insurance proceeds at the insured’s death. That’s why it’s better
Divorce can impact your life immensely. No one can ever be fully prepared to deal with the feelings of grief, anger, and sadness that follow — and few are prepared to face life alone once again. If you have children, the situation gets even more complicated and you must consider their prospect of being brought up in a single-parent household. The realization of being single again can be emotionally draining. The last thing you want to do is think about your finances, but it’s an important issue that you can’t afford to overlook. Money often becomes a point of contention in the battle between you and your spouse, and your own personal financial situation can be thrown into disarray. We have provided information
that can help you with concerns you may face after your divorce to address the issue now. Divorce creates new relationships and new responsibilities, as well as uncertainties for the future. Taking the above steps will help reduce some of that uncertainty, at least
in your financial life.

Finances of Divorce

Case in point: During their 18 years of marriage, Susie and Bruce had built a comfortable, stable life. Through hard work, they had achieved the American Dream: a four-bedroom home in a suburban community with safe, quality schools; a growing nest egg that included a college fund for the children; and enough discretionary cash left over to vacation several times a year.

Then they divorced. By the time the dust settled after two years of legal struggles, the house was gone, as were most other assets. Bruce lived in a busy apartment complex, with noisy neighbors and a three-by-six foot balcony; Susie, at age 40, declared bankruptcy and moved back in with her mother. Their two teenage daughters drift restlessly between Mom’s and Dad’s and the homes of friends, having abandoned earlier plans for college.

Divorce can be a financial disaster. When a couple decides to call it quits, it is almost always for personal reasons such as incompatibility or infidelity. The issues quickly shift to money, however, and the result can be a slugfest, even in so-called amicable break-ups. Everybody loses, except, perhaps, the attorneys.

It need not be that way. Few people will ever find the divorce process fun. Nonetheless, it need not turn your life into a financial wasteland. There are ways to reduce the costs.

Divorce is expensive, as many of the more than one million couples who call it quits each year will tell you. Exact figures are difficult to come by, says Lynne Diamond, president of a consulting firm called Divorce Wizards. In an exclusive interview in 1999 with newyorklife.com, Diamond said that, “by best estimates, the average cost is about $18,000 a person.”

High-conflict divorces, in which large assets are involved, can push the price through the roof, says Laura Johnson, family law consultant and author of Divorce Strategy: Tactics for a Civil Financial Divorce (Broken Heart Publishing, 1998). According to Johnson, the final price tag came to more than $200,000. Worse, the conflict can go on for years. Ms. Johnson’s book provides more information on stemming the cost of divorce.

Estate Planning For The Single Parent

The single-parent family is a fact of life today. According to 2002 figures provided by the U.S. Census Bureau, of the 72 million children under age 18 in the United States, 28% (19.8 million) live with one parent.

These single-parent households are economically unique, especially when it comes to protecting dependents from financial uncertainties. That is because, unless there is an absent parent providing support, economic security hinges on the custodial parent’s income. This creates an at-risk situation. The reason: The death of the custodial parent will almost certainly lead to the end of the existing family unit.

If you are a single parent, your premature death could have consequences for your children in several ways beyond the emotional loss of a parent. A third party could administer their inheritance if they are minors. Your assets could be put in a trust and managed by a court-appointed administrator whose fees would be taken from your estate. Other family members could become entangled in court battles over custody, guardianship, and financial control.

To protect your children, you should consider the following:

• Make sure your Will is updated. Otherwise, everything involving your estate and your children’s financial future may be decided by a probate judge.

• Select a guardian for minor children and do so with great care. Select someone who is capable and willing to take on the tremendous responsibility of raising your children if anything should happen to you. Make sure guardians understand that this is not a ceremonial honor (such as becoming a godparent), but the acceptance of a legal responsibility. Talk to your attorney about drafting a guardianship document and making it part of your Will.

• Leave written instructions regarding everything from how you want your children raised (religious preferences, college plans, etc.) to how you want assets managed and used to
benefit and protect your children. These will serve as guidelines to help those who assume the responsibility of raising your children. Put these instructions in your Will. NYLIM’s
LifeFolio personal document management system can help you prepare your loved one for an emergency situation. You can find that at http://www.mainstayfunds.com.

• Make sure your children’s future needs are funded. That is why it is important to maintain a strong insurance and investments program. Mutual funds, life insurance, and college savings plans can provide the funds to raise your children and help fund their
education. Do not name minor children as beneficiaries. Instead, consider using a trust, as indicated.

• Make trust arrangements. Pick a trusted advisor as trustee — so your assets are managed according to your wishes for your children’s benefits. Talk to your attorney about the details.

Recommendation: Don’t delay the need for estate planning for your peace of mind and the sake of your children.

If you would like to talk more in depth about your own situation or someone you know, please feel free to e-mail me.

This is my first blog entry.  Some of you will have to be patient with me.  I’ll pick up on the technology pretty quick.  My intention with this blog is to open up discussions about saving and investing.  I am a licensed, practicing, financial advisor.  By holding a license, I am forbidden to give advice to someone without knowing them. I also must by, SEC and NASD rules, hold a license in the state in which you reside.   For this reason,  I will stay anonymous.  If through the blog and discussions you would like to contact me directly, I will facilitate that.