Change is Coming: FAFSA Edition

Contributed by: Nick Defenthaler, CFP®

As like many Michiganders, fall is my favorite season. What’s not to love? College football, sweatshirt weather, Halloween festivities, the changing colors of leaves, and crock pot meals just to name a few. Fall is also the time where college students are in full gear with their first semester and getting back into the academic swing of things. This is also a time where parents often put pen to paper to determine how to help fund tuition for their kids, both with savings and the financial aid system.  As parents consider their options for financial aid, the first place to turn is typically the FAFSA (Free Application for Federal Student Aid) form, which is the main determining factor of how much financial aid a student will qualify for. In years past, the FAFSA was due in February each year and was completed with financial information based on the previous year. The logistics of the filing deadline made it very difficult for families to gather the necessary financial information to make sure they completed the form accurately and timely for the February deadline. Talk about a hassle. Good news – this is all changing starting this year. 

An Executive Order signed by President Obama in 2015 (made effective for October 2016) contained changes designed to streamline the process for the 2016-2017 school year. Now families can provide financial information based upon an earlier time frame, deemed the prior-prior-year. For example, a student who will enter college in the fall of 2017 will now furnish financial information from the 2015 tax return instead of the 2016 tax return. In addition, the FAFSA will now be made available in October of each year, rather than January 1st, giving parents more lead time to complete the form.

Here are some main takeaways from the change that could be relevant for your situation:

1. Easier Application Process: By using financial data from two years prior (PPY), applicants will be able to take advantage of the IRS Data Retrieval tool – an innovative tool where income tax data can be pulled directly from the IRS into the FAFSA form, saving time and improving accuracy. 

2. Start Earlier: Initial college financial aid decisions will be made based on an earlier time-frame – the tax year which begins in the middle of the student’s sophomore year of high school.

3. Finish Earlier: The final financial aid decision will also be made at an earlier date during college—the tax year which begins in the middle of the student’s sophomore year of college will determine aid for the senior year.

4. Extended Family Assets: Assets held in grandparent-owned 529 accounts that are often saved for the final year of college as a planning strategy may now be used a year earlier with no negative impact on the student’s future financial aid eligibility.

5. 2015 Deja vu: Because of the new rules with the FAFSA, the 2015 tax year will be used twice in calculating financial aid. The first usage will be for the 2016-2017 school year and once again for 2017-2018 due to the new prior-prior year arrangement.

If you have questions on filing the FAFSA or planning strategies around funding tuition with college savings, don’t hesitate to reach out to us!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional. Raymond James is not affiliated with FAFSA.

Third Quarter Investment Commentary

Contributed by: Angela Palacios, CFP®

After a very interesting first half of the year with early negative returns, followed by Brexit in June, markets performed well in July and then quieted down in the month of August. September brought with it a bit of increased fluctuation when investors thought the Federal Reserve Board may raise rates at the September meeting but calmed back down when that fear subsided. As of October 1st the S&P 500 gained over 7.8% this year including dividends with nearly half of that gain (3.85%) coming in the third quarter. The year-to-date story, however, has not been told primarily by the S&P 500 as we have gotten so used to over the past several years. 

Diversification Works Again

This year other asset classes have had the opportunity to shine as Emerging markets; commodities and high yield have topped S&P 500 returns. Diversification seems to once again be working after a long drought. The chart below shows performance of various asset classes by year with the best performer’s bars on the top of the stack and worst relative performers on the bottom. Notice the Green line (S&P 500) has been near the top of the list for the past three years but that hasn’t been the norm over the last 14 years. This year we have returned to the more normal pattern where the S&P doesn’t dominate.

Source: Blackrock

Rate Hike Kicked Down the Road

Not surprisingly the Federal Reserve opted not to raise interest rates last month. The dissention among the voting members, though, was surprising. Three members of the voting board voted for an interest rate increase going against Janet Yellen’s recommendations to hold course. This is the first noted dissention since 2014. The next meeting occurs in November just a few short days before the election. It is highly unlikely they will make waves that close to the election so it looks likely that if a rate increase occurs it will be at the December 13-14th meeting.

Election

I would be avoiding the elephant in the room if I didn’t mention the election. Jaclyn Jackson wrote a piece on political parties and their impact to your portfolio, I would encourage you to read this before making any rash investment decisions based on the election. The battle between Clinton and Trump is proving to fulfill every media fantasy. They both certainly make for excellent headlines. Trump will be doing his best to rally voters to change by making promises but also by making things seem worse in the economy than they likely are. While there is often some volatility leading into an election because of these negative headlines, usually after the decision has been made markets settle down and most often continue in a positive direction the remainder of the year.

Checkout Investment Pulse, by Angela Palacios, CFP®, a special summary of the Morningstar ETF conference she attended.

Harvesting tax loss may sound counter-intuitive but can go a long way to enhance net after-tax returns for investors. Find out some strategies to implement and common mistakes to avoid.

This month Nick Boguth, Investment Research Associate, gives us an introduction to cost basis methods and what we typically have our clients utilize.

Jaclyn Jackson, Investment Research Associate, explains to us how just like the right mix of ingredients for a tasty meal, we also need to know the asset allocation mix that makes our investment journey palatable.

If you have topics you would like us to cover in the future, please let us know! As always, we appreciate the opportunity to meet your financial planning and investment needs. Thank you!

Angela Palacios, CFP®
Director of Investments
Financial Advisor

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing involves risk and investors may incur a profit or a loss. Investing always involves risk, including the loss of principal, and futures trading could present additional risk based on underlying commodities investments. Diversification does not ensure a profit or guarantee against a loss. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

Investor Basics: Cost Basis Accounting

Contributed by: Nicholas Boguth

Cost basis: one of the many things we at The Center monitor in order to serve our clients. Most of us know that cost basis is the original value of a security (usually the purchase price), but a lesser known fact is that there are many different accounting methods used to calculate tax liability when the decision is made to sell a security. The table below describes the different methods available.

This is important because the incorrect accounting method could lead to an unnecessary or unexpected amount of capital gains. Hypothetical example: you bought 50 shares of Tesla back in 2012 when it was $30, and another 50 shares in 2014 when it was $200. Now it is 10/5/16, and you went to sell 50 shares at its current price of $210. How much of your sale would be considered capital gains? Well, if your accounting method was FIFO, the answer would be $180 per share, whereas if your accounting method was minimum tax (The Center’s default option) then it would be $10 per share.

The outcomes between accounting methods can be drastically different, and each method has its place depending on your objective. Decision-making from client to client may vary which is where the help of a financial professional can come into play. Please read our Director of Investments, Angela Palacios’, CFP®, Investor Ph.D. blog for insight into more strategies that The Center practices in order to help minimize tax burden.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Boguth and not necessarily those of Raymond James. This is a hypothetical example for illustration purpose only and does not represent an actual investment. This information is not intended as a solicitation or an offer to buy or sell any security referred to herein. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Investor PhD: Harvesting Losses and Avoiding Gains

Contributed by: Angela Palacios, CFP®

This may sound counter-intuitive, but taking some measures to harvest tax losses on positions and avoiding unnecessary capital gains distributions this time of year can go a long way in improving your net (after tax) returns.

Make sure you are reviewing your portfolio throughout the year for tax losses to harvest.  Stock losses were at their peak during mid-February, but if you waited until this fall to think about tax loss harvesting you have most likely missed the boat as much of those losses have been recovered and moved on to higher highs. The end of the year is rarely the best time of the year to harvest tax losses. 

Harvesting losses doesn’t mean you are giving up on the position entirely. When you sell to harvest a loss you cannot have had a purchase into that security within the 30 days prior to and after the sale.  If you do you are violating the wash sale rule and the loss is disallowed by the IRS. Despite these restrictions, there are several ways you can carry out a successful loss harvesting strategy.

Loss harvesting strategies:

• Sell the position and hold cash for 30 days before re-purchasing the position. The downside here is that you are out of the investment and give up potential returns (or losses) during the 30 day window.

• Sell and immediately buy a position that is similar to maintain market exposure rather than sitting in cash for those 30 days. After the 30 day window is up you can sell the temporary holding and re-purchase that original investment.

• Purchase the position more than 30 days before you want to try to harvest a loss. Then after the 30 day time window is up you can sell the originally owned block of shares at the loss. Being able to specifically identify a tax lot of the security to sell will open this option up to you.

Common mistakes some people make when harvesting:

• Dividend reinvests count!!! So if you think you may employ this strategy and the position pays and reinvests a monthly dividend you may want to consider having that dividend pay to cash and just reinvest it yourself when appropriate or you will violate the wash sale rule.

• Purchasing a similar position and that position pays out a capital gain during the short time you own it.

• Creating a gain when selling the fund you moved to temporarily that wipes out any loss you harvest. Make the loss you harvest meaningful or be comfortable holding the temporary position longer.

• Buying the position in your IRA. This will violate the wash sale rule just like if you bought it in your taxable account. This is identified by social security numbers on your tax filing. So any accounts held under those same tax payer IDs are not allowed to purchase the security in that 30 day window of harvesting the losses.

Personal circumstances vary widely so it is critical to work with your tax professional and financial advisor to discuss more complicated strategies like this!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Third Quarter Investment Pulse

Contributed by: Angela Palacios, CFP®

Special conference edition! September brought not only the beginning of school and cool evenings but also the Morningstar ETF conference. Jaclyn Jackson and I were able to take a few days away to attend some enlightening sessions full of hearty debate, idea sharing, and new information during the first week of September. Some of my key takeaways follow!

Key takeaways from the Morningstar ETF conference:

• The Sustainable investing (ESG or socially responsible preferences) space has grown rapidly in the past 5 years. 80% of companies in the S&P 500 published sustainability reports in 2015 verses only 20% in 2011. Sustainability reports discuss a variety of issues for the firm including pollution mitigation, water use, and best practices for attracting a diverse workforce. Institutions, women and younger investors have been driving this demand. To learn more click here.

• There is more than meets the eye when performing due diligence on index holdings and exchange traded investment options. A low expense ratio isn’t the bottom line of costs associated with an investment. Stocks that make up the index and how an index is built and changes over time can greatly impact unseen costs. Also the experience of the people trading the portfolio can have a large impact. 

• Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, shared her views on Central Bank Policies, recession probability, sluggish growth, and interest rates. She feels the risk of recession remains low. She also sees higher interest rates as a positive more than a negative. Savers are better for the economy then the spenders, according to Ms. Sonders, so it is time to give them a chance!

• Behavioral investing rounded out the sessions. Sarah Newcomb Ph.D., Behavioral Economist, rolled out Morningstar’s new tool kit on behavioral investing. In rocky markets we have a tendency to want to do something. Anything to make us feel better. Much like a soccer goalie during penalty kicks, the best thing they can do is to stay in the middle and do nothing, rather than try to anticipate and move in the wrong direction. Fans don’t like this though; they would rather see the goalie do something. In investing the best thing to do during turbulent markets is often to do nothing, but that goes against our own nature. Bottom line, we need to make a plan during calm times to prevent ourselves from making bad decisions in the moment.

Stay tuned all this week for more investment, market, and quarter three updates!

Angela Palacios, CFP® is the Director of Investments at Center for Financial Planning, Inc.® Angela specializes in Investment and Macro economic research. She is a frequent contributor The Center blog.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios and not necessarily those of Raymond James. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Investing involves risk and investors may incur a profit or a loss. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results.

Simplifying Your Retirement Plans

Co-Contributed by: Matthew E. Chope, CFP® and Gerri Harmer

If you’re like most, you have multiple retirement plans from previous employers. These may be hard to track and lead to piles of paper statements. Recent rulings make it easier to consolidate accounts and potentially save on fees.

Recent changes in rulings now allow most retirement plans to be “rolled over” to other qualified plans that previously were not allowed including Simple IRAs and 401ks. One exception is you must hold your Simple IRA for two years before funds can be moved in or out of the account without paying tax penalties.  Pictured is a chart showing permissible roll over types.

Things to consider before acting:

• Compare investment offerings and fees for each account to find the best choice to roll into. These are usually located on your statement or in the prospectus. You can also call the phone number on your statement to inquire.

• Consider consulting a financial advisor to get the best overall financial picture.

• Funds must be withdrawn and redeposited within 60 days to avoid paying tax penalties.

If you have questions on how to get started, or want to talk with a professional on what your rollover options our, please reach out to your CERTIFIED FINANCIAL PLANNER™ here at The Center.  

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

Gerri Harmer is a Client Service Manager at Center for Financial Planning, Inc.®

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets. Tax matters should be discussed with an appropriate tax professional.

Non-Qualified Deferred Compensation (NQDC) Plans

Contributed by: Kali Hassinger

A Non-Qualified Deferred Compensation plan (NQDC) is a benefit plan offered by some employers to their higher earning and/or ranking employees. Some of you may have heard of these plans referred to as “Golden Handcuffs” because they often require that an employee stay with their current employer, or at least not move to a competing firm, in order to receive the compensation. This nickname provides both a negative and positive connotation, but, when appropriate, NQDC plans can offer employees greater control over their income, taxes, and financial future.

NQDC plans, unlike your typical 401(k), are not subject to limitations or non-discrimination rules. That means that the employer can offer this benefit to specific employees and there is no restriction on the dollar amount deferred. This is advantageous to an employee who is expecting to be in a high tax bracket, is already fully funding their retirement savings plan(s), has a surplus in cash flow, and may foresee a time when their taxable income will be reduced. With this strategy, the employee and employer agree upon a date in the future to pay the employee his/her earned income. Both parties agree to when the funds will be received in the future, and it isn’t taxable income until it is actually received by the employee.

In most cases, these plans are considered “unfunded” by the employer, which means that the money isn’t explicitly set aside for the employee. This scenario creates a certain level of risk for the employee because the funds would be subject to any future bankruptcy or creditor claims. There are some strategies that the employer can utilize to mitigate the risk (involving trusts and insurance), but they need to uphold the NQDC status. Otherwise, the deferred compensation amount will become fully taxable to the employee along with a 20% penalty. Funded NQDC plans exist as well, and these plans set the deferred compensation assets aside exclusively for the benefit for the employee. Funded plans, however, open themselves back up to ERISA requirements, making them far less popular.  

When an employer and employee enter in a NQDC agreement, it can be a win for both parties.  Employers are securing that valued employees will remain loyal, while employees are able to reduce their taxable income now. 

Kali Hassinger, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.®

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The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Kali Hassinger and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with the appropriate professional.

Financial Planning: Creating a Road Map for your Future

Contributed by: Laurie Renchik, CFP®, MBA

Setting the stage for a comfortable retirement can start with your first paycheck and continue through every stage of life. Whether you are at the beginning of your career or well on your way to reaching financial goal milestones, one of your options along the way is to develop a relationship with a financial planner.

Why partner with a financial planner?

When you establish a relationship with a financial planner you start with a customized financial plan and pair it with ongoing investment advice. That way the plan leads investments rather than the opposite. By pairing a plan—informed by long term goals—with your investment strategy, investment decisions are based on you rather than a starting point of past performance or beating the market. 

If we could simply lay out a plan, set it on autopilot and land on time at our destination it would take all of the financial wondering and stress out of planning for the future. Life, however, is no ordinary journey from point A to point B; it is likely that unexpected turns happen at the most inopportune times. Turns like career changes or getting close to retirement are inflection points in life where your financial planner can make a big difference. 

I have found that the most successful financial planning relationships are focused on real life advice, in real time managing change as it happens. Looking forward helps allows for a more proactive approach, reducing the importance of relying on the rear view mirror for perspective. While it may be tempting to start with investments and lay out your plan later, it is not a complete solution. Without financial planning investing alone may not produce the results you are counting on. 

Here are my top three route changers that can add value in your journey with a financial planner:

1. Financial planning doesn’t mean planning for the day your health begins to fail; it means asking where do I want to be in three years? Ten years? Twenty years?

2. Steer your financial plan by making investment decisions based on your goals and current circumstances. It may be tempting to jump straight to investments. Resist the temptation for a more focused journey.

3. Tracking your progress through every stage of life is an effective accountability check and helps increase the likelihood of reaching your destination on time and prepared.

So whether you’re beginning your financial journey or nearing a big inflection point, feel free to call us and ask how we can help create a plan and map out your future to better align your investments with your goals.

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc.® In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie is a member of the Leadership Oakland Alumni Association and is a frequent contributor to Money Centered at The Center.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Laurie Renchik and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Life Planning: When Real Life Trumps Technical Financial Planning

Contributed by: Matthew E. Chope, CFP®

A meeting I had recently with the daughter of some long-time clients reminded me that sometimes what matters most in what we do with clients isn’t the dollars and cents and the detailed tax analysis, but what we call life planning. What am I talking about? Well let me tell you a little bit about the kind of planning we did.

The client’s daughter, a successful, single 30 year old woman, came in for a basic financial check-in after finding out that her job was being discontinued with her employer. She seemed somewhat relieved, because her job was not challenging her intellectually and she needed a change. She wanted to make sure she was making the right financial decisions, and needed some guidance on planning for her next stage of life. What she really wanted to know was if it was okay to take four to six months off from working, and what the financial implications would be on her short and long term goals. It seems that her primary objective at this point in her life was to find someone to spend her life with and to ultimately build a family, and taking the time to do this was a higher objective than saving for retirement—if she could swing it financially.

This young woman had been on the path of multi-generational financial planning for years.  Her parents had been guiding her based on their good habits, and we were able to provide some financial education before she went off to college to help build a strong base of financial knowledge and etiquette. In addition, she was able to get a solid college education and had been earning a good income, saved very well, and had lived below her means up until this point. Upon termination from her employment, she would be receiving a severance and health care for a couple of months, and had built a very comfortable nest egg in taxable, Roth and traditional IRA’s. She had a home with over 50% equity and was very flush with liquidity and confident in her financial situation.

After reviewing all the things in her financial life, we came to the conclusion together that she was in a strong enough financial position to pursue her primary objective of finding a life partner and building a family.

What’s Next?

We came up with a temporary travel budget for the next four to six months so that the sabbatical could take place and she could feel comfortable with it. She could travel abroad and around the United States, visit different places and experience new adventures; all while being creative to find someone that she could spend the rest of her life with. We talked about the things that needed to be done during her time off:

1. A Belief Statement:  Write down at the top of a blank piece of paper, “What Do I Believe.” By writing this down, capturing at this moment in time how she felt, she’d be able to return to it in the future. This will help her realize when she is close to finding her partner—does this person fit her values and belief systems. Or she can decide if it's crucial that they do or don't believe in the same things as she does.

2. 100 Thing List:  List of the 100 things she wanted to experience in life so that the money, she has spent all this time earning and saving, has some reason and goal behind it in order to be used for experiences that matter to her. Ideally we don’t just work to grow a big pot of money, but grow it and use it for life fulfillment. We want no regrets later in life. 

3. Vision Statement: Her idea of where she wanted to be in one year, three years and in ten years. Vision statements help guide current choices and offer a great reflection tool to check personal progress.

So, while we talked about some financials at this meeting, it was only enough to know that she was going to be okay to take time off from work. The majority of our time was spent on things that were not financial topics but were life planning issues—those non-financial issues that were most important to her at this point in her life. Sometimes we have to look at the big picture and go beyond money in order to dig deep into life planning issues, because how you chose to live your life and use that money in meaningful ways trumps the financial nuances or details of taxes, savings, and investing.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc.® Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions.

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Any opinions are those of Matthew Chope and are not necessarily those of Raymond James. This case study has been provided for illustrative purposes only. Individual cases will vary. Every investor's situation is unique; prior to making an investment or withdrawal decision; please consult with your financial advisor about your individual situation. It is not known whether the client referenced in this case study approves or disapproves of Matthew Chope or the advisory services provided.

Finding the Right Asset Allocation

Contributed by: Jaclyn Jackson

Most delicious meals start with a great recipe.  A recipe tells you what ingredients are needed to make a meal and, importantly, how much of each ingredient is needed to make the meal taste good.  Just like we need to know the right mix of ingredients for a tasty meal, we also need to to know the asset allocation mix that makes our investment journey palatable.

Determining the Right Mix

Asset allocation is considered one of the most impactful factors in meeting investment goals.  It is the foundational mix of asset classes (stocks, bonds, cash, and cash alternatives) used to structure your investment plan; your investment recipe.  There are many ways to determine your asset allocation.  Asking the following questions will help:

• What are my financial goals?

• When do I need to achieve my financial goals?

• How much money will I be investing now or over time to facilitate my financial goals?

Seasoning to Taste

Now, suppose equity markets were down 20% and your portfolio was suffering.  Would you be tempted to sell your stock positions and purchase bonds instead? Figuring out an asset allocation based on goals, time horizons, and resources is essential, but means nothing if you can’t stick with it.  For certain ingredients, a recipe may instruct us to “season to taste”. In other words, some things are subjective and our feelings greatly influence whether we have a negative or positive experience.  For asset allocation, understanding your risk tolerance helps uncover personal attitudes about your investment strategy during challenging market scenarios.  It gives insight about your ability or willingness to lose some or all of your investment in exchange for greater potential returns.  When deciding our risks tolerances, we must understand: 

• The risks and rewards associated with the investment tools we use.

• How we deal with stress, loss, or unforeseen outcomes

• The risks associated with investing

Following the Recipe

When we follow a recipe closely, our meal usually turns out the way we expected.   In the same way, committing to your asset allocation increases the likelihood of meeting your investment goals.  Understanding your risks tolerances can reveal tendencies to undermine your asset allocation (i.e. selling or buying assets classes when we should not). Fortunately, there are a few strategies you can employ to help stay on track.  

• If you are risk adverse, diversifying your investments between and among asset categories can help to improve your returns for the levels of risks taken.

• If you find yourself buying or selling assets at the wrong time, routinely (annually, quarterly, or semi-annually) rebalancing your portfolio will force you to trim from the asset classes that have performed well in the past and purchase investments that have the potential to perform well in the future.

• If you find yourself chasing performance or buying investments when they are expensive, buying investments at a fixed dollar amount over a scheduled time frame, dollar cost averaging, can help you to purchase more shares of an investment when it is down relative to other assets (prices are low) and less shares when it is up relative to other assets (more expensive).  Ultimately, this can lower your average share cost over time.

Finding the right asset allocation for you is one of the most important aspects of developing your investment plan.  Luckily, getting clear about investment goals, time horizons, resources, and risks tolerances can help you mix the best recipe of asset categories to make your investment journey deliciously successful.

Jaclyn Jackson is an Investment Research Associate at Center for Financial Planning, Inc.® and an Investment Representative with Raymond James Financial Services.

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This information is not a complete summary or statement of all available data necessary for making an investmentdecision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider yourinvestment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk, investors may incur a profit or loss regardless of strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against a loss. Dollar-cost averaging does not ensure a profit or protect against loss, investors should consider their financial ability to continue purchases through periods of low price levels.