Since the beginning of the year, these terms cannot be avoided in the financial press. For the first quarter we were constantly reminded that the markets were following a “risk on trade” as money moving from fixed income investment investments to equity investment , driving up the domestic markets to one of the best first quarters in the last few years.
Since then we are hearing the term “risk off” as the pundits are telling us that the traders are moving the money off of the riskier assets back to bonds. Recently we have been hearing these words used almost daily. One day the market is up and the next the market is down. It’s been used to explain the movement of funds back and forth between “riskier” assets “equities” and risk “avoidance”’ assets like 10 year government bonds or even gold.
If you saw the movie “Karate Kid,” you know that this is how Mr. Miyagi taught Daniel Son how to defend himself with Karate by having the “Kid” put the wax on and then take the wax off his car. Neat trick: turning a repetitive boring task into a sophisticated defensive move. Is this type of trading a magic way to teach us how to defend our investments?
In a word - NO!
There is nothing an investor can learn about investing by listening to reporters explaining the reasons that traders are making their moves. There is nothing to be learned about meeting your long term goals by getting a micro view of trader activity. In fact, trading is a zero sum game. At the end of the day, someone must lose for someone else to “win.”
Investing is not a fast money game. It is a well-planned out trip, with rest stops along the way. It is the exact opposite from the way that many people thought they could make money on the Facebook IPO.
Overhyped and oversold, only two weeks later early investors have lost more than 25%. Traders tried to make profit by jumping in quick and getting out; they got hammered. Smart investors asked themselves a basic question: would I want to hold this company over the next five years based upon its offering price? The answer was and is no - we still have no transparency into Facebook’s advertising income.
Investing for long term goals is not a game, nor is it gambling. Investing is a systematic process by which we take on some risk so that we can achieve a rate of return that has a possibility of achieving our goals. If you want excitement, go see MIB III or The Avengers.
*The views expressed are not necessarily the opinion of Royal Alliance Associates, Inc., and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Individual circumstances vary. Investing is subject to risks including loss of principal invested. No strategy including asset allocation or diversification can assure a profit against loss.
Fixed income investments are subject to various risks including changes in interest rates, credit quality, and other factors. Securities sold or redeemed prior to maturity may be subject to a substantial gain or loss. In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities.
Investors should understand that investing in strategies that are non-correlated to the stock and bond markets are not without risk. There can be no assurance that alternative investments will be profitable and will even outperform asset classes correlated to the stock and bond markets.
The Roth Advantage Part 2: First Time Homebuyer
March 16, 2018
Dan Kresh FPQP™
There are ways for first time homebuyers to access some funds from retirement accounts without "penalty". Though you may be able to avoid an early withdrawal penalty, you will be lowering the amount in your retirement account. You would likely be purchasing your first home many years before you plan to retire, depleting your account when it has the most time to grow. This is a complicated decision. It is important to understand the differences between how you could access funds early from Traditional or Roth IRAs.
A first-time homebuyer can access up to $10,000 from either a Roth or Traditional IRA to contribute towards a down payment[i]. Any funds taken out from a Traditional IRA, for any reason, including a first-time home purchase would be taxed as ordinary income. The tax deferred nature of the Traditional IRA is its biggest advantage, so using funds from a Traditional IRA to help fund a home purchase will forfeit some of that benefit while shrinking your nest egg.
With a Roth IRA, you can take out contributions at any time for any reason without a tax consequence since it's already after-tax dollars[ii]. The Roth IRA owner can also access up to $10,000 of profit for a first-time home purchase, and if you have had the Roth for more than 5 years that would be tax free.[iii] You should NEVER consider a retirement fund an emergency fund, however; the fact remains that there are less barriers and penalties to accessing funds from a Roth IRA early than from a Traditional IRA.
Tapping into your retirement account to buy a home should not be your first choice, but it's nice to know what options could be on the table. You have the best chance of growing your nest egg if you contribute the maximum into your IRA for as long as possible. Taking funds out of your retirement account before retirement age, with or without penalty and or tax, means you will have a smaller principal to hopefully compound over time. Your retirement money will serve you best in retirement and should be invested in a well-diversified portfolio for the long haul. Any investment involves the risk of loss of principal but the more diverse your investments and the longer your time horizon the better your chance is to mitigate that risk.
If your income is at or approaching limits for contributing to a Roth IRA part 3 of this series will discuss a potential way for you to contribute to a Roth IRA using Roth conversions. It's never too early to start thinking about retirement. The earlier you start the more time you have for growth. You work hard for your money, we work hard so your money can work for you.
[ii]Roth IRA Withdrawl
[iii]IRA To Buy A House
A Roth IRA distribution is qualified if you've had the account for at least five years and/or the distribution is made after you've reached age 59½, because of your total and permanent disability, in the event of your death or for first-time homebuyer expenses. Distributions made prior to age 59 1/2 may be subject to a federal income tax penalty. If converting a traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional IRA contributions and on all earnings.
You should always consult a tax professional and though this piece contains some tax information it should not be considered tax advice.