Out Of The Box

I started in the investment industry in January of 1992. I was trained the same as every other investment advisor, that “Buy and Hold” or “Asset Allocation” is the only way to invest money properly. It didn’t take long to realize that a market downturn could quickly steal 25% or more of a client’s portfolio. It didn’t feel right telling someone that they didn’t need the money now and that over time they would come out just fine. That explanation never seemed to make people feel better.

I found that asset allocation was based on a system called “Modern Portfolio Theory”. This theory says that if gas prices go up, then so will gas stocks since the gas companies become more profitable. At the same time, transportation stocks will go down, because their largest cost (fuel) is going up. If your portfolio has both these positions, then it goes in the middle. Over time everything goes up, but your portfolio has less volatility along the way.

Modern Portfolio Theory made complete sense to me because it works according to economics. What shocked me was to find that the large investment firms seemed to water down this model. Instead of having Oil stocks and Transportation stocks, they instead use Growth stocks and Value stocks. Unfortunately growth and value don’t have the same relationship as gas and transportation. If the market goes DOWN, both growth AND value stocks go DOWN!

I also was shocked to find that the asset allocations were based off 20 year or more time frames. This means that the client needs to plan on staying in this allocation for 20 years or more in order to get the results that are expected. I haven’t found ANY clients that want to stay in an investment for 20 years or more!

I started exploring other ways to invest that made more sense. I found that the market tended to move in cycles or waves. For example Presidential elections cause a 4 year cycle. Tax season creates a type of annual cycle. Nature works in cycles as well. Light travels in cycles, electricity travels in cycles, even waves and the tide move in cycles. It seems that most things in nature are cyclic. It only makes sense that the market would have a cyclic movement also.

I started working with cycles and waves in 2000 and have avoided major market downturns due to this approach. Since then I have designed and implemented computer models that help me determine what cycles are dominant and where we are currently in each cycle. When it appears the market has crested the top of a cycle and is beginning the descent down the other side, we go to the safety of cash. This prevents the loss of principle in the portfolio. If we avoid the loss of principle in down markets then we reach new portfolio highs much quicker during the next up market.

I have implemented multiple systems into each portfolio. The varying systems offer client’s diversification without sacrificing return. Each system determines where we are in the cycle and then determines which investment option provides the greatest potential return with the least amount of risk.

If your tired of the same response “You’re in it for the long haul” and would like an investment approach designed to keep you out of the major market downturns without giving up the potential associated with large market upturns, then you should explore our systems further.

Can I Contribute To Both A 401k And An IRA?

I just had the question asked: "Can I Contribute To Both A 401k And An IRA?"
What a great question. This means you are trying to put some serious money away. I congratulate you for that.


The resounding answer is YES! The ultimate question, though, is can you deduct the entire contribution to the IRA. If you are single and your company offers a 401k or other type of retirement plan, you can still contribute $5,000 to an IRA or up to $6,000 if you are 50 or older. If your Modified Adjusted Gross Income, or MAGI (for most people this number is similar the the Adjusted Gross Income, which is the number on the bottom of the first page of your tax return) is less than $55,000 then you can deduct the entire $5,000 or $6,000 (50 or over) contribution amount. If you earn over $65,000 you can't deduct ANY of the contribution (although you can still contribute). The gray area is when your MAGI is between $55,000 and $65,000 for 2009. There is actually a formula that will help you determine how much of your contribution can be deducted when your income falls within this area. It is:

Example: If you're single the "Highest dollar limt of MAGI range" is $65,000subtract your MAGI from this, let's say it is $60,000. Next, the contribution limit is $5,000 (under 50). The last part of the equation is "Highest dollar limit of phase-out range" which is $65,000 minus the "Lowest dollar limit of phase-out range" which equals $10,000.

This breaks down to: $5,000 x ($5,000 / $10,000) which equals $2,500.

This formula seems compicated when you look at it but it is quite simple. If we are half way between the beginning and end of the phase out range (MAGI is $60,000 when the bottom and upper limits are $55,000 and $65,000) then half of your contributiion can be deducted. If you were a quarter of the way into the phase out then you could deduct a quarter of your contribution amount.

This all gets a little more complex when you are married. Variables are if you and both your spouse work or not, if each spouse has a retirment plan at work and such.

I continually stress to people who are maxing out their retirement contributions: "Make sure you are doing the best thing for future taxation". It may be better to put money into a Roth and your 401k instead of an IRA and 401k.

Til later,

John

When Can I Take Money Out Of My 401k?

The easy answer is at age 59 1/2. Most people who ask this question ask it because they don't want to pay a penalty to the IRS for early withdrawal of their 401k. What most people don't know is a small part of the internal revenue code (section 72t) that allows them to take money out of their 401k PRIOR to age 59 1/2.

Have you ever wondered how someone can begin taking a pension prior to age 59 1/2 without penalties? Well section 72t allows you to take money out of your 401k prior to 59 1/2 if you make the distributions look like a pension plan. Your next question is probably "how do I do that?"

It isn't very difficult to follow the rules set forth by section 72t. Basically your distributions must be similar in amount and frequency and you must continue taking them for a minimum of 5 years. Your 401k administrator can give you exact details and will help you conform to these rules.

Congratulations on saving well for retirement. If this conversation interests you then you must have been diligent in your putting money away and managing it.

How Much Can I Contribute To My 401k?

In 2009, those under 50 years old can contribute a maximum of $16,500. If you are 50 or older that increases another $5,500 to a total of $22,000.

An equally important question should be "How should I have the money invested within my 401k?" People over the age of 50 who have accumulated a sizeable 401k balance (usually their largest single investable asset) have experienced tremendous volatility. They have lost between 30% and 50% two different times in the last ten years.

Many are looking for ways to protect what they have already saved while not giving up the potential of growth during good market periods. Friends and acquaintances who know I own a Registered Investment Advisory service ask me all the time "How should I have my 401k invested?" My answer is that my answer will change over time. Today the market might require one type of allocation while a down market will require a completely different allocation. If this friend or acquaintance doesn't see me after my allocations have changed, then they may sit on the wrong allocation during a down market and lose as much as everyone else. Because of this, I will only give advice to people who will follow my recommendatins on a regular basis.

It makes sense to be invested during an up market and be in cash during a down market, right? Who wouldn't want their account to always go up? Obviously it isn't that simple. You must develope a system to tell you the probability of what is to occur next. I have been in this industry since 1992 and have found that tracking cycles (waves) in the market makes the most sense. Cycles occur in everything on this earth. The weather works in cycles, tree rings are in cycles, even the Presidential election creates a 4 year cycle. I have software that runs daily checking to see what the long term and intermediate term cycles are in the market and where we are within them. This has been a wonderful way to decrease risk to 401k accounts while not limiting upside potential.

For more information on this process, go to www.eWatch401k.com