Portfolio Rx:Recovering from a Market Drop

January 21, 2011

Article provided by Forefield Advisors

Everyone knows the stock market has its ups and downs, but just what’s involved in recovering from a serious down? If you lose 10% one year but your portfolio returns 10% the next year, are you even again?

The short answer: no. The math of recovering from a loss isn’t quite that symmetrical. You have to gain more than you lost to recoup all your losses. To understand why, let’s look at a hypothetical example. Say you have a $50,000 portfolio. In Year 1, you suffer a 10% loss and are down $5,000. That leaves your portfolio worth only $45,000.

In Year 2, the market rebounds and your portfolio rises by 10%. However, that 10% increase is based on a $45,000 portfolio, not $50,000. That means the 10% return adds only $4,500 to your portfolio, not $5,000, leaving you still $500 down from where you started. You would actually have to earn a return of a little over 11% to get back to your original $50,000.

The bigger the loss, the bigger that rebound needs to be to get you even. For example, if that $50,000 portfolio had taken a 40% hit, as many did in 2008, you’d need almost a 67% increase to offset that $20,000 loss and get back to the original $50,000. That could take several years even if stocks perform well.

The challenge is compounded by investor psychology. Adjusting your asset allocation to aim for a higher return is one way to try to recoup losses faster. However, many investors find it difficult to take on additional risk after having watched their investments take a hit. And there’s no guarantee that more risk will necessarily produce the desired result–at least not within the desired time frame.

The lopsided nature of recovery from market losses underscores why risk management is such a key component of successful portfolio management. Being realistic about the level of risk your portfolio involves and how much time you have to come back from potential downturns may help increase both your emotional and financial resilience.

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5 Harsh Financial Statistics: Women Need to Plan Ahead

January 12, 2011

 

Harsh statistics should propel women to plan ahead – Chicago Sun-Times

http://www.suntimes.com/business/savage/2292120-452/women-financial-percent-retirement-filings.html

Ouch! Once again Terry Savage delivers a swift kick to women by reminding us about the harsh financial realities that we face throughout our lives. For those of you who haven’t already heard some of these statistics, they are both worrisome and worth repeating:

  • In 2009, women represented 39 percent of bankruptcy filings
  • Women live  between five and six years longer  than men
  • Women make up 75 percent of the elderly poor today
  • 80 percent of women living in poverty were not poor before their husbands died
  • Median pension benefit for men was $9,600 vs. just $4,800 per year for women (mid 1990’s data)

I know that  it is both daunting and frightening to consider our financial futures in light of these statistics. But, we will not improve our future financial situations by burying our heads in the sand and ignoring facts and probabilities.

So what can you do now?

If single or head of household:

  • Save  -Everyone can figure out how to put a little money aside.
  • Begin saving now/today
  • Begin small and save more as time goes on
  • Only buy what you can afford to pay for ‘in full’ at the end of the month
  • Pay off credit cards in full every month
  • When you swipe, keep a log of your debit card spending
  • Write a monthly budget and stick to it
  • Write a financial plan and review it every 6 months

If married:

  • Save  -You should have an personal savings account.
  • Begin saving now/today
  • Begin small and save more as time goes on
  • Participate and understand your retirement plan
  • Participate and understand your financial plan
  • Make sure spending levels in retirement will support the spouse who lives longer

Like it or not, most women at one time or another, will be likely have the sole responsibility for our financial futures. Take action now by saving and participating in the financial planning.

Jane Nowak is a Financial Planner with Kring Financial Management located in Atlanta, Ga. Jane’s practice focuses on Women’s Retirement Planning and Financial Planning for Women. Her articles have been published on line at NASDAQ, Financial Planning Association and Womenetics.com, SmartMoneyChicks.com.  Follow Jane on Twitter at: http://twitter.com/moneygal2020


Credit Card Debt is THE Surest Way to Smother Your Financial Future

January 5, 2011

Even though we are ‘doing better’ as a nation with regard to the levels of personal debt that we are carrying, I still find the most current statistics on debt in America astounding! The recent (and ongoing) economic downturn has hurt many folks financially. And it looks as though many of us are still relying on the short-term, high cost loans that ‘plastic’ provides to keep us afloat.

The Facts

•Average credit card debt per household with credit card debt: $16,007* -*Average APR on credit card with a balance on it: 14.67 percent, as of Feb., 2010

•36 percent of respondents said they didn’t know the interest rate on the card they use most often.

•Total U.S. revolving debt (98 percent of which is made up of credit card debt): $852.6 billion, as of March 2010 (Source: Federal Reserve’s G.19 report on consumer credit, March 2010)

•About 56 percent of consumers carried an unpaid balance in the past 12 months. (Source: “The Survey of Consumer Payment Choice,” Federal Reserve Bank of Boston, January 2010)

•Undergraduates are carrying record-high credit card balances. Twenty-one percent of undergraduates had balances of between $3,000 and $7,000, also up from the last study. (Source: Sallie Mae, “How Undergraduate Students Use Credit Cards,” April 2009)

•44 percent of small-business owners identified credit cards as a source of financing that their company had used in the previous 12 months – more than any other source of financing, including business earnings

•Credit cards are now the most common source of financing for America’s small-business owners

Some Takeaways

Remember do NOT use credit cards to finance your lifestyle.

•Only charge what you can afford to pay off (in full) each month.

•If you have trouble with overdoing it with the credit cards, whittle the number of cards you own down to 2 cards.

•Resolve to pay cash.

•AND, put your credit cards in a freezer bag filled with water. Freeze them. Defrost and use only when needed. -No microwaves allowed.


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