• Money 26.11.2014 No Comments

    This article discusses when you need to decide how to invest your savings and when the times comes to leave money maturing and when the times comes to draw it from your investment for your retirement.

    If you invest in bonds, IRAs or traditional 401k, whether by buying individual bonds, or by investing in any type of any other investment, and if you have more than one pension plan, then you have a portfolio of investment that can give you good returns on the money. The first part of this series of articles will discuss a number of strategies that can be used to maximize total returns safely. The second part of the series of posts will discuss how much of your portfolio you might want to allocate to investments in bonds or any other vehicle of retirement accounts.


    Any investment for your retirement ought to start with a number of questions:

    What is the ultimate use of the money? Am I saving for a specific need, for example, to fund my son’s college education? When will the money be used? Can I afford to lose any part of my investment?

    Should the money be in taxable or in tax-exempt investments? Professionals have developed strategies that can be adapted by individual investors in the management of their own portfolios. These are discussed below.


    Assume that you are saving for a specific use (for example, to buy a car). If the money is needed within a fairly short amount of time, say two years or less, then your best option is to confine your choices to securities whose prices do not fluctuate. That limits you to money market funds, CDs, or short-term instruments such as T-Bills, even though, as this is being written, that means in all likelihood that you will earn literally almost nothing or well under 1% a year, annualized.

    You might wonder why it is not advisable to buy longer-term bonds with higher yields and enjoy these yields until you need the money. There are two reasons. First, you cannot be certain that you will recover the entire principal when you need it because you do not know where interest rates will be when you want to sell. Also, as it will be explained in future articles, commission costs are particularly high when you want to sell or draw the money from your investments, particularly in the less liquid sectors of the market. Brokers will tell you that individual investors get killed by commissions when they sell.


    “Maturity Matching,” or the “Bullet Portfolio”

    However, if the intended use goes out somewhat further in time, say between two and ten years, then you have a different alternative, which professionals call “maturity matching.” (This is also called a “bullet” portfolio.) You would buy a security which will mature at the time principal is needed. For individual investors, typical intended uses include saving for a vacation, a car, or a child’s college education; in short, any objective where you can anticipate needing a certain amount of money, and you know when the money will be needed.

    Open for example a IRA or 401k that will mature at the time the money is needed enables you to go out further along the yield curve and therefore to buy financial products that are higher yielding than the shortest cash equivalents (assuming a normal upward-sloping yield curve). This structure also eliminates the risk that principal will have declined in value if interest rates rise prior to the time that the money is needed.

    A bullet portfolio does not dictate which instruments you should choose. If, for example, the money is needed in five years and you have invested it in physical gold, you might buy a five-year Treasury note, a five-year pre-refunded municipal bond, a five year bank CD, or a five-year Treasury zero. If rates seem particularly attractive (that is, high), then the zero is an attractive option since it eliminates reinvestment risk.

    Another alternative for longer term investors with very large portfolios would be to use what is known as a “weighted maturity” structure. The basic idea behind such a structure is that a variety of maturities are selected. But generally, you would choose a combination of maturities whose duration is close to the expected target date when you would use the money. This protects your portfolio against a major erosion of the value of principal. And weighting the maturities enables you to take advantage of attractive buy points in the yield curve. One possibility, for example, would be to overweight the maturity sector that corresponds to the time the money is needed. Or an investor requiring the highest possible level of income might want to overweight both long-term bonds and pre-refunded shorter bonds. Variations of this strategy are discussed below.

  • Money 26.11.2014 No Comments

    Between October 9, 2007, and March 5, 2009, the Dow Jones Industrial Average sank from a high of 14,034 to 6,594. It lost over half its value and sank any expectation of retirement security for participants in 401(k)-like plans such as precious metals IRAs, including the ARP. It was a toboggan slide that started with most people holding on to the belief that it was only a temporary downturn reflecting normal market volatility. But after three months, when the market had lost two thousand points, most people began to realize that they were in for something more serious but still had no an inkling of how much further down it would go. The market was sinking in gradual slides and breathtaking plunges. The steepest plunge was between October 1 and 10, 2008, when it dropped from 10,831 to 8,451.

    On October 10, the employees where I worked received an e-mail notice that the representative of ING, the Dutch financial giant that managed our retirement plan, would be available for counseling about our investments. As the third-party administrator, ING was also supposed to be providing advice on how to maximize our accumulations. We received those notices every three weeks like clockwork. The message from him was always the same: save more, which of course benefited ING’s bottom line. Admittedly, I was feeling particularly snide that morning. I hit the “Reply to All” button on my e-mail program and asked, “Would that also include psychological counseling, given what has happened to our retirement investments with the stock market crash?”


    My question set off a round of e-mail gallows humor. The response I liked the best was, “Noooo—that would be grief counseling.” After the jokes and bitter comments ran their course, I responded with a note saying that the only solution to our plight rested in a reform that would allow us to transfer our dwindling accumulations to the state’s traditional pension system, a system that worked. I didn’t expect anything to come of that note.

    This was, of course, not the first time participants in the ARP had gone through a roller-coaster plunge. After the 9/11 attacks, the market had plunged, as it had in the 1980s and many other times. We were living the psychological lifestyle of gamblers, with ups and downs, some more enervating than others. For colleagues in the traditional pension system, things were different. The market went up. The market went down. They hardly noticed or cared since that would not affect their retirement incomes. If the market went down, that was their employer’s problem, not theirs.

    I didn’t expect that this particular stock market crash would shake my fellow ARP gamblers out of their slumber and make them pay attention, much less want to do something to change the situation. A couple of weeks after the plunge, a member of the faculty, Marcia McGowan approached me. She said she was worried about our retirement situation and that what I had written made sense. She asked if there wasn’t something we could do. I told her I had tried but no one seemed to care. But, this time is different, she argued.


    Maybe she was right, I thought. Maybe the crash had awakened people from their sleepwalking and they were ready to pay attention. Okay, I thought, if she’s ready to move, maybe others can be persuaded. We hatched a plan. We would get a half-dozen or so senior faculty members and administrative employees to sign a letter of concern about our common retirement plan and send it via e-mail. I drafted the letter and Marcia edited it. To my surprise, we quickly found ten people to cosign it and sent it to the entire faculty and administrative staff.

    The response was immediate and positive. People were concerned. We asked them to respond if they wanted to attend a meeting. There were so many positive responses that we had to schedule a larger room and hold a second meeting. The e-mail was also forwarded throughout the state bureaucracy. I then received a telephone call from Walsh, who said he was coming to the meeting; so was Woodruff, to answer our questions.

    We established meeting ground rules to prevent the management official from taking over. Comments and questions after the presentation would be limited to three minutes. They would have to be made from the floor. No one would be able to take over the podium, which would remain firmly in our hands. As added insurance, we enlisted Ross Koning, a biology professor and former local union president, as sergeant at arms.

    I looked out over the seventy people assembled in the auditorium, as they pored over a packet of materials given to them at the door. Woodruff and Walsh were seated near the rear. There were faculty members but also administrative members from middle to top management; they were also participants in the ARP. This was not a traditional labor-versus-management issue because many in management were in the same situation.