IN 2007, YOLANDA HAWKES NEEDED advice. The Atlanta resident was ready to "invest in something besides a 401(k)" as she focused on her retirement planning. So she called on Danay'Freeman, financial adviser and author of Building Wealth through Spiritual Health (Darda Press; $19.95).
To help Hawkes build assets. Freeman had her open a traditional IRA. Financial experts such as Freeman typically advise employees to max out their 401(k) contributions, regardless of whether their employers match, and then to invest in a Roth IRA or traditional IRA as well.
Only two in 1 0 African Americans believe they are on track to meet their goals for retirement, compared to 34% for the general population, according to The African American Financia/ Experience, a study by Prudential Financial Inc. Nearly 40% of those surveyed say they are way behind or haven't even started. Almost half (46%) admit to needing help in specific areas when making financial decisions. With the financial markets having recovered from the losses tied to the Great Recession, scores of African Americans continue to miss out on the recovering equity markets.
The importance of investing for retirement is underscored when one considers that a person will need at least 70% of his or her pre-retirement income to maintain the same standard of living once he or she stops working, according to experts. Social Security alone will not provide this level of income.
For 39-year-old Hawkes, a senior corporate recruiter for a large consumer goods manufacturer, she estimates that she will need $2 million in her retirement accounts by the time she stops working. Thus far. she has amassed nearly 2.5% of that and continues to contribute 7% of her annual salary, which is in the high five-figure range. It she stays on track, assuming an 8% to 1 0% annual return, she could see her retirement funds amass to a range of $800,000 to $1. 1 million by the time she turns 62.
Freeman suggested she invest in mutual funds and exchange traded funds (ETFsJ, including ïhe WisdomTree LargeCap Dividend Fund (DLN) and PowerShares (PRFZ). to give her a diversified portfolio of small- and mid-cap investments. Small-cap investments are generally in companies whose total shareholder value is less than $1 billion and, while risky, are purchased due to their upside potential. Mid-cap investments are in companies whose value is usually greater than $1 billion, but less than $5 billion. These offer less of the upside potential, but come with less of the downside risk. ETFs funds that trade like stocks) are attractive to clients for several reasons, says Freeman. "They have lower expense ratios [costs] than mutua! funds, diversify a portfolio in a single transaction format, and offer lower taxes, no investment minimum, and increased trade flexibility."
Freeman also suggested Hawkes purchase individual stocks such as Apple Inc. (AAPL). of which she bought five shares at $99 each in 2009. As of earlier this year Apple was trading at around $533.
"She bought Apple low when [others] were fearful." says Freeman, noting Apple was undervalued at the time. "When everyone else thought the world was ending in 2009, she was comfortable enough and educated enough about the process that she went into the market."
Whether the market rises or falls, you need to stay the course and invest throughout your lifetime
Everyone needs an investment plan, which is what determines your portfolio's asset allocation mix and type of investments (see sample asset allocation tables). An investment plan should include considerations such as one's time horizon before retiring, risk tolerance, and tax considerations. So, whether you're in your 20s, 30s, 40s, 50s, or 60s, here are some winning strategies to help you sail through economic storms into sound retirements.
As those in their 20s begin their professional careers, it is the best time to get their financial lives on track. To do that, they should:
* Invest in a 40 1 (k) through their employer
* Map out their goals with the assistance of a financial planner
* Start the homeownership process
* Build solid credit and saving for retirement
Since time is on their side, young professionals can afford to be more aggressive, with a heavy weighting of equities in their portfolio. Although some may have a low tolerance for risk, they should realize that equities have produced an average annual return of 11.83% over a 30-year period, according to a recent University of Michigan study. Investing early for retirement allows money to grow tax free and over the long term can add up to large returns. First, newly minted professionals should take advantage of tax-deferred income by investing in employer-sponsored 401(k) and 403(b) plans, which represent an easy access point for financing retirement. (For info on 2012 contribution limits, go to IRS.gov.)
Another vehicle to place young professionals on that path is an IRA. For instance, a 25-year-old who begins with a $2,000 contribution to an IRA and adds that same amount each year will end up with more than $330,000 by the time he or she is 65. assuming a 6% annual return.
The youngest clients of Edward D. Williams, founder of Fairfax, Virginia's DEW Financial Management Group L.P.L. (www.ipl.com/ edword.d. williams), matured during a decade when children saw their baby boomer parents' retirement plans evaporate because they were not prepared for the future beyond having faith in jobs and pensions,
Now at age 26, those same clients, who are married, employed by federal contractors, and earn combined salaries of more than $100.000 annually, aie aggressively building strong retirement portfolios by investing in ETFs such as iShares. The iShares' High Dividend Equity Fund (HDV), since its inception in 20 1 1. has had a 12.12% total return benchmarked against the 12.56% recorded by the Morningstar Dividend Yield Focus Index.
Williams says, "Investors in their 20s should be aggressive and proactive." So he also suggests they consider investing in individual stocks, such as AT&T Inc. (T), Merck & Co. (MRK), Intel Corp. (INTC), and ConocoPhillips Co. (COP).
WHY INVEST IN A MUTUAL FUND NOW?
In the past three years. Che Dow Jones industria! average gamed nearly 98% from its Great Recession low of 6.547.05 on March 9. 2009. through its 12.962.81 close on March 5. 2012 Those who weren't investing missed out as the financial markets recovered from the recession-fueled lows. And with the U.S. economy in recovery mode, there remains more upside potential going forward.
As the most common way to invest in the financial markets, mutual funds were heid by 52 3 million, or 44 }% of U S. households in 2011. These investment vehicles are heavily regulated by the Securities and Exchange Commission and offer investors professional management, diversification, and reasonable liquidity
Shawna Frazier. managing director of business development and marketing at Profit Investment Management L.L.C (www. profitfunds.com) in Silver Spring. Maryland (No. 15 on the BE ASSET MMUGERS list with $2 billion in assets under management), spoke to BLACK ENTERPRISE about what makes a top-performing mutual fund.
Frazier says what's critical to success is an experienced fund manager who has performed well in many bull. bear, and flat market cycles and who understands today's fast trading environment. "We have had some of the most violent bear markets. Many people had to come out of retirement and start working again because of the hit their portfolios took." Frazier says "Beyond having a passion for money-making, rtsk reduction, and a disciplined stockpicking approach, good fund managers aiso love market news."
The best way to size up a manager is to read their funds' prospectuses When evaluating mutual funds here are some key things to consider:
Performance over one-, three-, and five-year periods
The most common measure of performance is total returnsdividends, interest, capital gains, and changes in share price. You want to look at returns annuetized for a specific time period. You should compare a fund's returns to its respective benchmark for the market, for example, the Dow Jones industrial average for large companies and the Russell 2000 Index for smaller firms. A healthcare fund that gained 7% may look good when measured against the S&P 500. up 3% in 2011. but 12 9% was the average annual return for that sector in 2011.
Companies In a fund's portfolio
The goal is to own quality companies that outperform their benchmarks. Typically, value investors buy large companies that have fallen out of favor, but will eventually go up in price while small company investors buy fast-growth or emerging companies such as tech startups.
"We buy stock at a reasonable price after spotting a catalyst or event that shows how it will grow. It could be a positive earnings surprise, a killer product, doubling in sales, etc.," Frazier explains. "Sometimes a stock we are waîcbirig may be below thai level, but we see what is underlying it. We see the hidden value factor in the catalyst that will get that stock moving upward. We purchase when the discount opportunity presents itself,"
Low or reasonable annual turnover percentage
A good indicator of a manager's style is a fund's annual turnover rate. Turnover measures how many times a manager buys and sells the stock in a portfolio over the course of a year. A fund with a turnover of 100%, in effect, means it changes its holdings completely once every year.
"There is no predictable number, but it shouldn't be too high," says Frazier. "At Profit, less than 50% of the companies in the portfolio change annually Churning is not judicious."
Industry sector weightings with that mutual fund
Fund managers tend to gravitate toward certain industry sectors. Sector weighting- what percentage is allocated to a sector- is a critical component of a fund portfolio's performance. A fund might have a weighting of 5% in financial services, 15% in consumer goods. 10% in technology, 20% in heaithcare. 15% in retail, 10% in telecommunications, 10% in industrials, 5% in energy, 5% in automotive, and 5% in utilities,
Sector under-weighting (too little of one sector) or over-weighting (too much of a sector) are relevant considerations. "The main benchmarks we use are the Russell 1000 Growth Index for large-cap funds and the Russell 2000 for small-cap funds as guidelines," says Frazier.
Fundamentals, industry trends, the economy, and other factors
Managers must be perceptive about industry trends. For instance. Frazier says, look at the growth in U.S. cellphone use and the impact of technology in the last decade. A portfolio that was not invested in technology would be at a significant disadvantage
Frazier also stresses the importance of fund managers recognizing how international events can affect a portfolio. "[They] are smart, diligent, and can recognize changes in the global landscape and make decisions on conflicting information," she says. "A portfolio manager who has a keen understanding of the world around them is key to making the best investment decisions."
Additionally. Profit hunts for companies with an attractive franchise and solid growth rate, it is a bottom-up process. "We look at historic markets, discounted cash flow, transaction multiples such as price-to-earnings ratios, etc.," Frazier says.
Low fees or no-load funds
Hefty sales charges can turn a winning fund into a mediocre one because expenses eat into returns. So a 3.5% commission, for example, would reduce a 10% return rate to 6.5%, But there is no solid evidence thai shows no-load funds (no sales charge) underperform or automatically perform better than load funds, "I tell investors to pay attention to the manager's track record." says Frazier "You may find higher or lower fees that are associated with a highperforming fund. What you want to achieve as an investor is more important than an initial screen on low fees. You also want to look for long-term performance consistency."
Keep in mind, says Frazier, "all mutual fund managers, if they are in the business long enough, will experience underperformance. You need to look to someone you trust and whose investment philosophy you believe in, as well as a fund that fits your investment objectives."
While still in the early stages of their careers, those in their 30s are no longer the freshmen of their workplace. With greater incomes and responsibilities than their younger counterparts, those in this age category should:
* Continue to build upon the financial foundation set in their prior decade
* Increase their contribution rates to their 401k)s
* Consider opening an IRA or other investment vehicle
* Look to become a homeowner at this point
* Open college savings plans, if they intend to start a family
Since many begin to get hitched and start families during this period. Danny Freeman, principal of Darda Financial Services L.L.C. (www.dordawedirh.com) in Winston -Salem. North Carolina, says young professionals need to be even more focused on investing Îor their long-term future. A former banker, Freeman counsels thirty-somethings ?? be aggressive with up to 20% of their portfolio. He suggests they invest in ETFs because they have no minimums.
He particularly likes WisdomTree LargeCap Dividend Fund, an exchange-traded, diversified fund with large holdings in tech, energy, and pharmaceuticals. Nine shares cost less than $500. The one-year return is 9.75%, and the distribution yield is 3.01%. Shares purchased like stock have no minimum, and discount brokers offer the lowest commission fees. He also suggests Blackstone Group L. P. (BX), a private equity firm. He says Blackstone invests in 750 companies, has no minimum as it is traded on the New York Stock Exchange, and is liquid. "1 began buying it last fall at $12.50 and it is now $16. It has the potential to grow - its metrics remind me of Apple about 1 2 years ago," Freeman says.
Freeman's long-term investment pick is Hillenbrand Inc. (HI), the parent company of Batesville Casket Co. He likes Hillenbrand's cash flow, dividends, and sound management, and that it has diversified into medical technology and heavy equipment. "My goal as an adviser is to produce returns that beat the index and are near the stock market returns, at lower risk and expense."
Those in this group are hitting their peak earning years, but this is also where expenses, such as ho home improvements, and college tuition, tend to skyrocket Individuals in this category should:
* Look to maximize contributions to all their retirement accounts
* Ensure that emergency and college savings plans are well-funded
* Become budget conscious and resist the urge to purchase unnecessary big-ticket, depreciating assets
* Make sure that they have begun the estate planning process, including the drafting of a will
This group should consider the tax-friendly, low-cost, and high-reward potential of ETFs. says 40-year-old David Lopez, a tax consultant and founder of David A. Lopez and Co. LLC. (www.dovidlopezcpa.com) in Philadelphia. Lopez suggested his forty-something clients, a couple with a combined household income of $160,000. look at three ETFs to invigorate their underperforming portfolio of stocks, bonds, and money markets. Lopez says, "The couple was able to gei into industrials, healthcare, and the financial sectors without making various transactions to purchase individual equity securities in those segments. It gave them the ability to 'test the waters' by buying smaller positions at various times since investment minimums are nonexistent"
One pick was Invesco PoweiShaies QQQ (QQQ), 68% technology-centered with holdings in Apple Inc., Microsoft Corp. (MSFT), Intel Corp.. and Cisco Systems Inc. (CSCO). It was up 24% since 2009. compared to 18% growth in the Nasdaq composite index. Second. Guggenheim Mid-Cap CORE (CZA). which invests heavily in industrials, financial services, and utilities with holdings in Ameriprise Financial Inc. (AMP), Paychex Inc. (PAYX), Xerox Corp. (XRX). and HCA Holdings Inc. (HCA). The three-year average annual total return of the Momingstar five-star-rated ETF was 22.5%. The third fund was Rydex S&P MidCap 400 Pure Growth (RFG), which focuses on healthcare, industrials, and consumer items. Among others, it owns Regeneron Pharmaceuticals (RGN). ?? Educational Services (ESI), and Equinix Inc. (EQIX). Its three-year average annual total return was 34.86%.
Known as the "sandwich generation," they are squeezed by obligations to almost-grown kids and aging parents. Combined with the fact that they are staring down the barrel of retirement within the next decade or so. it becomes necessary to:
* Reassess their financial situation and determine in they'll meet their retirement goals
* Look to combine retirement accounts and re-balance their portfolio depending on their situation
* Remember that the IRS has catch-up retirement savings provisions for people age 50 and up
* Consider at purchasing long-term care insurance
Lopez recommends this group invest in "municipal bonds, as they secure future payments and let you readjust a portfolio without relinquishing control." Investors should investigate state municipal bonds since interest payments are usually federal and state tax free.
Lopez advised a couple in this age group to readjust their asset allocation from 90% stock and 10% cash to 60% stock and 40% cash instruments. The reason, he says: "If the market retreats, their portfolio has less time to recover." He also asked the couple to consider purchasing fixed annuities (financial insurance contracts that earn interest).
Lopez favors company stock such as Microsoft Corp., which had a record $2 1 billion in earnings for the second fiscal quarter of 2012 and is scheduled to launch Windows 8. Another is Chandler, Arizona-based Microchip Technology Inc. (MCHP). which provides microcontroller and analog semiconductors. It has growth potential and since 2007 has paid a total of $6.26 per share in dividends. Lopez also likes Sirius XM Radio Inc. (SIRI), because it has 22 million subscribers. He says nearly half of new car owners extend their subscription.
Seniors and retirees may be less concerned about contributing to their retirement and more interested in getting distributions from those accounts. But generally they should:
* Establish a fund of safe, liquid investments, such as certificates of deposit and money markets, to meet anticipated living expenses for the next three to five years
* Focus on investing the balance in bonds and funds with the twin goal of preserving principal while protecting purchasing power
* Review estate plans
"Their income is fixed, but their expenses are subject to inflation, and hard assets serve as a hedge against higher costs," says Ivory J. Johnson, a certified financial planner and director of financial planning at Scarborough Capital Management (www.401kadvice.com) in Annapolis, Maryland.
In 2007. Johnson advised his client. Nancy Little, to reallocate her portfolio, which was heavily weighted with General Motors Co. stock. He talked to her about investing in bonds, commodities, and gold, a good hedge against inflation that tends to do well during economic downturns.
Little owns a commodities fund, a weakening dollarf und. a managed futures position, and gold bullion. She bought the MainStay High Yield Opportunity Fund (MYHYX). which had a three-year return of 2 1 .3 5%. and a fund formerly known as the Rydex Long/Short Commodities Fund (RYLFX). which had a 3.86% return since inception in 2009. She also made Central Gold Trust (GTU) 2S% of her portfolio. It rose 20.58% since 2007.
"I put about 2 5% of my retirement portfolio into alternative investments and they've done better than anything else I own," says the 61 -year-old, who lives in Farmington Hills, Michigan, and works as an auditor at Ford Motor Co."My total portfolio return was 13% from 2008 through 201 1, with no volatility. 1 didn't lose anything."
LITTLE REALLOCATED HER PORTFOLIO TO WITHSTAND AN ECONOMIC DOWNTURN.