In retirement planning, the simplest questions to ask are oftentimes the most difficult to answer. JourneyGuide is a new retirement planning software designed to quickly provide those answers in an interactive application. We begin our five-part series on JourneyGuide by first looking at the most pressing question, “How much can I spend in retirement?” Traditionally, the focus of retirement planning has been on accumulating to a target account value. Clients are repeatedly told “you need to have X dollars before you can safely retire.” The emphasis has been unduly placed on an intangible figure that can have a negative impact on the advisor-client relationship. If the target account value appears too lofty, the client may react with an attitude of helplessness and have a very negative outlook towards retirement. Another outcome of focusing solely on the retirement account value is the abstract concept of translating an account value to something the client can better relate to; namely, a discussion about lifestyle and how much the client can spend in retirement. JourneyGuide’s innovative, patent-pending algorithms allow clients to see in real-time what is most meaningful to them, i.e. their retirement spending number. Instead of using an antiquated rule such as a   Read more…

Each index fund’s prospectus explains its approach to selecting investments,
as well as providing its expense ratio, historical returns, risk profile, and other fund information. Most index funds are full replication funds. That means they buy all of the securities in the funds they track. Others are sample-based. Providers of these funds may use complex mathematical models to identify securities from among those in the index or look for price inconsistencies on which they can capitalize. An enhanced index fund chooses selectively from a particular index portfolio in order to produce a slightly higher return. The goal is to narrowly beat the index by anywhere from a fraction of a percent to two percent-
age points but not more, since a wider spread would classify the enhanced fund as an actively managed mutual fund rather than an index fund. Enhanced index fund managers may achieve higher returns by identifying
the undervalued stocks in the index, adjusting the holdings to include a larger proportion of securities in higher- performing sectors, or using other investment strategies, such as buying derivatives or using leverage. While enhanced index funds may expose you to the risk of greater losses than their plain-vanilla counterparts, they may also offer an   Read more…

Investors use indexes as benchmarks, or yardsticks of investment return. These benchmarks can help you evaluate
the performance of the overall market, particular market sectors and industries, individual securities, and active invest- ment management. For example, you can measure the performance of a large-cap stock portfolio of US companies against the S&P 500, the DJIA, the MSCI Large-Cap 300, or the Russell 1000. What’s more, since the goal of an active investment manager, whether he or she is overseeing a portfolio of individual investments or an actively managed mutual fund, is to provide a stronger return than the relevant index, you can evaluate the manager’s results against that same standard. You’ll find that some managers out- perform some of the time, but only a few of them are able to do so over extended periods. Just because an investment outperforms
 its benchmark in a particular year doesn’t necessarily mean it’s right for your portfolio. You still want to evaluate each investment
in light of your risk tolerance, time horizon, and overall investment strategy. Similarly, an investment that misses its benchmark from time to time may still be a smart addition to your portfolio if it helps you diversify. Not all benchmarks are   Read more…

An index doesn’t just happen. It’s created by an index provider to meet one or more objectives, such as providing a benchmark, serving as the basis of a financial product, or both. Having identified the
index’s purpose and determined that it can be calculated, the provider can begin to develop its methodology, which involves: Defining the index’s focus and scope. Identifying the securities that will form its portfolio. Determining how the index will be weighted. Setting the criteria for changing the components of the index, how those changes will be made and deciding how it will be calculated. If you’re investing in an index-based product, you need to know how the underlying index is weighted and what impact that weighting system is likely to have on performance. Most equity indexes are market-cap weighted. These indexes are sometimes described as providing the most accurate reading of what the market is doing. That’s because the largest companies with the most shareholders tend to have a greater impact on market return than smaller companies that are less widely held. However, there can be a disconnect between index results and the economy if the robust performance of a few large companies drives the index up   Read more…