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Politics and Investing Don’t Mix

Fear is a powerful sales tool.

A sales technique that I’ve seen more and more of recently is the exploitation of a person’s political views in order to instill fear and, ultimately, sell undesirable financial products. The pitch goes something like this:

  1. [Political event X] just happened or is likely to happen.
  2. As a result, the economy will take a nosedive.
  3. You should buy my product to protect yourself.

The technique is popular because it’s effective.

The technique is popular because it can be used to appeal to just about any set of political views. (To appeal to people with left-leaning political views, the pitch is typically something to the effect of the market being rigged by the financial elites. To appeal to people with right-leaning views, the pitch is often about over-taxation, over-regulation, or excess government spending.)

And the technique is also popular because it can be used to sell just about anything. For example:

  • The economy is going to hell, and that’s why you should buy gold.
  • The economy is going to hell, and that’s why you should buy my market-timing newsletter.
  • The economy is going to hell, and that’s why you should buy this annuity.
  • The economy is going to hell, and that’s why you should invest in my hedge fund.

The fact that this approach can be used to pitch just about anything — as well as the fact that it can be used to appeal to either of two directly contradictory sets of beliefs – is precisely the reason you should never trust it.

In order for the pitch to work out well for you, the pitch-person has to get their political prediction right, they have to get the resulting economic prediction right, and they have to be right (and honest) that the product they’re pitching is indeed a good solution in a scenario in which the economic prediction turns out to be right.

That’s what’s necessary in order for it to work out well for you. In order for it to work out well for them, they just have to convince you to buy in the first place.

Investing Blog Roundup: Why Not Annuitize?

I’ve written before that I think too few people annuitize their savings. Or, said differently, I think many people would benefit from exchanging a portion of their liquid assets for a guaranteed stream of lifetime income (most often by delaying Social Security, but also in some cases by purchasing an actual lifetime annuity). This week, Christopher Farrell of The New York Times provides several very reasonable counterpoints to that idea.

Investing Articles

Other Money-Related Articles

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Transferring an IRA and 401(k) in a Divorce

A reader writes in, asking:

“My divorce was finalized a few weeks ago, and I am supposed to receive a portion of my ex-husband’s IRA and 401k. Are there any specific rules to follow as far as how to move the money from his accounts to my IRA? Or does he just take the money out, write me a check for the appropriate amount, and I deposit the money in my IRA?”

Yes, there are specific rules to follow. And it’s important to note that the rules are different for IRAs than for employer-sponsored retirement plans. Let’s talk about IRAs first.

Transferring IRA Assets in a Divorce

Publication 590-A speaks to transferring an IRA after a divorce. There are two key points here.

The first key point is that there are two ways to do it:

  1. Change the name on the account (in cases in which the entire account is being transferred to you), or
  2. Move the money via a direct trustee-to-trustee transfer, in which the money is sent directly from one financial institution to the other.

A check written to you is a problem, because it does not fall under either of these options. That is, it is not possible to do a “rollover” in which the money is sent to you, then you put it into your own IRA. It has to be a direct transfer from one financial institution to the other (i.e., from the custodian of your ex-spouse’s IRA to the custodian of your IRA).

The second key point is that the divorce decree (or a written document incident to such decree) must specifically state that you are supposed to get this interest in your ex-spouse’s IRA.

Transferring 401(k) Assets in a Divorce

The rules for an employer plan — such as a 401(k) or 403(b) — are different.

First, rather than the divorce decree needing to state that you’re supposed to get an interest in the account, it has to be a “qualified domestic relations order” (QDRO) that states that you get an interest in the account. Also, it’s critical that the order includes certain specific pieces information in order to qualify as a QDRO.

Second, with an employer plan, a rollover is possible. That is, as long as there is a QDRO ordering that you get the part of the account in question, the plan can make out a check to you, and you can then deposit it (i.e., “roll it”) into your IRA — though you only have 60 days (from the date you receive the distribution) to do so.

Investing Blog Roundup: How Long Do Bear Markets Last?

This week, I enjoyed two articles that each take a look at how long bear markets tend to last. For me, the biggest takeaway is that there’s a lot of variation. Just because a market decline has lasted a given length of time (or hasn’t yet lasted a given length of time) doesn’t mean that we should/shouldn’t expect anything in particular in the near future.

Investing Articles

Other Money-Related Articles

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Do Target Retirement Funds Automatically “Buy Low, Sell High”?

A reader writes in, asking:

“Like you, I like the idea of ‘all in one funds,’ specifically the Vanguard Lifestrategy series. I have a significant portion of my IRA in Lifestrategy Moderate Growth. What I’ve wondered about is how those funds handle rebalancing during the type of market volatility we’re experiencing now-i.e., is it done on a continual basis, as new cash comes in and distributions go out? Or quarterly? Is it inherent in these fixed-ratio funds that they will, to some extent at least, ‘buy low and sell high?’”

Vanguard’s LifeStrategy and Target Retirement funds use daily cash flows into (or out of) the fund to rebalance the portfolio. Beyond that, further rebalancing only occurs if the fund’s allocation strays outside of a certain target range (which Vanguard does not publish). You can find a bit more info in this interview with Vanguard’s John Ameriks.

And, I would not say that it is inherent that the funds-of-funds will automate a “buy low, sell high” process. In periods during which the market exhibits momentum (as opposed to mean reversion), the funds’ daily rebalancing will actually harm performance rather than help it.

For example, if the stock market continues to drop slowly but steadily for an extended period, an investor in a LifeStrategy fund would experience greater losses than an investor who had a DIY allocation that was originally identical but never rebalanced over the period. (Reason being that the LifeStrategy investor will keep rebalancing into stocks every day, only to see them decline further.)

And the same thing happens if the market goes up steadily for an extended period. That is, the LifeStrategy investor will constantly be selling stocks, only to see them move up further, and he/she will therefore underperform the DIY investor who doesn’t rebalance over the period.

But the opposite can happen as well.

If a decline turns out to be a steep but short-lived dip, the investor in the LifeStrategy fund will have gotten to buy some shares “on sale” whereas the DIY investor who didn’t rebalance will not have purchased any such “cheap” shares.

And if a brief rally occurs during a bear market, the investor in the LifeStrategy fund will have sold some stocks at the temporarily-relatively-high price, whereas the DIY investor who didn’t rebalance will not have done so.

In short, during periods in which the market heads relatively steadily in one direction, frequent rebalancing (as you would experience in a LifeStrategy or Target Retirement fund) will generally underperform a strategy that involves less frequent rebalancing. Conversely, during periods in which the market rapidly bounces back and forth, frequent rebalancing will usually outperform a less frequent rebalancing strategy.

Investing Blog Roundup: Suing for Lower 401(k) Costs

After last year’s ruling by the Supreme Court in Tibble vs. Edison International, lawsuits have been brought against several large 401(k) plans, alleging that the plan fiduciaries have not done a good enough job of selecting the lowest-cost share classes available.

As Morningstar’s John Rekenthaler wrote in a recent article, participants in Anthem’s 401(k) plan have brought an especially ambitious suit, alleging that the plan’s funds are more expensive than they need be, despite the fact that they are mostly relatively low-cost Vanguard funds. It will be interesting to see how such cases play out in the next few years — and whether or not they bring any significant changes to the industry.

Investing Articles

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