Will Rising Higher Interest Rates Hurt the Stock Market?

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After many years of keeping short-term interest rates at zero to help the economy recover from the 2008 recession, the Federal Reserve Board is slowly nudging rates up. It has implemented several quarter-point increases and says it intends to push rates up to the 3% range over the next several years. This is good news for conservative bank savers who may finally get paid some interest on their capital, and potentially bad news for bond holders who may see the value of their bonds fall in the short-term as new bonds with higher interest rates are issued. But what will rising rates mean for stock investors? Accepted wisdom says higher interest rates hurt stocks, because investors now have more choices for guaranteed higher yields on fixed income products like bonds, money market funds, and the bank. Dimensional Fund Advisors decided to test that wisdom by taking a statistical look at what has...

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FAQs About 3 Common Investment Accounts

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What is the main difference between a Roth IRA and a Traditional IRA? In a Traditional IRA, contributions can be tax deductible and growth is tax-deferred. Tax is paid upon withdrawal in retirement. Roth IRA contributions are not tax-deductible. Qualified Roth IRA withdrawals and growth are tax-free. How do I decide which to choose? Choosing between the two types depends on your income tax bracket now versus the future. Since there is no way to tell the future, you will need to come up with an estimate for what your tax bracket will be in the future. This also depends on what your specific goals are for future saving. How can I estimate my retirement tax bracket? You can begin by looking at your current tax return and eliminating things like your wages since you will not be working anymore and adding things like Social Security or a pension benefit. There are even some helpful...

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Part V: Cash Management and Budgeting – Connecting the Dots

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In this final segment on Cash Management and Budgeting, lets connect all the dots from the previous four segments to construct one comprehensive easy to use system that helps you create the following: A forward-looking budget that accurately reflects the reality of your life and tells each dollar of income where to go. It gives the highest priority to the amount of savings, investment and debt reduction necessary to build wealth each month according to your unique financial goals, objectives and life values. A turnkey system that automates savings, investments, bill paying and record keeping each month simplifying your life and minimizing ongoing financial decision making and the time you spend worrying about money issues. There is an initial process required to create your budget and solve any deficits as outlined in parts three and four of this series.  If done well, it should function pretty much automatically thereafter with simple routine oversight. ...

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4 Crucial Financial Tips for Recent College Graduates

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So you graduated from college and you are off to your first job.  Congratulations on making it this far!  I’d tell you things are about to get real, but you know things are already “real” and you’ve proven you can handle it.  What is about to happen is your next major life change.  Here are four tips that are crucial to set you up for financial success moving forward. BUDGET – If this sounds like a dirty word to you, then it is time to get comfortable with a cuss word that your grandmother will actually approve of.  The most basic budget simply tracks your take-home pay against your monthly cash outflows.  Where it tends to get a little tricky is converting cash-flows into monthly amounts, so that you end up comparing apples-to-apples.  For weekly expenses like groceries, multiply the expense by 4.3 to get the monthly amount.  Also, if you...

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Domestic investors miss a world of opportunity

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Over the past few years international stock markets have trailed the U.S. stock market by big margins. Faster growth in U.S. corporate profits, coupled with a strong dollar, meant that domestic investors were rewarded for keeping their money here. That dynamic changed this year as foreign stocks in aggregate began to outpace American stocks with average returns overseas running as much as 50% higher than U.S. returns. Once again, investors are being reminded that it’s not good to concentrate their money in one market, even if that market is the biggest in the world. There are some 10,000 non-U.S. stocks listed on foreign exchanges and their market capitalization accounts for about 48% of the world’s stock market value, says Dimensional Fund Advisors (DFA). That means a domestic-only investor misses out on almost half of the available stock market opportunities. Even though the U.S. market did well in the three years leading up to...

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Stock markets make money, individual stocks often don’t

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You’ve heard this statement many times before: the stock market’s returns beat that of low-risk investments many times over. Well, it’s true: since 1926, when comprehensive stock market statistics began to be gathered in the United States, the stock market’s annualized return has run a little over 10% a year, three times greater than the returns on one-month U.S. Treasury Bills. But individual stocks often don’t do as well as the stock market, says a new research paper by Hendrik Bessembinder, a finance professor at Arizona State. He found that returns on most individual stocks have not surpassed T-Bill returns. In fact, most of the stock market’s outperformance is due to just 4% of listed stocks; “The other 96% collectively matched one-month Treasury bills,” he wrote. More than half of U.S. stocks over the period were beaten by T-Bills, he found. Even worse, the most common net total return for a single stock...

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The 6-Point Checklist To Plan Your Estate

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Estate planning is a required consideration for anyone with assets, no matter how modest. It ensures your possessions, legacy and loved ones are protected in the case that anything were to happen to you. To help you effectively plan your estate, we put together a 6-point checklist. 1. Inventory First you should create a list all of all assets and any debts you have in your name, making sure to include both tangible and intangible assets. Tangible assets could be your house, valuables, car, boat, land, etc. Intangible assets would be bank accounts, retirement accounts, and life insurance policies. You should have all tangible assets valued by an assessor in order to document the value of each asset on your inventory list. Make sure to document any current or future debts that are held in your name also. 2. Draft Next, create a draft plan specifically identifying where each asset should go after you...

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Saving for a Wedding is Hard: Financial Success in Marriage is Harder

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While engaged couples focus plenty of attention on how to save for a wedding, many overlook the critical planning required to have financial success after the big day. Get to know the basics Primarily, you and your future spouse should discuss the basics of your financial situation before you get married. Have at least a basic understanding of your mutual assets and liabilities. This information is vital to assess how your current situation will affect future goals and to set expectations on how you plan to work together to meet them. If you plan to buy a home shortly after the wedding, but have not saved enough for a down payment, you can adjust your spending accordingly to incorporate this goal. It is also important to recognize when prenuptial arrangements should be discussed, because spouses are likely entering the marriage with significantly different financial situations. Getting married may also affect your student loan payments...

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Do I Need a Financial Advisor? Top 10 signs that say you do

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How do you answer the question "Do I need a financial advisor?" Here are some warning signs that we see when new clients come to us: You don’t seem to be getting anywhere. Money comes in and goes out, you don’t save, and your credit card balances never go down. Your employer offers a 401k or other tax-favored retirement savings plan, but you don’t contribute. You contribute something to your employer’s plan, but have no idea what you are invested in. You have multiple retirement accounts at former employers and don’t know what to do with them. You’ve inherited a much larger amount of money and investments than you are used to dealing with. You aren’t sure how much money you’ll need to generate an adequate retirement income. Or, even worse, you think Social Security will take care of all your needs. You aren’t sure how your family will get by if you die or become disabled...

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Part IV Cash Management and Budgeting: Eliminating Deficits

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In Part III of our continuing series on cash management and budgeting, we discussed the importance of identifying your highest financial priorities like retirement, children’s education, or buying a home when preparing your budget. Your savings for these priorities should be the first items in your budget.  Once these objectives are identified and quantified, then you should fill in all the remaining spending that takes place in your household.  Not surprisingly, most households find themselves in the red.  There just isn’t enough income to cover the savings needed to fund your life’s goals and continue your current spending patterns.  Learning to pay yourself first and then live on what is left takes some thoughtfulness and some time. There are three things you can do to balance your budget deficit over time; reduce your current spending, liquidate your debt, and automatically allocate future income growth to debt reduction or savings.  Obviously, debt reduction and...

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