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ADVISORS ARE THUMBS DOWN ON TRADITIONAL ASSET ALLOCATIONS “The millennial generation watched the baby boomers lose a lifetime of savings in the dot com correction, credit crisis and housing crisis. There is not a lot of faith in equities right now. But then again, history has demonstrated that this is when stocks explode.” -Investment Advisor and Author Dean Bahniuk “The Roth is more of a supplemental vehicle funded entirely by contributions, as opposed to rollovers. With traditional IRAs, there comes a point where you have to start taking out, so you have to start thinking about preserving principal,” Copeland said. Roth accounts can remain intact through an investor’s later years, and after death pass on to heirs without any distribution requirement, as opposed to traditional IRAs. “Part of that is the tax deferral aspect of the traditional IRA in that the government wants its money back, whereas with Roth the tax has already been paid so they don’t care,” Copeland said. Thus, Roth IRAs had their highest share in equities at 59 percent and were 90 percent more likely to invest in equities than holders of traditional IRAs, the report stated. Today in the U.S., about 50 million IRA accounts serve as the main retirement vehicle. For the most part, workers will opt for the 401k plan if that is available at work, because it usually includes matching contributions, and will more likely be prohibited from contributing to a traditional deductible IRA. “And of course, unless you are in the public sector, you will likely not have a traditional, defined-benefit pension plan available to you, although some large companies still have them,” Copeland noted. Still, only about 10 percent of those eligible contribute to an IRA. “People should always take advantage of deductible investments in their retirement, although not if they are just Individual Retirement Account (IRA) Asset Allocation, by IRA Type, 2010 70% 59.1% Traditional-Contributions 51.1% 50% Traditional-Rollovers Sep/Simple 41.3% 45.5% 60% Roth 0% Balanced Funds Equity Other Source: EBRI IRA Database. Balanced funds include balanced funds, life cycle/style funds, and target date funds. Money includes money market mutual funds and certificate of deposits (CDs). 10.6% 15.8% 8.5% 12.8% 7.7% 7.2% Money 12.6% 19.8% Bond 13.5% 9.8% 12.2% 9.9% 10% 10.5% 20% 15.5% 20.5% 30% 16.1% 40% FINANCIAL getting by, since there is a considerable penalty for early withdrawal,” he said. About the only anomaly the EBRI study found centered on the fact that the youngest IRA holders between the ages of 25 and 34 with balances under $10,000 had the lowest allocation of equities in their portfolios. Copeland attributed this to the fact that these accounts may have been inherited from parents or grandparents and thus subject to imminent forced distribution requirements. Or as newbies, these investors were unsure how to handle themselves in the seemingly risky world of equity investing. Investment advisor Michael Zhuang finds this trend disturbing and thinks they should be in equities from the very start. “Their human capital, manifested through their income from employment, is like a bond already,” he said. “And they won’t use the money for another 50 years, and so there is no chance whatsoever that stocks won’t over perform bonds in 50 years as long as they hold a well-diversified index portfolio,” he said. Harper Willis, owner of the website, believes target date funds will assist the less than savvy investor to avoid the pitfalls of being his own asset allocation strategist. “You give up some control, including the ability to customize your own retirement plan. But that might actually be a good thing. Many of us are poorly equipped to manage portfolios ourselves in part because, as many studies show, we tend to buy and sell at the wrong times,” he said. Willis said you should respect your inner demons when planning your own asset allocation strategy. “You must ask yourself how vulnerable is your portfolio to sharp market decline and will you be able to ride out such fluctuations. If you think you might panic in a severe market downturn, then take a more conservative approach.” Steve Tuckey writes about insurance and other financial services issues for several national publications. Steve can be reached at Steve. December 2012 » InsuranceNewsNet Magazine 47

December 2012

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