Know Your Finances:Questions from readers

Posted by Ellen Le on August 4, 2010

Andrea, from Chadds Ford, asks if she should move money out of her
bond funds into stock funds after seeing that the S&P 500 increased almost
7 percent in July.

I wish I could tell Andrea when the stock
market will stop being so volatile, but my Magic 8 ball is in the shop. But I
can tell her that despite the market’s flat track record over the last 10
years, I feel confident that over the next ten years high quality stocks will
outperform bonds. Interest rates on bonds are historically low and the earnings
yield on stocks, which is company earnings divided by the stock price, is
historically high relative to bond yields. Also, according to companies’ price
to earnings multiples, they are not terribly expensive.

It all boils down to what price you pay for a
stock. If you don’t have a professional advisor looking after you then I
suggest you put your money into low cost stock funds at Vanguard or Fidelity.
Two good funds are the Vanguard Dividend Appreciation Fund (VDAIX) and the Fidelity
Contra Fund. The Vanguard Dividend Appreciation fund has an initial minimum
investment of $3,000 and the Fidelity Contra fund has an initial minimum
investment of $2,500.

And, it is always best to maintain a healthy
balance between both stocks and bonds no matter which way the market is moving.
That exact balance will depend on a variety of factors such as your asset base,
your age, your income sources, and your tolerance for risk.

Jack, from Wilmington, asks if there is an optimal strategy for
him and his wife to consider when they take their social security
benefits. Jack is 64 years old and
his wife is 57 years old.
Since Jack is several years older than his
wife, it would be best for Jack to file for his benefit when he reaches full
retirement age at 66. Jack would then immediately suspend his benefit and not
take any benefit so that they are delayed and much larger when he takes the
benefit at age 70. (Also, the survivor benefit for his wife would be much
larger if he delays taking his benefit at 70.)

Because Jack has filed with social security
(and then suspended it), when his wife reaches full retirement age at 66 she
can apply for a spousal benefit rather than her own benefit, and then she won’t
be locking in her lower benefit for life.
She must specify that she is applying for the spousal benefit because
the social security office will automatically give her the larger of her
regular or the spousal benefit.

When Jack’s wife reaches 70 years old, she
can then switch to her benefit which may be higher than the spousal benefit.
She would not be able to switch to her larger benefit if she was already taking
her own benefit.

Everyone’s situation is unique. This example
is predicated on the notion that Jack and his wife can afford for Jack not to
take his benefit at 66. It makes sense to talk to a financial advisor or the
social security office directly before you make final decisions.

About Ellen Le

Ellen is the Founder and President of Ascend Investment Management. She was born in Philadelphia and has lived in the Delaware Valley for most of her life. When she is not researching investments and managing portfolios, she pursues her interests in tennis, bridge, hiking and art. Beginning her investment career in 1981 as a stockbroker at E.F. Hutton and Co., Ellen now has over 20 years of investment management experience. Prior to founding Ascend in 2006, she managed high net worth assets for many years at Bank of America, Mellon Bank, and most recently at Davidson Capital Management. At Davidson Capital Management, Ellen served as a Senior Vice President and Senior Portfolio Manager of the firm. She managed assets for more than 50 family relationships and was a core member of the firm’s Investment Committee.Ellen earned a BA in History from Brown University and a MBA in Finance & Investments from The George Washington University. She is a member in good standing of the Chartered Financial Analyst (CFA) Institute, which is a global organization dedicated to setting a high ethical standard for the investment profession. Her professional memberships include the Delaware County Estate Planning Council, Women Enhancing Business (WEB), and the Chadds Ford Business Association. She is a docent with the Delaware Art Museum and an active volunteer with the Brown University Alumni Association.