Christine Benz for Morning Star writes: The clock is ticking if you'd like to make an IRA contribution for the
2012 tax year: The deadline is the tax-filing deadline, April 15. With
that date just a bit more than two weeks away, we decided to survey
Morningstar.com readers to find out what they were putting in their IRA
accounts this year.
As always, the Discuss forum
conversation showcased a range of perspectives and strategies. Perhaps
not surprisingly, U.S. bonds found few champions given low bond yields
and the prospect of higher interest rates. But several posters also
voiced trepidation about U.S. stocks, unnerved by the fact that they
scaled new heights in the year's first quarter. Many respondents said
that they're focusing on foreign stock funds for their new IRA
investments, arguing that overseas markets look more attractive than
U.S. at this juncture; emerging markets received repeat shout-outs.
Other posters said they're leaning on multi-asset-class vehicles to do
the heavy lifting in a market environment where nothing looks especially
cheap.
To read the complete thread or share your own IRA-funding strategy, click here.
'International Stocks Will Provide the Best Long-Term Returns'
A healthy contingent of posters in the thread said they're earmarking new 401(k) allocations for foreign stocks. Overseas bourses have underperformed U.S. indexes so far in 2013, and Saji1986 think it's a good time to hunt for bargains. "I am going to build up my position in Oakmark International (OAKIX) this year. With European and to some degree Asian stocks feeling some pressure, I'm counting on [lead manager David] Herro to maybe find some value out there. Also, my international stock percentage in my portfolio has dipped to about 17%, and I like to keep it at around 20% to 22%. So for me it's pretty simple: my allocation calls for it, and I always feel better handing over my money to a proven manager!"
A healthy contingent of posters in the thread said they're earmarking new 401(k) allocations for foreign stocks. Overseas bourses have underperformed U.S. indexes so far in 2013, and Saji1986 think it's a good time to hunt for bargains. "I am going to build up my position in Oakmark International (OAKIX) this year. With European and to some degree Asian stocks feeling some pressure, I'm counting on [lead manager David] Herro to maybe find some value out there. Also, my international stock percentage in my portfolio has dipped to about 17%, and I like to keep it at around 20% to 22%. So for me it's pretty simple: my allocation calls for it, and I always feel better handing over my money to a proven manager!"
The fundamentals of international markets look attractive to BMWLover,
who wrote, "We still have about 10 years to go to retirement, so I'm
sticking to my premise that international stocks will provide the best
long-term returns." Bonds? Not so much, according to this poster.
"Bonds, especially U.S. Treasuries, will be big losers (in both real and
nominal terms) in the coming years."
Tomas47 thinks small- and mid-caps are a sweet spot in
foreign markets. "For a number of years I have tilted my domestic-equity
portfolio towards value stock funds and small-cap stock funds," this
poster wrote, "so decided to do the same for international equities. So
this year I added Vanguard International Value (VTRIX) and Vanguard FTSE All-World ex-U.S. Small Cap ETF (VSS) at a 3% allocation each. This complements my 12% allocation to Vanguard Total International Stock Index (VTIAX)."
Asia has beckoned to McMontana, who's steering IRA
contributions to a firm that specializes in the region. "As part of a
plan to bump up overall Asia exposure on a long-term basis, 2013's IRA
contribution went to Matthews Asia Dividend (MAPIX) and Matthews Asia Strategic Income (MAINX) in early January."
Emerging markets also look attractive to several posters. Orygunduck uses
portfolio target weightings to guide future IRA allocations and urges
others to do the same. "I'm under-allocated in emerging markets, so I'll
probably allocate most of my IRA contribution there, although I still
have to run my numbers." Poster Danahan has recently steered contributions toward Scout Emerging Markets (SEMFX).
But foreign stocks weren't the only overseas investments finding
support. A handful of posters also mentioned foreign bonds as a
repository for their IRA contributions. Chief K, for example, is considering moving some U.S. bond proceeds to international bonds once Vanguard launches its new offering. TDWebb is investing the 2013 IRA contribution in both foreign stocks and bonds. "Two-thirds of my 2013 IRA contribution will go to T. Rowe Price International Growth & Income (TRIGX) and one third will go into T. Rowe Price Emerging Markets Bond (PREMX), increasing my international stock and international bond holdings.
'Investments That Focus on Dividend Growth Will Outperform Bonds'
Not every respondent was steering IRA contributions overseas, however. As in many a thread over the past several years, high-quality U.S. stocks, especially dividend payers, had their backers.
Not every respondent was steering IRA contributions overseas, however. As in many a thread over the past several years, high-quality U.S. stocks, especially dividend payers, had their backers.
Intuitiveguy is obtaining that exposure via individual stock purchases as well as a dividend-focused exchanged-traded fund. "I have bought Verizon (VZ), Vanguard High Dividend Yield Index ETF (VYM), and Vanguard REIT Index ETF (VNQ)
as of now in my two Roth IRAs... I believe, dividend funds and REITs
will continue to grow, and Verizon is a super company which has a good
dividend yield."
Meanwhile, SargeantMajor views dividend-paying stocks as a
sensible parking place given what he thinks are unattractive equity and
bond markets. "Being only a year or so from retirement, I find myself in
a bit of a quandary I did not foresee only five years ago. Bonds are
unattractive and equities appear overvalued. My wife and I are rolling
our assets into dividend-bearing funds, and equity-income funds: more
specifically, Principal Equity Income (PEIIX) and American Funds Capital Income Builder (CAIBX).
I believe at least in the near term, these types of investments that
focus on dividend growth will outperform bonds, which are due for a
major adjustment soon, and growth stock funds."
Although Sequoia Fund's (SEQUX) yield isn't an attraction, ComStar
likes the Gold-rated fund's strategy. (Last year, Sequoia closed its
doors to investors buying in through certain channels.) "The Roth is all
invested in the Sequoia Fund," this poster wrote, "and while it is
being managed the way it is, I suspect I will be with them for quite a
while."
'I Can't Bring Myself to Put Dollars in at These Levels'
Yet some posters said they're notably concerned about U.S. equity valuations at this juncture. Dragonpat, for example, steered her IRA contribution to several different investments, including the typically defensive FPA Crescent (FPACX), which currently has a high cash stake. "The American stock market looked overpriced in January and February when I make my contributions and invest them, so it was hard making decisions," she wrote.
Yet some posters said they're notably concerned about U.S. equity valuations at this juncture. Dragonpat, for example, steered her IRA contribution to several different investments, including the typically defensive FPA Crescent (FPACX), which currently has a high cash stake. "The American stock market looked overpriced in January and February when I make my contributions and invest them, so it was hard making decisions," she wrote.
Sylvie, meanwhile, has identified exactly the right fund to
put in her IRA, but is waiting for prices to fall before pulling the
trigger. "I'm planning to put my contributions into PRIMECAP Odyssey Aggressive Growth (POAGX).
I have numerous small caps and pharmaceutical stocks that I picked
myself, and while they have done all right, I've decided to reduce
holdings and give myself more free time, so I'm going to let [this
fund's managers] manage this portion for me. So far, though, I can't
bring myself to put dollars in at these levels. So I've just opened it,
and am waiting to fill up the pot."
CardsFan, too, is waiting for valuations to improve before
putting new money into stocks. This poster wrote, "I have built a cash
position so that I can buy when the sky is falling or there is blood in
the streets. ...I don't think I'll have to wait too long for some more
bad news... One of the ways I have built cash was to sell some bond
funds. There were so many people trying to get into them, I felt the
need to get out."
Some investors said they're getting around the conundrum of what to
invest in by buying funds that invest in multiple asset classes.
Chang, for example, steered this year's IRA contribution to PIMCO All Asset All Authority (PAUIX),
citing the following four virtues. "(1) excellent record, (2)
thoughtful, successful active management/asset allocation by Rob Arnott,
(3) good yield [belongs in a tax deferred account], and (4) serves as a
one-stop access to all of PIMCO's funds."
Moderate-allocation vehicle T. Rowe Price Capital Appreciation (PRWCX) will be receiving Lordsakana's IRA contribution, while Annacz is employing the tried-and-true Vanguard Wellington (VWELX).
"This has been a tough year to attempt to figure things out," this
poster wrote. "I'm 74 and need some bond security but don't want to miss
all the action in equities. So, I'm putting new money--I'm still
working--into an inexpensive, actively managed, value tilted, balanced
fund... Safe but not too safe."
Dancingrain is thinking really long term,
allocating money to an IRA on behalf of children. "My yearly
contribution to the IRA account is about 20% of my total yearly
retirement contribution, so I put the IRA contribution into Vanguard Target Retirement 2060 (VTTSX). In the year 2060, I'll be 86 so this IRA pot is really meant for my children when I am dead."
Other posters said they like to exert more control over their asset
class exposures, so they use new IRA contributions to put their
allocations back into line with their targets. That's the strategy
employed by Bill Rogers, who shared, "New money is used to get
the portfolio back to the desired asset allocation so that it stays
within the [asset allocation] bands."
Orygunduck is on the same page, offering this sage advice.
"How one invests in their IRA should be part of their overall asset
allocation plan. That it is in an IRA should not alter this plan,
although if one invests for total return it is usually advisable to hold
the income-producing part of one's asset allocation in the most
tax-efficient space like an IRA."
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