Dear Friends and Family,

President Harry Truman, tired of getting advice that ended with “on the other hand”, famously asked for a one-armed economist. The past 20 years has seen a burst of new financial ideas due to increasing computer power and the digitizing of historical financial data. Some of these ideas contradict long held theories. Here are a few on the other hand views.

A] Conventional wisdom suggests that IRAs be converted to Roth IRAs as early as possible to recover the taxes due on conversion. Little thought was given to conversions in retirement. On the other hand, a conversion in retirement can be very useful under certain circumstances if the following applies. 1] The IRA funds are not needed in retirement 2] Retirement taxes are low because it is the period after retirement but before Required minimum distributions start. 3] The plan is to leave the IRAs to the beneficiaries. 4] The taxes due can be paid with after tax funds. Conversion to a Roth will lower future owners and beneficiaries’ income taxes and possible estate taxes and fees.

B] The long-held view that a greater number of securities in a portfolio, the better the diversification and therefore the safer the portfolio. There was a gut feeling that this approach was not in the investors best interest. Some called this di-worseification. On the other hand, we now have data that indicates that indeed greater diversification leads to lower returns. Also, it takes fewer securities to provide most of the safety of diversification. Twenty securities provide 80% of the risk reduction of holding one security. Smaller funds, called Select funds are now more common and usually outperform the advisor’s larger offerings. The trend to smaller funds has been enabled by company and regulatory compliance departments better understanding of diversification.

C] Fixed income was always recommended as a part of portfolios. Bond’s primary purpose was as a source of income and funds during bear markets. On the other hand, research has pointed out four areas when fixed income securities may be less desirable.

1. If you are young, a buy and hold stock portfolio is recommended on the assumption you will not need funds during bear markets.

2. If you are looking for performance only. During the 20th century U.S. Treasuries yielded 1% and the Stock Market yielded 7% annually AFTER INFLATION.

3. If you are receiving Social Security or pension benefits you already have a substantial fixed income portfolio. A married couple benefit of $50,000 a year is equivalent to a $2,000,000 fixed income portfolio. Additional fixed income securities may be unnecessary.

4. If your employment is secure then more equities are in line. If your employment is riskier then more fixed income is called for.
I would expect more changes in investment thinking will immerge due to the growth of theoretical investment research.

Katz Family Financial