The Importance of Setting Goals

Goal Target

Setting your financial goals is a key step in taking control of your wealth. By determining what you’re trying to accomplish and assigning each of your financial accounts to the appropriate goal, you can ensure that your investments are aligned with your objectives.

What should you be thinking about when deciding which accounts should be part of each goal? All accounts in any one goal should have a similar time horizon (meaning when you’ll need the money) and should be similar in terms of how much risk you’re willing to take. For example, you might combine an IRA account with a 401k account (and possibly other accounts as well) into a “retirement” goal.

Combining accounts into these kinds of groups rather than managing each one individually lets you more efficiently manage your investments. It can also help you recognize and avoid risks that can build up across multiple accounts in your portfolio. And compared to lumping all of your accounts together into one giant pile, splitting them into goals can help ensure that you’re on track to meet each of your objectives. By combining similar accounts into the same goal, you can get a clearer picture of your financial situation and make better investing decisions.

What Will the Fed Do with Interest Rates?

Inflation Rate PCE

What the Federal Reserve does with interest rates may sometimes seem like an esoteric guessing game, but it can affect almost every investment in your portfolio. The level of interest rates directly affects the return you can get on cash, and indirectly affects how stocks, bonds, and many alternative investments perform.

Last week the Fed tweaked the wording of its formal policy statement, paving the way for an end to the era of near-zero interest rates that’s lasted since the global financial crisis. Most analysts currently believe this first interest-rate increase will occur this summer. But even if that comes to pass, the Fed isn’t likely to raise rates very far or very fast. At the end of 2015, and possibly for a while beyond that, the level of interest rates is still likely to be very low by historical standards.

One reason interest rates are likely to stay low is the state of the economy. Though the unemployment rate has tumbled from 10% in late 2009 to 5.5% in February, there are signs that the economic rebound is fragile. The Citigroup Economic Surprise Index, which compares economic data to analysts’ prior forecasts, has fallen into negative territory. The surge in the value of the US dollar against other currencies since late last year may also act as a headwind for the economy by hurting American businesses that sell their products overseas.

The current outlook for inflation also suggests that interest rates won’t rise very far. The Fed’s preferred measure of inflation, called the personal consumption expenditure index, is only 0.2%. The “core” number, which excludes some of its more volatile components, is 1.3%. These numbers are far below the Fed’s 2% inflation target. Even if the inflation rate does slightly increase later this year as the effect of lower commodity prices wears off, there doesn’t seem to be much of a threat of high inflation that would force the Fed to take drastic action.

How Big Is Too Big for Apple?

Apple Logo

Apple is America’s most valuable company, and the contest isn’t even close. Its market capitalization—the total value of all of its stock—is around $725 billion, about twice as much as the next largest companies such as Exxon Mobil, Google, and Microsoft. It grew so large by providing investors a return of almost 2,100% over the past 10 years, which is an average return of 36% per year. But as is often stated when it comes to investing, “past performance does not predict future results.” So will Apple stock be able to continue producing such generous returns for investors?

In theory there’s no reason why it can’t. It’s often difficult for large companies to maintain fast growth rates because their high market share mean fewer opportunities to take sales away from competitors. But the market share for Apple’s flagship product, the iPhone, is only about 20%. Such a number suggests that there’s at least a possibility of Apple continuing its dramatic growth even if other products such as the iPad, the recently released Apple Watch, or a rumored Apple electric car aren’t able to replicate the iPhone’s success.

Historically, however, companies have struggled to repeat their stock market success after they earned the title of America’s most valuable firm. Calculations by The Economist show that the four other companies that have achieved this distinction since the early 1980s (IBM, Exxon Mobil, General Electric, and Microsoft) on average had cumulative returns of 1,282% in the 10-year period before reaching the top spot, but an average return of only 125% in the subsequent 10 years.

Part of this phenomenon likely has a statistical explanation: just like athletes who have had outstanding rookie seasons may often seem to suffer “sophomore slumps” in their second years, a company that’s done so extraordinary well that it’s become the most valuable American company is unlikely to be able to maintain the same level of success. But there may be other explanations as well. It might be more difficult for a company’s executives to manage a massive organization than a smaller one, for example.

Investors shouldn’t automatically assume that Apple won’t at least partially repeat its past success. After all, Apple first became the most valuable stock in 2011, and it’s largely been able to build on its previous success since then. But if it’s able to continue outperforming the broader stock market, it would be defying the historical odds.

Using “Asset Location” to Reduce Your Tax Bill


Growing your portfolio isn’t only about selecting the right investments; it’s also about maximizing how much of the gains you can keep and minimizing how much you have to give to the government. Therefore understanding the tax implications of your investments is a key part of taking control of your wealth. Fully utilizing tax-advantaged accounts (such as 401k and IRA accounts) is important, but it’s not the only step in achieving better after-tax investment returns.

Different investments can be treated very differently by the taxman. Dividends from stocks (or funds that invest in stocks) are generally taxed at a much lower rate than interest payments from bonds (or funds that invest in bonds). Funds that have a high “turnover” (meaning they frequently rearrange their underlying investments) will often generate more taxable income than funds with lower turnover. Most income from municipal bonds is exempt from federal income tax (and sometimes state income tax too).

If you have a mix of tax-advantaged accounts and regular accounts, you can benefit from the tax differences by putting more of the high-tax investments in the tax-advantaged accounts and the low-tax investments in the taxable accounts. This tactic is called “asset location” (you’re locating your assets in accounts where they’re most efficient from a tax perspective). Done properly, it can let you retain more of your wealth and make it easier to achieve your financial goals.