Email
Print2010 Wealth management
Getting back to the basics will help you ride out the economic storm.
Once upon a time in America, investors poured money into the stock market, invested in real estate and were confident that their long-term bets would carry them through retirement and leave something behind for their kids.
Then a run-of-the-mill economic slowdown in 2008 hit a massive pothole. And we all know the rest of the story: The economy is still fragile, and confidence hasn’t increased among investors because they aren’t seeing financial matters getting any better, says Scott Shilling, owner of MidWest Wealth Management.
“The range of outcomes from here is gigantic,” he says. “If we get the right policy out of Washington, the economy could turn around and do just fine, like it did from 1980 to 2007, with low unemployment, 3 to 4 percent inflation and periodic minor recessions. But it will take a pretty severe turnaround.”
While waiting for policy to change, be proactive on the home front, financial experts say.
“The last 12 months have been tough economically across all sectors,” says Dan Apple, president of Cooper State Bank. “We’ve seen job losses, investment portfolio devaluations and housing values drop. But there are still things that working consumers can be doing to improve their own personal financial situation.”
Know where you’re going
It will come as no surprise that financial experts encourage clients to map out their investing plan. Mike Platte, senior vice president and branch manager at UBS Financial Services, says it is job one.
“You have to know what you want to accomplish,” he says. “Some goals are short-term and some are long-term, and most people have a combination of these. The key to financial success over any time period is forming a plan and sticking to it.”
You have to know why you’re saving, and it helps to sit down with an objective third party—a financial planner—to outline a comprehensive plan, Platte says. The next step is following your plan. Some money-saving measures, such as sticking to a budget, will require reflection, introspection and old-fashioned self-discipline.
“It’s important to have an idea of what your monthly expenses are, and a lot of people simply don’t know,” Platte says.
Building the discipline to save may be difficult at first, but like any other habit, it will take hold over time, Platte says. And as with other habits, it may pay to start small. Place a jar on the kitchen counter and deposit the $4 you’d spend on gourmet coffee each morning in your own coffers as you pour a cup to go. The visual reminder of how quickly that small daily amount adds up will motivate you—that $1,000 a year could represent a trip to Disneyland with the grandkids after you retire, when otherwise you could be sitting at home missing them.
Platte says anyone can learn to invest from books and friends—even the Internet has reliable resources. But working with a professional is preferable for most investors.
“People are busy, and working with a professional who does this all day, every day helps,” he says. A financial professional knows the industry and is aware of upcoming changes, allowing clients to maximize return and take advantage of tax deferrals.
Once the plan is in place, review it annually to account for changes in tax laws, new jobs and other life changes that may occur, Platte says.
Get out from under debt
Once a plan is in place, manage that debt. “Review all of your outstanding debts and check the balances and the interest rates,” Apple says. “Then check to see what is in the market. Interest rates are at historical lows for credit right now.”
He says unsecured debts, such as credit cards, could possibly be refinanced into secured debt, like home loans.
Jeffery Chaddock, private wealth adviser for Chaddock and Associates, an Ameriprise private wealth practice, advises his clients to get debt off the books entirely.
“I can’t control the weather and I can’t control the stock market, but one thing I can control is my debt and the amortization,” he says.
There’s no telling what dividends your mutual fund will pay this year or how much profit you may earn. But if you know you’re paying 4 percent on a car loan, or 25 percent on a department store credit card, you’re throwing that profit away unnecessarily.
So pay off the automobiles, credit cards and loans, then revel in the feeling of power. “It’s a piece you can control,” Chaddock says.
Platte concurs. “You don’t want to have any high-interest revolving debt,” he says.
Invest in the community, invest in yourself
Jerome Schmitt, executive vice president of WesBanco Trust & Investment Services, says investors may find a secure and profitable investment in T-bills. As government officials continue to try to find a way to finance our country’s mounting deficit, new treasury securities will be introduced to the market.
“For some investors, income tax rates may be significantly higher, so municipal bonds will be more attractive,” Schmitt says.
Another fairly reliable option is to invest your dollars in your own retirement. “Contribute as much as possible to your 401(k) or your IRA—even up to the maximum if you are able,” Cooper State Bank’s Apple says. “This saves you money in taxes now and allows the interest and dividends to grow tax free.”
Schmitt recommends careful monitoring of existing investments and wise selection of new ones. “First and foremost, guard against potential erosion of market value of bond investments by limiting maturities of fixed income investments,” he says. “Stocks with an above market yield, defined as 3 percent or higher, and the capability of increasing dividends will prove to be rewarding over the next year.”
Be consistent
Chaddock advises clients to offset uncertainty with certainty. The market may change, but if the investor remains steadfast, it will pay off in the long run.
“Today’s world is different than ever before,” he says. “There is no normal. But you have to have an infrastructure and not just throw a dart.”
The first thing investors should do is have a cash reserve, Chaddock says. The textbook recommendation is to have three to six months worth of expenses set aside. In a volatile and competitive job market, Chaddock recommends doubling that.
While they are building their reserves, investors also should work toward paying off debt. At the same time, they should build their investment portfolios—a task that’s easier than you might think in the current economy.
“People who accumulate wealth know that continuing to invest is the best thing that can happen in a trough,” Chaddock says. These investors accumulate more shares for less capital during the low points, and their recovery is more rapid when the upturn occurs, he says.
There is one caveat: Think long-term. In most cases, “long-term” means about five years. Over that period, most investments will come out ahead. So buy low and settle in if wealth accumulation is the goal.
Chaddock says even some of the smartest folks out there tend to clench up at the thought of rough economic waters and consequently want to slow or stop their investing. But he recommends forging ahead with eyes on the horizon.
“Wealth is built better in difficult times,” he says. “The rich get richer because they know these principles. Think like Warren Buffett—understand the power of a little research and a little risk.”
Look at your life
Shilling, of Midwest Wealth Management, has investment strategies that have worked out well for his clients, but he says they boil down to where you are in life.
There are two different stages of investing, he says—accumulation (up to roughly age 60) and distribution (age 60 and older). Each stage requires a different strategy.
During the accumulation stage, the focus is on asset allocation, investing in equities and buying low so your values can rise. In this stage, time is your friend and you are building wealth.
During the distribution stage, your focus moves away from building wealth and toward spending what you’ve already accumulated. In this stage, your investments have to produce a predictable income. Risk is set aside for predictability.
“In the distribution phase, the investor cannot count on a rising stock market to fund retirement income,” Shilling says.
As an example, Shilling offers a 70-year-old couple who needs $6,000 per month to fund their current lifestyle. If they have $2,000 from Social Security and $1,500 from pensions, they still require another $2,500 per month in predictable, secure income from their investment portfolio.
“To fund that gap, their investment must be put into low-risk options like money market funds, CDs, fixed annuities, investment grade bonds and certain types of annuities that provide lifetime income,” Shilling says. “Any remaining investment funds can then be placed in equities if necessary for longer term growth to counter potential inflation.”
Those who do have pensions will fare well—as Shilling puts it, they’ll still be able to eat, pay the bills and go play with the grandkids. But most of us don’t have pensions to rely on, so investing wisely becomes doubly important.
“How you invest that money is critical to making sure you have an income for life,” he says.
Shilling has an easy barometer investors can use to test their financial stability. “If you worry about your retirement income for more than 30 minutes a month, get a second opinion from an adviser that focuses on investors in the distribution phase,” he says. “It will be worth the time and money to get peace of mind.”
Like his colleagues in the finance field, Shilling advises investors not to panic. “The pendulum is going to come back the other way,” he says. “It may not be quite as good as it has been in the last 25 years, but in my heart I’m an optimist.”
Kristin Campbell is a freelance writer.
