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PrintWealth Management
Tips on how to protect your financial portfolio.
2011 Crestock
It’s been a rough few years in Ohio and across the nation, with joblessness and volatile markets becoming an ever-increasing concern. As we face potentially huge changes over the next few years in the state and beyond, how can investors ensure that their money is going to be protected? Some of Central Ohio’s leading financial experts weigh in.
Some say the economy may be looking up. Scott Shilling, owner of MidWest Wealth Management, says changes at the federal level could make a big difference to investors. Recent arguments over the debt ceiling caused anxiety among investors, which was reflected in big fluctuations in the market. Shilling recommends that investors keep a level head.
“I’m always surprised at the way people let it bother them,” he says. “It’s like a self-fulfilling prophecy.” The 2012 presidential elections are likely to cause similar anxiety, he says. In this case, investors shouldn’t panic, but also can’t discount the importance of these elections. “Government keeps getting bigger and bigger, and so elections are increasingly important,” Shilling says.
Some analysts look at the current economic climate and see a correlation to the past. Shilling says he thinks it looks a lot like the early 1980s, when the country was in a financial quagmire under the leadership of Jimmy Carter, and voters elected Ronald Reagan, bringing an about face in fiscal policy.
If history were to repeat itself, gold could be in for a big shift, Shilling says. Ten years ago, gold was priced at $300 per ounce; now it costs $1,800 per ounce. “Within a year of the start of the Reagan administration, the price of gold dropped 50 percent and kept going down,” Shilling says. “I would be extremely nervous to buy gold right now.”
“Buying gold now is only a good idea if the federal government continues to run trillion-dollar deficits for the next 20 years, and people aren’t going to let that happen,” Shilling adds.
Other analysts take a more cautious view of the economy. Among those is Jeff Chaddock, a private wealth advisor with the Chaddock Group of Ameriprise Financial Services, who says investors should keep an eye on interest rates and be prepared for a potential jolt.
“The most critical changes that will affect our daily lives are taxes, inflation and interest rates,” he says. “So far, inflation has been curbed, which has allowed us to persevere despite rising food costs and gas prices that hit $4 per gallon. On the other hand, if interest rates rise, which is predicted to happen after 2013, this will affect the cost of almost everything, including borrowing for housing, cars and major appliances.”
Chaddock says taxes represent a big unknown, but it is certain that tax policy can have a huge impact on investors. “Nobody knows how taxes will be affected as Congress tries to lower our national debt,” he says. “But we do know that changing tax code and rising interest rates can have a significant impact on business development and corporate earnings.”
G. William Gibson, senior vice president of investments for Gibson Retirement Group of Raymond James, agrees that things may begin to even out. “From a tax planning standpoint, 2011 will be more stable than 2010 due to last December’s two-year fix on most tax rates,” he says. Inflation is always a concern, but some securities can provide a hedge against that, he says.
“Some U.S. Treasury Inflation-Protec-ted Securities are actually priced below the rate of inflation,” he says. “Buyers are more concerned about their return of principal than the return on principal. Safety is a relative term.”
Dan Roe, chief investment officer of Budros, Ruhlin & Roe, also believes that recovery is coming, but that it may be slow. “We have believed for several quarters that any economic recovery would be uneven, with some months offering up good news of jobs, housing and economic growth, and other months providing news that suggests we may be headed for a new recession,” he says. “Such a lumpy recovery almost guarantees a good deal of market volatility. However, we believe that a new true recession is not the most likely scenario, but that economic growth will be somewhat anemic, particularly in comparison with prior post-recession recoveries.”
Roe says companies may still be hesitant to hire new employees and likely will exercise caution when it comes to significant expenditures. This accounts for the rise and fall Roe foresees. Companies will spend a little (which will show up as a positive economic indicator) and then wait to see if the rewards come (which may be reflected as a temporary slump).
“While it is certainly not an optimal environment for investing, you can still earn solid returns on your investments, especially when compared to near zero returns on cash,” Roe says.
When it comes to choosing investments, diversification remains a key point. Don’t risk all capital in just one sector or fund. Shilling of MidWest Wealth Management sees growth potential in many sectors and recommends investment in the stock market.
“Stocks are extremely attractive right now, and it looks like 1980 all over again for me,” he says. “The stock market had basically gone nowhere for about 12 years, and then there was strong economic growth for the next 20 years.” This is a prime time to invest in stocks, he says. “The prices are so low, there doesn’t even have to be a boom for stocks to look very good.” He recommends spreading investment around in four or five market sectors to minimize risk, which is done easily through investing in a mutual fund.
Roe recommends that investors also pay attention to their bond portfolio, which tends to get less attention than stocks.
“Given that yields are so low, holding some of the more opportunistic, yet riskier, bond sectors such as high yield and foreign bonds, particularly emerging markets bonds, can provide more current income and enhance total return,” he says. Investors who are uncomfortable choosing specialized bonds can take advantage of a number of high-quality, multi-sector funds that will do the choosing for them.
No matter what the economic climate, it is important to take care of the basics. According to attorney Tom Baxter of Baxter & Borowicz, those basics include a minimum of proper insurance coverage and careful planning. In a litigious culture, people are at risk of being sued, and those who own anything of considerable value should protect themselves against lawsuits. The right insurance policy will pay an attorney’s fees, at the very least.
When it comes to personal property, such things as real estate, vehicles and other big ticket items need protection. “Anything with a title ought to be insured,” Baxter says.
Business owners are subject to lawsuits for a wide variety of reasons—a common one is wrongful termination. To prevent a disgruntled ex-employee from walking away with the family home and all of the employer’s personal possessions, it is essential to keep the personal and business interests separate. This can be done easily by forming a limited liability corporation. Baxter says it costs virtually nothing to create an LLC because often the business owner can incorporate without the help of an attorney. The benefits are well worth the paperwork involved, Baxter says.
“Someone may come after the business, but the personal assets will be protected,” he says.
It used to be that people looking to protect their wealth moved it offshore—to Switzerland or to small chains of islands like the Cook or Cayman islands, where the governments are amenable to the idea of protecting assets from creditors. Now there’s seldom a reason to do that since domestic trusts can do the same things at a much lower cost. Ohio doesn’t have such policies set up, but a number of states do—Delaware, for instance. If a resident of Ohio sets up a trust in Delaware, that money is protected from creditors. The money cannot be seized to pay for a legal judgment (exclusive of alimony, child support and a handful of other situations), but is available to its owner to pay for living expenses, Baxter says.
Chaddock says the right investment strategy will be different for each person and family, but certain basics always apply.
“A good start is to follow the solid foundation of guidelines set forth by our grandparents: strong cash reserves, no debt and a robust portfolio of highly rated and strong dividend holdings,” he says.
Kristin Campbell is a freelance writer.
