Investing In Life - With No Regrets

At the start of this New Year, I’m often asked what I think the best investment for 2005 will be. Investors are always looking for financial guidance to steer them through the uncertainty of the future. While it’s important to keep up with trends and cycles in the markets, there’s one very important investment that most people fail to make – investing in life. In our pursuit of high-returns and increasing income, most of us forget that money is merely a means to an end, not an end of itself. Today’s retirees have patiently built their nest eggs with decades of hard work and self-restraint. They knew they couldn’t live beyond their means and still provide a secure retirement lifestyle. After all those years of saving and sacrifice, they’ve entered their golden years having met their financial goals. But having met those financial goals, many find it hard to let go and enjoy life. They’ve always dreamed of taking that European vacation or going on a cruise. Others want to remodel their kitchen or start a new hobby. Those with strong religious beliefs might desire to go on a short-term mission or be more involved in charity works here at home. But in every case, money concerns often hinder us from pursuing our dreams. When I talk to a new client, I always ask them about their life goals. One of the most common financial conversations I have with retirees goes something like this: “Jeff, we’ve always wanted to travel. And now that Bob has retired, we finally have the time. But I’m just afraid we can’t afford it.” Nine times out of ten, the couple has more than enough set aside to follow their dreams. They just needed the reassurance that it was OK. While it is important to plan for the future and to spend wisely, it is also important that you pursue your dreams while you still have the time, ability and health to do so. I don’t have to look beyond my own family for a poignant story to illustrate this point. My father and step-mother had always planned on traveling---some day. My dad, a type A if there ever was one, has kept busy pursuing business development projects. Then about three years ago, my step-mother developed heart problems and soon after, macular degeneration started in one eye. At one eye appointment, the eye doctor asked my step-mom what her dreams were. She mentioned traveling up to Canada. The eye doctor took my father aside and gave him a major wake-up call, telling him, “Take her to Canada while she can still see it.” My dad began planning their Banff vacation the next day. Recently, macular degeneration has started in her ‘good’ eye and her sight is failing fast. There are many plans and dreams that will never be realized now. It’s simply too late. Who would have guessed that life could change so quickly? The same was true for my wife’s mother. Health problems had plagued her for years, but she’d made it to retirement and looked forward to spending more time in her garden, traveling, and spoiling her four grandchildren. But only a year out of retirement, she was diagnosed with breast cancer and passed away less then two years later, at the young age of 63. Don’t let life pass you by. Enjoy the fruits of your labors while you can. Here at the beginning of 2005, take a moment to make a list of one, two or three things that you want to pursue this year. Be specific and make the goal doable. Then, as one famous ad says, just do it! Husbands, your wives have waited for years for some of their dreams to come true. If you can’t think of ways to enjoy life, I guarantee that your wife will have a list prepared and ready for you to consider! I can’t think of a better way to start the New Year than with a fresh, renewed commitment to enjoy our blessings and spend more time with the ones we love. If you would like free, clear, unbiased advice send your questions to jeff@guardingyourwealth.com today, you’ll be glad you did. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com.

The Riskiest Investment

Some folks just can’t stand the thought of losing money. Well-meaning investors, fearful of the fluctuations of the stock market, decide the safest place to put their nest egg is in the ‘safety’ of fixed investments, like CDs or government bonds. They’ve heard horror stories of friends who lost a bundle in the 90’s ‘Tech Bubble’ or in the aftermath of 9/11. “That’ll never happen to me,” they say. “I’ll never put my nest egg at risk.” But they don’t realize that their actions are bringing about the very thing they fear the most. To understand the risks of being ‘overly risk adverse’, you first have to understand the two basic types of investments. I call this analogy “Loan vs. Own”. You can either loan your money to someone or you can own something with it. That’s simple enough, isn’t it? You can loan your money to the bank, the government or a corporation. You can own something by buying a home or other real estate, owning a small piece of a company by purchasing its stock, or by investing in a stock mutual fund. Loan investments are designed to provide a stable source of income but don’t protect you from rising prices. Own investments, such as mutual funds that invest in stocks, are designed to protect you from rising prices but have a return that fluctuates. Think of it this way. Most people buy homes instead of renting because they know that over time their home will appreciate in value and be worth more in the future than what they paid for it. Renting, most people feel, is like putting their money down the drain—you don’t get anything for it in the long run other than the dividend of a place to live. Your home will fluctuate in value depending on interest rates and the economy in your area. There are some months and years your home will actually lose money, but that doesn’t mean a home is not a good investment because, generally, real estate will appreciate in value over a period of 5 or 10 years. So here’s the bottom line. For money you plan to use in the next 1-3 years or for that portion that you must have to provide income, it’s better to rent your money—to use loan type of investments. The other portion of your money should be used to buy investments where you own something that’ll appreciate in value over time. This brings us back to our main point; investing the money you need for the long term in mostly ‘loan’ type investments will actually cause you to lose money in the end. The Rule of 72 clearly illustrates this point by allowing you to quickly estimate how long it will take you to double your money. Say you’re earning 5% on a fixed investment. By dividing 72 by 5, you find it’ll take you almost 14 1/2 years to double your money. Even a small increase in return makes quite a difference. At 7% interest, it would take just over 10 years for the same results. When you consider that the historical average annual stock market return has been 10-12%, compared to 6% for fixed investments, you can see that it can take twice as long to double your money with ‘loan’ type investments. With life spans constantly increasing, most retirees will be depending on their nest egg for 25 years or more. You can’t afford to ‘safely’ park your nest egg in bonds or CDs and hope to maintain your current lifestyle, unless you have a very large nest egg. It’s true that over the past couple of decades ‘loan’ investments have performed very well. That’s mainly because we’ve been in an environment of falling interest rates. When rates fall the value of a bond increases. That trend is coming to an end. Bonds are not expected to repeat their past performance in the foreseeable future. Keep in mind, with the right advisor, the volatility of investing in equities can be reduced through proper management. So if you’re serious about achieving and maintaining the lifestyle you desire, you must take steps now to make those goals a reality. For free, clear, unbiased advice send your questions to jeff@guardingyourwealth.com. You’ll be glad you did. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463 or at jeff@guardingyourwealth.com

Profiting in 2005

This time last year I predicted that the stock market would go up around 8% and that the return on bonds would be lower than people had come to expect over the last 20 years. Those following my advice averaged 8-10% on their money last year. So what is your plan for 2005? But wait! I was wrong! Instead of going up 8% the S&P 500 index went up 8.99%. I was also expecting bonds to earn 3-4%. The intermediate term treasury index only increased 2.02%. I recommended investors decrease the amount of money they have in bonds and increase the portion in stocks. I also suggested using Real Estate Investment Trusts (REITs) as a replacement for some of the money in the portfolio previously allocated to bonds. For all of 2004, small company stocks were up 17%, the Nasdaq 9%, REITs 32%, and the large international index increased 17%. If you took my advice and had a well diversified portfolio you should have averaged 8%. My conservative clients averaged 6-8% with some earning 10-15%. Enough about the past, how should you invest for 2005? Exactly the way I recommended in 2004. I expect the stock market to return around 8-10% in 2005, albeit with some bumps along the way. Many people have been talking about a bubble in the real estate market. I disagree and believe REITs will continue to do well. I anticipate that the Federal Reserve will continue to raise short-term interest rates in 2005. I don’t expect long-term interest rates to dramatically increase. Since current rates are below the inflation rate, this rise should not seriously affect the economy. There’s been a lot of talk about the size of our deficit and its effect on foreign investors financing our debt. I believe President Bush will successfully get a budget passed that will assure the world that he is serious about reducing the deficit. Over the last year, commodity prices such as oil, copper and natural gas increased dramatically. I expect commodity prices to continue to remain at these levels and possible even go higher as a result of the Asian and world economy’s continued growth. Oil will generally remain above $40 a barrel with occasional spikes similar to what we’ve seen recently. I don’t expect these higher prices to put a significant drain on the U.S. economy. This overall scenario means that it will be difficult for those investors who are trying to earn 6-8% investing in bonds. It’s simply not going to happen. For the next several years, even conservative bond-type investors will need to look to real estate and equities to average 6-8% per year. Of course, real estate and stock market-based investments will fluctuate more than bonds. Many of the retirees that I talk with are greatly concerned and compare the market’s ups and downs to riding a roller coaster (and you won’t see many seniors lining up to ride the coasters these days). The thought of losing the money they depend on to maintain their standard of living makes them queasy enough—especially after many of them lost a lot of money in the stock market between 2000 and 2002! That’s why it is vital that you work with an advisor who uses non-traditional money management methods designed to limit potential volatility. Unfortunately, most advisors follow the traditional ‘Buy and Hold’ methods of investing which basically say you should be willing to sit by and do nothing while you lose 30-40% of your money! I strongly caution against that method—it just doesn’t make sense. There are ways to invest in equities with the comfort of knowing that your lifestyle isn’t at risk because of market fluctuation. Unfortunately, products like Equity-Indexed Annuities (EIAs) were developed by the insurance industry in an attempt to meet this need, but they force you to give up control and access to your money. You shouldn’t buy any investment that requires you to pay penalties as high as 22% to get at YOUR money. And don’t be lured by the ‘bonus’ they may pay. There’s no such thing as free money. You’re the one who could end up paying in the long run. If you’d like free, clear, unbiased advice send your questions to jeff@guardingyourwealth.com. Mr. Voudrie is a Certified Financial Planner, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463.

GYW Update

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