Prepare Financially For When Disaster Strikes

Our hearts and prayers go out to those affected by Katrina. Many are fortunate to have escaped with their lives. It shows us all once again that there are many things that are more important than money. That being said, it is important that we be prepared financially should such a disaster affect us. Read on to learn how. The financial impact on the lives of those displaced by Katrina cannot be overstated. There are three stages of need in such situations—the immediate, the temporary and the long-term. Each stage presents different financial challenges and requires different advanced planning. The first thing you should do to financially prepare for disaster is to have copies of your important legal documents in a safe place other than your home. This includes copies of your Will, Trusts, Powers of Attorney, and Living Will but also insurance policies, titles to vehicles, Social Security and health insurance cards and real estate deeds. As a service to my clients, I store these electronically so they can be accessed anywhere at any time. These are essential documents that may be needed in an emergency and will be invaluable should you bear a catastrophic loss. Secondly, you should have access to cash to aid you both in evacuation and the immediate aftermath. When the power is out you can’t use a credit card. If essential supplies are in great demand they will sell to the highest bidder. I recommend a fireproof/waterproof safe be used to protect this cash in your home. I know of people who have built such safes into the concrete foundation of their house. In emergency situations, cash is king and can make the difference between being caught in the path of the disaster or fleeing to safety. Third, it is important that you are able to access your investments should you need to use those funds to aid your recovery. For instance, it will take months and even years for those affected by Katrina to get their lives back in order. Some people think that because they have insurance that they won’t need access to their investments in these situations, but that’s not true. It could take weeks or months before claims are filed and settled. For events like Katrina, it is likely that insurance companies will argue over whether the damage was caused by a wind event (which is covered) or a flood event (which is not, unless you had expensive flood insurance). Some claims will end up in arbitration and/or court. It is the same for transportation. Those who lost vehicles will have to file claims and await payment. What are these people going to do for shelter and transportation in the meantime? That’s why access to your investments is so important. It is also one of the reasons why I have been so vocal against investments like annuities that force the investor to pay substantial surrender penalties to get THEIR money. Don’t allow yourself to be in a situation where you will lose tens of thousands of dollars in needless penalties on top of your disaster losses. For those ravaged by Katrina, access to their investments will allow them to pay for transportation and temporary housing. It will allow them to buy food and clothing and to replace all the necessities they’ve lost. Even if some of these expenses will eventually be reimbursed by insurance, access to these funds allows them to quickly improve their situation. For those who are retired, it is very difficult to recover financially from disaster-related losses—especially if only some of the loss was covered by insurance. Sure, you can deduct these losses on your taxes but that is little consolation. People in this situation will have little choice but to reduce their standard of living. You may never be in a disaster that can ruin you financially, but it is only prudent that you take steps now to prepare in case the unexpected happens. Store copies of your important documents off-site, have ready access to an ample amount of cash and make sure that your investments can be sold without significant surrender penalties. These precautions will cost you little and can dramatically improve a terrible situation. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Are Hedge Funds Right For You?

Hedge Funds have been a hot investment lately. Once reserved for the very wealthy, hedge funds now have minimum investments as small as $10,000. Should you jump onboard the hedge fund bandwagon, or let this latest investment craze pass you by? Hedge funds are pools of private money that use specialized investment strategies in an attempt to earn greater returns for their investors. They can invest in just about anything in an attempt to make money. Usually, hedge fund strategies include the ability to short the market so they can profit by correctly timing market declines. Hedge funds have become popular because, historically, some have returned over 20% per year. As a result, the number of hedge funds has grown dramatically the last few years. Many successful mutual fund managers have left fund companies and started their own hedge funds. Since hedge fund managers often receive as much as 20% of the gains, the managers can make a lot more money. Hedge funds are normally structured as a partnership or a limited liability company. As such, only ‘accredited’ investors can participate. An accredited investor is someone with over $1,000,000 in investable assets or an annual income over $200,000 per year. Not a lot of people fall into this category. And Wall Street knew those high returns would be an easy sell to other investors. So they created a fund of hedge funds. Think of it as a mutual fund that invests in hedge funds. Voila, small investors now have access. Don’t let the attraction of high returns tempt you into investing in a hedge fund or a fund of hedge funds. I believe they are unsuitable for almost every investor. Here’s why. First, those sky-high returns were achieved when there were a small number of hedge funds pursuing each strategy. Now there are so many hedge funds pursuing similar strategies, the returns aren’t there. Worse, it’s forcing managers to pursue even riskier strategies. It’s like being at an auction. If you are the only one bidding you’ll probably get a great deal. If you are one of a hundred different bidders there’s not much chance of getting a bargain. In fact, if you don’t watch out you might even pay more than the item is worth. That’s what has happened in the hedge fund world. Very few hedge funds have current returns anywhere near those stellar returns of the past. In fact, it’s been reported that the majority of hedge funds have actually performed worse than the market indexes for much of this year. Some have even closed down and returned the money to their investors because they couldn’t meet their objective. Hedge funds have very high costs. Whereas an expensive mutual fund might charge a 1.5% management fee per year, the typical hedge fund charges 2%. Plus, the hedge fund manager will typically take 20% of any gains. It’s even worse with a fund of hedge funds because there is an additional layer of fees. You take the risk, they take the reward. Hedge funds and funds of hedge funds have little regulation and even less disclosure. The potential for fraud is high and transparency is low. Investors are trusting someone they don’t know to handle their money and will have little idea what they are doing with it. Big money investors get info the small investor can’t. Most hedge funds require that you remain invested for a set period of time—say 1 year. If investors start withdrawing their money, it may force the manager to sell investments at a loss, harming the investors that remain. Since hedge funds with long histories of stellar returns are closed to new investors, you’ll have to take a chance on managers with little or no experience in the Wild West world of hedge fund investing. Lastly, for those who must have alternative strategies, there are many options to short the market or to get double the market return through mutual funds offered by Rydex and Profunds. These mutual funds are transparent, regulated and much, much less expensive. Even so, they still aren’t for the faint of heart! So I recommend investors let the hedge fund bandwagon pass them by. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

The Horse Ain’t Dead Yet

Agents have been screaming at me to stop beating the ‘dead horse’ about equity-indexed annuities and the dangers of working with commission-based advisors. Unfortunately, the ‘horse’ ain’t dead…it’s very much alive and kicking. I receive calls or emails from at several people every week with stories that clearly illustrate this point. All of these situations have many things in common and the better you understand them the less you will be at risk. Mr. ‘Smith’ contacted me just a week or so ago. He and his wife are very conservative and near retirement. They have about $1 million in investable assets and their $300,000 home is paid for. Of all this money, less than $30,000 is invested in the stock market with almost all of it being in a super-safe money market account. His email asked me what was wrong with their ‘plan’ of investing basically everything they had into long-term, highly inflexible equity-indexed annuities. The agent who gave them this advice also recommended getting a reverse mortgage on their home and using that money to buy a high-cost life insurance policy under the guise that it could cover their long term care needs. This smart, well-educated couple was about to make the biggest financial mistake of their lives. ‘Susan’ contacted me the same week. Her father recently passed away and now her mother was making the decisions on over $1 million in investable assets. Susan was alarmed when she discovered that an ‘estate planner’ was pushing Mom to invest her entire nest egg into a 15-year equity-indexed annuity contract! 100% of it! This ‘estate planner’ wasn’t an estate planner at all. She was an insurance agent using that title to sound more qualified. She had convinced Mom that the equity-indexed annuity was the answer to all of her problems and Mom was ready to invest. By the way, YOU can be an “estate planner”, “wealth manager”, etc. too. All you have to do is get a business card saying you are and, bingo, you are now more qualified! Watch out for fancy titles, as they can be a ruse to gain your trust. At Susan’s request, I looked over the contract and uncovered some startling facts. If Mom cashed out after the 10-year surrender penalty was up, she would forfeit the ‘bonus’ and any index gains, and earn a measly total return of only 1.5%. That’s it, regardless of the index. The only way she could EVER get the bonus and index gains was to annuitize the contract for a minimum of 5 years. Even if she died, the children wouldn’t receive the bonus unless they annuitized! Or course, none of this was explained by the trustworthy agent. What can you learn from these examples? First, these investors were being asked to invest a substantial portion of their nest egg into a single type of product. This is the first red-flag. Never, ever, put all or even half of your eggs into one investment basket. Second, these investors were being asked to buy long-term pre-packaged investment products that strictly limited access to their money unless they paid hefty surrender penalties. I’ve talked with people who thought the surrender penalty was less than one percent only to find out it was closer to 20%! Never buy an investment with a surrender penalty over 5%. Third, regardless of what they call themselves, these ‘advisors’ were only able to sell insurance-based investments. They can’t sell government guaranteed, corporate or municipal bonds, mutual funds, stocks, REITs, CD’s or any of the other products used by full-fledged advisors. They are a one-trick pony. Third, these advisors obviously don’t have the experience or knowledge to offer appropriate financial advice. A trustworthy advisor would never, ever make the recommendations these charlatans made. They are completely unsuitable Fourth, these agents have little concern for the investor. They were more concerned about themselves then their client. Find someone who will put your needs first. Susan and the Smith’s are the lucky ones. They contacted me and avoided a nightmare. Unfortunately, there are thousands of investors that are taken advantage of every day. This should be criminal and until it stops I will continue to ‘beat this dead horse’! I’ll help you. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

The Guaranteed Minimum Income Benefit

Variable Annuities now offer a Guaranteed Minimum Withdrawal Benefit which allows you to earn 5% or 6% even if the market drops significantly. Undoubtedly, you will be pitched a variable annuity or pressured to transfer your existing one into a new contract with this benefit. Should you? Read on to uncover the truth behind this feature and see if it’s right for you. The Guaranteed Minimum Withdrawal Benefit provides a guaranteed minimum return on the annuity contract that can be accessed prior to death. For instance, the GMWB rider might guarantee a minimum return of 6% per year. So even if the market value of the account drops and doesn’t recover you will still be guaranteed of earning 6%. Most people who owned a variable annuity between 2000 and 2002 quickly regretted the purchase. They were stunned to see their account values drop significantly. Sure, the variable annuity has a death benefit but that doesn’t help you fund your lifestyle while you’re alive. As a result, the sales of variable annuities have declined over the last few years. In fact, the majority of variable annuity sales the last few years have simply been from people moving money from one annuity contract to another. Insurance companies had to find a way to attract new investors. They think the Guaranteed Minimum Withdrawal Benefit will do that. Should you buy one or switch your existing annuity to one with this new benefit? Not in my opinion. Here’s why. It’s too long-term. To take advantage of this benefit you have to keep your money tied up even longer. The GMWB isn’t immediately active. In most contracts, money must be invested for ten years before you can take advantage of it. Usually, you then must annuitize the contract for a minimum of five years in order to receive those benefits. This means you are looking at a minimum of a 15 year investment. By the way, you lose the GMWB benefit on any money you withdraw prior to the initial 10-year waiting period. It increases your costs even more. The additional charges for the GMWB can be ½ of 1% or more every year. And you pay the additional annual fee on the full account balance regardless of whether you ever use the benefit. That’s in addition to the 1.5% per year charge for administrative and mortality expense fees. That’s in addition to the management fees of 1%-1.5% paid to the people running the sub-accounts. All in all, you could be facing annual fees of 3.5% per year or more! There is a low probability of needing it. The insurance companies know history. The lowest 10-year period on the S&P 500 since 1975 was 5.8%. Eighty-two percent of that time, the S&P 500 delivered average gains over 10% ! There is a very low probability of this benefit ever being used. The expense of this benefit will have produced a drag on performance each and every year. Over a ten-year period, your account value could be 20-30% less in a variable annuity with this benefit then in a low-cost exchange-traded fund. If you average 6.1% in the variable annuity over 10 years then all you were paying for was a false sense of security. It distracts you from why you invest in the first place. People use stock market-based investments to generate a higher return than on other investments. You invest for performance. The reason variable annuity sales have declined the last several years is because of poor performance. I’ve never heard anyone say they chose to invest in a variable annuity because it had better performance than the alternatives! Don’t let pricey gimmicks distract you from the fact that you are making a stock market-based investment. Would you invest in a mutual fund that charged 3.5% a year in fees when there were others available that charged much less? That’s essentially what you are doing when you buy a variable annuity. So beware of the advisor that recommends you buy a variable annuity. A properly managed, well diversified portfolio is a much better choice. It may not be flashy, but it works--while allowing you to maintain control and flexibility over your money. Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Learning From Others’ Mistakes

When it comes to investing your money, it costs a lot less to learn from mistakes others have made than repeating the same mistakes yourself. This week, I will share one reader’s horror story and their mistakes so you can avoid these costly pitfalls. This is a true story. Just a few days ago, I received a call from “Mrs. Smith” from Texas. Her husband invested virtually all of their retirement nest egg into a variable annuity on the advice of an advisor he had just met. That was in early 2000. Today, the $800,000 he invested is only worth $100,000. The nest egg that they planned on using to comfortably retire has vanished. It’s gone. And at 60 years of age, they have little chance of rebuilding it. Their lives are changed forever—all because they made some basic mistakes. The first step in protecting yourself from a similar fate is to recognize that it can happen to you. Their story is not unique. It’s easy to think that we are smarter, that there’s no way we would make a similar mistake, but that’s not true. These are very intelligent people -- people who have advanced educational degrees and high-paying jobs. Just because you are an expert in one field doesn’t mean you can’t be taken advantage of in the financial services industry. In fact, brokers and advisors are trained on what to say and even what body language to use to gain your confidence. It’s called ‘mirroring’. We are more apt to invest with someone who is like us, so some advisors mirror your personality, actions and attitudes to dramatically increase their sales. You think I’m kidding? If so, reread this first step because it applies to you! The second step in reducing your chances of making a bad investment is to take your time. If an advisor says “you have to act now or you will miss” an opportunity, then miss it! If you are serious about investing the money it’s taken you a lifetime to accumulate, do your homework first. Mr. Smith made his fateful decision to invest only 30 minutes after meeting the advisor! The next big mistake that Mr. Smith made was that he put 100% of his money into a single investment. Never, ever, put 100% of your money in any investment—even if it is directly guaranteed by the government. Even grandma knows that, yet people do it every day. If an advisor recommends you invest 100% of your money into any single investment, run out the door and never look back. I received another email this week from someone in Ohio. An ‘Estate Planner’ had just recommended that her mother invest $1,200,000 into an Equity-Indexed Annuity. That’s a great investment…for the agent who would make over $100,000 on the deal! Her 70 year old mother was a recent widow, being asked to invest every penny into a 10-15 year investment. This is insanity, yet it is perfectly legal! Most retirees want an advisor who recommends good investments, closely monitors those investments and takes action when necessary to harvest profits or to stem losses. Instead, most people end up working with a salesperson looking for a commission. Lastly, Mr. Smith failed to take action while the value of his investment dropped 87.5%. If the value of your account drops by more then 10%, act! Don’t believe anything an advisor who has lost that much of your money has to say. Unfortunately, Mr. Smith has little recourse. The paperwork he signed essentially released the firm and the advisor from responsibility. By the way, Mr. Smith signed paperwork that wasn’t even filled out! Of course he didn’t read it, either. Never sign something that you haven’t taken home, read and then re-read again. Never sign something that is not completely filled out. Countless people have lost fortunes by following the advice of people who seemed so friendly and trustworthy. Don’t be one of them. I’m ashamed of the practices used by many of my colleagues in the financial services industry. It’s time the industry changed, removed all the conflicts of interest and began serving its clients. Until then, be on your guard! Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’. In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.