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BROUGHT TO YOU BY

SUZIE SAWYER

TRINITY INVESTMENTS

 

 

 

Q: Q: How Does Life Expectancy Factor Into Investing for Retirement?

 

A: Life expectancies have made tremendous gains over the last century, more than any other time in history.  In 1900, the life expectancy was around 47.  Today it is around 78, and for a male reaching age 65, it is 83 (source: Social Security Administration).  Many of us will live more years past age 65 than we spent working!

 

Economist Harry Dent, in his book “The Roaring 2000s Investor,” redefines retirement as a “time of freedom when you can do what you really want, what is most meaningful to you, after you are freed of the obligations for career and child rearing…a time to pursue your highest lifestyle goals.”

 

Dent goes even farther by suggesting that we consider moving into this phase of life, which Maslov called “self-actualization,” earlier rather than later.  He makes a point of noting that the most important dimension of a person’s financial plan should not be merely how to financially survive retirement, but how to create the lifestyle and life work that is most desirous, that most closely matches your dreams and aspirations, and most contributes to society.

 

A successful retirement is not just all about money, it’s about your health and well-being as well.  It doesn’t matter how much money one has when they enter retirement if their poor health precludes enjoyment of their riches.  Proper dietary practices and a good exercise regimen are the least expensive of all “set-asides” in life, but for some, the most difficult.  There is nothing complicated about a financial plan that calls for eating right, exercise and saving a little at a time.

 

Setting up a dietary plan or a gym routine is beyond the scope of my expertise, but I do think we can tune up our financial lives by considering what Thomas Stanley, PhD, author of The Millionaire Next Door, describes as common denominators of the wealthy.  They live well below their means.  They allocate time, energy, and money efficiently in ways conducive to building wealth.  They believe their financial independence is more important than social status.  Their parents did not support them.  Their adult children are economically self-sufficient.

 

It’s clear that with life expectancies on the rise, a combination of personal health and financial health has become increasingly important to a comfortable retirement. Working with your investment professional to prepare for the financial aspects of retirement and taking steps toward a healthy lifestyle will go a long way toward helping you live the retirement you’ve always pictured.

 

Suzie P. Sawyer is a Managing Director/Investment Advisor Representative of Trinity Investment Services, LLC and can be reached at (228) 864-4460.  Securities offered through Century Securities Associates, Inc.  Member FINRA and SIPC. A subsidiary of Stifel Financial Corp.

Home Office: 501 North Broadway, St. Louis, Missouri 63102, (314) 342-4051

 

Q: How did our current conceptions of retirement come into being?

 

A: Our society’s views of retirement have developed over a long period of time, and continue to evolve.

 

In pre-industrial America, retirement did not exist.  Ancient Native Americans just moved on and left the old behind if they could not produce.  Our Colonials were a bit kinder, viewing the elderly as a source of wisdom and valued for their skills and crafts.

 

Mass production changed all of that, as a worker came to be viewed as a cog in the assembly line that eventually would wear out and have to be replaced.

 

As our society changed from a nation of craftsmen to a nation of industrial workers, we traded job and occupation for craft and vocation, according to author Mitch Anthony in The New Retirementality.

 

As life expectancies increased, it did not take long for older workers to become the object of discrimination by authorities.  The way to get rid of the problem was to come up with some sort of mandatory retirement.

 

This went hand in glove with the fledgling labor movement, which was struggling to organize workers.  Unions quickly embraced the ideas of enforcing job security for older workers as well as providing for retirement and pensions.

 

Some attribute the retirement age to German Chancellor Otto von Bismark, who in the 1880s invented a pensions scheme to remove old bureaucrats.  He pegged retirement at 70, using the Biblical reference “threescore and ten year,” but eventually lowered it to 65 since few lived that long.

 

I’ll discuss more on this topic, including the formation of the Social Security system, gains in life expectancy over the last century, and living a happy, meaningful retirement, in subsequent “Ask the Expert” features.

 

Suzie P. Sawyer is a Managing Director/Investment Advisor Representative of Trinity Investment Services, LLC and can be reached at (228) 864-4460.  Securities offered through Century Securities Associates, Inc.  Member FINRA and SIPC. A subsidiary of Stifel Financial Corp.

Home Office: 501 North Broadway, St. Louis, Missouri 63102, (314) 342-4051

 

 

 

Q: How much risk should I take on in my investment portfolio?

 

A: Any investment will have some degree of risk.  Risk can be defined as the chance that an investment’s return will be different than expected, including the possibility of losing some or all of the original investment.  The concepts of risk and return are inexorably linked; the greater the amount of risk that an investor is willing to assume, the greater the potential for a higher return.  Investors, guided by advisors they trust, should focus on determining the degree of risk they are willing to accept as they pursue their investment goals.

 

Instead of subjecting themselves to a miserable ricochet between the manic “risk on” and “risk off” trade, I always urge investors to adapt their investments to their goal.  Sometimes this even requires adapting the goal itself.

 

Rather than relying on a gut instinct, consider how much risk you think you can emotionally withstand.  As you’ve probably experienced in the last few years, that gut feeling often changes as the markets move.  You should think about risk tolerance as the amount of risk you need to assume in order to pursue future financial security.

 

You can determine an appropriate level of risk in your portfolio by evaluating how to allocate your assets to meet your future obligations.

 

In my opinion, retirement success is about matching your goals with a means for getting there.  Accepting a prudent amount of risk is inseparable from that project.  We can help guide allocating your assets based on math rather than mood.

 

Suzie P. Sawyer is a Managing Director/Investment Advisor Representative of Trinity Investment Services, LLC and can be reached at (228) 864-4460.  Securities offered through Century Securities Associates, Inc.  Member FINRA and SIPC. A subsidiary of Stifel Financial Corp.

 

Home Office: 501 North Broadway, St. Louis, Missouri 63102, (314) 342-4051

 

 

Submitted by Anonymous

Q: What role do trusts play in an estate plan? Should I establish a trust as part of my own estate plan?

 

A: A trust can be a valuable tool in the estate planning process. A trust is a set of instructions regarding how you would like your assets managed and then distributed to your beneficiaries. A trust is a legal document that names an individual or entity (the “trustee”) who takes legal title to, and manages, the assets you transfer to the trust for the benefit of the persons (the “beneficiaries”) you specify in the trust document.

 

Trusts are created in two different ways. A trust may be created and implemented while you are alive (an intervivos or living trust), or it may be created through your will at your

death (a testamentary trust).

 

Because a testamentary trust is created through your will, it is effective only upon your death. As with all estates passing by a will, the estate is subject to probate, and at the

conclusion of the probate process, the assets are distributed to the trustee. In addition, because it is created at death, the testamentary trust cannot provide for the management

of your assets during your lifetime and, therefore, cannot plan for incapacity.

 

A living trust is created during your lifetime and provides instructions for the management of your assets while you are alive, as well as for the management and distribution of your assets at your death. Typically, these types of trusts are revocable, meaning they can be amended or changed at any time before your death. This provides flexibility, because if your personal or financial goals change, you can make changes to your trust.

 

Once your living trust has been created, it is imperative that you re-title your assets to the living trust, making the trust the legal owner of those assets. The instructions within the living trust only govern those assets actually owned by the trust, so re-titling your assets is vital to ensuring that your instructions can be followed. When you die, assets passing through a living trust avoid probate.

 

A living trust can be a good way to maintain control over your estate during your lifetime, while also allowing you to control the distribution of your assets to your heirs. For more information on trusts, and which is best for your needs, contact your estate planning attorney today.

 

Suzie P. Sawyer is a Managing Director/Investment Advisor Representative of Trinity Investment Services, LLC and can be reached at (228) 864-4460. Securities offered

through Century Securities Associates, Inc. Member FINRA and SIPC. A subsidiary of Stifel Financial Corp.

 

 

Q: I’m in the process of switching jobs.  What are the advantages of rolling the money from my previous employer’s retirement plan into an IRA?

 

A: In the previous “Ask the Expert” feature, we discussed several different situations in which it may make the most sense to leave your money in your previous employer’s qualified retirement plan (QRP).  For instance, if your former employer’s plan is well-managed, offers low costs, and includes investment options that are not readily available to outside investors,  or if there is a possibility that you may return to your former employer, you may want to leave your money where it is.  Another reason for leaving your money in the QRP is if you have an investment in your former employer’s stock, once you have made a partial or full rollover to an IRA, the Net Unrealized Appreciation option is no longer available.  Also, funds in a 401(k) account are generally not available to creditors, whereas in some states, IRA assets may be available to creditors in the event of bankruptcy.

 

These situations aside, rolling your money into an IRA can offer several benefits.  First of all, your assets will continue to have the potential to grow on a tax-deferred basis, just as they had in your employer-sponsored retirement plan.  A rollover IRA can also provide you with greater control over your assets and an extensive array of options for investing your balance.

 

Finally, with a rollover IRA, you can combine money from employer-sponsored plans, as well as existing IRAs, into a single IRA account.  Consolidating your assets can help you simplify your finances and enable you to better keep track of your investments and their performance.  Not only will your assets be easier to manage, you’ll be able to keep working toward your retirement goals by making additional contributions to your new IRA – up to $5,000 in 2012, $6,000 for IRA holders age 50 or older.

 

For more information on rolling your retirement assets into an IRA, contact your financial professional today.

 

 

Q: I’m in the process of switching jobs. Does it make sense to leave my money in the retirement plan sponsored by my previous employer?

 

A: When leaving an employer, you will have the opportunity to roll over your qualified retirement plan (QRP) funds to either an IRA or your new employer’s plan. Moving to an IRA often gives the you more control and extensive options for investing your funds. Moving to a new employer’s QRP might also give you a sense of control but your investment options may be limited. There are also some situations where it makes the most sense to leave the money in the old QRP. For instance, If your former employer’s plan is well-managed, features low costs, and includes investment options that are otherwise not readily available to you, it might be in your best interest to leave the funds in the plan. This would be especially beneficial if you do not have a plan with a new employer available to you or if you are hesitant to open an IRA. Also, if there is a possibility that you may return to your former employer, it might be appropriate to leave the funds where they are. This should particularly be considered for government employees participating in 457 plans. The nature of this type of plan typically provides penalty-free retirement income much earlier than an IRA or 401(k). If you will reach age 55 or older while still employed, maintaining a 401(k) plan gives you an option to begin taking distributions prior to age 59 ½ (beginning at age 55) without incurring an IRS penalty. Rolling funds to an IRA negates that option. We’ll examine other reasons for leaving your money in your old QRP, as well as the benefits of rolling your money into an IRA, in future Q&As.

 

Q: With bond rates fluctuating, how can I make sure I’m investing at the right time?

 

A: Every bond investor wonders whether they should invest money now or wait. Investing now means locking in a fixed income stream at current rates. But what if rates move higher tomorrow? Waiting is an option, but not without its own risks. If the waiting period ends up being a long time, the interest foregone by not having the portfolio invested is a lost opportunity – especially if rates fail to rise as expected. In addition, should interest rates fall, instead of rising as expected, potential appreciation in bond prices is also missed. A laddered bond portfolio offers a possible solution. Primarily, laddering allows a systematic way of investing in a portfolio without the constant guessing about what direction interest rates will move next. To build a laddered portfolio, investors purchase a collection of bonds with different maturities spread out over their investment time frame. Staggering maturities allows the income and yield of the portfolio to gradually adapt to changes in the interest rate environment and maintains consistency in the average maturity. This, in turn, helps reduce market risks, as longer-term bonds generally have greater volatility (change in value) than shorter-term bonds. A laddered bond portfolio seeks to provide a stream of income, with preservation of capital; laddering, however, does not assure a profit or protect against loss if bonds are sold prior to maturity. Bonds can be actively chosen and monitored by your investment professional based upon a fundamental evaluation.

 

Q: With the start of the new year, I’d like to take control of my finances. Can you recommend any steps I can take to get my individual retirement accounts in order?

 

A: Getting your financial house in order is a great idea. You can help make the most of your IRAs by utilizing these simple IRA resolutions: • Make contributions earlier – By not delaying your $5,000 contributions, IRA holders have the opportunity to receive more tax-deferred earnings on investments, or tax-free earnings for Roth IRAs, over a longer period of time. This is especially true for those who are age 50 or older, as “catch-up” contributions allow an additional contribution of $1,000 per year. • Consider consolidation – Do you have multiple IRAs at other firms? By consolidating, you can reduce annual fees and paperwork for multiple IRA accounts. • Review distribution planning and elections – Are you aware of the distribution options available for IRAs, such as the Rule 72(t) program? Or are you aware that a non-spouse beneficiary of assets held in a participant’s 401(k), or other type of employer- sponsored plan, now has the option to directly transfer those assets into an inherited IRA? • Check current beneficiary designations – Are your primary and secondary beneficiaries still in order? Could there be a need for a change because of marriage, birth, death, or divorce? • Review multiple beneficiary designations – Do you have multiple beneficiaries named on your IRA, and is each beneficiary’s designated share correct and clearly specified? Do the beneficiaries know they are beneficiaries of IRAs? • Locate a copy of the IRA agreement – Do you have a copy of your Individual Retirement Account Application? Have you reviewed it and other details regarding your situation with your attorney or CPA? • Consider Roth IRAs – Are you not contributing to a traditional IRA because you cannot deduct contributions? If so, you may want to consider a Roth IRA. Qualified tax-free Roth distributions may be what you need for retirement and/or estate planning. For assistance with these and any other financial issues, contact your investment professional today.

 

Q: I’ve heard a lot about Long-Term Care Insurance – is this something I should consider?

 

A: Since no one knows what the future may bring, we plan and prepare. “Freedom consists not in doing what we like, but in having the right to do what we ought.” – Pope John Paul II We buy insurance not because we want to, but because we don’t know the future. Long-Term Care (LTC) Insurance is defined as coverage for the variety of health and supportive services necessary for a person who requires some form of daily, ongoing assistance. There is much to consider when it comes to LTC Insurance, but please don’t make that an excuse to procrastinate. The time to buy insurance is always before you need it. Most people acknowledge the risk of needing long-term care at some point in their lives – generally during retirement. Some thoughts to consider if you are between the ages of 45 to 64 (median age group for purchasing LTC Insurance): - Look into some of the newer inflation growth options that are available. Your LTC Insurance plan should account for the rising costs of care. -The right-sized policy can lower your premium. Plans that offer unlimited benefits are the most costly, since there are no claim limits. Shorter duration policies with a set benefit period are less expensive and increasingly favored. -Self-funding a greater portion of your cost of care can enable you to achieve significant savings (meaning start saving some money). -Good health gets you good rates. No one can predict when their health will change, and your health at the time you apply is a key variable in the premium you’ll pay. If you are currently healthy, you may save 10-20% on your premium versus being turned down if your health declines. -Most LTC policies offer some form of “shared care” option, which allows couples to share benefits and may include a couples discount on your premium. There is no cost or obligation when you request a quote. Consult your financial professional to find a policy that is right for you.

 

Q: Considering the state of the economy and the current volatility in the stock market, would now be a good time for me to move my money into other investments?

 

A: While completely pulling out of the stock market certainly is one option during rocky times, you may find it more beneficial to keep your money invested in stocks and wait for things to hopefully improve. Consider the following: - Staying Invested: Many times volatility in the stock market causes people to park their investments in cash. However, just as many of those staying in cash also fail to see an upward trend taking place in the market and, for them, not being fully invested may mean missing out on gains and achieving lower returns. In fact, in the 12 months following the end of a bear market, a stock portfolio fully invested in the S&P 500 had an average total return of 37.8%; by missing the first six months of that recovery by holding cash, returns would have only been 7.7% (Source: Ned Davis Research, Inc.) - Utilizing Dollar-Cost Averaging: When the market is volatile, many investors wonder “Is it the right time to buy?” Dollar-cost averaging can help ease those concerns by committing a fixed amount to an investment at a regular interval. Investors buy more shares when prices are low and fewer shares when prices are high, usually resulting in a higher average price per share than average cost per share. Investors should consider their financial ability to continue purchases through periods of low price levels or changing economic conditions. Such a plan does not assure a profit and does not protect against loss in a declining market. Stay tuned for additional strategies for riding out a volatile market in our next feature. For more information on how to best survive a volatile market, consult your financial advisor today.

 

Part 2: In our last feature, we were asked the question, “Considering the state of the economy and the current volatility in the stock market, would now be a good time for me to move my money into other investments?” First, we addressed the need to stay invested. Many times volatility in the stock market causes people to park their investments in cash. However, just as many of those staying in cash also fail to see an upward trend taking place in the market and, for them, not being fully invested may mean missing out on gains and achieving lower returns. We also delved into dollar-cost averaging, which involves committing a fixed amount to an investment at a regular interval. Investors buy more shares when prices are low and fewer shares when prices are high, usually resulting in a higher average price per share than average cost per share. To be effective, investors must consider their ability to continue investing when prices decline. (Such a plan does not assure a profit and does not protect against loss in a declining market.) Here are some additional recommendations for dealing with a volatile stock market: - Evaluate Your Current Portfolio: Portfolio weightings in different asset classes may shift over time due to performance. It is important to periodically review your portfolio to make sure you are properly diversified and to determine whether your current mix of investments is still suitable for your goals and risk tolerance. -Ignore the Media: Each day, we are bombarded with 24-hour coverage of investment news and too many financial publications to count. While the media provides a valuable service, they typically offer a very short-term outlook. Investors should instead seek to gain a longer-term perspective. -Stick to Your Long-Term Investment Plan: There are no secrets to managing a volatile market and many investors start to “doubt their beliefs and believe their doubts.” The best way to navigate a choppy market is to have a long-term plan, a well-diversified portfolio and to stick to it! To help you keep a balanced perspective, always consult your financial advisor before making changes to your portfolio. By following this advice, you’ll be better prepared to cope with any surprises the stock market may send your way. For more information on how to best survive a volatile market, consult your financial advisor today.

 

Q: My father has recently passed away. What are the rules for taking money from an IRA that lists you as a beneficiary?

 

A: The rules surrounding distributions from an inherited IRA are complex. If you’ve inherited an IRA, it’s a good idea to familiarize yourself with the five-year rule, which could potentially be used to your advantage. It states that a beneficiary, who is an individual, has until the end of the fifth year following the year of the owner’s death to withdraw the entire balance of the account. The five-year rule may only be used in certain cases. If the deceased was the holder of a traditional IRA and passed away before attaining age 70 ½, the beneficiary may utilize the five-year rule. Or, if the deceased was the holder of a Roth IRA and died at any age, including after age 70 ½, the beneficiary may utilize the five-year rule. If the individual has inherited a Roth IRA, and the deceased died more than one year ago, the five-year rule may come in handy. If this individual has missed required minimum distributions (RMDs), he or she is subject to a 50% penalty on the outstanding amounts and may be subject to interest for late penalty payments. However, the individual is within the window of the five-year rule. He or she can forgo the RMD method and make sure to withdraw the entire balance of the inherited Roth IRA by the fifth year following the year of the owner’s death. This action will keep the individual from being subjected to the 50% penalty for a missed distribution. If the individual has inherited a traditional IRA and the original holder died at an age younger than 70 ½, he or she can start taking RMDs based on his or her single life expectancy (SLE) the year following the year of death. But what if the individual does not want to relinquish the inheritance and does not want to increase his or her taxable income that year? The five-year rule will allow him or her to skip RMDs until five years after the year of death. This gives an individual some time to allow for tax planning when accounting for the extra income derived from the recently inherited IRA. Because these rules are so specific & mistakes often equal penalties, please consult your financial advisor and/or tax professional.

 

Q: Should I factor in life expectancy figures when determining how much I’ll need to save for retirement?

 

A: When it comes to retirement income planning, life expectancy figures can be severely misleading. Many people will outlive their own life expectancies. Therefore, people ought to think long and hard about longevity risk—the very real possibility of living 20, 30, or 40 years (or more) past retirement age. While a healthy 65-year-old man has a life expectancy of age 81, he has a 50 percent probability of reaching age 85 and a 25 percent probability of reaching age 92. For a woman age 65, the odds rise to a 50 percent chance of reaching 88 and a one-in-four chance of living past her 94th birthday. The odds of at least one member of a 65-year-old couple reaching 92 are 50 percent, and there is at least a 25 percent chance of one of them reaching 97. (Source: Society of Actuaries, Annuity 2000 Mortality Table.) There has never been a generation in history that has been faced with a challenge of the magnitude and scope that faces you today. Your retirement may last as long as your working life. What happens if you do live to be 95, 100, or beyond? If you retire at 60, you may need income for another 35, 40, or possibly even 50 years. Will your income last as long as you do? We all know the averages don’t matter. None of us knows anyone with 2.3 kids. Let’s make sure we don’t use average life expectancy rates to make a mistake in our planning.

 

Q: Should I consider stock market averages when planning for retirement?

 

A: One way to misunderstand raw information is to confuse abstractions with reality. Market averages are such an abstraction. Averages do not actually exist. Market results exist—and nothing compels actual market results to obey averages. Let’s look at an example. According to Ibbotson Associates, looking back from 1926 through the end of 2010, the S&P 500® stock index averaged a return of about 9.9 percent annually. But out of all those 85 years, how many times did it actually provide a calendar year return between 9 percent and 10 percent? Did you guess 20? 30? 10? Try zero. Is that too narrow of a band? Then let’s find out how many times the market’s return was between 8 percent and 12 percent. Surely 30 or 40 of those 85 years, right? Actually, the market’s return was in the 8 to 12 percent range just five times. In fact, the market’s loss was greater than 20 percent more times than it returned a gain of 8 to 12 percent. But that’s only part of the story. The market’s gain has been 20 percent or greater 32 times out of those 85 years, also according to Ibbotson. The stock market is like electricity. If used prudently with the right risk management tools, like insulation, regulators, and wall sockets, you can have light to read a book at night, enjoy air-conditioning in the summer, and listen to music on the radio. Using it without proper respect and understanding can give you quite a shock. The stock market’s returns don’t go in a straight line—they never have. Expecting a return of 9 to 10 percent each year would have left you feeling a little off course in the past 85 years. Making sure your retirement plan is up to task requires planning for the inevitable times invest¬ments will under-perform their historical averages. A professional financial advisor can help you structure your portfolio based on your risk tolerance and time horizon.

 

Q: I know I should be saving for retirement. But how can I keep from making costly mistakes with my savings?

 

A: A comfortable and confident retirement is on most people’s list of reasons to invest. The financial services industry has done a pretty good job of educating investors about the growth phase. But little has been done in preparing investors – or even advisors – to adequately handle the retirement income phase. And the rules are different. As you think toward retirement, what should you do to prepare yourself for the income phase of investing – where your money pays you? If you make a mistake early in the growth phase, it may be relatively easy to recover. Let’s say you don’t contribute the legal limit to your 401(k), IRAs, or other retirement plans. Or you take some wild risks, or even cash out of the market at the wrong time – you may still have years to decades to make up for lost time. Early mistakes are easier to fix. A mistake in the income phase is different; it could jeopardize your lifestyle for the rest of your life, as well as your legacy. An income-phase mistake can have an impact on your income every month for the rest of your days. These kinds of life-changing financial mistakes generally fall into two categories. The first I call the “hope strategy,” in which we simply hope that things will work out fine and make no effort to learn about what we can do to increase our chances of enjoying a comfortable retirement. The second kind of mistake is doing the opposite, which is “drowning in information.” In this case, investors consume a vast amount of raw data and then act, or decide not to act, based on a misunderstanding of this information. A professional financial advisor can help you avoid making these mistakes as you prepare to make the most of your retirement savings.

 

Q: How do you recommend I organize and maintain my files so that everything is easily accessible?

 

A: Last month we discussed cleaning up files and records. This month I want to give you some tips on how to keep them better organized. I usually recommend that my clients organize their files into four sections: a “routine” drawer holds an unpaid bills file, correspondence files, insurance files, and files on such items as hobbies, travel, and community activities. A second drawer contains more permanent files relating to assets, liabilities, and property records. Here is where you would keep records relating to property ownership, investment accounts, automobiles, boats, and other assets. You would also keep mortgage information, loan information, and other information relating to your property. A third drawer is for family. Keep personal records, files on children and/or grandchildren, and personal correspondence in this group. Finally, in the fourth drawer keep all tax records and family estate planning information. Tax returns should be kept for seven years. Family trusts, wills, and other planning documents should be kept here, bound permanently into their files. Thin is better when it comes to file contents. Keep the number of documents or papers in individual files to a minimum. When files grow too thick, separate their contents into multiple files. Periodically take a group of files and “scrub” by reviewing their contents and throwing out paper which is out of date or for which you no longer have any use. If you are unsure about throwing out records, consider the source. If the source is likely to have a copy or record, let the source warehouse the records for you. Whole files which are no longer needed, but which you feel the need to keep, can be stored in cardboard file boxes in the garage or attic. Finally, keep important records, which cannot easily be replaced, in fireproof boxes or in a safe deposit box.

 

Q: The amount of paperwork in my home office seems overwhelming! How can I get a better handle on the mail and other items that I’m constantly inundated with?

 

A: Recently I was faced with the task of cleaning up the files and records of an elderly client who found himself without family or resources equal to the task. Like many of his peers, over the years he had accumulated a lot of “stuff” in the form of records, mementos, and a table heaped with junk mail. Particularly among the elderly, accumulations like his are not uncommon. When faced with the “throw out or keep” decision, “keep” prevails too many times…especially as we age. Therefore, considering that space is expensive and giving up what little we have to “stuff” can detract from our lives, it makes good sense to develop a home filing system or procedure that holds the “keep” to a minimum. Start by applying some basic rules of administration, such as: “handle a piece of paper one time, then file.” Next, develop a system to sort mail and do so daily. Try sorting mail into three piles: junk that doesn’t get read on its way to the waste basket; bills that immediately go into an unpaid bills file; and reading material that you plan to read later. Next, I like to keep a composition book around my desk for notes in lieu of writing down information on scraps of paper or sticky notes. This acts as a chronological journal to which I refer from time to time, often to find that forgotten reminder or telephone number. Finally, I equate the design of a home filing system to that of the process of setting up kitchen cabinets. Keep like items together. Keep those files that you are most likely to use on a daily basis close at hand. Files that you are less likely to use can be kept in less handy spots. Please be sure to read next month’s Q&A when I will discuss how to create a filing system to keep your documents better organized.

 

Q: I’m in my mid-50s and beginning to think about retirement. My biggest concern is if I will have enough money saved. How can I be sure I don’t outlive my savings?

 

A: Part 1 of 3 - Posted September 25, 2010 Being nervous that you will outlive your retirement funds is a familiar concern. Some experts estimate that annual retirement needs could range anywhere from 70 to 100% of your current income. Planning for retirement as early as possible is a significant step towards acquiring the funds you’ll need to pursue your future goals. Our way of thinking about retirement needs an overhaul. We persist in asking our retirees to make what author Mitch Anthony (The New Retirementality) calls “age-justments,” turning off who they are and the activities that drive their pulse … simply because they reached age 62. In reality, the good news is retirement is not like flipping a switch. It’s not a black and white transition – it is really a three-phase process, and each phase has a different investment process. The first phase of retirement truly begins well before actual retirement. It occurs between ages 50 and 61, when the kids have left home and our focus becomes wealth accumulation. At this time, we concentrate on building our nest egg, paying off our debt, and thinking about where we wish to live and what kind of life we would like to have for the last third of our lives. You may be thinking about travel, down-sizing, moving to that little cottage by the beach, or even continuing to work in some capacity. At this point, the investment focus is growth-oriented and the larger portion of our portfolio will be in equities. Please check back for November's Ask the Expert to see our discussion on phase two of retirement. Then join us again in December when we will discuss part three. ------------- Part 2 of 3 - posted October 25, 2010: Last month, we discussed the first phase of retirement, when our focus is wealth accumulation. This month, I’d like to tell you about the second phase, from ages 62-75. This time in our lives may be the most misunderstood time in retirement. As we leave work life behind and begin trading leisure time for human capital (the present value of future earnings), real change begins. Retiring does not mean simply quitting work, but rather choosing how we use our time. We have the freedom to do what we want, without having the economics of the endeavor as the chief motivating factor. A study done by the Gallup® organization found that 60% of retirees want to become entrepreneurs or seek a more fulfilling job, 10% are seeking a new work-life balance, 15% hope to enjoy a traditional retirement, and the remaining 15% do not want to retire. From an investment perspective, those who continue to work and earn, at whatever they choose to do, may be able to take more risk with their investments because they continue to build human capital. Their portfolios should generally reflect some bias toward equity or growth investments, consistent with their risk tolerance. As production of human capital tapers off, and the need to depend upon investments for support or other retirement goals increases, this riskier strategy should begin to transition to less risky investments. Please join us again in December for part three, when we discuss the third stage of retirement. ------------- Part 3 of 3 - Posted November 23, 2010 Over the past months, we have been discussing the three phases of retirement. In October, we discussed the first phase, when we focus on wealth accumulation. Last month, we talked about the second, possibly most confusing phase, when we have the freedom to do what we want with our time, without having the economics of the endeavor as the chief motivating factor. This month, let’s delve into the third phase of retirement. This phase begins around age 75. Health concerns may arise, and we may decrease expensive travel and recreation that we previously pursued. The option of generating human capital has diminished, and with it so should the risk in our portfolio. This does not mean that we abandon all stocks in favor of bonds … rather that we become more cautious, concentrating on preservation of capital. According to Social Security actuary tables for 2006, men born today have a life expectancy of 75.1 years and women have a life expectancy of 80.21 years. Of course, heredity and lifestyle choices play a part in our quality of life issues – particularly after age 75. Many seniors continue to travel, sail, golf, etc. as they have the extra time to do so. Being nervous that you will outlive your retirement funds is a familiar concern. Planning for retirement as early as possible is a significant step towards acquiring the funds you’ll need to pursue your future goals. Life, as with all things in nature, has seasons. Your investment strategy should reflect seasons as well. The Stifel Nicolaus Wealth Strategist Report® is a financial planning tool that provides an in-depth analysis of your retirement goals relative to your current financial situation. If you are interested in this service, please contact my office by calling (228) 864-4460.

 

Q: I've begun saving for my retirement. How will I know if I'm saving enough?

 

A: It’s almost impossible to overstate the importance of savings and a patient investment policy in preparing for retirement. Save early and often. I was reading through a MetLife survey on retirement readiness, much of it related to the emotional side of readiness, and was struck by a couple of responses. MetLife surveyed a diverse group, starting with pre-retirees as young as age 45, up through actual retirees, who composed about 20% of the sample. Here’s what really struck me: they asked the pre-retirees “Do you plan to retire...?” and these are the responses they got. Earlier than you planned/expected: 6% About the same time as you planned/expected: 47% Later than you planned/expected: 46% Most people, in other words, expect to retire on their own schedule, while a big chunk also figure they will have to work longer than they thought. But when they asked the actual retirees, who have already gone through the transition, “Did you retire...?” there was a completely different outcome. Earlier than you planned/expected: 64% About the same time as you planned/expected: 33% Later than you planned/expected: 3% Almost two-thirds ended up retiring earlier than they thought they would, and almost no one retired later than they expected. And, really, the reason for early retirement doesn't matter. The message is simply this: You are expecting to retire on your schedule, but two-thirds of you may well have your retirement accelerated. To be prudent, you will need to have your capital accumulation completed earlier than you think. You may be planning to save for another ten years; but you might only have five. Search out experienced advisors who provide consistent investment planning strategies, such as using relative strength as a risk management tool, and will consider your individual needs and goals. It’s later than you think.

 

Q: Exchange traded funds have been in the news a lot lately - what are they and how can they benefit me?

 

A: Exchange traded funds (ETF) are one of the fastest-growing investment products in today’s global marketplace. The change in breadth and scope of the product set has been dramatic, growing from one fund in 1993 to more than 880 currently, according to data from the National Stock Exchange. ETFs are most simply described as a basket of securities that typically seeks to track a specific market index, is traded on public exchanges like stocks, and utilizes a unique in-kind creation/redemption process to keep up with demand for the fund. The benefits of ETFs include transparency, intraday pricing and trading, tax efficiency, and relatively low costs. Common uses of ETFs include diversification, portfolio completion, sector rotation, tax-loss harvesting, cash equitization, duration/credit adjustment, hedging, and manager replacement. ETFs fall into multiple benchmark categories; there are now ETFs covering every major market index and sector of the equity and fixed income markets, specialized ETFs that cover specific industries, commodities, currencies and market niches, and international ETFs that are country- or region-specific. Many view ETFs as an excellent means of investing in a favorite sector while mitigating the risk of being exposed to the fortunes of a few companies. ETFs are also viewed as precise tools that can be used to diversify an entire portfolio, particularly now that ETFs have made so many different benchmarks investable. ETFs are subject to market risk, including the possible loss of principal. There will be brokerage commissions associated with buying and selling exchange traded funds unless trading occurs in a fee-based account. Diversification and asset allocation do not ensure a profit and may not protect against loss. Investors should consider an ETF’s investment objective, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other important information, is available from your Financial Advisor and should be read carefully before investing.

 

Q: How does the market generally perform during mid-term election years?

 

A: Mid-term elections are right around the corner and becoming an ever popular item of news coverage. While votes will not be cast for a few more months, past election cycles (since 1898) have produced above-average returns from the 12 months beginning with the conclusion of the 2nd quarter of mid-term election years. Mid-term election calendar years have, on average, produced nothing spectacular, but the 12 months starting with the end of June have been a bit more impressive. For example's sake, we calculated 12 months returns in such a fashion (June 30 – June 30) for both mid-term and presidential elections. Both election years, on average, tended to produce above-average returns. The mid-term election time period is not generally positive for incumbent parties (based upon presidency), which tend to lose materially within the lower house, but out of 28 mid-term elections since 1898 the Dow Industrials have "won" during 19 of those years within that June 30-to-June 30 window with an average return of 12.65%! The Presidential election years have also been quite strong during that window, producing 19 up years and only 9 down years, and an average return of 13.29%. We can compare these numbers to the average return of the Dow in all years beginning on June 30, which is +7.39% going back to 1898. If you would like more information on election-year returns, please e-mail me at sawyers@centurysecurities.com with the subject line: Election Year Market Returns. I will be happy to e-mail you back the chart showing these figures. The information contained herein from Dorsey Wright and Associates has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.

 

Q: My portfolio took a significant hit in 2008. What happens if we get another 2008? Is "buy and hold¨ an answer for the long term?

 

A: Between October 9, 2007 to March 9, 2009, the Market lost $11 trillion; the S&P 500 Index was down 57%, the Dow was down over 57%, and the NASDAQ 100 was down 52%. Investors saw an average loss of 56.78%. You may be wondering at this point what to do. Do you or your current advisor have a strategy to mitigate the risk of another bear market? With the markets as volatile as they¡¦ve been in recent years, simply subscribing to traditional asset allocation principles may not be enough to help you weather the next storm ¡V there are so many other factors to take into consideration when it comes to managing your portfolio. Here at Trinity Investment Services, for example, our investment methodology utilizes the following: „X Market Indicators ¡V Is risk high or low? „X Sector Indicators ¡V Opportunities „X Inventory ¡V Fundamentals, Funds, ETFs, etc. „X Point & Figure Chart ¡V When to buy & managing the trade „X Advice Based on Managing Trades, Including Sell Side Discipline Your expectations should meet reality ¡V whatever that is for you. We manage risk using technical analysis, trailing stop losses and investment selection. Here¡¦s the question you should ask yourself: Is it time to look around and explore alternatives? Possible answer #1: No. Next action: Stay put with your current advisor(s). Hope for the best. Possible answer #2: Yes. Next Action: Get a second opinion from us at Trinity Investment Services. We can help you with risk management, because we understand that bear markets hurt.

 

Q: i want to convert my traditional ira to a roth, but need to know how much i would have to pay in regards to taxes in the next two years?

 

A: Thank you for your question regarding Roth IRAs. For those who weren’t aware, the elimination of Adjusted Gross Income (AGI) limitations in 2010 now allows many retirement savers to take advantage of Roth IRAs. Since traditional IRAs are funded with pre-tax dollars while Roth IRAs are funded with post-tax dollars, anyone wishing to convert a traditional IRA to a Roth must pay tax on pre-tax contributions and earnings. The amount of tax you pay in a Roth IRA conversion is determined by your tax bracket. As you may already know, individuals who convert a traditional IRA to a Roth in 2010 will be allowed to spread the tax due on the conversion amount evenly over their 2011 and 2012 tax returns. You may want to consider making a traditional IRA non-deductible contributions of $5,000 for 2010 (plus “catch-up” contributions if age 50 or older) for the purpose of a 2010 conversion. Why? Converting these contributions (plus the earnings) to a Roth IRA penalty-free will only require taxes to be paid on the earnings. If you are married, this same strategy may apply for your spouse as well. It’s important to note that the value of all your IRAs (not including Roth IRAs) must be aggregated to determine the taxable vs. non-taxable portion of any conversion. Specific questions in regards to your taxes owed must be discussed with your tax professional. If you can handle the tax burden and if your CPA advises you to convert, saving for retirement in Roth IRAs can be one of the best strategies, as assets that remain in a Roth for five years and until age 59 ½ can generally be withdrawn tax- and penalty-free.

 

Q: As crazy as the stock market has been the past couple of years, do you have any trading advice?

 

A: 1. Most tips to buy a stock come from sellers, and most tips to sell come from buyers. 2. The first stocks to double in a bull market usually double again. Of course, this is not always the case. 3. When closing out a position, forget it. It's over. Many people take a profit and are unhappy if the stock does not collapse immediately. 4. News on a stock is not important; how a stock reacts to that news is. 5. The principal quality of a good investor or trader is patience. Do not be carried away by other people’s enthusiasm. 6. When you buy a stock, write down your reasons for buying it for future reference. If your reasons change over time, reevaluate your position and decide if you want to hold it or sell it. 7. Remember, it is very easy to buy stocks, but it is more important to know when to sell. If you have a profit, you need to know when to take it and also when it is better to take a small loss instead of a larger one later. 8. It is extremely difficult to buy at the absolute bottom or sell at the very top. Using point and figure charts, however, may help detect when you may want to consider buying and when you may want to consider selling. 9. The best stocks may be easier to identify when the market declines, while the worst stocks tend to stand out when the market rises. 10. Don't let profits turn into losses. This is easier said than done.

 

Q: How can I get a better grasp on my family’s finances?

 

A: Basic family financial planning begins with cash flow management. In many cases, it is this first step that determines the ultimate financial success of the household. By understanding cash flow, the family can make good decisions that may help them avoid unnecessary debt, borrow responsibly, accumulate wealth for the future, and plan for major needs such as education expenses or retirement. My experiences have shown me that many families and individuals do not have a sound understanding of how they spend their money. Due to the ease of purchasing with credit cards, its accompanying deferral of debt, and the proliferation of ATMs, it is not uncommon to encounter situations where the family unit has no idea how much it costs them to live. The cash flow statement for a family unit is similar to the profit and loss statement for the business. It tracks income in and expenses out. An easy way to develop the cash flow statement is to begin by setting up a simple spreadsheet that lists sources of cash coming in and expenses going out. Cash may come from a variety of sources, including but not necessarily limited to employment income of the working household members, gifts, realized investment gains and losses (a subtraction), net rental income earned, interest earned, and reinvestment of dividends and capital gains in non-retirement investment accounts. I like to categorize my expenses into three main categories: • Fixed costs • Variable living expenses • Discretionary expenses Fixed costs include your mortgage, loans, credit card payments, and insurance that must be paid out first, before anything else. Variable living expenses make up the bulk of our remaining expenses. These include the many basic expenses over which we have some choice as to how we spend. These include utilities, household upkeep and maintenance, food, transportation costs, insurance, personal care and clothing, subscriptions, and club dues. If we take the total of these two expense categories and subtract that from our income, the remainder is money we have available for discretionary spending. Discretionary expenses include expenses we choose to incur, although they are not essential to our basic lifestyle, including gifts to charity and gifts to others, recreation, travel, unaccounted-for spending, hobbies, and savings in retirement and other investment accounts. Knowing where we can make choices is the most important part of this exercise. Many years ago, the late John Savage (famous in the life insurance industry for his common sense approach to personal financial planning) said that there were two kinds of people: Those who spend first and save what’s left and those who save first and spend what is left. Invariably, the former ended up working for the latter. Taking that to heart and knowing where you are spending money for wants versus needs is the first step in developing a sound financial plan.

 

Q: What do you think it takes to help people manage their money? Larry

 

A: The following is a summarized excerpt from the foreword of the new book by William Bernstein – a man who is well-known in the world of finance for his thoughts on asset allocation as well as for running the “Efficient Frontier” web site. This foreword includes a discussion of the qualities it takes to manage money well, which I’ve paraphrased below: Successful investors need four abilities. As with any other profession or hobby, first, they must possess an interest in the process. If managing money is not enjoyable, then a lousy job inevitably results. Unfortunately, most people enjoy finance about as much as they enjoy taking out the trash. Second, investors need more than a bit of math expertise, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires a working knowledge of statistics and an understanding of the laws of probability. Sadly, fractions, at a minimum, are a stretch for 90 percent of the population. Third, investors need a firm grasp of financial history and knowledge of demographics. Alas, as we shall soon see, this is something that even professionals have real trouble with. Even if investors possess all three of these abilities, it will all be for naught if they do not have a fourth and most important one: the emotional discipline to execute their planned strategy faithfully, come what may. It is this last requirement – the emotional game – that interests me most. We use a systematic investment process that is unemotional and objective for just that reason. Many investors and advisors fly by the seat of their pants for security selection and asset allocation. When throwing darts, it is possible to hit the bull’s eye occasionally; it is another thing entirely to sustain that success. It is most difficult when, as Bernstein phrases it, “the tide goes out” (i.e., the market goes down).

 

Q: I’ve noticed that there have been many articles in national publications this past year about 401(k) plans and in most cases it seems like it’s either an exposé on the problems of the 401(k) or misinformation and bad press. In your opinion, which is it?

 

A: When I read articles on the supposed problems with 401(k) plans I try to figure out what or who is the culprit here? Is it the 401(k) or is it the fact that the clients a) retired early, b) with inadequate savings, and c) are overspending to an enormous degree? Many articles cite the biggest problem with 401(k)s as the fact that they could drop a lot in the year you decide to retire. A little forward thinking would suggest that risk management and asset allocation are important parts of the equation – also it would be a good idea to scale back your risk level in the few years before you retire. Certainly a lot can be done to improve an employee’s retirement readiness with a 401(k). Help with investment decision-making, counseling on the appropriate savings level, and assistance with asset allocation and risk management are all needed. And let's not forget why individuals clamored for 401(k) plans in the first place: the age of a lifelong company employee was over and workers were tired of forfeiting pensions with 5-year or 10-year cliff vesting when they changed jobs. 401(k) plans are portable and your contributions are always fully vested. My assessment is that almost every problem these retirees are having has little to do with the structure of the 401(k) plan. In my opinion, almost every problem stems from: 1. lack of knowledge of other retirement income products 2. lack of risk management and/or poor asset allocation decisions as one nears retirement 3. inadequate savings rate 4. overspending in retirement I find it hard to believe that anyone who can’t afford to retire would do so – let alone retire early! And let's face it: math is math. If you don't save enough while you are working, you won't have enough when you retire. It’s that simple.

 

Q: I have a 401(k) at my work, but my employer is not able to help me with this. I am concerned that my investments may be too risky. I also don’t know how to invest my money for the future

 

A: Today many companies (i.e. employees) do not receive the necessary service and education for selecting and maintaining their 401(k)s, but the employer is otherwise reasonably satisfied with their investment choices and provider. Employees and employers alike are very concerned about what has happened to their accounts over the past 18 months and are wondering whether they are well positioned going forward. As Investment Advisor Representatives, we can help you assist yourself, as an employee, or work with your employer to offer independent, objective, and professional advice for a reasonable fee. This process would typically involve an initial face-to-face meeting between our team and the plan participant or employer (whatever the case may be). At that time, an assessment of the plan participant’s financial goals, investment objectives, risk profile, and unique financial situation will be discussed and a questionnaire completed. We would receive the plan participant’s most recent retirement plan account statement for review and analysis. We would then independently review the retirement plan’s investment options, including company stock. A written allocation and strategy recommendation believed to have a risk/reward ratio consistent with the participant’s financial goals and situation would then be delivered.

 

Q: Why should I consider investing with you?

 

A: First of all, let me say that Century Securities is a subsidiary of Stifel Financial Corp. and a sister company to Stifel, Nicolaus & Company, Incorporated, which was established in 1890. Our unique relationship with Stifel Nicolaus allows us to take advantage of all Stifel’s resources. Our team is nurtured by years of trust and understanding and by shared goals and shared successes. It is our relationships and the commitment to those relationships that motivate us to provide superior service. We are constantly studying and researching in order to bring you the resources to help meet any challenge. That is our goal – to meet your demands and to rise to your expectations in the utmost professional manner. That being said, we employ an adaptive, systematic investing strategy. This strategy is designed to change holdings as the market environment changes. We adhere to both the buy and sell side of our decision making process and let the discipline help us navigate this market and this stormy economic environment. We believe this strategy sets us apart from the standard “buy and hold” strategy. As Investment Advisor Representatives, we help clients manage the risk in their portfolio. Historical perspectives help guide us through any apparent “uncharted territories.” Always keeping in mind that past performance of the market is no guarantee of what will happen in the future.

 

Q: How do I select an Investment Professional?

 

A: Today’s investors have a wide variety of investment choices available, and it can be difficult to wade through vast amounts of information to determine the best possible options. Before you can cultivate a quality relationship with your investment professional, you must, of course, find a professional to work with. Whether you are searching for an investment professional for the first time, or considering making a change in advisors, it’s important to seek out a qualified and experienced person who places your needs and goals first and who shares your values when it comes to investing. •Advertising – Financial Professionals are allowed to advertise with the approval of the Compliance Department of their firms. You can often gather pertinent information from those ads as to the education, experience, and expertise of that professional as well as information about the company they represent. •Referrals - An excellent way to meet an investment professional is through referrals. Talk with your friends, family, and colleagues to determine if they’re already working with someone whom they trust and respect. •Interviewing - Your investment professional is working for you, so why shouldn’t you interview them first to ensure that they are the right person for the job? You’ll first want to inquire about his or her credentials, licenses, and education. In addition, you’ll want to find out how long he or she has been in the investment industry, as well as his or her prior work experience. Be sure to ask for references. I believe this is very important and often over-looked by both the client and the broker. I have a brochure on my desk and make it a part of every initial meeting. •Before selecting an investment professional, you’ll also want to determine how he or she is compensated. Some firms offer both commission-based and fee-based investing programs. During the interview, ask how you’ll be charged for the services you receive. •A final thing to consider is longevity. Make sure the investment professional you choose is dedicated to developing a long lasting relationship with you and will always be there to serve your needs as you work towards your financial goals. You’ll want to find someone who will work in your best interests (instead of simply “pushing products”) and a firm that has the financial strength to stand the test of time. Investing for the future requires a long-term commitment from a professional and a firm you can trust. After all, you’re not just investing for your self, but for your loved ones as well.

 

Q: How do I know if I need a financial professional or broker to help me?

 

A: In my opinion, everyone needs professional financial advice and assistance. We have become a very specialized society. We hire people to help us with everything so our time and energy can be spent on things we want to do, like to do, and are well-equipped to do. I find that most people are better off seeking the expertise, experience, information, and discipline provided by a financial advisor. Specifically, financial professionals can help to: • Avoid costly mistakes, manage risk, save time, and develop strategies designed to help improve your overall investment results. • Guide you through the maze of retirement options – 401(k), IRA, Roth IRA, pensions, annuities, etc – and can help put you on course to pursue the type of retirement you've always dreamed of. • Decrease your estate tax liability, thereby aiding the financial stability of your loved ones. • Pursue your education savings goals through 529 Plans, Coverdell savings accounts, and other techniques. • Determine the type and amount of insurance you need to help protect yourself, your family, and your assets. • Minimize your taxes and plan to help reduce future tax impact. • If you own a business, develop a strategy to manage your business finances, including cash management, financing, employee benefits, and more. Furthermore, a financial professional provides the emotional discipline required to make sure plans are acted upon, changed as needed, and/or maintained. She or he can provide guidance, reassurance, support, and stability to help you stay on course and pursue your long-term goals and make the most of the circumstances in your life – career, marriage, children, assets, liabilities, etc. You can make financial decisions by yourself or buy advice from an experienced professional. The financial decisions of individuals are commonly costly and mediocre, and, alternatively, the appropriate financial professional will help you make good decisions for you and your family at a comparatively low cost.

 

Q: How can we tell if the market has reached a bottom?

 

A: Looking for a bottom in a falling stock market is more art than science. Technicians have their charts, and fundamentalists have reams of data to support their positions. I like to cross reference and employ both strategies. I believe using common sense requires a couple of basic assumptions. First, when investors are scared, for whatever reason, they tend to flee (sell) stocks and seek out less risky places to put their money, like U.S. Treasury Bonds. This typically drives the price of bonds up (increased demand), lowers bond yields, and depresses stock prices. Second, the process typically reverses itself when dividends and stock earnings’ growth become more attractive than the return from U.S. Treasuries as bond prices fall. Using the approach outlined above, let’s look at current markets. As of May 5, 2009, the S&P 500 (unmanaged index)* closed at 903.80. Estimated earnings for 2009 are $61.30. This equates to an S&P 500 Price/Earnings of 14. Forward projected earnings for 2010 are $77.07, or an S&P 500 P/E of 11.13. Conversely, a current 10-year Treasury bond is yielding 3.16%, the equivalent P/E of 32. At some point investors begin comparing returns between bonds and stock. With a P/E for stocks of 14 compared to a Treasury equivalent P/E of 32, investors might be coaxed to take money from Treasuries and buy stocks, indicating a bottom has been reached. An investment in stocks will fluctuate with changes in market conditions. Government bonds, unlike stocks, are guaranteed as to the payment of principal and interest by the U.S. Government if held to maturity. Keep in mind that this is a simple answer to an extremely technical question, as market movements from tops or bottoms tend to be influenced by many factors other than the returns from stocks and bonds. However, if you are happy with earnings estimates from S&P, the Fed’s action, and you have a little faith in Congress, in my opinion you might actually call this a bottom. *Investors cannot directly invest in an index.

 

Q: With interest rates so low, should I still be buying CDs? If not, what other investments should I consider?

 

A: Dear Investor – thank you for your questions. Interest rates are at historic lows – that’s good for borrowers – not so good for savers! CDs are FDIC insured, however, the price you receive on a sale prior to maturity depends on prevailing interest rates and may be more or less than you paid. CDs are defined as time deposits for a specific term and usually at a specific interest rate. They are issued by banks and savings and loans (also available to purchase through investment firms). There are many other fixed income investments that are available as well. Before embarking on an investment strategy, it is imperative that you determine your personal tolerance for risk. Risk can be defined in different ways. Using the current national average yield of 0.33% for tax-free money markets, $1.00 would double in value to $2.00 over a period of 210 years! (Source: Rasmussen Reports). With inflation historically being 3.50% annually, you must consider the returns you are receiving vs. the risk you are taking. Just because the investments are safe, doesn’t mean you’re not taking on risk. There are ways to determine, analyze and reduce risk in your investment strategy. If you had a cavity in your tooth, you wouldn’t try to fix it yourself – you would call a dentist. Your investment professional should meet with you periodically to discuss changes in your lifestyle, financial goals, circumstances, and timeframes in order to assure you’re on the right path. Please call us if we can help you.

 

Q: If my company quit matching my 401K, should I still contribute to my 401K or look into something else?

 

A: Dear friend – Thank you for your question. With over 7% unemployment currently, first of all, be thankful that you are a valuable part of your company. In such an uncertain world, it’s more important than ever to be a team player and on top of your game. Ultimately, however, we are responsible for our own retirement. Social Security was started in 1935 as a way to get older men out of the workforce to make room for younger, newer ideas and ways of doing things. This paved the way for the innovations we enjoy today. Part of what has gotten us into this mess that we collectively find ourselves in economically is a feeling of entitlement. We are not entitled to company-sponsored healthcare or to retirement benefits – those are privileges. We have gotten used to these benefits, but we are not owed them. Many years ago (our parents’ and grandparents’ generation) people did not retire. They lived – they worked – they took care of their elderly – they died. So, to answer your question –emphatically yes, continue to fund your retirement. The definitive word is “your.” Many companies are trying to keep their proverbial heads above water. Employers want to reward their employees, and most will if they possibly can. By continuing to fund your retirement, you are taking advantage of an age-old strategy called dollar cost averaging. This simply means that by investing fixed amounts of money at regularly scheduled intervals, you will buy more shares of your investment when the price of that investment has declined and buy fewer shares when the price of your investment has risen. As a result, over a period of time, you may lower your average cost. This should only work to your benefit. Of course dollar cost averaging does not assure a profit or protect against a loss in declining markets. For dollar cost averaging to be effective, you must continue to invest during periods of declining prices. Here are a few more motivational statistics to ponder: 1) 52% of American households have saved $25,000 or less for retirement (source: AARP). 2) 37% of retired adults underestimated the amount of living expenses they would incur during their retirement years (source: Harris Interactive Poll). 3) The average monthly cost for nursing home care (semiprivate room) in the USA today is $5,566 (source: MetLife Mature Market Institute), and the average monthly Social Security check is $916.66. You should be so much more excited about investing today than you were 18 months ago. Everything is priced lower, in essence “on sale.” If you received a bad appraisal on your house, you wouldn’t run out and sell it. Your retirement account should be approached the same way. Maybe you need to rebalance, maybe you need to change your allocations, but you absolutely should continue funding your retirement.

 

Q: With stock prices so depressed, would this be a good time to buy or should we wait for them to turn around to see who is still in business?

 

A: Great question, Adam! We must concentrate on what we know. Each market is going to be a little bit different. However, cyclical downturns have historically been tied to credit excesses. This time is no different. Prudence in borrowing may be rewarded in the next cycle. What remains the same in all markets is supply and demand. We see that ebb and flow in the produce department of the grocery store every week. The ultimate measure of supply and demand in the market is a stock’s price. This is the net of all the buyers and sellers at any given moment. The largest government bodies in the world are acting to lessen the severity of this “crisis.” Remember, the media continues to scream about the stock market – these are journalists, not economists. What they’re mostly talking about is the Dow Jones Industrial Average – just 30 stocks – stocks you may not even own or want to own. The facts are: fewer and fewer stocks are participating in the drop. Since WWII, economic expansions have lasted five times longer than recessions and bull markets have been twice as long as bear markets. The S&P 500 is down 50.60% since its high on October 20, 2007. Depending on what you buy, when you buy, how your assets are divided, and your risk tolerance, I believe this is a great time to buy. Please consult a professional advisor who can help you navigate the sectors.

 

Q: I recently lost my job. What should I do with my 401(k)?

 

A: First of all, let me say that I am sorry to hear about the job loss. Most everyone knows how it feels to be in your position and how critical it is that you find the right job for you now. Oftentimes those types of situations – that seem like unmitigated tragedies – are just the thing that we needed to get re-energized and motivated. Now, about your 401(k); when you are no longer employed somewhere, you’re no longer part of that culture. Things that you would have been party to, you’re not – water-cooler gossip, healthcare updates, and the like. Although you will still receive statements from the 401(k) provider, by the mere fact that you are no longer there, you will not have immediate access to pertinent information – unless of course you monitor the plan daily. There are three options: #1. You may be able to leave it at your former employer with their 401(k) provider. If you know the financial advisor on the account, you can still access information and receive guidance. #2. Once you obtain another job, you may be able to roll those funds to the new employer’s 401(k) as soon as you are eligible. Most 401(k) plans have eligibility requirements, such as age and length of service, in order to get started. #3. Roll your 401(k) funds from your former employer’s plan to your own Individual Retirement Account. This would allow you to continue to grow your account tax-deferred with no penalties or taxes to be paid until withdrawal. If at some future point in time you need to access those funds, because you weren’t able to secure a job as quickly as you had needed or hoped, it would cost you less (in taxes and penalties if you are under 59 ½ years old) than if you took the money directly from the 401(k). It is critical, at this time, to talk to a financial advisor that can guide you according to your current situation. Please call us at (228) 864-4460 if we can help you further.

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