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Haft 10 mistakes

  1. 1. Ten Common Mistakes
  2. 2. Ten Common Mistakes The MOST COMMON MISTAKES PEOPLE MAKE WITH THEIR MONEY... ...and how to avoid them. ALAN HAFT
  3. 3. Ten Common Mistakes © 2007 by TriMark Press, Inc. This book is intended for general information purposes only. While the publisher and author have utilized their best efforts in preparing this book, they make no claims or warranties with respect to the accuracy or completeness of the contents. The information may not be applicable to you and is intended for general demonstration purposes only. There are many exceptions to the general principles stated herein. Before you apply or act on this or any other legal, investment, funding, tax, insurance or other financial information, you should consult with a financial planner who can evaluate the facts of your specific situation and advise you on the proper course of action based on that evaluation. All rights reserved. No portion of this publication may be reproduced or transmitted in any form or by any means, electronic, mechanical or otherwise, including photocopy, recording, or any information storage or retrieval system now known or to be invented without permission in writing from the author, except by a reviewer who wishes to quote brief passages in connection with a review. Requests for permission should be addressed in writing to the author. ISBN: 978-0-9767528-6-8 Published in Boca Raton, Florida, by TriMark Press, Inc. 800.889.0693 Printed and bound in the United States of America. Alan Haft alanhaft.com 800-809-4699 *DISCLAIMER: Everyone’s personal situation is uniquely different. Investments, taxes and estate planning concepts addressed during the course of the book are complex subjects. With this in mind, please be sure to consult with a qualified tax, estate and/or investment advisor(s) before any action is taken.
  4. 4. Ten Common Mistakes TABLE OF CONTENTS ABOUT THE AUTHOR ........................................................................................... 4 INTRODUCTION ................................................................................................... 5 M I S T A K E # 1 : TOO MANY EGGS IN ONE BASKET .......................................................................... 7 M I S TA K E # 2 : FAILURE TO RE-BALANCE ..................................................................................... 11 M I S T A K E # 3 : USING THE WRONG GAS ....................................................................................... 17 M I S T A K E # 4 : TOO MUCH TAX ...................................................................................................... 21 M I S T A K E # 5 : NOT WATCHING THE FEES .................................................................................... 23 M I S T A K E # 6 : NOT PROTECTING YOUR MONEY ........................................................................ 25 M I S T A K E # 7 : RELYING ON GROWTH FOR INCOME ................................................................... 31 M I S T A K E # 8 : NOT ENOUGH LIFE IN YOUR LIFE ....................................................................... 35 M I S T A K E # 9 : NO ESTATE PLAN ................................................................................................... 41 M I S T A K E # 1 0 : … AND THE BIGGEST MISTAKE OF ALL …? ............................................................. 45 CONCLUSION ............................................................................................................... 47
  5. 5. Ten Common Mistakes ABOUT THE AUTHOR A lan Haft is a nationally recognized investment advisor who has been featured in a variety of media outlets including Money Magazine, Forbes, Morningstar, BusinessWeek, The Los Angeles Times, The Chicago Tribune and many others. His financial column “The Haft of It” appears in a variety of newspapers around the country and he has two books soon to be published including a compilation of his newspaper columns and You Can Never Be Too Rich... simple and essential investment advice you cannot afford to overlook (John Wiley Sons, November 2007). With his partners, he has conducted hundreds of financial planning seminars and workshops that address a wide variety of investing concepts. The firm currently services retirees and pre-retirees in southeast Florida, southern California, the New York Tri-State area and many other areas around the country. For more information, please call 800-809-4699.
  6. 6. Ten Common Mistakes INTRODUCTION As the old adage goes, “The more things change, the more they remain the same”. When it comes to planning for retirement, this saying still rings quite true. When I was a child, I recall sitting at my Certified Financial Planning Mom’s side where I spent quite a lot of time watching her create investment plans for people of all ages. That happened several decades ago, but the concerns people had and the mistakes they were making are still very much the same concerns and mistakes I’m seeing and hearing today. Some things, however, have changed and not always for the better. These days, corporate pensions are quickly becoming a relic and even Social Security has its own share of problems. When I was a child, the markets seemed far less volatile and less prone to turmoil. Furthermore, people retired and didn’t seem all that concerned with something called “longevity risk,” the risk that you will outlive your money. Today’s retirees can likely live another twenty to thirty years past retirement, sometimes even longer.
  7. 7. Ten Common Mistakes As a result of these common issues and concerns, now more than ever before, planning for retirement can be a frightening thing and can bring up difficult questions to answer such as: • Will I ever have enough to retire? • How can I make sure I won’t outlive my money? • How can I make sure I grow my money well ahead of inflation while keeping it safe? • How can I get the greatest amount of income with the least amount of risk? • How can I minimize taxes and ensure my family’s well-being? If you’ve ever asked yourself any of the above questions, then this preview of the soon-to-be-published book The 0 Most Common Mistakes People Make With Their Money …and how to avoid them is for you. I hope you’ll find this preview interesting and more importantly, I hope you’ll come away with a few ideas so that your financial journey to and during retirement will be a more pleasurable experience.
  8. 8. Ten Common Mistakes M I S TA K E # 1 TOO MANY EGGS IN ONE BASKET W hen it comes to giving yourself the best possible chance for continued and sustained investment success, the timeless law of “diversification” is the best place to start. Many people think their portfolios are diversified simply because they have many investments. But that’s not always the case. As odd as it may sound, when you think of a diversified investment portfolio, imagine a Domino’s pizza. A properly diversified portfolio includes many slices divided up into neat little segments that don’t overlap. Each section represents a particular sector of the market.
  9. 9. 0 Ten Common Mistakes For example: • Domestic stocks o Large Companies (“Large Caps”) o Medium-sized Companies (“Mid Caps”) o Small-sized Companies (“Small Caps”) • International stocks • Emerging Market stocks (India, China, Latin America, etc.) • Bonds • Commodities • Real Estate • Technology • Natural Resources • Health Care • Cash • And others A truly diversified portfolio: • Takes much of the guesswork and stress out of investing • Minimizes market risk • Recognizes that not everything will go up in value at the same time • Recognizes that with rare exceptions, one should avoid selling a slice of the portfolio that is not performing well
  10. 10. Ten Common Mistakes • Recognizes that at various times, every sector will have its day and with rare exceptions, very few people can accurately predict exactly when that day will come You may be reading this and thinking, “If slices of a diversified portfolio go up and down in value at the same time, then how can I end up ahead of the game?” Great question. If such a thought came to mind, then that’s excellent insight. The answer is that diversification alone won’t win the game. Simply diversifying your portfolio and ending the process there would be like spreading tomato sauce and mozzarella on raw dough, then serving the “pizza” cold without cooking it. For a diversified portfolio to be efficient and reap the potential rewards for success, one additional step needs to be taken and this critical step is found in the second most common mistake, “Failure to Re-balance”.
  11. 11. Ten Common Mistakes
  12. 12. Ten Common Mistakes M I S TA K E # 2 FAILURE TO RE-BALANCE I n its most simplistic form, “re-balancing” a portfolio simply means maintaining its original balance. Let’s take a closer look at what this actually means. Failing to re-balance a diversified portfolio is like forgetting to cook that pizza mentioned in the last common mistake. Without this critical step, what would typically be my personal all-time favorite food could easily turn out to be the worst meal ever consumed. Here’s why: Suppose we turn back the clock to the late 1990s. For simplicity, suppose I listened to prudent advice at that time and diversified my investment portfolio into five sectors of the market, dividing my money up equally amongst them:
  13. 13. Ten Common Mistakes • U.S. Stocks: 20% • International Stocks: 20% • Technology: 20% • Real Estate: 20% • Other: 20% Given the gains and losses of various market sectors, suppose a year later the value of my diversified portfolio (in percentages) wound up looking like this: • U.S. Stocks (up in value): 30% • International Stocks (down in value): 10% • Technology (surged in value): 40% • Real Estate (down in value): 5% • Other (down in value): 15% True, I may have been diversified, but do I just end the process there? Not if I want to give myself the best possible chances for sustained and consistent investment success. If I just “held” my portfolio above without re-balancing it, as the market later crashed in 2001-2002, I would have very likely “given back” the gains I made within the U.S. Stocks and Technology sectors. But if I left my emotion out of the process, I would have realized that I needed to re-balance the portfolio. With re-balancing in mind, I would have noticed that Tech and U.S. Stocks had gone way up in value, while the value of International and Real Estate stocks were greatly reduced. To re-balance the portfolio, I would have ignored my emotions and mechanically sold the profits in the Tech and U.S. Stock sectors to restore them to their original percentages, that of 20%
  14. 14. Ten Common Mistakes each. And what would I have done with those profits? If I left my emotion out of the process and didn’t listen to the neighbors who might have thought I was nuts, I would have reminded myself that every sector in a well-diversified portfolio will have its day, we just can’t be sure when. With that important thought in mind and some courage to boot, I would have used the profits of the Tech and U.S. stock sectors to “re-fill” those sectors that went down in value. In the above example, I would have added the profits from the Tech and U.S. Stock sectors to the Real Estate and International sectors. Selling a percentage of the successful sectors, taking the profits and using them to re-fill those sectors that went down in value would have restored my entire portfolio back to its original starting percentages of 20% each. In doing so, besides the neighbors thinking I was a bit crazy for selling profits in the red-hot Tech sector, what have I really accomplished? …A little while later, I would have realized that I accomplished what every investor dreams of: sold high and bought low. Let’s take a look: After the re-balance was complete, Tech and U.S. Stocks eventually wound up crashing and burning, the market finally settled down and what happened next? What happened next was something very few people could have ever predicted: stocks within the sectors of Real Estate and International took off like a rocket, earning highly impressive rates of return.
  15. 15. Ten Common Mistakes Thanks to my mechanical dedication to re-balance my portfolio, I would have reaped great rewards given that I not only held those once ice-cold sectors, but also because I added money to them while they were on sale. I typically re-balance a portfolio just over a year after the last re-balancing. The reason for waiting just over a year comes down to one thing: minimizing taxes. Assuming some sectors went up, when you sell profits after holding the stocks for a year you will pay long-term instead of short-term capital gains on the earnings. For those not familiar with taxes, long-term gains are currently taxed at 15% whereas short-term gains are taxed at your current tax bracket (which is typically higher than 15%). Needless to say, a portfolio might need to be re-balanced sooner than just over a year since the last re-balancing. Due to significant market gains or downturns, it might make practical sense to re-balance earlier as a result of unforeseen economic conditions. Sound easy? It is, but what makes re-balancing difficult for some people is when they let their emotions get in the way. Just think: late 1990s, you’re making significant paper profits in Technology and I come along and tell you, “Time to re-balance. Sell off those profits and invest them in sectors that aren’t performing well.” It’s at this moment that your emotions could prevent a re- balancing from taking place. Those who remember that what goes up always comes down – we just don’t know when – will not let their emotions get in the way. They will let the highly efficient and timeless art of diversification and re-balancing do the guesswork for them.
  16. 16. Ten Common Mistakes The “Other” Sector You might have noticed a line item in the simplistic diversified portfolio above labeled “Other.” What is this sector? This is the only sector within a diversified portfolio in which we can let our emotions reside. This is the sector that allows us to “gamble” our money in areas outside the diversified portfolio. Within this sector, I sometimes deviate from the basic rule to diversify. It’s within this sector that I invest in whatever I desire (more on this in the next chapter). So, the next time you post some impressive gains in your account, you should not simply sit back and think about whether that new car should be a Lexus or a Mercedes. Instead, you should consider the critical and important need to re-balance. After all, as we all know, what goes up always comes down. With rare exception, it’s the unemotional investor that understands the importance of diversification and re-balancing. Sticking with these timeless, fundamental rules gives all of us the best possible chance to come out ahead of the investing game.
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  18. 18. Ten Common Mistakes M I S TA K E # 3 USING THE WRONG GAS L et’s go back to my very simplistic “diversified” portfolio outlined in Mistake #2: 1. U.S. Stocks: 20% 2. International Stocks: 20% 3. Technology: 20% 4. Real Estate: 20% 5. Other: 20% If the above portfolio met the investor’s requirements for diversification, the next logical step would be to select “something” to represent each sector within the portfolio. The “something” I’m referring to basically comes down to one of three possible choices:
  19. 19. 0 Ten Common Mistakes 1. Rocket fuel: individual stocks, 2. Watered down fuel: managed mutual funds 3. Diesel Fuel: stock indexes Let’s take a quick look at each possibility: Using individual stocks to represent a particular sector certainly provides you with the greatest opportunity to make money. However it also bears the greatest amount of risk. With scores of companies to select from within each sector, how do you really know which company offers the best chance for success? With rare exception, very few people do. It’s for this reason I typically recommend that most people refrain from using this method to represent each sector within their diversified portfolio. Some people rely on a professional to do the stock picking for them and this is commonly done by investing in a managed mutual fund. While there are certainly some very good funds out there, reams of statistics prove time and time again that most fund managers rarely beat the index they are benchmarking their performance to. For example, a mutual fund manager picking stocks within the Large U.S. Company Stock sector is “benchmarking”, or “trying to beat” the index known as the Standard Poors 500 (SP 500). For those who don’t exactly know what the SP 500 is, it’s an index that contains the 500 largest U.S. companies from various industries, and it is generally considered to be the best representation of “the market” as a whole. With the vast majority of fund managers failing to beat the performance of the index they are benchmarking to, why do so many people still invest in managed funds? Looking beyond the
  20. 20. Ten Common Mistakes flashy mutual fund ads reveals my personal no-frills favorite choice to fill up the sectors within a diversified portfolio. I often say, “Instead of trying to beat the market, be the market”, and the most efficient way to “be the market” is with choice three above: using index funds to represent each sector within a diversified portfolio. An index such as the SP 500 is a passive investment – no one is trying to pick individual stocks within the sector. Typically, based on certain criteria, all stocks within the sector are chosen and are then very rarely traded. It’s a silly question, but which would you rather have: 1. Higher fees and historically lower rates of return? or… 2. Lower fees and historically higher rates of return? If you prefer #2, which most people certainly would, then using an index to represent each sector within a diversified investment portfolio provides the most efficient way to fill up the portfolio. Index funds are typically low-cost to the investor and often (but certainly not always) deliver higher rates of return than the mutual fund managers you might be paying to try and beat it. One last thought: If you are interested in investing in individual stocks, consider investing only a small portion of your money. As mentioned in the last chapter, this is what the “Other” sector in our Domino’s pizza model of a diversified portfolio is there for.
  21. 21. Ten Common Mistakes This “Other” sector is reserved for the companies we want to invest in, the hunches we get, the evenings spent watching Mad Money, CNBC or perhaps the stock a friend told us about. If you have some of that gambler in you, allow this gambler to live within the “Other” sector and let the art of diversification and re-balancing reside in the rest.
  22. 22. Ten Common Mistakes M I S TA K E # 4 TOO MUCH TAX Have you ever had the unhappy experience of holding a mutual fund that went down in value, only to discover that you somehow wound up owing taxes on it? As strange as it sounds, this could happen. How and why it happens is beyond the scope of this preview, but the bottom line is this: sad but true – when you invest in a managed mutual fund, you have virtually no control of the taxes you pay while holding the fund. If you’re interested in reducing tax, one of the first things you should do is take a look at whether or not you’re investing in managed mutual funds outside an IRA. Holding managed funds outside an IRA often results in taxable consequences beyond your control. Paying taxes each year on a fund reduces your return on the investment, and that’s certainly not very efficient.
  23. 23. Ten Common Mistakes How much tax does your fund cost? Your tax return should certainly give you a very good idea as to how much you’re paying on your funds. Another way of checking out the taxable consequences of holding a fund (or funds) is to investigate something called “turnover” and Morningstar.com is a good place to do this. “Turnover” simply means the amount of times a year the fund manager replaces the portfolio with an entirely different set of stocks. If the fund manager changes the entire portfolio once a year, that’s a 100% turnover. If the fund manager changes the entire portfolio two times a year, that’s a 200% turnover. If the manager changes half the portfolio that’s a 50% turnover, and so on. Each time the fund manager “turns over” a portfolio that usually leads to one thing: paying tax, and in some cases, too much tax. Certainly, there are some funds out there that are more tax- efficient than others, but as far as I’m concerned, the simplest way to reduce taxes on managed mutual funds is to invest in the indexes instead. Remember: an index is a “passive” investment. There is no one trading stocks within the index and given that there are typically very few trades (if any) done within the index, there is often no “turnover” that would cause unnecessary taxes. Investing in the indexes puts you in control of when you pay the tax, not a fund manager who makes those decisions for you.
  24. 24. Ten Common Mistakes M I S TA K E # 5 NOT WATCHING THE FEES A fter a careful analysis of his investment portfolio that totaled close to $500,000, I asked “Jack” if he’d be interested in having us manage his portfolio. If he was interested in taking me up on the offer, I told him our requirements would be as follows: • Write us a check for $10,000 just to get started • Pay us approximately $15,000 per year regardless of whether or not we made him money • We wouldn’t pay any attention to the amount of tax he pays each year • And lastly, just to make sure we’re on the same page, over the ten year period he’s trying to grow his money for retirement, the total amount of fees he’d pay us would be roughly $150,000… with no guarantees he’ll ever make any money Did Jack take my offer?
  25. 25. Ten Common Mistakes Silly question, right? Even though he was unhappy with the performance of his investments, he responded something to the effect of, “Who’d ever take such a totally ridiculous offer?!?” My response was simple: “You already did.” What Jack wasn’t aware of was that over the many years he’s held his portfolio of managed mutual funds he already took the “offer” above, he just wasn’t quite aware of it. While I’m not here to say all managed mutual funds, are “bad” (there are most certainly some very good ones out there), what I am here to say is that if you aren’t paying attention to the fees you’re paying, you are doing yourself a horrible disservice. Taking time to understand the fees you are paying is a critical ingredient to investment success. To check the fees you’re pay- ing, go to Morningstar.com or better yet, Lipper’s Personalfund. com. Once you know this information, as opposed to the fund companies taking out the fees for you, imagine you physically have to write out a check to pay the fees. Doing so will produce one of the following results: (1) make you feel a bit better given the fees you’re paying are far less than what you’re earning, or, (2) give you the incentive to get out of Dodge and find a different place to invest. When it comes to managed mutual funds, I often stay clear of them and invest in the indexes that typically incur far less fees, provide better tax control and historically speaking, earn higher rates of return. When it comes to investing (as well as everything else), it’s the little things that count most. Failing to address the details could easily make gourmet pizza wind up tasting like the frozen stuff.
  26. 26. Ten Common Mistakes M I S TA K E # 6 NOT PROTECTING YOUR MONEY H ealth insurance protects against medical emergencies, homeowner’s insurance protects against flood or fire, and car insurance protects against drivers like me. What kind of insurance protects your money? Have you ever given that any thought? It sometimes surprises us how little thought some people give to this important subject. After all, you work really hard for your money. Wouldn’t it make sense to protect your investments? I suppose the next logical question would be, “Sounds good. How can I do that?” There are a number of ways you can protect your money and I’m not talking about keeping it in a fireproof safe or watching it on a daily basis. Certainly, those could be effective ways of
  27. 27. Ten Common Mistakes protecting your money, but most of us have more interesting things to do such as working, eating, going to the movies or in my case, challenging my kids to Nintendo on a weekend evening. If these activities or any others are more interesting to you than watching your money on a daily basis, then here are a few quick thoughts on how you can protect your investments: Reduce Risk: We find that many people, especially those in retirement, often have too much money in the stock markets. One of the best ways to protect your money is to diversify stock investments into safer places such as bonds, CDs or a number of other possibilities not mentioned here. For Stocks: When investing in individual stocks, one fantastic way to “insure” against possible loss is to buy something called “put options”. When they hear the word “options,” many investors run for the hills thinking there is great risk involved. Some types of options have unlimited risk while others are very conservative, and buying a “put option” is one of those. When you buy a put option, all you are doing is giving yourself the chance that someone will be obligated to purchase your stock at a price above what it’s trading at sometime in the future. Imagine this: you have a lot of money in a particular stock. You’ve had some really nice gains and the price per share is currently at $100. Over the next few months, for whatever reason, the stock tanks and you now find it trading at $50 per share. Sad day? Ordinarily it would be, but because you bought a “put option,” someone out there is obligated to buy that stock from you as if it were still trading at $100 per share.
  28. 28. Ten Common Mistakes Needless to say, there is a cost to buying the put option and as a result, there’s a chance you might have paid the “insurance” for nothing. But when it comes to “insuring” individual stocks against loss, buying a put option is often a fantastic consideration, especially for those who want to protect large gains concentrated in one stock. Another way to protect an individual stock against loss is to establish something called a “stop loss.” To keep it simple, think of a “stop loss” as a safety net underneath your stock. Using the example above, if a stock is currently trading at $100 per share, you can “place” a safety net (stop loss) at $90. If the price of the stock drops and hits the safety net at $90, the position would be sold at that price, but bear in mind: there is no guarantee the stock would be sold at $90. For various technical reasons beyond the scope of this preview, the stock might “fall through” the safety net and not get sold. Chances of this happening are unlikely, but it could happen, thereby making the “put option” a more reliable choice. Exchange Traded Funds: If you like the idea of investing in index funds, you may want to consider investing in index Exchange Traded Funds. In general, ETFs are indexes that trade like a stock. The primary difference between an index ETF and an index mutual fund is that ETFs trade within the day (as opposed to the end of day when mutual funds are actually sold). In addition, given that ETFs “act” like a stock, you can also place stop losses on them and in many cases buy options on them as well – both benefits that you cannot do when investing in index mutual funds. So, if you are investing in index mutual funds and want more control of your investment, you may want to consider investing in index ETFs instead. However, bear one thing in mind: the
  29. 29. 0 Ten Common Mistakes “negative” of an index ETF is that if you are investing on a frequent basis, you would most likely be better off sticking with index mutual funds. This is because when you invest in an index ETF, you will incur trading costs every time you make additional investments. When you invest in an index mutual fund, typically it won’t cost you anything each time you add more money to the account. Variable Annuities: An investment into a variable annuity provides tax deferment and direct investments into various stock market indexes or sub-accounts (mutual funds). Most variable annuities have death benefits as well as living benefits. These offer a wide variety of guarantees to the investor at a cost. Benefits could include features such as return of the original investment to the heirs when the investor dies. Such a feature obviously protects the heirs in the event the account goes down in value. Other benefits could include the highest account value paid at death and also various guarantees for income in case the account goes down in value as well. Many companies offering variable annuities have death and living benefits that will differ widely, so be sure to closely investigate each option and its cost before making an investment. Growth CDs: The actual terminology for this type of investment is Structured Products, but many refer to them as “Growth CDs.” This type of CD is offered by banks and sold through brokerages. They are actual Certificates of Deposits fully insured by the FDIC, but there’s one major difference between these CDs and those offered at the local bank: the interest these CDs could earn is determined by the performance of various stock market indexes. If a particular index goes up in value, then you could earn more than the typical bank CD. If the index
  30. 30. Ten Common Mistakes goes down in value and you hold the CD to maturity, you’ll get your principal back, plus in some cases a minimum amount of interest. If you are looking to invest in the market while protecting your principal, “Growth CDs” could be something to consider as part of your diversified portfolio. If the concept of a “Growth CD” sounds familiar, it might be because it’s similar to that of an Index Annuity. Similar to a Growth CD, an Index Annuity offers stock market participation without risk to your principal. Also, just like some Growth CDs, market participation is typically “capped” or limited up to a certain amount. Furthermore, earnings, if any, are “locked in” on an annual basis. Lastly, as opposed to the CD, all potential index annuity earnings are tax deferred. There are far too many details about index annuities to outline in this preview, but there are a handful of important provisions to understand before investing. These include, but are not limited to: the length of time you are required to hold the account; the quality of the insurance company offering the annuity; the way the potential earnings are calculated, and surrender fees.
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  32. 32. Ten Common Mistakes M I S TA K E # 7 RELYING ON GROWTH FOR INCOME For a brief moment, think of your money as water in a bathtub. You spend your working years filling up the tub with water so that one day, you can start to live off of it for the rest of your life. At the same time, you will probably be trying to preserve it as much as possible. After all, no one can really be sure how long they are going to live so understandably, most people want to be careful how much of the water they drink. So, you withdraw a few cups of water every year hoping that as you take some out, it’s replenished by more coming in from the faucet. The only problem is, if there’s no water coming in from the faucet, or worse, the drain is open while you’re taking water out, you could very well accelerate the loss. This potential for disaster is what I often refer to as “The Most Dangerous Game”: relying on the speculative, uncertain growth of stocks to give you the income you need.
  33. 33. Ten Common Mistakes Take “Max and Wendy,” a retired couple who several years back were relying on the growth of their stocks to give them the income they needed. Their advisor showed them some well-rated mutual funds with strong track records. For the first year or two, they had no problem withdrawing roughly 6% of their account to provide needed income. Then, out of nowhere, disaster struck. The drain in the tub opened up and as they withdrew their precious water to live on, some of it was going down the drain. As the year came to a close, they withdrew their 6% for income but an additional 10% went down the drain, bringing their total loss to negative 16% for the year. When they did the math, they saw that they now needed to withdraw much more than 6% the following year. They did, and as bad luck would have it, some of the water also went down the drain that year as well, thereby accelerating the loss and throwing their retirement income “plan” into a tailspin. Unfortunately, this is a familiar story. While this is just one example, I can think of many people we’ve met who have suffered such a dire fate. When it comes to retirement, far too many people such as Max and Wendy’s advisor rely on the speculative growth of stocks or stock funds to generate needed income. Have you or your advisor ever asked the question, “What happens if my stocks don’t go up enough in value to replace the income I withdraw?” Worse, has anyone ever asked the question, “What happens if I withdraw money and the value of the account goes down at the same time?” In either case, you could very well be digging a hole into your principal or worse, accelerating the loss.
  34. 34. Ten Common Mistakes To prevent this, you may want to strongly consider repositioning portions of your money into income-producing investments that do not rely on the speculative, possible growth of stocks to generate the income you need. Investments that generally provide reliable income include, but are not limited to: • CDs • Bonds: o Corporate (taxable interest) o Municipal (tax free interest) • Dividend stocks • Preferred stocks • Real Estate Investment Trusts • Immediate annuities Repositioning money into a diversified portfolio that includes some of the above would provide income that is separate from the growth portion of your investments. Through dividends and interest, income generated from these investments do not rely on the speculative and possible growth of the markets, thereby helping you avoid playing “The Most Dangerous Game.” How much do you need to invest into income-producing investments to generate the income you need? It all depends upon a number of factors including, but not limited to: the amount of income you require and investments that are available at the time the income is needed.
  35. 35. Ten Common Mistakes If you are interested in avoiding “The Most Dangerous Game” and creating reliable income that does not rely on the speculative growth of the stock market, a careful analysis of your portfolio and income requirements needs to be done by a qualified advisor that well understands how to avoid this critical mistake.
  36. 36. Ten Common Mistakes M I S TA K E # 8 NOT ENOUGH LIFE IN YOUR LIFE T he subject of life insurance typically conjures up two dark thoughts: death and pushy salesmen, both of which most people would prefer to avoid. However, as far as we are concerned, life insurance represents just another slice of a well-diversified portfolio, especially since we do not consider life insurance a cost, but an investment. Yes, an investment. Little do most people realize that with the right type of life insurance in place (Universal or Whole Life, not Term Life), there is a likely chance that if you no longer need the life insurance policy, you can potentially sell it for a profit into what’s commonly referred to as life insurance’s “secondary market.” Not only do we see life insurance as an investment, but we also know there could be many uses for including it within a diversified portfolio such as:
  37. 37. Ten Common Mistakes Tax Deferred Growth: An investment into a life insurance policy will allow its cash value to grow tax-deferred. Universal Life insurance policies typically increase cash value based on current interest rates, whereas Variable Universal Life insurance policies will potentially grow the cash value based on the performance of various stock market investments. For those who need life insurance and have contributed the maximum amounts to their 401ks or IRAs, investing in a life insurance vehicle is worth considering. Just like the IRA, an investment into a life insurance policy provides tax-deferred accumulation. As far as we’re concerned, an investment into a life insurance policy is often a more prudent choice than an investment into its somewhat close cousin, an annuity. Here are a few reasons why: • They both offer tax-deferred growth. • The cash value in a life insurance policy is almost always far more “liquid” (accessible) than annuities that often have limited penalty-free access to the cash value during the term of the contract. • Earnings in a life insurance policy could potentially be withdrawn tax-free whereas earnings in an annuity are taxable as ordinary income, the highest of all possible taxes. • The potential for earnings within a life insurance policy is typically comparable to earnings potential within an annuity (if not better). • There is currently a very strong “secondary market” for life insurance that could potentially allow an insured to sell the life insurance policy to a third party for a profit. There is a limited secondary market for annuities.
  38. 38. Ten Common Mistakes • When a life insurance policy is passed to your heirs, not only is the amount passed tax-free, but the amount is almost always far greater than the cash value due to the death benefit. Tax-Free Income: Depending on how the life insurance policy was designed, there could be significant cash buildup within the policy. With cash in the account, as mentioned above, it is highly possible that you could withdraw cash from a life policy tax-free. Generating income from the cash value within a low- cost, high-quality life insurance policy could make this one of the strongest benefits of adding some life into your life. Long-Term Care: Some life insurance policies allow the insured to withdraw money from the death benefit in order to take care of various long term care medical needs. Private Pension: One of the strongest advantages of adding some life into your life is to create what we commonly refer to as the “Private Pension.” Imagine this: funding a “Private Pension” that through the combination of an immediate annuity and a life insurance policy creates a lifetime fixed income stream, mostly tax free and typically at attractive rates of return that you cannot outlive. The income will never change and is not subject to stock market or interest rate risk. Best of all, because you added a little life into your life, the amount that’s used to fund the Private Pension gets returned to your family tax-free upon your death. There are many ways to design a Private Pension and only with an evaluation of your personal situation and retirement goals can a detailed plan be put into place.
  39. 39. 0 Ten Common Mistakes On a final note, the earlier in life you plan for the Private Pension, the higher the income will typically be at retirement. If there is ever a strategy that benefits from early planning, this one is definitely it. Instant Wealth: Recently, we had a person approach us with some cash on hand, wanting to make an investment in the stock market that would provide the best possible returns for his granddaughter. He had little need for the money, had plenty of money outside this investment, and was quite clear that this money was being put to use for one reason and one reason only: to leave behind to his granddaughter. In his case, we told him to stay away from the stock markets and instead invest the money into a life insurance policy. Why? … Well first off, the investment into the life insurance policy instantly more than doubled his money and guaranteed it to his granddaughter upon his demise. The risk of the market and the time it would take to potentially grow the money to equal the life insurance’s guaranteed death benefit were completely eliminated, thereby making the investment into the life policy well worth the effort. Freeing Up Principal: We meet many people in retirement who are saving as much as they possibly can for their family. For a fraction of the estate value, they may want to consider investing a small portion of their investments into a life insurance policy that guarantees the value of the estate at death. Doing so often provides the insured peace of mind knowing that if they wind up spending all of their money down to the last penny, they will still leave the value of the estate behind thanks to the life insurance policy.
  40. 40. Ten Common Mistakes Paying The Tax: In many cases, taxes are due at death, creating a burden for those who are left behind. Estates can be taxed; so can IRAs, annuities and a long list of other investments. Needless to say, someone has to write a check to pay the tax, and the “liquidity” of an estate is sometimes limited, especially when one passes away with generally illiquid large real estate holdings and relatively speaking low cash amounts. In many cases, a quality life insurance policy can be a beneficial “gift” to leave behind so that taxes are paid from the tax-free death benefit the life insurance provides. In our opinion, best of all, if you wind up not ever needing the life insurance for any of the reasons above, you would simply hold the policy and sell it at a future date. Although there are no guarantees, chances are likely that you can later sell the policy into life insurance’s secondary market, recoup your investment and potentially make an attractive profit from the sale. Who are the people that purchase these life insurance policies from the insured? It’s not the local Mafia but some of the largest, most reputable financial institutions in the world such as Warren Buffet’s Berkshire Hathaway, Lehman Brothers, Credit Suisse and a long list of many others.
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  42. 42. Ten Common Mistakes M I S TA K E # 9 NO ESTATE PLAN You spent your entire life doing everything right, when all of a sudden, the inevitable strikes. You go out driving with me and due to the distraction of my iPhone, we wind up not at the IHOP for breakfast but floating on a cloud somewhere, hopefully with Springsteen playing somewhere in the background. After you chastise me for my awful driving, you simmer down a bit. Now at peace with endless IHOP to eat and classic movies to watch, everything seems just fine until you look far down below to see your assets are going places you never imagined. Furthermore, there’s the possibility that people are fighting for your stuff and the courts are holding up the transfer of assets to those who need it the most. Certain you did all things right, you can’t figure out why there’s a mess down there. It’s at this moment you learn that the Will you created could be contested, you forgot to fund your trust,
  43. 43. Ten Common Mistakes maybe you neglected to update the beneficiaries, or perhaps you forgot to leave clear instructions as to who’s supposed to feed the dog. As morbid as it may sound, we often tell people to close their eyes for a moment and imagine they’re resting on a cloud, looking down and watching the aftermath of their life play out. Dictate, or write out what you want to have happen, then take that “script” to an estate planning attorney so that he or she can make sure the plan you have for your assets is enforced and cannot be contested. Do you have an estate plan? Hands down, this could easily be one of the most important mistakes of all. Many people merely have a Will and while this important document can certainly do a worthy job of providing instructions as to who gets what, this document can be “contested”, meaning that people can still fight over your assets long after you’re gone. To protect against this happening and to ensure everything you want to take place will transpire, you should strongly consider creating a Living Trust. Once a Living Trust is established, assets that belong in the trust “move” into the trust and remain there, presumably for the rest of your life. While the assets are there, the trustee (who is typically yourself) retains full control. At death, assets within the trust are passed to whomever you want without the possibility of your Will being contested or your heirs going through “Probate”, which is the time-consuming, frustrating and costly legal process that determines who gets what.
  44. 44. Ten Common Mistakes There are many other reasons to consider creating a trust and the list is far too long to detail in this preview. Just know that a Living Trust isn’t only “for the rich.” It could be worthwhile for all estates regardless of their value. Meeting with a qualified estate planning attorney will allow you to best assess whether or not a Living Trust belongs in your life. We would highly advise you to at least take a meeting to determine this.
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  46. 46. Ten Common Mistakes M I S TA K E # 10 ...AND THE BIGGEST MISTAKE OF ALL The common mistakes we’ve covered thus far are as follows: 1. Too many eggs in one basket 2. Failure to re-balance 3. Using the wrong gas: stocks, funds or indexes 4. Too much tax 5. Not watching the fees 6. Not protecting your money 7. Relying on growth for income 8. Not enough life in your life 9. No estate plan 10. …and as for the last most common mistake, any idea what this one is?
  47. 47. Ten Common Mistakes As far as we’re concerned, the last most common mistake is a potential whopper. Forget fees, diversification, taxes and everything else up above. The last most common mistake can easily be the worst one of all. The last most common mistake actually has little to do with investing. Furthermore, the last most common mistake has basically been around since the dawn of time and perhaps even before time itself. Do you have any idea what it is? Here’s a hint: The last most common mistake has everything to do with you and no one else. You have total and absolute control to prevent this most common mistake. Any guess? Give up? As far as we’re concerned, the most common mistake of all comes down to one word and one word only: complacency. “Should have,” “could have”and “would have” are words all of us should avoid ever having to say. Whether you act on a few good ideas expressed here or anywhere else, taking action is the key to your success. If you’ve read a few good ideas in this preview, take time to evaluate them for your personal needs and goals. After all, when it comes to investing, or anything else for that matter, it’s always the little things that count the most.
  48. 48. Ten Common Mistakes CONCLUSION I hope you’ve enjoyed this preview of my full-length book that is due to be published soon. In the meantime, should you want to attend one of our educational workshops or meet with me, my partners or any of the other highly reputable advisors in our firm, feel free to contact us at 800-809-4699. In closing, we want to wish you and your family the very best of luck and success on your journey ahead. For more information, visit www.alanhaft.com
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