Your Retirement Welcome to Your Retirement, our monthly web-newsletter with information and education that can help you with your retirement planning efforts. We provide straight-forward, easy to understand, unbiased and candid information. Feel free to use this information and to also pass it along to your friends and associates. If you are interested in previous issues of this newsletter or additional information, check out our website---retirementplanningconsultants.com or email R. Julian, at firstname.lastname@example.org . ® RETIREMENT PLANNING CONSULTANTS A Guide To Your Retirement Planning - Volume 1 - Number 10 Saving – Investing For Retirement---Twelve Time-Tested Core Principles In our March, 2004 Newsletter we offered principle #1 ---Stocks (Stock Mutual Funds) offer the best opportunity to participate in the long-term growth of the economy. In April, principle #2—Buy only what you understand. In May, principle #3--- Invest in a combination of stocks for long term growth and bonds for stability and income. In June, principle #4---Asset allocation and diversification does matter. In July, principle #5---You can buy low and sell high. In August, principle #6---Market timing is a mistake. In September, principle #7---Don’t chase hot performance. In October, principle #8---Focus your efforts on what you can control. In November principle #9 ---No such thing as risk-free investing. Here is Principle #10 - Stay with a long-term perspective. The earliest saved dollars have the most time to compound and can stand the most year-to-year uncertainty along the way. The stock market in the past 10 years has shown us that the market moves upward but it also goes down. But, market declines are not a reason to quit investing. Just like a tree, the market does not move upward in a straight line but it does trend upward over time and the keys to success are time and compounding. The longer you stay invested, the faster your money will grow. It is the most important factor in investing. It allows “compounding” time to work its magic. Time is on your side. A dollar saved today is worth twice or three times as much as a dollar saved 10 years from now. An 8 percent return on your investment doubles your money in 9 years. A 9 percent return doubles your money in 8 years. December 2004 <ul><li>In This Issue: </li></ul><ul><li>Twelve Time Tested Core Saving – Investing Principles: Principle #10: Stay With A Long-term Perspective </li></ul><ul><li>The Realities Of Retirement : # 4 In A Series: Defined Benefit Pension Plan – Defined Contribution Plan: Which One Is Better? </li></ul><ul><li>What You Should Know: Why Are Investors Taking Their Brokers To Arbitration? </li></ul><ul><li>Our Planning – Saving – Investing for Retirement Workshops </li></ul><ul><li>Homework: What Are The Rewards of Diversifying Your Investments? </li></ul><ul><li>Lazy – Low Maintenance Investing With Index Funds : #4 In A Series: The Lazy Coffeehouse Portfolio </li></ul><ul><li>This Month’s Question: Why Do Some People Hate Annuities? </li></ul><ul><li>How Can I: Find Information About Long Term Care? </li></ul><ul><li>Interesting Perspective: Should You Worry About Your Pension? </li></ul><ul><li>The Smart Saver Says: You’ve Got To Have A Plan </li></ul><ul><li>Sandy Cartoon: </li></ul><ul><li>Follow Up Report : Do You Know Your A-B-C’s Of Mutual Fund Investing? </li></ul><ul><li>Quick Takes: #1Pulling Off A Triple Play With Your 401(k) #2: Can You Trust What The Experts (?) Have To Say About Asset Allocation? </li></ul><ul><li>Stock Market – Investing Humor: </li></ul><ul><li>Quotable Quotes: </li></ul><ul><li>Coming In The January Issue : What Is An Efficient Market? </li></ul><ul><li>Homework --- The Answers: What Are The Rewards of Diversifying Your Investments? </li></ul>
-2- We have seen a good number of defined benefit plan terminations thus far in 2004 and several consulting firms have reported a high number of employer decisions to freeze their defined benefit plans so that added benefits are not earned under the plans. These surveys also indicate that other actions that close plans to new entrants, change benefit formulas, or otherwise reduce the scope and costs of the plans, are in the works. In the private sector, the number of employees covered by a defined benefit plan has dropped from almost 44% at the beginning of 1980 to about 17% now . However, in the public sector, the defined benefit plan is the norm. About 90% of all state and local government workers are currently covered by a defined benefit plan. This figure has not changed in the last 10 years. (Fortune May 31, 2004) A defined benefit plan guarantees a fixed monthly income when you retire. The amount is based on years of service and salary. According to the Employee Benefits Research Institute (EBRI), workers of long tenure and continuous participation in a traditional defined benefit plan have accumulated an average of about $175,000 in these plans. This means that they can purchase an annual annuity of about $6,100 or a monthly payment of $510. The defined contribution plan---of which the 401(k) is the most important, guarantees nothing. What you get when you retire depends on how much you put in and how well your investments perform. Which is the better plan? It depends somewhat on where you are in your career and how often you think you will change employers. A defined benefit plan builds in value slowly and most of its worth comes in the later years of your employment with a specific employer. But, the value of your 401(k) grows according to how well your investments do. And, you can take your 401(k) with you when you move to another organization. You can’t do that with a defined benefit plan. If you are older and more likely to stay put, then the traditional defined benefit plan can be the better plan. If you are younger and mobile, the 401(k) may be best. Q. Which pension plan do you have? If defined benefit, how are your benefits determined and how will they be paid? Is your plan fully funded? If defined contribution, are you contributing enough to the plan? How well are your investments performing? In Realities of Retirement, in our January 2005 issue, we’ll take a look at How Will Inflation Impact Your Retirement. “ The trouble with doing something right the first time is that nobody appreciates how difficult it was.” Unknown What You Should Know: Why Are Investors Taking Their Brokers To Arbitration? Back in 1976, Howard Beale, the aging TV news anchor in the movie “Network” is angry. The network has just fired him because of low ratings. He goes on the air and urges his viewers to go to the windows and yell, “I’m mad as hell and I’m not going to take it anymore.” Today, it appears that a good number of investors are taking Beale’s advice and they are taking their brokers to arbitration because they lost money in the market. The losses are A dollar saved today will be worth $10.06 in 30 years, assuming a modest 8% annual before-tax return (the historic average for a conservative mix of stocks, bonds and cash). In 10 years, a dollar invested at 8% will be worth only $2.16 . Late starters have to work harder. The mad race to “beat the market” all the time is the main reason so few people beat it at all. That is why a long-term perspective gives the individual investor an edge over the Wall Streeter. It’s not in getting rich quick, but in meeting the long-term goal of getting rich slowly. In the short run, the market can be deceptive. But, in the very long run, the market has proven to be almost boringly reliable and predictable. The longer the time period over which investments are held, the closer the actual returns in a portfolio will come to the expected average. The hare does not always beat the tortoise. “ The mind is like a parachute---it works only when it is open.” Unknown The Realities Of Retirement: #4 In A Series - Defined Benefit Pension Plan – Defined Contribution Plan: Which One Is Better? I have been trying to follow the debate going on-----which is the better pension plan that will fund your retirement --- a traditional defined benefit plan or the defined contribution plan (401(k), 457, 403(b). How do the two plans differ? In a defined benefit plan, the employer bears the investment risk. It’s up to the employer to properly invest its pension funds to finance future payments to retired employees. This means that good returns on investments lower the employer’s cost and bad returns increase it. The employee’s benefit is not affected. In a defined contribution plan, employees bear the investment risk. Good returns increase their accounts and bad returns decrease them. The employer’s cost is not affected. Defined benefit plans are automatic. Defined contribution plans are voluntary. The defined contribution plan (401(k) was developed in the late 1970s. Employers adopted the plan for a number of reasons---they cost less money to run than a defined benefit plan, they were easier to run and the employee was responsible for investing the money. Initially workers welcomed their 401k plan because they decided on how to save-invest their money. However, few people back in the 1970s realized the implications of letting tens of millions of workers with little investment education and know how, take charge of developing their own retirement nest egg. In the past 20 years or so, more and more companies switched to the defined contribution plan. Nearly three out of every five workers are now enrolled in a 401(k). Between 1975, when the Employee Retirement Income Security Act (ERISA) became effective, and 2003, the number of defined benefit plans decreased from about 175,000 in 1983 to around 32,000 in 2002. In 1980, about 75% of our work force was covered by a defined benefit plan. Today, it is less than one-third of our work force.
-3- mounting and it’s time to start to look for someone to blame. Who is the likely person to blame? Could it possibly be the broker or the financial advisor? Why? Well, it’s not entirely because they lost money. Hey, a lot of us lost money back in 2000 – 2002. But, these folks are angry because of some of the sales practices and advice they received. Barbara Roper, director of Investor Protection for the Consumer Federation of America states that “the fact that your investment performed more poorly than you’d hoped is not the basis of a claim.” What are some of the more common abuses? A good number of investors claim that their broker was “churning” their account --- excessive trading that generates commissions for brokers. Others say their broker engaged in unauthorized trading in their account. An investor with a complaint against a U.S. brokerage firm is almost guaranteed to end up in arbitration. Most brokerage contracts generally require that a customer will go that route. But, before you blame someone, be sure that you take the necessary steps so that you are sure that you have a valid case. If you feel something has gone wrong, talk with your broker – advisor and see if you can correct the problem. If you cannot resolve it at that point, talk with his supervisor or manager. If that doesn’t work, get in touch with the firm’s compliance office. Then, if you still are not satisfied, you can then consider arbitration at the NASD (National Association of Securities Dealers). Their dispute resolution telephone hotline number is 1-212-858-4400. You can also access their web site at www.nasdadr.com . Here you will find information explaining the claims process. Throughout the process, be sure that you keep good records that detail your interactions. Keep copies of the forms you sign and the information you receive. Roper says “Your chance of getting your money back goes up dramatically if you can document what has happened.” Do you need an attorney? You are not required to have an attorney in arbitration but your broker will use an attorney, so you can be at a significant disadvantage if you do not. What is the history of complaints that go to arbitration? Seventy percent of cases are settled before a hearing takes place. The investor gets back some of what has been claimed as a loss. Just over half (55%) of the cases that go to arbitration are decided in favor of the investor. Martin D. Weiss, author of The Ultimate Safe Money Guide, How Everyone 50 and Over Can Protect, Save, and Grow Their Money, states, “At almost every stage of the process, there will be an opportunity for you to settle with your broker. You can get your attorney’s help in weighing the pros and cons, but there is no 100 percent ‘right’ course. The final decision is yours and no one else’s.” Homework: What Are The Rewards of Diversifying Your Investments? Over time, different kinds of investments tend to perform differently. By investing in a variety of asset classes, you may reduce your exposure to a downturn in any one sector---while improving your opportunity for a higher return over the long term. For your homework this month, take a look at the table on page 9 and see what the annual returns for each of the 6 different categories are. Are you diversified with your investments so that you may have the opportunity for a higher return over the long term? Our Planning – Saving – Investing For Retirement Workshops Retirement 101: The Basics Retirement 201: Advanced Concepts Retirement 301: Where Do I Save – Invest? Three brand new workshops specifically developed to help you to learn about, understand and utilize the basic concepts and principles of planning - saving - investing for retirement. “ I thought the instructor did an excellent job with his presentation, his explanations and his illustrations” Jeff Barry, Lab Department, City of Kalamazoo In order to have a comfortable retirement tomorrow, you need to develop your plans today. A comfortable retirement doesn’t just happen. It takes planning and we can help you. We can help you to develop a step-by-step process; a saving - investing “road map.” We will provide you with straight-forward, easy-to understand, unbiased and candid information. We don’t get bogged down with financial jargon. We keep it simple. Over the years, we have helped thousands of people with their retirement planning efforts. Ninety-two percent of the participants in our recent sessions have rated the workshops as “good” to “excellent.” Each workshop participant receives a copy of our three extensive workbooks (80 pages plus) that contains worksheets, questionnaires, charts, graphs and a full range of examples and illustrations what will help them to understand and use this information. With our thirty years of working – researching – teaching in this area, we know how to inform – educate and help people with their plans. Your retirement may be years away but planning for it shouldn’t be. Talk to the people in your benefits – compensation office about our workshops and ask them to get in touch with us so that we can bring our sessions to your workplace. If you’d like to see a brochure which details what we do in our three sessions, send us an email ---email@example.com “ Teachers open the door, but you must enter by yourself.” Chinese proverb
-4- This Month’s Question: Why Do Some People Hate Annuities? Let's face it. Annuities are confusing. So confusing that a lot of people don't really know what they are buying into. Another problem is that some sales people can really put the pressure on a prospective client. Janice Revell in her “The Money Manager” column in Fortune magazine (10/18/2004) states, “Tax-deferred variable annuities could be called the cockroaches of the investment world.” A couple of weeks ago, a columnist for smartmoney.com neatly summed up my feelings when he wrote---"Variable annuities are sold more aggressively than fake Gucci handbags on the streets of New York City." How about a Rolex watch for $100?---how about $85? An annuity is a contract with an insurance company to provide retirement income. A variable annuity is basically a tax-deferred vehicle that comes with an insurance contract. Because it is contained in an insurance contract, earnings inside it grow tax deferred. Variable annuities can be immediate or deferred. Before we go any further, let's try to clear up some confusion about annuities. A good number of folks have a tax-deductible that comes with an employer sponsored plan. Fixed annuities pay a set rate of interest. And the immediate annuity will pay a monthly income for life. Although variable annuities offer investment features similar in many respects to mutual funds, a typical variable annuity offers three basic features not commonly found in mutual funds: Tax-deferred treatment of earnings, a death benefit and annuity payout options that can provide guaranteed income for life. Generally, variable annuities have two phases: The "accumulation" phase when investor contributions - premiums - are allocated among investment portfolios – sub-accounts - and earnings accumulate; and the "distribution" phase when you withdraw money, typically as a lump sum or through various annuity payment options. So, why should to avoid the Gucci handbag - variable annuity salesperson? A good number of financial experts say that the fees are high, the investment choices are limited, typically you get penalized for withdrawals that you take during the first five to seven years and, everything gets taxed as income rather than capital gains. The vast majority of them have “surrender charges which hit you with a penalty of up to 9% of the total annuity amount if you withdraw your money during the first seven years. And they come with a mind-boggling array of features and costs that have been the subject of attention from a number of people and organizations. “ Remember, past performance is no guarantee of future returns. But a simple philosophy of diversifying in different baskets, capturing the entire return of each basket, and creating a long term financial plan, will serve any investor for the long haul.” Bill Schultheis, The Coffeehouse Investor For additional information on Coffeehouse investing visit Bill's web site at www.coffeehouseinvestor.com Lazy - Low Maintenance Investing With Mutual Funds: #4 In Our Series: The Lazy Coffeehouse Portfolio Bill Schultheis spent 13 years working with individual and institutional accounts with Smith Barney in Seattle. In 1999, he turned to a new career as a financial advisor and published The Coffeehouse Investor, a book which dealt with the super-simple principles of developing a successful portfolio. He calls it the Lazy Coffeehouse Investment Portfolio. In his book, Schultheis urges readers to focus more on their passions and creativity and less on money and the hype and hysteria of Wall Street. He states that if you will do this, you will actually build more wealth and improve the quality of your life at the same time. He adds that successful investing has nothing to do with "hot" stocks and "cool" mutual funds. Schultheis states that when we unclutter and simplify our investment decision making, we both enhance our portfolios and enrich another part of our lives ---creating a space to pursue things that really matter. There are three core Coffeehouse Principles: 1) Diversifying in different asset classes---2) Capturing the entire return of each asset class---3) Developing a long term financial plan How do you put together the Coffeehouse Portfolio? You use seven no-load Vanguard index funds. Put 40 percent in the Total Bond Index ( VBMFX ) and 10 percent in each of six stock funds: The S&P 500 Index Fund ( VFINX ); Large-Cap Value ( VIVAX ); Small-Cap ( NAESX ); Small-Cap Value ( VISVX ); Total International Stock Index (VGTSX); and the REIT Index ( VGSIX ). What are the Coffeehouse Portfolio returns? 1991: 23.55% 1992: 9.57% 1993: 15.64% 1994: -0.58% 1995: 22.89% 1996: 14.53% 1997: 17.95% 1998: 6.88% 1999: 8.30% 2000: 7.25% 2001: 1.88% 2002: -5.55% 2003: 23.56% Annualized: 10.84% (through 2003) www.coffeehouseinvestor.com/Returns When Schultheis created the Coffeehouse Portfolio back in 1999, the dot.com, internet, on-line tech mania was at its peak. Back then, many investors were chasing these stocks (IPO’s) that were returning 30 – 40 - 50% or more a year. Many of the Wall Street professionals laughed at his conservative index fund approach to investing. Paul Farrell author of Lazy Person’s Guide to Investing: A Book for Procrastinators, the Financially Challenged, and Everyone Who Worries About Dealing With Their Money is a fan of Schultheis . Farrell who is also a columnist for CBSMarketwatch.com says that the bottom line is that you should ignore the Wall Street hype--- “ Forget about trying to win in a dead-money, flat-line, sideways market. Market timing and active trading hot sectors won't work for 99 percent of America's investors. Stick to a basic passive long-term buy ‘n’ hold strategy. You'll win in a bull market. You'll win in a sideways market. And you'll win in the next bear market.”
- 5 - Interesting Perspective: Should You Worry About Your Pension? During the past year or so, you may have heard about or read stories concerning under funded defined benefit pension plans. United Airlines has stated that they will no longer make contributions to their pension plans and they may terminate them and if they do, it will be the largest corporate pension default in history. US Airways announced they are suspending contributions to their plans that are under funded by an estimated $2.3 billion. Delta Airlines is seeking concessions valued at $1 billion annually from its union and is also on the verge of bankruptcy and wants to drop its defined-benefit pension plan. Then, you have the people in Olean, N .Y. who work for Halliburton, the large oil services firm. About two years ago, the company urged workers to take their pensions early and if they didn't, they would lose their right to take their benefits in a single check. The workers who accepted the offer got their money quickly but the money was less than what they had been told earlier they would be receiving. The problem? According to the New York Times, there is a "gaping hole in the nation's safety net. Tens of thousands of Americans are discovering, as they approach retirement, the money that they were promised is not forthcoming." Workers are beginning to question how secure they really are. A fully funded pension plan is one in which the market value of the plan assets is enough to cover at least 100% of benefits accrued by employers up to the current date. Wilshire Associates states that 81% of corporate defined benefit plans are under funded. As a result of the 2000 - 2002 market downturn, the condition of pension funds sharply deteriorated. The companies who walk away and renege on their obligations are forcing the government's Pension Benefit Guarantee Corporation (PBGC) to take over retirement plans. In order for the PBGC to take over a plan, the employer has to or already be in bankruptcy. Of the 45 million Americans with traditional defined benefit plans, about 1 million are in plans that have been taken over by the PBGC. But, even though the numbers are small, that is no consolation to Bob Holmbeck, a retired electrician with 35 years of service with the National Steel Pellet Company. He retired in 2002 and less than a year later, his pension was reduced by more than 15 percent and he also lost his medical benefits. National's pension obligations were assumed by the PBGC when U.S. Steel acquired National in bankruptcy. PBGC is limited in the amount of the pension they can cover for individuals like Holmbeck and that resulted in the cutbacks for the 10 percent that faced a reduction in benefits. Then, there are concerns about the long term solvency of the PBGC. Although the PBGC has about $40 billion in The salesperson may tell you that there are no "sales commissions" but they are usually buried in the annual costs: administration, investment management, and contract costs, insurance guarantees-----this can earn the salesperson anywhere from 5 - 8%. In some cases, a variable annuity can be a good option. If you are moving money from a former employer and you are not ready to retire, you can still accumulate savings and continue to build your retirement nest egg. A number of people who purchase variable annuities say they were misled by aggressive sales persons and also say they didn't know what they were getting into. One of my sons caved in to a sales pitch and signed on. He got out of his annuity after a short period of time because "I couldn't see how I was going to make any money. I didn't know how much insurance I was buying and how much I was investing in mutual funds.” He is not the only confused person. According to a survey of 1,023 adults by the Insurance Information Institute, more than a third of Americans aren't even sure what annuities are. Customer complaints have caught the attention of regulators. Over the past two years, the National Association of Securities Dealers (NASD) brought more than 80 disciplinary actions against variable annuity brokers. In May, NASD barred two brokers from the annuity business because of abuses in selling variable annuities. According to the report from the National Association and the Securities and Exchange Commission (SEC), some brokers have capitalized on this confusion. In July, Federal regulators released a report which examined corrupt activities in annuity sales. The SEC and NASD in a joint response on annuity sales practices found “high pressure sales tactics” and “instances of brokers making unsuitable recommendations to senior citizens and other individuals who could not afford the products without mortgaging their homes.” Ethical practices???? But, in spite of all of this attention, sales persons are still doing a good job in peddling variable annuities. According to the National Association of Variable Annuities, premiums from variable annuities rose to nearly $35 billion in the first three months of this year--that is up from about $30 billion a year ago. They now have about $1 trillion in assets. Jane Bryant Quinn in her column (8/30/2004) states that a variable annuity will "cost you more in taxes and risk your security too.” John Biggs, former chairperson of TIAA-CREF pension funds states, "I cannot imagine a personal situation where I'd recommend a VA as a good idea." Now, let me tell you about that Rolex I'd like to sell you. “ Wherever there is money, there are weasels, usually in direct proportion. Someday, an economist will win the Nobel prize for discovering the direct dollar-to-weasel equation that explains the world.” Scott Adams, “Dilbert And The Way Of The Weasel” How Can I: Find Information About Long Term Care? Interested in information about long term care and long term care insurance? On the web, check out www.mrltc.com .
- 6 - assets and takes in about $1 billion annually in company premiums for insurance, it is paying out about $3 billion a year to beneficiaries of the 3,400 plans it has taken over. In his testimony to Congress, PBGC Director Bradley Belt, said that he expected to report a significantly increased deficit for 2004 that will eclipse 2003's record deficit of $11.2 billion. The agency has lost an average of $10 billion a year for the last three years. He stated, "The longer-term solvency of the pension insurance program is at risk." How can you determine if your plan is under funded? It is not easy. The PBGC used to publish an annual list of the 50 companies with the most under funded plans. However, in 1997, after pressure from some companies, the PBGC stopped publishing the lists. A lobbying group for large employers, ERISA Industry Commission, said that the lists “unnecessarily alarmed employees.” So, what can you do? Start with the Summary Annual Report (SAR). It will tell you whether the plan has lost money but not whether it is under funded. You can ask your benefits administrator to see the plans tax return for the most recent year but it will take a bit of digging to find the information you need. While the plan must follow ERISA guidelines, the PWBA does not monitor such plans closely. If you find anything questionable in any plan, contact one of the PWBA's 15 regional offices. If your plan administrator doesn't provide an SAR, call the PWBA's hotline at 866-275-7922. Planning - Saving - Investing For Retirement Sandy Says: You’ve Got To Have A Plan (1) Your Goals and Objectives For Investing – developing your retirement nest egg. Your portfolio should be based on your financial objectives and not a reaction to the daily business headlines or a commentator’s “expert opinion.” (2) Your Time Horizon -the number of years you have to save – invest; 10, 20, 30, 40 years; the length of time between now and when the money invested will be spent. (3) Your Personal Financial Situation – single, married, children, college tuition expenses, caring for aging parents, etc. No one knows your financial situation better than you do. (4) Your Tolerance for Risk – Are you a conservative, moderate, aggressive investor? Do you know why? Does your tolerance for risk carry over into how you select your investments? Every successful long-term investment strategy is anchored in a disciplined program –a plan that is founded on a program of regular saving. What you save is a choice. It is something you decide every time you write a check or pull out your credit card. And, if you don’t save a healthy amount out of every pay check, it doesn’t matter if your earn 8% or 18% on your investments. You’ve got to have a strategy – plan. A good number of my pals, like my Uncle Ralph invest in “the investment de jour”, a “collection of tips”, what the “experts” are saying --- without any idea of their overall goals and objectives. Of course, Uncle Ralph is also the guy who thinks that “day traders” are folks who go to flea markets to exchange acorns. Us squirrels (maybe not Uncle Ralph) know what Yogi was talking about because we know where we want to go---we have a plan--- we have to stash away enough - many acorns today so that we can have them in the future. For the life of me, I can’t figure out why people are confused about what Yogi is saying. It always makes perfect sense to me. “ Failing to prepare is preparing to fail.” John Wooden, Legendary Basketball Coach, 1910 - Hi, I’m Sandy The Smart Saver and I am here once again to give you some tips on Planning-Saving-Investing For Retirement and I am still taking a light-hearted approach and still trying to make the whole saving-investing for retirement process a “fun” event. And of course, I am still not your average squirrel. In that wonderful book that I used to read to my kids, Alice In Wonderland, Alice asks the Cheshire Cat, “Would you tell me please---which road I ought to walk from here.” The Cat replied, “That depends a good deal on where you want to go.” Alice said, “I don’t much care where.” The Cat then replied, “Then it doesn’t matter which way you walk.” My friend, Yogi Berra, baseball player-manager, philosopher, once told me “If you don’t know where you’re going, you might end up somewhere else.” That’s good advice for all of us. When it comes to saving - investing your acorns for retirement, you’ve got to know which way you “ought to walk”; you’ve got to have a road map. You are not going to get to where you want to be by accident. Your job is to create a plan that suits your personal situation and stick with it. And your plan should address four factors. Sandy Cartoon Sandy to wife Camille: What do you think a market correction is? Camille: That is what happens on the day that follows one of your stock purchases. Sandy: Ouch…that one really hurts. Camille: Yes, in more ways than just one..
- 7 - Follow Up Report: Do You Know Your A, B, C's of Mutual Fund Investing? As an investor, you may have heard about or read about "Class A," "Class B," Class C", or other classes of mutual fund shares. They are different ways to pay for the assistance and advice you receive when selecting and buying or selling shares in a load mutual fund. If you are thinking about choosing one of these classes, it is important for you to understand that there are real differences between them. Load fees typically range from four to eight percent and the way they are paid varies. With a front-end load, up to 5.75% of the principal- (usually class A shares) - you pay the sales fee up front. With a back end load (class B shares) - you pay the sales fee on your way out. And then you have the class C shares---you pay the sales fees every year and you might even have to pay a full load when you sell. Some also refer to it as the constant load fund. But, you don't really have to buy A, B, or C. Another alternative---and some say this is a better one---is to buy a no-load fund. Why? No-load funds do not have share classes. All you will pay is an annual administrative fee which can be kept low by investing in index funds. When you pay a commission for the purchase of your fund, you automatically start off with a loss. For example, if you start off by investing $10,000, but you put it into a loaded fund with a 5% front-end load, you are really only investing $9,500. What do you get for your $500? A thank you from the salesperson and average or below average performance. Just about every study on the subject has concluded that over long periods of time there is virtually no difference in returns between the performance of all load funds and all no-load funds-except for the sales commission. Sales loads do not benefit the investor so, why pay them? There are plenty of no-load alternatives. And, one more thing. The Securities and Exchange Commission (SEC) and the National Association of Securities Dealers (NASD) have gone after some financial firms for pushing B shares when A or C shares were more appropriate. In addition, the NASD issued an alert to consumers urging them to be more cautious about buying Class-B mutual fund shares. Do you know what's in your mutual fund portfolio? “ If I had 8 hours to chop down a tree, I’d spend 6 of them sharpening my axe.” Abraham Lincoln 1809 – 1865, 16th President of the United States • Quick Takes: #1: Pulling Off A Triple Play With Your 401(k) You won’t see many unassisted triple plays in a baseball game. It is one of the rarest of all feats and it has been accomplished only 12 times in major league baseball history. But, you can accomplish an unassisted triple play when you enroll in your organization’s 401(k) plan. How? Play #1: You don’t pay taxes on the money you contribute. It reduces the tax that is taken out of each of your pay checks. Play #2: You get matching funds from your employer---many do. For each $100 you contribute, your employer might kick in another $20. It’s extra money. Don’t leave it on the table. Play #3: Your money in your 401(k) is “tax deferred”---and that means that you do not pay taxes on the money when you contribute it but instead when you withdraw and actually use the money. 1 – 2 – 3---a triple play with your 401(k) O.K.---yes I am a wannabe poet but this will probably be my one and only attempt at it. You might be able to bet on it. #2: Can You Trust What The Experts (?) Have To Say About Asset Allocation? Asset Allocation, of course, is the decision you make when you invest as to where you will allocate your assets (money) into stocks, bonds, or cash type investments. A regular feature in a magazine that I read (Investment Advisor) is called “Asset Allocation” and in this feature they have investment professionals telling us how they are forecasting you should invest your money--- what percentage in stocks, what percentage in bonds and what percentage in cash type investments. Of the 8 investment professionals, we had a wide range of forecasts. For stocks, there was a range of a high of 77% and a low of 20 %. For bonds, there was a range from a high of 60% to a low of 10%. For cash type investments – savings, there was a high of 35% and a low of 1%. Now that you are aware of those forecasts, what would you do? You could go stocks---one of the “experts” recommended an allocation of 77%----or you could go bonds---one of the “experts” recommended an allocation of 60%----or you could go cash---someone recommended an allocation of 35%. Should you allocate 77% of your assets to stocks or should you allocate 20% of your assets to stocks? Should you take a conservative position and allocate 35% of your assets to bonds or be aggressive and allocate 60% to bonds? Now, you are beginning to see why we amateurs are having a bit of difficulty in deciding where to allocate our assets. I guess the point I want to make is that in the investment world, you will not find “consensus.” Some will make their recommendations….others will make other recommendations……And, you know that after all is said and done, history will show that someone will be right on the money. The problem is that before you place your bet---before you invest your money, you have absolutely no way of knowing which one of the investment professionals will be right. And that is why “investing” is such a difficult task. And that is why following up on “expert recommendations” is a hit or miss proposition. “ If there’s 10,000 people looking at stocks and trying to pick winners, one in 10,000 is going to score, by chance alone, a great coup, and that’s all that’s going on. It’s a game, it’s a chance operation, and people think they are doing something purposeful---but they’re not.” Merton Miller (1923 – 2000), Nobel Prize in Economic Sciences
<ul><li>Quotable Quotes: </li></ul><ul><li>“ As a general rule, the most successful man in life is the man who has the best information.” Benjamin Desraeli, (1804 – 1881), novelist, debator and England's first and only Jewish prime minister </li></ul><ul><li>“ If you have built castles in the air, your work need not be lost; that is where they should be. Now, put the foundations under them.” Henry David Thoreau, (1817 – 1862), “Walden”, Lecturer, writer, handyman, surveyor </li></ul><ul><li>“ By pouring continuous data about stocks into bars and barbershops, kitchens and cafes, taxi cabs and truck stops, financial web sites --- financial TV turned the stock market into a non stop national video game.” Jason Zweig, “The Intelligent Investor – Benjamin Graham – Revised”, 2003 </li></ul><ul><li>“ Never mistake motion for action” Ernest Hemingway, (1898 – 1961), American novelist, short-story writer and essayist </li></ul><ul><li>“ Success is how high you bounce when you hit bottom.” General George Patton, (1885 – 1945), U. S. field commander in World War II </li></ul><ul><li>“ If you do not see the way clear, do nothing.” Daniel Drew, (1797 – 1879), Entrepreneur, colorful speculator of the 1880’s who believed that buying stocks in some circumstances was like buying cows by candelight. </li></ul>- 8 - Coming In the January Issue: What Is An “Efficient Market?” My friend Sandy---you know, Sandy The Smart Saver---was telling me the other day about his cousin Elvis, the wannabe Millionaire. Elvis thinks he knows about the stock market and how to invest. Elvis thinks an efficient market is a place where you can shop and find good prices and clerks that are helpful. That, of course, would be the explanation of an efficient market in a community but, an efficient market in the world of investing is a different matter. The Efficient Market Hypothesis evolved in the 1960s from the Ph.D. dissertation of Eugene Fama. Fama persuasively made the argument that in an active market that includes many well-informed and intelligent investors, securities will be appropriately priced and reflect all available information. An efficient' market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. “ In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information based both on events that have already occurred and on events which, as of now, the market expects to take place in the future. In other words, in an efficient market at any point in time the actual price of a security will be a good estimate of its intrinsic value." "Random Walks in Stock Market Prices," Financial Analysts Journal, September/October 1965 The random walk theory asserts that price movements will not follow any patterns or trends and that past price movements cannot be used to predict future price movements. Not all Wall Street professionals agree with this theory. Some call it "hogwash" and others refer to it as "malarkey." In our January, 2005 edition of Your Retirement, we'll take a look at the theory and see if and how it can pertain to you as an investor. Retirement Planning Consultants provides a number of resources designed to help individuals make informed decisions on planning – saving – investing for retirement. We offer unbiased and easy-to-understand information from an impartial outside source. We’ve been doing that for almost 30 years. Our “Planning – Saving – Investing For Retirement” workshops have helped thousands of individuals. For additional information or if you have any questions, contact, Robert R. Julian, Retirement Planning Consultants, 313 Blackstone Avenue, Ithaca, New York 14850, (607) 255-4405, email: rrj1cornell.edu. Visit our website at retirementplanningconsultants.com Stock Market – Investment Humor Q. Why is a stock market statistic like a “bikini” A. What they reveal is important. What they conceal is “vital.”
- 9 - This newsletter intends to present factual up-to-date, researched information on the topics presented. We cannot make any representation regarding the accuracy of the content or its applicability to your situation. Before any action is taken based upon this information, it is essential that you obtain competent, individual advice from an attorney, accountant, tax adviser or other professional adviser. Information throughout this newsletter, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information . No party assumes liability for any loss or damage resulting from errors or omissions based on or use of this material. What AreThe Rewards of Diversifying Your Investments? How to Potentially Decrease Risk While Increasing Returns Over time, different kinds of investments tend to perform differently. By investing in a variety of asset classes, you may reduce your exposure to a downturn in any one sector --- while improving your opportunity for a higher return over the long term. Past performance cannot guarantee comparable future results.