Pletschet: New decade’s resolutions for every investor, Part 1
For his web site – Click Here
Cliff Pletschet, financial columnist – passed away not long after this article.
Out with the old decade, blotched with wars, terrorism and financial collapse, and in with the new. So let me offer today and tomorrow some New Decade’s Resolutions regarding you and your money, steps that you should take and stumbles you should avoid in order to preserve capital for retirement.
I’m not suggesting that you wait 10 years to put these ideas into place, but I am allowing some wiggle room in deference to chronic procrastinators.
Know your worth: Step one in saving for retirement is one that hardly anyone takes. It’s the creation of your own personal net worth statement. You need to know how rich (or poor) you are before you can start building a savings and investment portfolio. So, on paper, add up all your assets — the market value of your home and other real estate, equity in pension and profit-sharing plans, IRAs and Keogh plans, cash value of life insurance and annuities, checking and savings accounts, the market value of stocks, bonds, mutual funds and the current value of autos and other possessions. From that total, subtract all your liabilities, such as home mortgages, credit card balances and other loans.
What you are looking for is any weak spot that needs attention. The most likely one and the one over which you have the most control is the market value of stocks, bonds and mutual funds. Perhaps your IRA needs to be bolstered. You now have a starting point — and you should update your net worth statement at least once a year.
Read on for a suggested portfolio asset allocation.
Control spending: The written-down family budget seems out of place in this free-spending era, but it’s still a good measure of where your money is going and how you can cut down on expenses. The goal is to avoid getting into debt over your head. Families living beyond their means was the chief catalyst that set off the Great Recession of 2008-2009. Too many home buyers went into adjustable-rate mortgages and when interest rates and monthly house payments adjusted up, they were forced into foreclosures. The family budget needs only two columns: income and outgo and common sense dictates that income should exceed outgo.
Face risk: While everyone should have some money protected in a bank account, Treasury securities and/or money market funds, putting all your money in such risk-free investments is not going to get the job done As much as you may fear the stock market, and there’s plenty there to fear, you need some money in stock. If you buy stocks with good dividend yields — many are paying much higher yields than those safe investments — then you remove some of the worry. On the other hand, in my view, the bond market, with very few exceptions, is more risky than the stock market. As I noted, loans triggered the Great Recession. You can live without the burden of bonds, so why not?
Have a retirement account: Everyone should have money in a 401(k) plan at work (if they are still working and the boss offers such a plan) and/or money in individual retirement account (IRA), either a traditional IRA or a Roth IRA.
Your IRA sponsor and/or your tax accountant (everyone needs one these days) can explain the differences and benefits of each. The important point is that these are tax-advantaged plans that encourage people to put away money for retirement.
Create that portfolio: Despite the equity you have in a pension plan at work and despite the value of your home, you need to create and manage an investment portfolio. Some of the money may be in a 401(k) and/or IRAs, but the combined value should be broken into an asset allocation. One possibility is 40 percent in blue-chip growth stocks, ideally ones offering good dividend yields, 20 percent in real estate investment trusts, 20 percent electric utilities and telecoms, 15 percent in TVA bonds and 5 percent in cash — bank accounts or money market funds.
Excuses people employ to avoid creating a portfolio include “I’m too old to start now,” and, “I’m too dumb to create and manage such a portfolio on my own.” Wrong on both counts!
While the younger you start, the better your chances of creating a meaningful nest egg, you’re never too old to start. Add to that the fact that your are a lot smarter than you think.
The investment world is far less complicated than most people believe, and there are plenty of people and tools to help you.
Your portfolio should embody four features: Simplicity, diversity, liquidity and transparency. Simplicity means avoiding investments too complicated to explain or follow. Diversity means your money is spread around so that losses in one or more investments can be offset in gains in others.
Liquidity means the ability to sell the investment without delay or high cost. And transparency means that you are able to easily follow the value of your investment, such as in stock tables in a newspaper or online.
The independent investor should trade through a discount broker. While such a broker offers no investment tips, its commissions are much lower. Scottrade, for example, charges only $7 for any size trade.