A New Year, A Financial Lifeline?
How are you doing on your New Year’s resolutions and goals? Are you still on track? Many take no action and expect different results. Why do we keep doing the same things over and over and “hope” things will mysteriously “change”? Hope and change are more than words. They can win elections, but the proof is in the results. Are you getting the financial results you desire?
As finances affect almost every area of our lives, stewardship should be one of the areas that capture our greatest attention in the New Year. Yet as a portfolio manager and financial advisor for the past 16 years, I am finding this is the area most people neglect. They get “too busy” or “uninterested” or even “unsure” how to plan ahead.
With the troubled economy, many financial problems that were covered over during the prosperous times have now been exposed. It’s not difficult to survive when jobs are plentiful and credit is easy! However in today’s economy smart money moves are a hot commodity!
Now as important as it is to make wise decisions with your money, it is just as important to avoid the bad money mistakes. These money mistakes are what cause people to go deeper in debt, not save enough for retirement, and lose money in the stock market to name a few.
In 2011, this is your year to make things right! Out with the old and in with the new. If you’ve already started saving for your future, this is the year to supercharge your savings. If you haven’t started, well this is the year to start! In order to plan ahead, we have to make sure we have a plan to combat the four deadly forces that wreak havoc in our finances.
To Win The Battle, We Need A Game Plan!
To win at the money game, you will need to be aware of the dangers that lie ahead. You can never be bullet proof, but having plans in place can soften the blows that are sure to come. Let’s look at four problem areas that have the potential to blow up a financial plan.
Problem Area # 1: Ignoring Inflation
Inflation erodes your future purchasing power over time. $100,000 in 2011 will not buy less products and services in 2012, never mind twenty years from now Are equities the best investment choice during inflationary periods of the market? Quite often, the answer is “no.”
What about bonds? Think again! These usually do not do well either. So what’s the magic answer? When inflation appears, the assets that tend to perform the best are alternative investments such as private equity funds, real estate investment trusts and commodities. These may not only help you diversify your portfolio, but also help you fight the effects of inflation on your invested assets.
Interest rates are starting to rise and I believe hyper-inflation (high inflation) is right around the corner. As you invest, you’ve got to recognize the impact that inflation can have on your investments and plan accordingly.
We Are Planning Ahead Right Now!
At FaithBasedInvestor.com, we are loading up on investments that do well during inflationary periods:
• Precious metals: We will continue to hold investments that have inflation protection. Gold and silver should continue to be hot commodities.
• Agriculture: We will continue holding companies and investments that have exposure to the food industries.
• Energy: We will continue to hold and look for opportunities in the energy sector: coal, oil, and alternative energy solutions.
• Foreign Currencies: We will diversify our domestic exposure (US Dollars) by using foreign currencies like the Yen, Swiss Franc, and Aussie Dollar.
• Dividend Stocks: We will look to hold and seek out companies paying dividends. This will help us with cash flow and outpacing inflation.
• Inflation-Protected Bonds: We will continue to hold U.S. and foreign bonds that have inflation protection.
Problem Area # 2: Ignoring Investment Fees
Investment fees represent the second wealth killer. These fees can add up to thousands or even millions of dollars over decades of compounding. 401(k) management and administration fees, mutual fund fees, and annuity expenses wipe out investor’s wealth each and every year. The Department of Labor recently showed that even a 1% increase in your fees can wipe out as much as 28% of the value of your 401(k) over time. Also look at your mutual funds. The average cost of most funds is north of 3% annually! (1.6% average expense ratio and 1.4% SAI Fees) For more on fees check out this article on 4 reasons why mutual funds are lousy investments.
Problem Area #3: Ignoring Taxes
The big appeal of 401(k)’s and IRAs is the ability to defer taxes, right? However, with the United States’ $14 trillion worth of debt, which likely direction do you anticipate future tax rates will go? 401(k)s, IRAs, and annuities are ticking tax bombs! The biggest problem with deferring taxes is this:
Let’s say you are successful managing your investments and grow a HUGE nest egg. Congratulations, right? Yes, it’s great to have more money! However, at retirement age when you pull this money out, all that growth and your tax deferred contributions now become fully taxable ordinary income when withdrawn. Say you save $5,000 and it grows to $100,000. The entire $100,000 is fully taxable. At a 40% tax rate, that’s $40,000 in taxes! The government allowed you the initial tax deduction of $5,000 for $40,000 or more in the future. Not a bad deal FOR THEM!
Now don’t hear we wrong. I’m not saving you shouldn’t have any tax-deferred investments. I just wouldn’t put all your savings here. I would have a combination of tax-deferred, tax-free, and taxable savings. It’s simply hedging your tax exposure.
Problem Area #4: Taking Far Too Much Risk For Too Little Of A Return
Many people tell you to buy an index fund and hold it forever… Or take a look at mutual funds with good five and ten year track records and you will do great! Good in theory, bad in practice for most investors. If you put $100,000 into an S&P 500 index back in 2000, that would be worth about $114,000 – a gain of nearly 14% in the S&P 500 fund from January, 2000 to January of 2011. Wow! 14% for 11 years worth of a roller coaster! Was this little return worth all of those sleepless nights?
Instead choose investments that are in line with your faith and values and you know inside and out. Most investors hand off their money to “someone else”, be it a mutual fund, advisor, broker, or money manager, without understanding what they are investing in, how much risk they are taking, what values they are supporting, and how liquid or illiquid the investment is.
Make This The Year To Get Educated
Don’t just take my word for it. Do the research, do your homework! Make this the year you will read up on finance and start making wiser decisions. What are your thoughts?