We've covered ways NOT to get advice--from people who don't know what they're talking about, or who may have axes to grind. Of course, there are good places to get advice and lots of options. We'll get to that later. Meanwhile, before you call a professional financial planner, you should have a broad idea of what you can and cannot get from them.
Financial planners provide a range of services that may include one of more of the following: setting up and managing an investing portfolio; advising on retirement plans and insurance; tax advice, often in conjunction with a tax professional; estate planning; and college financing.
However, financial planners are not in the guarantee business. A prominent financial planner I know was being interviewed on TV, and the first question he was asked was "where will the market be at year-end?" To which he replied: "I have no idea." It flummoxed the reporter. But the planner was right: there was not profit in figuring our a year-end result. That was not a service he was pretending to sell to clients.
Financial planners are not fortune tellers. They will deal in probabilities and risk models, but not in short-term predictions. They're concerned with the likelihood of a comfortable retirement in 20 or 30 years, not market movements in the coming days or even months.
So don't ask a financial planner to pick hot stocks. Don't expect them to make you money in every kind of market: there will be quarters, even years, when you will be down. Remember, you're looking at the long term. This might seem counter-intuitive, especially if you see someone else, also with a planner (maybe even the same planner!) making money while you're losing it. But you have to remember, again, the planners are not picking a set group of stocks designed to go up for everyone. Another investor may have a higher, or lower, risk tolerance, meaning their ups and downs will not sync with yours.
Understanding the long-term nature of investing will keep you focused on the ultimate goal--and not on the closing of each day's market.
Tuesday, July 1, 2008
Monday, June 30, 2008
Land: The Only Thing That Matters(?)
When it comes right down to it, "Gone with the Wind" isn't about Scarlett O'Hara's love for Rhett Butler. It's really about her love of Tara. It's an enduring love affair between a woman and her real estate: "land is the only thing the matters." Pearl Buck came to pretty much the same conclusion in "The Good Earth" (does anyone even read that anymore?) about a Chinese farmer who never gives up on the importance of being a landowner, despite all the upheavals around him.
Are they crazy, or what?
There is something magical about owning land, it's true. I'm not even talking about owning the land you live in, which is a home, not an investment. And I'm not talking about farmers, for whom landowning is a business. I mean landowning as an income-producing investment. And that's where you can run into trouble.
Land is that most illiquid of investments. It isn't portable. It can't be sold quickly, and if you do need to raise cash fast, you won't realize its full value, even in a boom market. And yet, we continue to invest in it, even when General Sherman ("Gone with the Wind") or the impending Communists ("The Good Earth") threaten it. Real estate can fit nicely into a portfolio, but you can easily do that with REITs (Real Estate Investment Trusts) that give you access to real estate with the simplicity and liquidity of a typical mutual fund.
Nevertheless, people continue to invest in real estate directly, ignoring the problems. For example, back in the 1990s, my wife and I rented several apartments in a condominium. Many of the owners in the complex bought apartments specifically to rent them out. However, some of them bought at the top of the market, and when rentals became a glut on the market, they found rental fees wouldn't even cover mortgage, taxes and upkeep.
It gets worse. We had some terrible plumbing problems at one point--the landlord had to watch that quarter's profits disappear literally down the drain. Selling in such a situation would've resulted in a heavy loss.
As I mentioned in a previous post, I'm often drafted as an investment advisor (which I am most certainly NOT) for family and friends. Some retiree friends of my parents own several apartments they rent out. They can't get over the fact that they get income from these investments, and find the idea of other income-producing investments too confusing. However, they are stuck with investments that would be hard to turn into cash--and they're at an age where medical problems could require money quickly. And recently they had to deal with a tenant who stopped paying rent--months of no income, plus the legal fees for eviction.
For some, a pure real estate deal may be useful. But for many, other investments are a much more practical bet. Whatever you do, don't romanticize your investments and don't get your financial advice from classic novels.
Are they crazy, or what?
There is something magical about owning land, it's true. I'm not even talking about owning the land you live in, which is a home, not an investment. And I'm not talking about farmers, for whom landowning is a business. I mean landowning as an income-producing investment. And that's where you can run into trouble.
Land is that most illiquid of investments. It isn't portable. It can't be sold quickly, and if you do need to raise cash fast, you won't realize its full value, even in a boom market. And yet, we continue to invest in it, even when General Sherman ("Gone with the Wind") or the impending Communists ("The Good Earth") threaten it. Real estate can fit nicely into a portfolio, but you can easily do that with REITs (Real Estate Investment Trusts) that give you access to real estate with the simplicity and liquidity of a typical mutual fund.
Nevertheless, people continue to invest in real estate directly, ignoring the problems. For example, back in the 1990s, my wife and I rented several apartments in a condominium. Many of the owners in the complex bought apartments specifically to rent them out. However, some of them bought at the top of the market, and when rentals became a glut on the market, they found rental fees wouldn't even cover mortgage, taxes and upkeep.
It gets worse. We had some terrible plumbing problems at one point--the landlord had to watch that quarter's profits disappear literally down the drain. Selling in such a situation would've resulted in a heavy loss.
As I mentioned in a previous post, I'm often drafted as an investment advisor (which I am most certainly NOT) for family and friends. Some retiree friends of my parents own several apartments they rent out. They can't get over the fact that they get income from these investments, and find the idea of other income-producing investments too confusing. However, they are stuck with investments that would be hard to turn into cash--and they're at an age where medical problems could require money quickly. And recently they had to deal with a tenant who stopped paying rent--months of no income, plus the legal fees for eviction.
For some, a pure real estate deal may be useful. But for many, other investments are a much more practical bet. Whatever you do, don't romanticize your investments and don't get your financial advice from classic novels.
Wednesday, June 25, 2008
The Right Medicine
I've heard that if you get professional advice on your investments, you should make sure the advisor is putting his money into the same investment vehicles as he's putting you into.
Wrong.
His needs may be different from yours. He may be older than you and less willing to accept the risk. Or younger, and better able to weather volatility. Do you ask your doctor if he's taking the same medication he prescribed for you? Of course not--he wouldn't, unless he coincidentally has the same condition you have.
This seems pretty obvious. But the issue is bigger than that. There are many other situations where something is right in one situation but wrong in another. The financial press, and even some experts, like a black-and-white world. But finance rarely works that way.
Consider annuities. They are extremely popular. According to the annuity trade group NAVA, there are $1.4 trillion in variable annuities. (And that's not even counting fixed annuities.) Although annuities have countless variations, the basic concept is simple: you create one with contributions over time, or with a lump sum, and the insurance company that runs it guarantees you a certain payout. There's usually a life insurance component as well. It can be a useful retirement planning tool.
Still, many advisors are against them, finding them too expensive. Many of them say they can find other solutions for long-term income. Nevertheless, it makes you think: $1.4 trillion is a lot of money for a "useless" product. The point is that if you can accept the cost, annuities can solve some major retirement problems in a very simple way. That's worth it to a lot of people, who don't have the time, patience, or sophistication to explore other options. I know some fine financial planners who recommend annuities to the appropriate investors.
Reverse mortgages also have their supporters and detractors. Consider an 80-something widow living in her home. The mortgage has long been paid off. The house is worth $500,000. Yes, it could be sold to pay for the care she needs, but she doesn't want to leave the house she's been in for 40 years. The reverse mortgage lets her take out some of the equity in cash so she can live her final years in comfort. When she dies, her heirs can sell the house, pay off the reverse mortgage, and inherit whatever is left.
A great solution, and not too complicated. But again, it's an expensive solution. The bank charges a lot for this. I've spoken with advisors who say they have better solutions, but again, I've also spoken with advisors who recommend them.
The answer is to go with what's right for you. There are very few products that are always good or always bad.
It's true, I've never found an advisor who recommends interest-only mortgages. (They may have limited use for certain real estate speculators, but that's it.) And it's hard to find an advisor who condemns all mutual funds in all circumstances. But these are exceptions.
The idea is to find the "medicine" appropriate for your condition. Go with your own thorough research or get advice from a qualified professional. Don't be swayed by "this is always good" or "this is always bad" hype.
Wrong.
His needs may be different from yours. He may be older than you and less willing to accept the risk. Or younger, and better able to weather volatility. Do you ask your doctor if he's taking the same medication he prescribed for you? Of course not--he wouldn't, unless he coincidentally has the same condition you have.
This seems pretty obvious. But the issue is bigger than that. There are many other situations where something is right in one situation but wrong in another. The financial press, and even some experts, like a black-and-white world. But finance rarely works that way.
Consider annuities. They are extremely popular. According to the annuity trade group NAVA, there are $1.4 trillion in variable annuities. (And that's not even counting fixed annuities.) Although annuities have countless variations, the basic concept is simple: you create one with contributions over time, or with a lump sum, and the insurance company that runs it guarantees you a certain payout. There's usually a life insurance component as well. It can be a useful retirement planning tool.
Still, many advisors are against them, finding them too expensive. Many of them say they can find other solutions for long-term income. Nevertheless, it makes you think: $1.4 trillion is a lot of money for a "useless" product. The point is that if you can accept the cost, annuities can solve some major retirement problems in a very simple way. That's worth it to a lot of people, who don't have the time, patience, or sophistication to explore other options. I know some fine financial planners who recommend annuities to the appropriate investors.
Reverse mortgages also have their supporters and detractors. Consider an 80-something widow living in her home. The mortgage has long been paid off. The house is worth $500,000. Yes, it could be sold to pay for the care she needs, but she doesn't want to leave the house she's been in for 40 years. The reverse mortgage lets her take out some of the equity in cash so she can live her final years in comfort. When she dies, her heirs can sell the house, pay off the reverse mortgage, and inherit whatever is left.
A great solution, and not too complicated. But again, it's an expensive solution. The bank charges a lot for this. I've spoken with advisors who say they have better solutions, but again, I've also spoken with advisors who recommend them.
The answer is to go with what's right for you. There are very few products that are always good or always bad.
It's true, I've never found an advisor who recommends interest-only mortgages. (They may have limited use for certain real estate speculators, but that's it.) And it's hard to find an advisor who condemns all mutual funds in all circumstances. But these are exceptions.
The idea is to find the "medicine" appropriate for your condition. Go with your own thorough research or get advice from a qualified professional. Don't be swayed by "this is always good" or "this is always bad" hype.
Tuesday, June 24, 2008
Investing Myths
Because I've been a financial journalist for many years, family and friends often assume I have special knowledge of where the markets are going to go. They even ask if I have insights into specific companies. I don't. That I, or anyone, has long-term reliable investing information on these companies is a myth, one of many I've come across over the years.
Here are a few more. Avoid them as you consider a long-term investing plan.
Myth #1: Some People Are 'In the Know'
It's what screenwriter Budd Schulberg said about Hollywood: "nobody knows anything." To a certain extent, it's true of Wall Street.The best investment managers invest in many companies and spread their money across many funds and strategies. If they knew about a couple of companies that were virtually guaranteed to go up, they'd pour all their money into them. But they don't. At the end of the day, no one--not investment advisors, analysts, academics, not even journalists--can say with any degree of certainty which companies are going to go up. This is why experts spread the risk.
Myth #2: The TV Knows
OK, so maybe there aren't people who can guarantee which companies will go up, but we can get a pretty good idea of market direction from the talking heads on TV. Well, maybe. There are some very smart people talking about business and finance on a variety of programs. And that's the problem--they're talking to everybody. By the time they announce that they believe a certain sector is going up, their advice is built into the price. Everybody knows and you can't get an edge. Think of it this way: what kind of odds would you get betting on a football team in the fourth quarter that's up by 21 points with a minute left to play? Because that's what you're doing when you're taking a short-term bet on something everyone knows.
Myth #3: Guarantees Are Always Good
I knew a young woman who was being responsible and putting money in her 401k retirement plan. Quite rightly, she put her monthly contributions into a stock fund. But then something "terrible" happened: it went down one quarter. Not a huge amount, but she did lose money. She quickly panicked and moved everything into a guaranteed fund. Sound good? No, it's bad. In the long-term, the stock fund would've recovered and done well, far surpassing her low-yield choice. She said she slept better at night knowing that what she had was "guaranteed." But she was only exchanging one form of risk for another: the risk she won't have enough money at retirement. The moral of the story: you can't eliminate risk, only manage it.
Here are a few more. Avoid them as you consider a long-term investing plan.
Myth #1: Some People Are 'In the Know'
It's what screenwriter Budd Schulberg said about Hollywood: "nobody knows anything." To a certain extent, it's true of Wall Street.The best investment managers invest in many companies and spread their money across many funds and strategies. If they knew about a couple of companies that were virtually guaranteed to go up, they'd pour all their money into them. But they don't. At the end of the day, no one--not investment advisors, analysts, academics, not even journalists--can say with any degree of certainty which companies are going to go up. This is why experts spread the risk.
Myth #2: The TV Knows
OK, so maybe there aren't people who can guarantee which companies will go up, but we can get a pretty good idea of market direction from the talking heads on TV. Well, maybe. There are some very smart people talking about business and finance on a variety of programs. And that's the problem--they're talking to everybody. By the time they announce that they believe a certain sector is going up, their advice is built into the price. Everybody knows and you can't get an edge. Think of it this way: what kind of odds would you get betting on a football team in the fourth quarter that's up by 21 points with a minute left to play? Because that's what you're doing when you're taking a short-term bet on something everyone knows.
Myth #3: Guarantees Are Always Good
I knew a young woman who was being responsible and putting money in her 401k retirement plan. Quite rightly, she put her monthly contributions into a stock fund. But then something "terrible" happened: it went down one quarter. Not a huge amount, but she did lose money. She quickly panicked and moved everything into a guaranteed fund. Sound good? No, it's bad. In the long-term, the stock fund would've recovered and done well, far surpassing her low-yield choice. She said she slept better at night knowing that what she had was "guaranteed." But she was only exchanging one form of risk for another: the risk she won't have enough money at retirement. The moral of the story: you can't eliminate risk, only manage it.
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