A recent survey by bankrate.com concluded that more than 50 percent of
Americans are not invested in stocks in any way, shape or form. To say
that this surprised me is an understatement.
It’s actually shocking to me that people aren’t buying individual
stocks. Especially since it means they don’t own any mutual funds that
contain equities, either within or outside of their retirement plans.
Returning to Basic Investing 101, stocks represent ownership in a
company. As such, they can fluctuate up or down in value every business
day. All business owners carry an element of risks, and since stocks
represent ownership, they also carry risk.
But with risk there are potential benefits. Returns are never
guaranteed, of course, but historically most stock market indexes
perform fairly well over time. That’s one reason I believe every
long-term investor should have a place for stocks in his or her
portfolio. Of course, there are no assurances, but historically stocks
have kept pace with rising costs.
For many households, their employer’s retirement savings program is the
only real savings. If retirement is far into the future, it could be a
mistake to totally ignore the equity markets. I understand that many
households have a distrust of Wall Street and are still shell-shocked
from the market meltdown.
Apparently this distrust of Wall Street carries over to financial
advisers because the same bankrate.com survey determined that 21 percent
of those surveyed didn’t trust stockbrokers or financial advisers.
Naturally, this saddens me because in my world, the financial advisers
that I interact with are of high quality, competent and caring.
History is no indication of the future, but investors who were scared
away and sold their stock holdings during the recession of 2008-09 have
missed out on sizeable market gains. To rub salt into the wound, if
those dollars went into the bank, they produced very minimal interest
gains over the past few years.
I’m not suggesting that every penny of your savings go into stocks. But
not putting any dollars into something that has great growth potential
makes you vulnerable to rising costs. Balance and diversification are
the key words for most investors. I’m confident that most households can
accomplish them.
If you’re in need of assistance, there are a number of excellent
financial advisers who can help you through the maze of the investment
world. There’s also the Internet, where you can find and research all
kinds of financial data. The challenge with online research is sorting
through the plethora of information.
Finally, don’t overlook personal observations from your daily
activities. For example, if you notice everybody is eating at a certain
restaurant chain, wearing the same clothing label, shopping at a certain
store or driving the same brand car, do some research.
One of the most famous mutual fund managers of all time got some of the
best ideas for his stock portfolio from his own personal observation.
I find it more than a little disappointing that half the investment
world is choosing not to invest in equities. Owning anything is certain
to have bumps in the road. But a bumpy road doesn’t mean it’s not
drivable. Remember, with interest rates so low and life expectancies so
long, totally ignoring stocks is a recipe for problems down any road.
Monday, April 27, 2015
Monday, April 20, 2015
Global warning: Economic dominance of the U.S. nearing end
Earlier this month, the local news was dominated by sports. The MSU
Spartans were advancing to the Final Four and our Detroit Tigers were
preparing for another season.
The national news, meanwhile, was focused on the debate over the Indiana Religious Freedom Law and the international news was all about the potential nuclear agreement between Iran and the USA.
Without question, all of these events were newsworthy. But perhaps the most overlooked story is China related; a story Larry Summers recently thrust into the forefront. Summers, you may recall, served as our Secretary of the Treasury in both the Clinton and Obama administrations.
The morning of the Tiger opener he wrote that this past month “may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”
I don’t want to go into depth to explain the machinations of the International Monetary Fund or other aspects of global finance, but it’s a fact that China has been instrumental in spearheading a new “World Bank.”
The new China-backed bank, called the Asian Infrastructure Investment Bank, will directly compete against the US-backed World Bank. The founding members of the new AIIB include Russia, Brazil, India, France and Germany. Even strong US allies like Israel and the United Kingdom agreed to join.
The stated goal of the AIIB is strictly to help fund infrastructure projects throughout Asian nations. Stated being the key word. But, intent or not, the AIIB is clearly a threat to the dominance of the IMF and World Bank.
The reason I bring this complex international issue up in a personal finance column is because it could ultimately impact all of our pocketbooks. Since World War II, the American currency has, in essence, been the world’s currency. For all of our lives we have known the world as dollar dominated.
Many experts suggest that living in a US dollar dominated world has added as much as 20 percent to our lifestyle. Said another way, how many would be adversely impacted by taking a 20 percent cut in their monthly finances? I’m guessing the vast majority of my readers would feel the impact of such a pay cut.
China’s economy is virtually the same size as ours, and by some measures, may now be even larger. There’s no question they are an economic powerhouse, and former Treasury Secretary Summers, now a Harvard professor, believes the economic dominance of the U.S. has come to an end.
Dr. Summers points to the dysfunctional leaders in Washington and criticizes them for failure to pass the reforms that have been on the table since 2009. Consequently, our national debt just keeps on growing.
International banking issues are not as exciting as the NCAA Final Four, and I doubt that any Tiger fans discussed the AIIB between innings. However, it’s important to keep in mind that we are indeed in a global world where we can feel the ripple effect of decisions made halfway around the world.
Only time will tell what adverse consequences may befall us if the world shifts away from a US dominated financial system. For the past several decades, the US has been the undisputed economic and political global superpower. But be aware: China is on deck.
The national news, meanwhile, was focused on the debate over the Indiana Religious Freedom Law and the international news was all about the potential nuclear agreement between Iran and the USA.
Without question, all of these events were newsworthy. But perhaps the most overlooked story is China related; a story Larry Summers recently thrust into the forefront. Summers, you may recall, served as our Secretary of the Treasury in both the Clinton and Obama administrations.
The morning of the Tiger opener he wrote that this past month “may be remembered as the moment the United States lost its role as the underwriter of the global economic system.”
I don’t want to go into depth to explain the machinations of the International Monetary Fund or other aspects of global finance, but it’s a fact that China has been instrumental in spearheading a new “World Bank.”
The new China-backed bank, called the Asian Infrastructure Investment Bank, will directly compete against the US-backed World Bank. The founding members of the new AIIB include Russia, Brazil, India, France and Germany. Even strong US allies like Israel and the United Kingdom agreed to join.
The stated goal of the AIIB is strictly to help fund infrastructure projects throughout Asian nations. Stated being the key word. But, intent or not, the AIIB is clearly a threat to the dominance of the IMF and World Bank.
The reason I bring this complex international issue up in a personal finance column is because it could ultimately impact all of our pocketbooks. Since World War II, the American currency has, in essence, been the world’s currency. For all of our lives we have known the world as dollar dominated.
Many experts suggest that living in a US dollar dominated world has added as much as 20 percent to our lifestyle. Said another way, how many would be adversely impacted by taking a 20 percent cut in their monthly finances? I’m guessing the vast majority of my readers would feel the impact of such a pay cut.
China’s economy is virtually the same size as ours, and by some measures, may now be even larger. There’s no question they are an economic powerhouse, and former Treasury Secretary Summers, now a Harvard professor, believes the economic dominance of the U.S. has come to an end.
Dr. Summers points to the dysfunctional leaders in Washington and criticizes them for failure to pass the reforms that have been on the table since 2009. Consequently, our national debt just keeps on growing.
International banking issues are not as exciting as the NCAA Final Four, and I doubt that any Tiger fans discussed the AIIB between innings. However, it’s important to keep in mind that we are indeed in a global world where we can feel the ripple effect of decisions made halfway around the world.
Only time will tell what adverse consequences may befall us if the world shifts away from a US dominated financial system. For the past several decades, the US has been the undisputed economic and political global superpower. But be aware: China is on deck.
Tuesday, April 14, 2015
A special plan for those with special needs
As a grandparent of a special needs child I have firsthand knowledge of
how much extra time, love and patience is required of the parents on a
daily basis. I’m so very proud of my son and daughter-in-law at how well
they manage their household day in and day out.
As a financial adviser, I am also keenly aware that having a child with special needs can be a significant strain on a household budget.
At the end of 2014, President Obama signed into law the Achieving a Better Life Experience Act (ABLE). One of the major goals of the ABLE Act was to provide people with special needs an incentive to save.
You would think that families would be thrilled when their special needs adult child got a job. Unfortunately, landing a job could create a drawback. If the special needs person earned too much money they could forfeit their eligibility for government programs.
In other words, to a certain degree it almost forced special needs people to keep their income so low that they were practically living in poverty. The ABLE Act is intended to alleviate this concern.
One of the provisions of the ABLE Act created 529A plans, modeled after 529 College Savings Plans, which I have written about before. A 529A plan is intended to help families with special needs children save for their future without giving up eligibility for public benefits.
As with traditional 529 plans, the 529A must be used for “qualified” expenses. Since special needs last a lifetime, the qualified expenses last over a person’s lifetime on purchases and expenses related to the special needs, including education, employment training, housing and health care.
A big difference between the traditional 529 and the 529A plan is that with the traditional program the account owner, typically a parent or grandparent, can withdraw the money at any time. Of course, they must pay taxes on any gains plus a ten percent penalty. With the 529A plan, the money is truly the special needs person’s money.
With most traditional 529 programs there’s a cumulative cap. It varies from state to state, but it’s generally around $200,000. The new 529A plans simply limit the annual contribution to $15,000 per year and only the first $100,000 is exempt from Supplemental Security Income. Once the account value exceeds $100,000, SSI benefits are no longer received.
With traditional 529 plans, families can purchase the program of virtually any state. For example, if you like the fund manager of say, Ohio, you can purchase it for your loved one. With the 529A plan, it must be your state.
I recently called the two 529 programs available to Michigan residents and I am sorry to say that neither offers a 529A program. Nor does one appear to be in the works. I find this extremely disappointing.
This is a program that Michigan should offer. I’m certain there are a number of grandparents who would like to financially contribute to the long-term care needs. It might be helpful to write your elected officials in Lansing and urge them to do something.
In the meantime, I tip my hat to all the moms, dads and grandparents who, on a daily basis, do the very best they can with a smile under difficult circumstances.
As a financial adviser, I am also keenly aware that having a child with special needs can be a significant strain on a household budget.
At the end of 2014, President Obama signed into law the Achieving a Better Life Experience Act (ABLE). One of the major goals of the ABLE Act was to provide people with special needs an incentive to save.
You would think that families would be thrilled when their special needs adult child got a job. Unfortunately, landing a job could create a drawback. If the special needs person earned too much money they could forfeit their eligibility for government programs.
In other words, to a certain degree it almost forced special needs people to keep their income so low that they were practically living in poverty. The ABLE Act is intended to alleviate this concern.
One of the provisions of the ABLE Act created 529A plans, modeled after 529 College Savings Plans, which I have written about before. A 529A plan is intended to help families with special needs children save for their future without giving up eligibility for public benefits.
As with traditional 529 plans, the 529A must be used for “qualified” expenses. Since special needs last a lifetime, the qualified expenses last over a person’s lifetime on purchases and expenses related to the special needs, including education, employment training, housing and health care.
A big difference between the traditional 529 and the 529A plan is that with the traditional program the account owner, typically a parent or grandparent, can withdraw the money at any time. Of course, they must pay taxes on any gains plus a ten percent penalty. With the 529A plan, the money is truly the special needs person’s money.
With most traditional 529 programs there’s a cumulative cap. It varies from state to state, but it’s generally around $200,000. The new 529A plans simply limit the annual contribution to $15,000 per year and only the first $100,000 is exempt from Supplemental Security Income. Once the account value exceeds $100,000, SSI benefits are no longer received.
With traditional 529 plans, families can purchase the program of virtually any state. For example, if you like the fund manager of say, Ohio, you can purchase it for your loved one. With the 529A plan, it must be your state.
I recently called the two 529 programs available to Michigan residents and I am sorry to say that neither offers a 529A program. Nor does one appear to be in the works. I find this extremely disappointing.
This is a program that Michigan should offer. I’m certain there are a number of grandparents who would like to financially contribute to the long-term care needs. It might be helpful to write your elected officials in Lansing and urge them to do something.
In the meantime, I tip my hat to all the moms, dads and grandparents who, on a daily basis, do the very best they can with a smile under difficult circumstances.
Monday, April 6, 2015
They don’t make pensions like they used to
The nonpartisan, nonprofit Employee Benefit Research Institute recently
revealed that 40 percent of employees have less than $10,000 in their
401(k) retirement accounts. Shortly thereafter, the criticism of these
programs began to pour in. Many of the critics called for the return of
traditional pensions, which would shift the responsibility of retirement
income from the employee to corporate America.
The EBRI data isn’t the only source of statistics that support the notion that too many American workers are not saving enough on their own. I’ve read articles in several business and financial publications that have issued the same warning.
Nonetheless, I don’t believe a return to the traditional pension is in the cards. Nor do I believe such a move would ultimately be a viable alternative.
It’s not that I’m anti-pension; it’s just that times have changed. For example, years ago people often spent their entire career working for just one employer. Not anymore.
Today’s workers are far more mobile than their parents. The way so many people hop from job to job, I believe very few would actually remain anywhere long enough to become vested in an employee-sponsored pension. One of the original ideas behind pensions, after all, was to reward long-term employees.
Those 401(k) critics who called for the return to traditional pensions often failed to mention that many pension plans couldn’t meet their obligations. Did it help when their liabilities were turned over to the Pension Benefit Guaranty Corporation? No, because the PBGC has its own financial issues.
Why did so many pension plans fail? There a number of reasons. Poor investment decisions by the pension fund managers were very likely among them. Another factor was that too many plans over promised. In many negotiated settlements that entailed bargaining, unrealistic results were agreed upon. Extended life expectancies also contributed to the failure of so many pensions.
In other words, although pensions sound nice, you have to keep in mind that they have problems as well. Detroit workers and retirees alike recently saw their pensions reduced. But they could be thankful they don’t live in Chicago, which has a pension liability that’s absolutely staggering. Not to mention several other government pension plans that are approaching the crisis level.
So if both pensions and 401(k) programs have issues, what’s the solution? Well, I don’t think it’s anything that can be legislated. What we need, in my opinion, is education on how to plan for retirement.
I do understand that it’s difficult to think about saving when you’re living paycheck to paycheck. But too many who are beyond that still fail to save. Unfortunately, saving for retirement is something many do only if there’s ever any extra money. Even then, much of that extra money is spent on a “deserved” or an adult toy that costs “just” a couple hundred dollars per month.
In other words, bad choices and impulsive decisions are reasons why some will never have enough money set aside. Saving and investing cannot compete with short-term gratification. That’s why financial education is so critical.
In this world, which I often refer to as YOYO (you’re on your own), parents and educators need to lead by example. They must teach the importance of financial discipline, investing and long-term saving.
The EBRI data isn’t the only source of statistics that support the notion that too many American workers are not saving enough on their own. I’ve read articles in several business and financial publications that have issued the same warning.
Nonetheless, I don’t believe a return to the traditional pension is in the cards. Nor do I believe such a move would ultimately be a viable alternative.
It’s not that I’m anti-pension; it’s just that times have changed. For example, years ago people often spent their entire career working for just one employer. Not anymore.
Today’s workers are far more mobile than their parents. The way so many people hop from job to job, I believe very few would actually remain anywhere long enough to become vested in an employee-sponsored pension. One of the original ideas behind pensions, after all, was to reward long-term employees.
Those 401(k) critics who called for the return to traditional pensions often failed to mention that many pension plans couldn’t meet their obligations. Did it help when their liabilities were turned over to the Pension Benefit Guaranty Corporation? No, because the PBGC has its own financial issues.
Why did so many pension plans fail? There a number of reasons. Poor investment decisions by the pension fund managers were very likely among them. Another factor was that too many plans over promised. In many negotiated settlements that entailed bargaining, unrealistic results were agreed upon. Extended life expectancies also contributed to the failure of so many pensions.
In other words, although pensions sound nice, you have to keep in mind that they have problems as well. Detroit workers and retirees alike recently saw their pensions reduced. But they could be thankful they don’t live in Chicago, which has a pension liability that’s absolutely staggering. Not to mention several other government pension plans that are approaching the crisis level.
So if both pensions and 401(k) programs have issues, what’s the solution? Well, I don’t think it’s anything that can be legislated. What we need, in my opinion, is education on how to plan for retirement.
I do understand that it’s difficult to think about saving when you’re living paycheck to paycheck. But too many who are beyond that still fail to save. Unfortunately, saving for retirement is something many do only if there’s ever any extra money. Even then, much of that extra money is spent on a “deserved” or an adult toy that costs “just” a couple hundred dollars per month.
In other words, bad choices and impulsive decisions are reasons why some will never have enough money set aside. Saving and investing cannot compete with short-term gratification. That’s why financial education is so critical.
In this world, which I often refer to as YOYO (you’re on your own), parents and educators need to lead by example. They must teach the importance of financial discipline, investing and long-term saving.
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