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Investment Risks

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Types of Investment Risks

 

Allow Time for Markets

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part 1 Understanding Markets

 

Category : What does victory love?

General and President, Dwight Eisenhower, said that “Victory loves preparation”. The amount of preparation the General did for the D-Day invasion of Normandy in 1944 was overwhelming; but so was the victory. How many times do we skip over preparation and feel we can do it best “on-the-fly”. One of the biggest lies we start telling ourselves is that “I work better under pressure”. This is usually told to ourselves and others when we have waited til the last minute to prepare. I know I am guilty of telling this lie and yet I know I’ve always had my best results (victories) when I took the time for preparation. In school, when I began a term project early or started writing a paper days before it was due I would have my best grades. In business, when I prepare a presentation a couple of days or more before it is due I realize the best results.

This is the guiding principle behind financial planning. Making a plan for paying off debt, retirement, paying for a child’s college, or building a multimillion dollar company is good preparation. Even though plans do not come out exactly as projected they always do better than no plan at all. Failure is always an unlikely possibility with a plan, but failure becomes a high probability without a plan.

When Eisenhower was preparing for the D-Day invasion, he and his staff tried to considered all of the possible variables which might happen, many they could not control. However, a good deal of time was spent on what parts of the invasion they could control. They knew for instance that they could have air superiority. They knew that they could control ridding the English Channel of enemy ships. They knew they could control how many troops they had.

The same with financial planning. While there are many variables which cannot be controlled such as inflation, taxes, growth rates, and markets. All of which must be accounted for in a plan. There are variables which can be identified as controllable such as how much to save, where to invest, the amount of savings increase, and spending. If proper control is exercised for the things that we are able to control; the effects of the items we cannot directly influence are lessoned.

Having a certified financial planner professional™ prepare a plan and identify the items which are and are not in your control will be what your victory will love.

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Category : Market Share

The U.S. finance industry comprised only 10% of total non-farm business profits in 1947, but it grew to 50% by 2010. Over the same period, finance industry income as a proportion of GDP rose from 2.5% to 7.5%, and the finance industry's proportion of all corporate income rose from 10% to 20%.

The mean earnings per employee hour in finance relative to all other sectors has closely mirrored the share of total U.S. income earned by the top 1% income earners since 1930. The mean salary in New York City's finance industry rose from $80,000 in 1981 to $360,000 in 2011, while average New York City salaries rose from $40,000 to $70,000. In 1988, there were about 12,500 U.S. banks with less than $300 million in deposits, and about 900 with more deposits, but by 2012, there were only 4,200 banks with less than $300 million in deposits in the U.S., and over 1,801 with more.

The financial services industry constitutes the largest group of companies in the world in terms of earnings and equity market capitalization. However it is not the largest category in terms of revenue or number of employees.

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Category : The Magic Numbers are 66 & 67

Full retirement Age (FRA) under Social Security rules is age 66 if you were born before 1960 and age 67 if born in 1960 or after.  In order to have the most options to maximize Social Security benefits a worker should not start taking Social Security benefits until after these birthdays.  Taking early retirement benefits beginning at age 62 brings on a lifetime of reduced benefits, the loss of “file and suspend” options for spouses and a reduction in spousal benefits.

 

To be sure Social Security has a lot of rules and some of those can be traps.  To avoid the “traps” a person should sit down with a Certified Financial Planner Practitioner™ and discuss all of the options.  There are very significant increases for not starting Social Security retirement benefits until after FRA.  Benefits increase each year past FRA up to age 70.  With increases in medical technology we all are living longer and are more active than the generations before us.  More and more people are just as, if not more, productive in their 60’s then the previous generation was in their 50’s.  Working till age 70 and starting Social Security benefits then is not a bad plan.

Exceptions to the strategy of waiting til FRA is poor health.  When significant health conditions arise that will reduce life expectancy taking early benefits before FRA may make sense.  This is the job of the financial planner to compare and analyse the different cash flows.

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Category : Never Pass Up Free Money

401(k) plans are the most popular retirement benefits provided to employees by employers today. I am amazed at the number of people who have access to a 401(k) plan at their work and still do not participate. Why pass up free money?

 

When it gets down to retirement in America there are only three sources for retirement income for most people. 1). Social Security Benefits; 2). Retirement plans from work like 401(k) plans; and 3). Personal savings. There is very little a worker can to do about Social Security, but all of the second and third sources of retirement money is solely based upon the worker’s choice.

 

Most 401(k) plans or other similar retirement plans offer an employer match. This is the free money. If the employee will make contributions (deducted from his/her paycheck) the employee will add to their account some additional money. How much additional is a choice of the employer. If the match is as low as 10 cents on every dollar that is still an automatic 10% return on the worker’s savings. Most plans offer a dollar for dollar match which is a 100% return! Whether the match is a nickel or a dollar it is all fee money to the employee. All plans have a limit as to how much contribution will be matched. The match will be up to a percentage of the employee’s annual salary that they contribute.

 

An Example:

   Cindy’s company will match $1 for every $1 that Cindy contributes up to 5% of her total compensation.

   Cindy’s salary is $50,000 annually or $2,083.33 twice a month.

   So if Cindy contributes 5% of her paycheck ($2083.33 X 5% = $104.17) which is $104.17 per paycheck the company will match with another $104.17. Thus in one year (24 paychecks) Cindy will have contributed $2,500.08 and the company would contribute $2,500.08 in matches. That is a 100% return on her money without any investment returns!

 

However, in the example above it Cindy were to contribute 6% or more she will not receive a match on the amount over 5%. The IRS allows a worker to contribute up to $18,000 per year. ($24,000 if over age 50). The problem is there is not any free money with the higher contributions. In the book, Tax-Free Retirement by Patrick Kelly (2007),

Mr. Kelly prioritizes retirement savings to be:

   1. Free Money

   2. Tax-Advantage savings (Roth IRA’s, Investment-grade life insurance, Municipal Bonds, Annuities)

   3. After-Tax savings. (Wealth Management accounts)

 

The first priority is to get the free money from the employer match. If you have access to any retirement plan with a company match be sure you take full advantage of it. As always talk with a Certified Financial Planning Practitioner ™ early in your career to keep you on a sound path.

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Three Simple Financial Maxims

Spend a little, Save a little, and Give a little.

Spend a little – live within your means. My old boss, Jack Norris, use to say “It is not the high cost of living that is a problem but the cost of living high”. Track where you spend your money. There are several programs available out there for free to help track your expenses. Part of a comprehensive financial plan is developing a household budget. Contact us for help and advice.

Save a little – pay yourself first is the best way to accomplish long-term savings. Have a systematic way of saving either through a payroll deduction or an automatic sweep from your bank account. Just saving $1 or two for every 10 dollars you make will change your life. Again, contact us and we will help you set up a long-term savings program.

Give a little – to those you love or the causes you love. When you give others your time, talents, and treasure you feel better. Make giving automatic just as you would savings. Most churches and charitable organizations will set up automatic giving through your bank account or charge cards. Strategies for giving can be an important part of retirement planning and estate planning. Talk to us about how this might be of benefit to you and your favorite organization.

Spend a little, Save a little, and Give a little..

Wes Shannon, CFP®

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