Ric opened the show this week sharing a few simple questions a shockingly high percentage of investors got wrong on a survey by Deloitte Consulting. These were investors, not people off the street. One of the questions was; If you had $100 and received 2% interest after one year how much would you have? One out of three got it wrong. He then mentioned the stock market recent downward volatility, pointing out why one uses asset allocation and never recommends 100% in equities. You should also never try getting in and out of the stock market. If you do get out of the stock market where do you deploy the proceeds? Bank savings after inflation and taxes don’t beat the inflation rate. Ric said those properly allocated are not freaking out over recent activity. If you can’t get through to the show as it airs you are welcome to dial 1-888-752-6742 to get any question you may have answered at no cost or obligation.
Ric offered a way to help get through the holiday shopping season debt free. Make a list of all the people you are going to buy gifts. Don’t write down what you are going to buy next to each name, but how much you can spend on each person. Add up the grand total, if it is beyond your means cut the list until you reach a level you can afford. Be sure to include sales, wrapping items, cards and shipping fees in your budget. When you begin shopping withdraw the amount of your budget and buy Travelers checks. Then go to the store without your credit card.
Caller has a pension and 403(b). The pension is going to be discontinued and she will receive some pension benefits when she retires. The 403(b) is changing administrators and will have a match. Her question was should she transfer the 403(b) to the new plan or leave it where it is? Ric recommends an IRA rollover for the old plan to gain more flexibility. In the new plan participate to the maximum to take advantage of matching free money.
Ric warned folks to avoid a new fad on Wall Street. It is called a “One thirty - thirty fund”. It is a mutual fund and invests all your money plus borrows another 30% to invest. Then it shorts another 30% in stocks. It is also known as a long short fund. Ric shared in the last six months money flows in these types of funds have surged 77%.
FINRA has a new rule taking affect in May on variable annuities. Under this new rule brokers are required to consider things like age, income, financial situation, needs, experience, objectives, intended use of annuity, time horizon, existing assets, liquidity needs, risk tolerance, and taxes. You will also need to be informed of the material features of the annuity such as surrender charges, potential tax penalty, fees and costs and market risk. Brokers must then have a reasonable basis that the investor will benefit from the annuity features and do a suitability determination. Those of you that own annuities today, did the person that sold it cover all these and more prior to your purchase? For more info; http://www.finra.org/PressRoom/NewsReleases/2007NewsReleases/P037404
Ric took a call concerning buying life insurance on strangers as a profit making business. Ric does not endorse the practice. He said it is unethical and expects the life insurance industry will have to put a stop to it or it will cease to exist. Premiums are calculated in such a manor that a certain amount of those taking out coverage will let it drop prior to having to pay out benefits. When insurance is issued for money making reasons that policy will not lapse and eventually the insurance company is going to have to pay a benefit. It looks like a good deal in the short run but if it continues either life insurance will get much more costly or it may not be available period. The negative societal effects are why Ric says to avoid these arrangements.
A caller has over time collected a hodge podge of stocks, funds and sector funds. Ric said this can be dangerous, it can be redundant, and in this case he was 100% in equities. Ric recommends other asset classes like bonds, real estate, commodities, international securities and natural resources. The way to go about this is come up with a plan of what your investments should look like. Start by asking your self when you want to retire and how much money do I need at that time. Then allocate your funds accordingly so you earn the rate of return you need to reach your objective.
Caller has an IRA and the beneficiary is a trust and he will be making required minimum distributions next year. Upon his demise he would like to leave the money to his current and second wife. Upon her demise he would like what is left to go to his children by his first marriage. Ric said these are conflicting goals from a tax perspective. Ric suggested a perhaps a more realistic approach might be to let the current wife have the IRA money and go buy a life insurance policy for his children so they get the benefit tax free. Leaving an IRA to a trust is not a good idea from a tax perspective since it needs to be fully paid out over at most a five year period. This maximizes and accelerates the tax liability.
Ric shared the weekly “Mutual Fund Scandal”. Ric said this one is perhaps the most egregious example of fraud and abuse in the retail mutual fund industry. Some managers have been found to be investing their own money the opposite of the way they invest the money in the funds they manage. They often sell stocks in their own personal brokerage account while buying them in the funds they run. Ric said this could be the ultimate conflict of interest.
Caller asked about the pros and cons of variable life insurance. Ric said that was easy there aren’t any pros. They only people that recommend variable life insurance are the people that want to sell it. Like many insurance products it is not bought rather sold. They do pay very high commissions that is the incentive to sell them.
Caller completely in International stocks because it has been doing so well. He wonders if a recession is coming will it be better in a money market or leave it overseas. Ric does not agree with this philosophy it is a form of market timing. Ric asked the caller’s age, which is 42. The money will be invested at least another 20 years. Ric asked if he thought the stock market will be higher 20 years from now. He thought it would be. If the market is going to be higher in 20 years why worry about if there is going to be a recession next year? Why fuss about short term decisions when you are involved in a long term investment environment? What is the point? With market timing approach you need to right each time you make a move or you will hurt yourself. Taking a long term view you only need to be right once in predicting the market will be higher in twenty years. Investing is not a sprint but a marathon. It doesn’t have to be complex or involve a lot of time, knowledge, or initial amount of money.
Caller attend on of Ric’s seminars and has a degree in finance and learned more in two hours from Ric than four years at university. He is having trouble maxing out his thrift savings plan and Roth IRA. Which one is the higher priority? Ric likes the retirement account at work but thinks there has to be a way to do both. If the need to fund the Roth is $4,000 a year, that equates to under a $100 a week. Look to budgeting and cutting out something. The caller then asked Ric to review his allocation. He is 54 years old and retiring in six years. Ric said to call his office where they can look at it greater detail plus include all his other savings and investments to see if you are truly properly allocated and secondly it is impossible to be properly allocated using only the government thrift savings plan. The five choices are not enough to provide a diversified asset allocation.
Caller is considering converting an IRA to a Roth IRA and for this year his marginal tax rate will be 25%. He would like Ric’s opinion on converting up to just under moving into the 28% bracket. It is hard to write that check to the IRS. It is a complicated decision but in the overwhelming majority of cases Ric says it is not worth it. You often end up prepaying the tax, you aren’t lowering your taxes. For some it makes sense as it allows future IRA distributions to be tax free. It doesn’t interfere with social security taxation, doesn’t reduce deductibility of itemized exceptions, and other things that save taxes down the road. Under current rules it might make more sense to wait until 2010. Keep in mind we will have elections between now and then. This is another example of just how hard it is to do long term planning in an environment where the tax and estate rules are changing almost yearly. Make decisions based on the laws in place today not on future expectation because things do change.
Ric shared a tactic credit card companies are “teaching” financial literacy class on college campuses. In this case they got free food as part of the class and of course filling out an application for a credit card. College students are marketing targets for credit cards. Ric said to talk with your kids about this since today the number one reason kids drop out of school is they can’t afford it. Twenty years ago it was only bad grades. Maybe get their credit report and see if or just how much plastic debt they have. It is even a good idea for your three year old to help guard against identity theft.
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