Sponsored by by Walter Updegrave, Monday, September 29, 2008
Another reason to plan hard for retirement: It might cheer you up right now.
In a sense, retirement planning is all about deferred gratification. You live below your means while you work so you can save for a time when you can live however you want. In short, you give up something today so you can live better tomorrow.
But what if preparing for retirement had a more immediate payoff? Wouldn't it be neat if you could enjoy the fruits of your effort now?
Well, maybe you already do. That, at least, is the implication of a recent survey by insurer Northwestern Mutual and health education company LLuminari. The study didn't address retirement per se.
But as the charts below show, people who do the sorts of things that constitute good planning tend to feel happier than those who don't. It appears that the very act of preparing for retirement may deliver a reward now as well as later.
No one is suggesting that getting ready for your post-career days guarantees lifelong bliss or that there's a formula for achieving nirvana. (Save an extra $100 a month and be 50% more fulfilled!)
But the notion that taking steps toward a secure retirement can make you more content is hardly a stretch. Economists, psychologists and others who study happiness find that people who have a sense of control over their lives cope better with stress and live more happily, while those who feel powerless are more likely to be depressed.
Or as the playwright George Bernard Shaw put it: "To be in hell is to drift; to be in heaven is to steer."
So what can you do to make yourself feel better about feathering your nest? Apply these three happiness-linked actions to your retirement planning:
If you fail to set goals early on, you'll be drifting instead of steering. So think about the percentage of pre-retirement income you'll want to replace once you retire - say, 80% to 90%. Then use a calculator like our Retirement Planner to see how much you must save each year to have a shot at reaching that goal. Keep refining your savings target as you near retirement.
Take Steps to Achieve Your Goals
If the amount you're putting into your 401(k) falls short of your savings target, boost your contribution. If maxing out your 401(k) still leaves a gap, you can funnel additional savings into an IRA or tax-efficient options like index funds or tax-managed funds.
It's unrealistic to avoid borrowing altogether. But you can prevent debt from undermining your retirement security by not carrying a credit-card balance. Not only will you avoid onerous interest charges, but the Northwestern study shows that people who are most committed to paying off their cards are almost 20% more likely to describe themselves as cheerful.
So the next time you're trying to decide between a higher 401(k) contribution and a big-screen TV, you might want to go with the option that may make you feel good now and in the years ahead.
Can one retire comfortably at 55 if one has accumulated 25 years of overestimated expected annual expenses in one retirement fund; and taking inflation rate at 3%, and passive income coming from investment in 15-20 stocks of dividend yield of 7%. The spreadsheet has indicated it is possible. I believe as one grow older, it is likely to spend less on some areas but offset by higher spending in healthcare and medical.
One also must have some medical insurance, full medisave and special CPF account remain intact at 55 as contingency plan, and the final fallback will be selling of the residential home and staying in old age home or rental flat.
Last week, we discussed how retiring young and rich can be an attainable goal if one plans early and invests wisely. Today, we run a personal letter from RONALD HEE, who shows it is possible to become financially free as a hardworking salaryman, without needing to rob a bank or be a corporate high-flier
To the graduating class of 2008:
YOU are entering a world of amazing possibilities - possibilities that people of my generation barely believed would be possible. The world is, quite literally, your oyster. You also enter a world fraught with challenges and dangers, and ever rising costs of everything.
In our day, the options were limited, but inflation remained low most of the time, and there was job security. I still have friends who are in the same company since they graduated 20 years ago. For you today, inflation is roughly twice the interest the banks are giving you. You will probably change jobs every two to three years. And you can be fired from any of them at any time. Or, any company you work for could downsize or close down just when you least expect it.
So, for middle-class working Joes like us, does it mean that just to survive, we will be chained to our desks until the day we die - if we're lucky and not get replaced or downsized? Is financial freedom at the tender age of 44 - for you, 20 years of earning - an impossible dream? It really boils down to one simple formula. Earn more than you spend; invest what you save.
The first thing, of course, is to find a good job. There will be many, here and around the world. But don't rely on your company or your boss to take care of you. You have to take care of yourself, regardless of the profession you choose. Assuming you are not in the lucky handful who will inherit a fortune or get a job that pays you in the six figures, or win the lottery, the career you choose is what makes your path to financial freedom possible. But you have to plan that path.
Let's first look at the cost side of the equation. Buy what you need and some of what you want and know the difference. Do you really need a 200-inch high-definition plasma TV, complete with state-of-the-art home theatre system? And how many hours per day are you going to enjoy that system? Instead of spending tens of thousands on something you will use for a few hours a week, consider instead how that money could work for you.
One thing that surprises me about the younger generation is your propensity to spend on credit. Why buy things you don't need, with money you don't have? To impress people you don't like? Here's a crazy idea: Have the bank pay you interest for your money, rather than you pay the bank interest for their money. Twenty-four per cent interest? That's approaching loan shark rates.
Always, always, pay your credit card bills in full. Can't afford to pay? Simple solution. Spend less. Be low maintenance.
At some point, you'd probably want to buy a car. With an excellent MRT and bus system, and taxis when you need them, is it worth getting a car? Unless you have a real need - you're a salesman, you have a family to ferry around, your child is sick all the time, your mum is old, your girlfriend will leave you otherwise - the reality is that a car is simply not worth it. Over 10 years, a $50,000 car will cost you about $130,000, once you factor in petrol, road tax, repairs, car payments and interest on the payments, parking tickets, a few minor accidents... Again, it's better for that money to work for you.
Like most people, your biggest purchase will probably be a home. For most of us, our first home will be a government flat. Whether you buy public or private, consider buying something that you can continue to pay for, for at least six months, should you be suddenly out of work. If you don't mind the loss of privacy, consider renting out any spare rooms. It's not impossible for your rental income to match your mortgage payments.
Now let's look at the income side. Your basic fallback is your CPF account. Let's assume that by age 44, you've worked 20 years. Assuming an average of $1,000 a month, you will accumulate $240,000, not including interest. Invest it if you wish, but the main use of CPF should be to pay for your home, so your cash outlay is minimised. In 20 years, with $240,000, you could quite easily pay off your flat. With your spouse also chipping in 50 per cent for the flat, you should have more than enough.
If you've managed your expenses right, it's quite possible to save an average of $1,000 a month. This, of course, gets easier as you grow older and earn more. Put some away into a savings account as your rainy day fund, eventually building up enough to keep you going for six months or more. Put the rest in the hands of a good financial planner. This is someone who should be able to give you an average return of at least 10 per cent a year. The miracle of compound interest will yield you $756,030 at the end of 20 years, more than three times what you put in!
It's now 2028. Twenty years have passed and it's your 44th birthday. You are into your second or third home by now, or maybe even have a spare house, each time either breaking even or making a small profit. You have a healthy CPF balance that covers basic needs. You've taken care of some health risks by buying insurance policies when you were young and they were cheap. And your investment portfolio is chugging along very nicely, yielding around $70,000 a year, without depleting your capital, so it's sustainable for the long-term. $70,000 a year is equal to a tax-free monthly 'salary' of $5,800. Not too bad.
CPF + savings + especially your investments = financial freedom. Work part time. Start your own business. Do something else that pays a lot less but fulfils you more, such as church or charity work. Become a beach bum in Bali. Or travel round the world for six months. Financial freedom means the freedom to make these kinds of choices.
So, my young friends, my wish for you as you embark on the next stage of your life is that you will plan from the beginning to be financially free. May you have the discipline and luck to accomplish it!
Ronald Hee, 44, is a freelance writer, and just a little shy of financial freedom
The market is made of buyers and sellers, and they have two different views from each other.
Two reasons to buy:
1) Right value, under value, or growth. The buyer is expecting the price to go up in the near, short or long term future, and depending whether you are traders or investors and also you are less worry that its price will crash.
2) Short covering
Fours reasons to sell:
1) Profit taking (no single reason why people take profits, it is just too complicated)
2) Cut losses
3) Forced selling (really painful, but ones have no choices under such circumstances)
4) Short selling
From the force of buyers and sellers, we know why market fall rapidly and climb slowly. There are potentially more sellers.
Then, why especially those hardcore value investors find it so hard to sell. Their common excuse is always: it is hard to time the market.
To accumulate wealth over time, we have to learn to sell and make profits. It does not matter who you are? Traders, investors, property owner, stall owners, business owner. It is selling that counts. Selling at profit, and take regular nett profit, sometime, we have to take losses to swap out really bad investment to a better ones. Without regular nett profit taking, we will not be able to witness the magic of compounding your gain. It is the magic of compounding that enable ones to reach your final goal of investing - your day of financial indpendence or freedom.
Why it is easier to buy than sell? Probably, buying is part of our nature. We buy, buy, buy as we consume. We always find reasons to justify to buy. Few of us are in the business of active selling so it is not in our nature to sell. Many of us are in the business of indirect selling of our time, energy, and talent.
So we can always justify our decision to buy a stock based on whatever methods we use. But, when it comes to selling a stock, it has become difficult. Why? Probably, it is not in our nature to sell. Selling a stock means we has made a conclusion to our easier buying decision. We want to avoid the seller remorse. Maybe we worry it can go up after selling, because it is difficult to time the market, the seller remorse will come to haunt us when it continue to climb higher, and higher.
When we buy, and hold, there is always hope, and it is this hope that keep us going. When we sell it, we terminate this hope and force us to look squarely at our easier buying decision. It can be really bad decision to sell and now we have lost the hope of making a fortune. Beat our heart and knock our head.
I think learning to sell and willing to give up hope is equally important to learning to buy and holding on to hope.
Selling can be as easy as buying. There will be chance to buy back and not necessary, we must buy at the last purchase price, but it can be higher too.
Source: forgotten who is the author? Probably, I typed it out from a Trading Mazagine.
Protecting your capital, growing your capital and finding the best return. Where and how to start are common questions. Some people examine their current job with its heavy time demands and decide that the life of a share trader sounds easy in comparison. We look at some common questions about becoming a full time share trader.
Perhaps this is the wrong question. Like any skilled profession, full time share traders are relatively rare and they tend to work for institutions. Full time private traders are rarer still. It is a skilled profession, but unlike many professions, it also offers a part time component. The skill can be applied to a single trade, or to multiple trades.
Many people use trading as a part time occupation that delivers a full time income. I believe this is a useful approach. When I started trading I was working full time on a contract position. I was on call 24 hours a day, seven days a week, with formal office hours from 7am to 6 pm.
Time was at a premium, and I knew that I would prefer to work at a job that was not quite so time demanding. The shift from earning money to making money earn for you is important. Unless you accept that the objective is to make your money work for you, then your approach to the market is most likely to be a gamblers approach, looking for quick money. The trader develops a different view of the world, and the relationship between capital and income.
The typical example of this difference is between those who want to immediately develop a replacement income for their wages, and those who want to use trading to supplement their income. The latter group focus on the most effective use of capital. They are not after a big hit – the gamblers approach. They look for the best return on their capital rather than focus on the size of the dollar return.
When I first started, trading provided a very useful supplement to my income generated from my savings. Bank interest may have delivered an extra $2,000 a year. Active management of market investments may have delivered $10,000 a year, or more. Trading was clearly the best use I could make of my savings capital.
The chart shows some sample returns. The simple trading returns are those achieved by students in my recent 8 week trading course in Darwin. They made their selections in lesson 1 at a time when they knew little about trading the financial markets. We applied a simple trend trading strategy. It was their management of the trades, on a weekly basis, that delivered the results. It was an effective use of their capital.
Pursuing a part time occupation is not the same as turning it into a full time occupation. An extra $10,00 a year on top of my wages was a welcome bonus. It came from just a few hours a week, squeezed in between other job commitments. If I did not around to opening a new trade because I was too busy, it did not have a significant impact on my standard of living. If a trade took longer to develop than I expected then the lack of cash flow did not disrupt my weekly grocery shopping.
As a part time trader, I did not have to rely on the income generated from trading.Full time trading is an entirely different beast. There is no regular income from wages. Suddenly the pressure increases because many people feel the need to see a regular weekly income from their activity. They do not like dipping into their savings to meet the weekly food bills.
They believe they have to make a certain amount each week to at least match their old wage income. The tendency to gamble becomes much stronger as some trades are closed early simply to generate cash flow.
This pressure is even greater if you do not already have a substantial level of savings which you can draw on for living expenses when necessary.
In my case, when my three year contract finished I was making enough from part time trading to not have to worry about looking for traditional work.I took on full time trading only after I was able to prove that I could already make a living from it. You become a full time trader by graduating from a part time trader when your trading income is equal to or greater than your current wage income. In this situation you will have already accumulated sufficient savings to make full time trading, with its irregular income flow, a real possibility of success.
But you do not need to become a full time trader to enjoy the benefits available from trading the market. Most people are able to very successfully use part time trading to provide an excellent supplement to their existing income. This may reduce the pressure to take on overtime, or make longer unpaid holidays are realistic option, or even hasten the drift towards part time work. These possibilities are all achievable when wage income is supplemented by part time trading income.
This approach is the most appropriate for most people, and for most readers of this newsletter. It is also a vital first step for those who aspire to full time trading.
Trading success is possible, but it is not for everyone. Treat it as a serious part time occupation first, and then make the transition based on success.
STI is becoming like London Bridge. London bridge is falling down, London bridge is falling down.
Why? Worry selling? Similar to people rushing to AIA office to quickly terminate their policies so they can sleep at night without further nightmare.
Summoning the Courage to Continue Investing by James B. Stewart Wednesday, September 24, 2008
As president, Franklin Roosevelt confronted far more dire circumstances than anything we've experienced in my lifetime, let alone last week, and yet he never succumbed to panic, desperation, greed or, most famously, fear.
In 1932, in the depths of the Depression, Roosevelt gave the commencement address at Oglethorpe University in Atlanta: "The country demands bold, persistent experimentation. It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something."
The proximate cause of last week's crisis in the financial markets, which evidently brought us to the brink of economic catastrophe, was paralysis: the refusal of banks to lend virtually anything, even overnight loans to their fellow bankers; the immediate demands for repayment of collateral and the refusal of investors to trust counterparties; the aversion to all forms of risk, real or perceived.
As paralysis seemed to grip our major financial institutions, I felt some of this myself. One day last week I returned to my desk to find Morgan Stanley (MS) trading at $18 as rumors swirled that it would be forced into a merger by week's end. Goldman Sachs (GS) (whose shares I own) had plunged to $100 as speculation mounted that it, too, couldn't survive as an independent institution. Had anyone told me even a week ago that two of the most venerable and respected names not just on Wall Street but throughout the world stood on the brink of extinction I would have said he or she was delusional.
I told a colleague that this was irrational; Goldman had just reported healthy earnings even under dire circumstances and was worth far more than $100 a share. At the same time, I said I couldn't bring myself to buy. "Who am I, one small investor, to stand before this tsunami?" I felt helpless in the face of forces far greater than myself.
Details of the Bush administration’s bold and costly plan to break this market psychology by providing up to $700 billion to buy the mountains of mortgage-backed debt and other toxic securities which are crushing the balance sheets of financial institutions remain unclear, perhaps by design. Congress can and should debate issues like excessive executive compensation and foreclosure relief, but these are not the issues that have caused today’s crisis. The government needs a bold, simple plan that offers maximum flexibility and jolts the financial heart into beating again.
So I am not going to dwell on the uncertainties and details, important though they are. There have been times in history when we as individuals have been summoned to a higher purpose than partisan ideology or what may seem to be our immediate self interest. This is one of those times.
In times of financial crisis, collective action can achieve what would be unacceptably hazardous for any one individual, J.P. Morgan's 1907 summoning of the country's major bankers to share information on the ongoing financial crisis being one famous example. Deploying principles of Keynesian economics for the first time, Roosevelt borrowed against the future productivity (and tax payments) of American workers to intervene massively in markets and the economy. This past week, we, as taxpayers, have again been asked to stand together in the face of crisis, to the tune of $2,000 for every man, woman and child in the country, the New York Times reported.
Put that way, $700 billion strikes me as a not unreasonable price to pay for the stability of the financial system on which our entire economy and collective well-being rest. I happened to speak late last week with high-ranking executives from three major industrial companies, Eli Lilly (LLY), Cummins (CMI), and General Mills (GIS). All said that thus far, the turmoil on Wall Street has not impaired their ability to finance their operations. At the same time they left little doubt that left unchecked, the contagion could have dire consequences for the broad economy, as opposed to the financial sector where thus far it has been contained.
The administration's proposal has not been accompanied by much high-minded rhetoric aimed at the American people. That is unfortunate. The plan, no matter how expensive or sweeping, will fail if all of us continue to be gripped by fear and risk aversion. Even if you managed to shift all your assets into gold and short-term Treasurys, it would surely be small consolation if nearly everyone else lost their life savings in collapsed money-market funds and bank failures and we faced another depression. It is time for all of us to summon the courage to invest calmly and rationally and in doing so demonstrate our confidence in the potential of the global economy and in our fellow man.
What, in practice, does this mean?
It means continuing to accept and even embrace a prudent degree of risk. No investment is entirely risk-free and the mindless quest for safety is damaging not only to your likely returns but the system as a whole.
It means to continue following a disciplined approach to asset allocation and investments such as the one I have long advocated in this column. Despite last week's wild swings, the market did not reach one of my buying thresholds, which is to buy on 10% dips. Had it done so, (2025 on the Nasdaq) I can assure you I would be buying.
It means to continue rebalancing your portfolio, taking profits when positions become overweighted, and adding to those that have fallen below your targets. I expect to continue my gradual additions of financial stocks in the belief that we will weather this crisis.
It means considering investment alternatives. I found myself this weekend looking at real estate listings. During the real estate crisis of the eary 1990s, I bought a Manhattan apartment which I rented to a sushi chef from Japan. People thought I was crazy. Not only did I eventually sell it at a handsome profit, but I received a Christmas card every year thanking me for the privilege of being my tenant. Based on my perusal this weekend, in some parts of the country we have reached the kind of opportunity to buy real estate that only comes along once a decade, if then.
I wish I had bought Goldman Sachs at $100 a share, not because with benefit of hindsight I know it is trading higher, but because my small action, magnified many times by countless other investors willing to act with the courage of their convictions, will withstand the force of a tsunami.
The Board of Directors of FerroChina Limited (the “Company” or “Group”) is pleased to announce that Changshu Xingyu Advanced Building Material Co., Ltd (“Xingyu”) has completed the installation of its recrystallation annealing production line and tension levelling line. With these equipments, the Group will be able to sell additional product range, capture higher value add product value chain and improve the overall profitability going forward. The output of these equipments will be used as feedstock for other subsidiaries of the Group until the cold reversing mill of Xingyu is ready.
Further to the Announcement on 25 April 2008 and 20 August 2008 regarding the appointment of Merrill Lynch as our financial advisor to assist with a review of potential strategic alternatives, the Company wishes to update that the Company has identified a potential investor, which has signed a Confidentiality and Non-Disclosure Agreement with the Company and is currently carrying out its due diligence investigations on the Company and its subsidiaries.
The Company and potential investor had entered into several discussions and negotiations on the terms of investment, following which a draft Term Sheet has been drawn up for the parties’ review.
However, the parties have to date not signed nor concluded any Term Sheet or Memorandum of Understanding. Hence, the proposed investment by the potential investor is still under negotiations pending the latter’s completion of its due diligence investigations.
Meanwhile, Shareholders are advised to exercise caution in trading their shares. There is no certainty or assurance as at the date of this Announcement that the proposed investment by the potential investor will be concluded. The Company will release further announcement to update Shareholders should there be further development regarding the proposed investment by the potential investor
Set trailing stop at 2.24 (breakeven and preserve capital)and watch resistance levels
True or false?
Rajesh Joshi, New York - Friday 19 September 2008 IN THE face of a global financial market meltdown, a battery of shipping executives suggested in New York last week that their industry — and their companies’ shares — are a safe haven against the fickle glamour of Wall Street.
Positve or negative?
Berlin and NOL hold talks over Hapag takeover Katrin Berkenkopf and Herbert Fromme, Cologne - Friday 19 September 2008
Ron Widdows THE German government has held its first meeting with Singapore carrier NOL, which is seeking to take over Hapag-Lloyd against strong opposition from unions and politicians.
Be strong and stay diversified. That's the best way to weather the current economic storm, says RON LIEBER
IT'S pretty hard to stick with a long-term plan for your money when the financial world seems to be unravelling around you.
Don't lose your head: Resist the temptation to climb under the covers, money safely in the mattress, and hide from a world that has surely changed forever
You were probably already uneasy about home prices, job stability and inflation. Then the government took over Fannie Mae and Freddie Mac, the stock of Washington Mutual fell below US$3 amid concerns about its own shaky standing, and Lehman Brothers went under - and that's just within a couple of weeks.
The temptation is to climb under the covers, money safely in the mattress, and hide from a world that has surely changed forever. 'The big question that people ask during these things: 'Is it different this time?' ' says J Mark Joseph of Sentinel Wealth Management in Reston, Virginia.
And is it? Well, no, not really. And as with any market disruption, you need to start by staring down the volatility and putting it in context. Then, face up to whatever fears led you to stop investing money or to move everything into safer vehicles - or to seriously ponder those alternatives. Finally, resolve to be brave (and well diversified).
Let's take these steps point by point:
'Market corrections are just a foreshadowing of what death is going to feel like. We're all trying to avoid death. That's what we're wired to do as human beings.'
- Brent Kessel,
president of Abacus Wealth Partners
'Our skills aren't really that transferable to the challenges involved.'
- Milo M Benningfield of Benningfield Financial Advisors
Stare down the volatility
It's perfectly understandable if you feel as if you have whiplash right about now. Any single company or industry is increasingly susceptible to the forces of global competition, the rapid flow of information and the variety of ways in which sophisticated investors can place big bets.
On a macro level, too, the markets feel unstable, flying up one day with relief over the Fannie and Freddie rescue and then plummeting the next over broader concerns about the health of financial firms.
By certain measures, however, the stock market isn't bouncing around as much as it has at other times. So far this year, the Standard & Poor's 500-stock index has risen or fallen more than one per cent in a single day 42 per cent of the time. That's just the 11th-highest figure since 1928.
Or check the 'investor fear gauge', otherwise known as the VIX, shorthand for the Chicago Board Options Exchange's Volatility Index. It measures market expectations of near-term volatility as expressed through the prices that people pay for options on the S&P 500 index. At many points from 1997 to 2002, the VIX reached higher levels than where it is sitting now.
That said, for the last year, the VIX has hovered at levels higher than any point in the previous four years, and it has hit those levels for reasons that give everyday investors pause about the markets. Milo M Benningfield, of Benningfield Financial Advisors in San Francisco, rattled off a number of them last week, including increased hedge fund activity; lack of guidance on corporate earnings, leading to surprises and stock gyrations each quarter; and opaque company balance sheets, which the companies themselves seem to revalue every few months.
Your natural inclination is probably to sell everything and invest in certificates of deposit or throw the proceeds in a money market fund. In fact, evolution insists on these feelings. 'We had survival mechanisms built in to avoid sitting around debating whether we should run away from the sabre-toothed tiger,' Mr Benningfield said. 'That's the fundamental problem with long-term investing. Our skills aren't really that transferable to the challenges involved.'
These skills can be learned, however, and Brent Kessel, the president of Abacus Wealth Partners, thinks yoga offers some crucial lessons. Mr Kessel, a money manager and financial planner in Los Angeles who is a long-time yogi himself, noted that most people try to get rid of their fear of the markets through some kind of external action, like selling.
'This is where yoga comes in,' he said. 'It's the practice of breathing through discomfort. You intentionally put your body in postures that are right at the edge of discomfort and then cultivate the ability to stay there. You tend to find it passes if you give it time, but instead we rush to the Internet to trade on our portfolios.'
A more constructive move at this particular moment might be to redirect your worry towards other areas of risk in your life. Mr Kessel said that if he were an estate-planning lawyer, he'd be calling clients right now to get them to address any half-finished paperwork.
'Market corrections are just a foreshadowing of what death is going to feel like,' he said. 'We're all trying to avoid death. That's what we're wired to do as human beings.'
Investing in the middle of market gyrations isn't just a question of controlling the urge to sell indiscriminately. It's also about taking a close look at the contents of your portfolio and then forcing yourself to fix an asset allocation that is out of whack and to buy in sectors of the markets that are out of favour.
At this moment, familiar names in your portfolio may make you feel comfortable. Perhaps it's a concentrated stockholding in your employer, whose business you know quite well. Or maybe you have some securities from a parent or grandparent, and you feel an almost familial obligation to collect the dividend and preserve the inheritance. Or you live in Cincinnati and are certain that Procter & Gamble can survive any calamity.
Yes, Fannie and Freddie and Lehman and WaMu can go to zero or close to it, but not your holding. 'It happened to them, but it's not going to happen to us,' is the argument that F John Deyeso of Financial Filosophy, a financial planning firm in New York City, hears frequently.
Maybe not. But consider how concentrated your risk is in other aspects of your life. Most of, if not all of, your income is from a single employer. If your spouse works for another one, then perhaps you're a bit more diversified, but not much. Your home, if you own one, may well be your largest asset. But it's a single property in a particular region. Your portfolio is the only place where it's even possible to diversify much.
Still tempted to cut off your 401(k) contributions, or funnel them all into cash? Well, how will you know when it's time to get back into stocks? Chances are, by the time you're comfortable with the markets you will have missed a good chunk of the rebound.
Better, then, to keep investing in a mix of stock and bond funds, international and domestic, large and small, with some alternative asset classes thrown in for good measure, which are appropriate for your goals and risk tolerance. Through index funds and various similar investments, Mr Kessel of Abacus Wealth Partners has his clients in more than 11,000 stocks around the world at any given moment.
Though no financial planners wish losses on anyone, plenty of them appreciate the way market calamities reinforce some fundamental truths. 'I think these things are great,' said Mr Joseph of Sentinel Wealth Management. 'It helps people get back to, as boring as it is, the fact that diversification works. And you never end up getting killed in something like this.' - NYT
Sponsored by by Interview by Eric Schurenberg Tuesday, September 16, 2008 provided by
The classic vision of retirement planning goes something like this: You start broke. You invest as best you can, and if nothing goes too terribly wrong, you finish with enough money to support yourself.
Retirement expert Moshe A. Milevsky, an associate professor at York University's business school in Toronto, sees it a bit differently. In his view, you start with all the wealth you need in the form of your lifetime earning power. Your job is to convert that personal asset as efficiently as possible into financial assets you can live off once your earning power runs out.
As for things going terribly wrong: Well, odds are that at some point in your life they will. So the key to retirement success, he says, is to identify and ensure against the risks that could knock you off track.
Milevsky's own life offers a prime lesson in how a chance event can derail the best-laid plans. He was studying graduate-level math and physics at Toronto's York University - envisioning a career "smashing atoms together," as he puts it - when his father died of cancer at age 50. The oldest of five children, Milevsky was forced to become a quick expert on his family's money.
The experience shifted his focus from academic physics to the practical math of personal finance and risk management. That unusual angle has defined his career and inspired the Individual Finance and Insurance Decisions Centre, the think tank that he founded eight years ago.
It's also the subject of the latest of his five books, "Are You a Stock or a Bond?", which lays out his views on retirement planning. In late August he spoke with managing editor Eric Schurenberg.
Q. Most advisers say the way to handle risk in retirement planning is to start out investing aggressively, with a lot of stocks in your portfolio, then gradually shift into safer assets like bonds as you get older. What's wrong with that?
A. It's an oversimplification. How long you have until retirement is one thing to consider when deciding how much risk to take. But there are many other variables.
Q. Like what?
A. The key is what economists call your human capital. Early in life, you tend to have very few financial assets - investments you can sell for money - but you do have a lot of time in the labor force in front of you, and that is your most valuable asset. As your career goes on, you earn a salary and devote some of it to acquiring investments. So the goal of investment management during your working life is to efficiently convert your human capital into financial capital.
Q. What does that mean other than saving adequately and investing wisely?
A. You also need to look at the risk inherent in your human capital: How stable is your job, how dependent is it on financial markets, how related is it to the economy as a whole? If you have a stable income that doesn't rise or fall with the stock market, you should have more money in stocks than the usual investment model for someone your age says you should. Otherwise - if, say, you work in the securities industry, where your income is likely to hinge a lot on the stock market - you need to invest more heavily than you might think in safe and secure bonds.
Q. Most advisers would say you also have to consider whether you have the nerve to handle a higher or lower level of risk.
A. I think advisers tend to take the mental aspect a little too far. People's risk tolerance changes every day. Yesterday the market is up: People are risk tolerant. Today the market plummets: They're no longer risk tolerant. You should build your retirement portfolios on something more stable than just your mood this morning.
Q. Have you designed your own portfolio built around your human capital?
A. Absolutely. As a tenured professor, with a very predictable income stream, I view my human capital as a bond. So to diversify, I have all my portfolio in stocks. In fact I've borrowed to invest more in stocks, so I'm actually 150% in equities.
Q. Must have been a tough year for you.
A. Yeah, the last few months have not been pretty. To take the sting out of the losses on my brokerage statement, every month or so I open a spreadsheet and recalculate all my capital, human and financial. As I said, my human capital is essentially a bond, so it has been rising in value as interest rates go down. That makes me feel better.
Q. That exercise would be less comforting, I'd imagine, to people who are close to retirement and have used up most of their human capital.
A. True. In the years right before and right after retirement, your financial security is very sensitive to market fluctuations and other risks that were not such an issue before. You need to change your mind-set from wealth accumulation to risk management.
Q. What are the risks?
A. I've run thousands of simulations of hypothetical retirements and ranked what can go wrong. Far and away the biggest causes of failure are longevity risk, inflation and a sour market early in retirement.
Q. Take us through them.
A. Longevity risk - the chance that you'll live too long for your savings - is particularly hard to plan around. Your retirement can literally last anywhere from 10 to 40 years. That wasn't a problem when you could count on a traditional "check a month for life" pension. But odds are, your employer doesn't offer one anymore.
Inflation is something you don't need to worry about in early or mid-career, when most of your wealth is in the form of human capital. That's because wages tend to keep up with inflation. But once you retire and your wealth has been transformed into financial capital, you are completely exposed to inflation risk. Over a 25-year retirement - typical for a married couple - inflation at 4% will cut the value of a $1,000 pension check to just $375.
The third big risk is a bear market. Over a few decades, you'll always have a few down markets, of course. When you're working, it doesn't matter whether the down markets occur early in your life or later. As long as you buy and hold, you'll end up with the same amount of money.
But once you retire, it matters a lot when the bear markets hit. If one occurs early in your retirement, your money won't last nearly as long as if it occurs a few years later. That's because if you start making withdrawals on top of market losses, it's hard to ever make up the lost ground.
Q. How do you hedge those risks?
A. No one kind of investment works against all three. So you need to diversify among investment products, just as you need to diversify among stocks and bonds and so on. This matters more than most people think.
Q. What investment products are we talking about?
A. One category is pensions or annuities, typically a fixed monthly check that an insurance company or pension fund guarantees to keep sending you as long as you live. That's a great solution to longevity risk.
But it's not much help against inflation, which will erode the value of any fixed payment over time. So you also need the traditional mutual fund portfolio that you manage and from which you withdraw funds over an extended period. You can choose high-returning assets like stock funds, which you'd expect to stay ahead of inflation over time.
On the other hand, those are exactly the assets that leave you vulnerable to a market downturn early in your retirement. That's where the third category comes in: the new generation of variable annuities with living benefits. They essentially promise you some upside linked to the stock market but at the same time guarantee you a minimum income for the rest of your life, regardless of when a bear market lands during your retirement.
Q. Your own research years ago showed variable annuities to be way overpriced for the benefits they provided. What changed your mind?
A. If today's variable annuities looked like the product of the same name 10 years ago, I'd still be opposed to them. They used to promise to make up losses only if you died while the market was down.
But the new ones deliver benefits you can claim while you're still alive. And the protection they provide against market losses would be very expensive if you tried to buy it some other way - say, in the options market.
So I used to be something of a crusader against variable annuities, but now I fall back on what the economist John Maynard Keynes said when someone challenged him for supposedly flip-flopping. "When the facts change," he said, "I change my mind. What do you do, sir?"
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