Conservative Investing Doesn’t Always Equal “Safe”

The well-documented tendency of women to invest more conservatively than men often serves them well. Conservative investments by definition carry less risk, and their generally more stable nature may prove attractive, especially when markets are as volatile as they’ve been over the past year, when portfolio values have risen or sunk dramatically over the course of a day or a week.

It’s tempting – and can be very comforting – to be invested so as to barely notice the turbulence. Sometimes, however, yielding to temptation can get in the way of a sound financial plan.

To be sure, there are risks in any investment, but some are considered to be safer than others. There are few monetary risks in money market accounts, insured savings accounts or certificates of deposit. But there is one substantial risk: low-risk investments inevitably earn low returns.

Unfortunately, in financial terms, putting your faith entirely in the lowest-risk investments can undermine the value of your portfolio, whether your goals stretch toward retirement or are trained on nearer-term objectives.

Risks in Security

All these low-risk investments are safer than stuffing your cash under the mattress, and you will at least receive a return that’s worth considerably more than if you had put your assets in a safe deposit box. But you can forget substantial financial gains – and that could turn out to be important in times like these, when inflation has become more visible than in the recent past. As of the end of June, the inflation rate was at 4.3% as measured from June 2007.

An Ibbotson Associates study of average annual returns during the 20-year period from 1986 through 2005 showed more conservative investments returned 4.74%; U.S. stocks, 11.93%; international stocks, 10%; real estate, 9.88%; international bonds, 8.74%; and U.S. bonds, 7.93%. Although such figures illustrate past performance that does not indicate future performance, the message is clear: over time, more sub-stantial gains are likely to come from riskier investments.

During this 20-year period, the average annual inflation rate was 3.03%*, so even the average money market investor would have stayed slightly ahead of inflation. However, anyone investing for real financial growth would have been lost unless they had stayed invested in somewhat riskier stocks and bonds. That would have meant riding through the market crash in October 1987, the Asian financial crisis of 1997, the dot-com bubble burst in March 2000 and the recessions of 1990 to 1991 and 2001 to 2003. They were all temporarily scary times, but portfolios of U.S. or international stocks would have gained more than 10% annually, far outpacing inflation and building a potentially substantial portfolio for retirement or to meet your other goals.

Inflation’s Toll

In a real sense, financial success depends on defeating inflation decisively. Conservative, low-risk portfolios may succeed in keeping pace with inflation, and that would allow you to afford to buy today’s basket of groceries at its cost 20 years from now. If just keeping up is your purpose, low risk investments might possibly do the trick. But if you have loftier goals, a totally low-risk portfolio is unlikely to produce what you want.

Studies have shown that well-diversified portfolios – carefully chosen mixes of risky and less risky investments – can help reduce volatility while delivering decent performance over the long term. Ibbotson’s 20-year study showed a well-diversified portfolio returning an average annual return of 9.46%. That’s the kind of return that can help propel your portfolio toward its goal. That may be the preferred definition of “safe.”

If you have questions about your portfolio’s make-up, please don’t hesitate to call me.

^*Source: Federal Reserve Bank of Minneapolis

There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise. International investing also involves special risks, including currency fluctuations, different financial accounting standards, and possible political and economic volatility. Diversification does not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or a loss.

Baby Boomer Execs
Don’t Favor Risk

A totally conservative investing strategy can be an impediment to your reaching your long-term financial goals. However, low-risk investments are popular with baby boomer executives. As a group, they apparently keep well over half their portfolio assets in what are generally regarded as the conservative investments.

A survey for the Clark Consulting Executive Retirement Report separated baby boomers into age groups to examine their investment strategies. Analysts noted an anomaly in that the youngest group executives - who might be expected to accept more market risk - were much more heavily into money market savings than their older peers.

Source: Senior Journal, August 2005.

Dip Early Into Social Security, Or Let It Mature?

You can tap into your Social Security benefits any time after you reach age 62 – some baby boomers began drawing checks in January this year. But should you?

If you take benefits early, you will receive less per month than if you had waited for full retirement age. (Visit ssa.gov to find the age at which you are entitled to full benefits.) On the upside, you’ll be receiving your funds earlier. (See related information under Investmentmyth)

Weighing Your Choices

However, while it’s perhaps not something you want to contemplate, taking a smaller benefit early can pay off if you don’t live past your “break-even” age. That’s the point at which the benefits you would have received at full retirement equal the total of your early retirement benefits.

If you are in poor health, you may well decide to retire and draw benefits at 62, but you should also realize that you may lose not only your paycheck, but also employer-provided health insurance. You’re unlikely to be covered by Medicare until you’re 65.

Working and Benefits

If you draw Social Security and continue working, your benefits may be reduced even further while you’re under full retirement age. Once you earn over a certain amount – changeable from year to year – your “excess” earned income decreases your available benefits.

You can recoup those lost benefits, however, after you stop working, when your benefits are recomputed and increased to offset what you lost while working. After you reach full retirement age, your benefits are not affected in any way.

If you are eligible for benefits as a spouse, and have not yet reached full retirement age, you can maximize your Social Security benefits by applying for survivor’s benefits now and delaying taking your own retirement benefits.

You also may choose to delay tapping your Social Security benefits until after full retirement age – up to age 70 – if you have no pressing need for the funds. Conversely, some opt to take benefits early and invest the proceeds instead of spending them.

If you’d like to discuss your approach to claiming Social Security benefits, please don’t hesitate to give me a call.

Investmentmyth

Wrong Ideas Confound Social Security Facts

Misleading ideas plague a correct understanding of various aspects of Social Security. Your benefit is actually based on your income over your 35 highest-paid working years, not your last five. And while 65 was the “normal” retirement age for those born in 1937 or earlier, it is creeping up toward 67, where it will remain for those born in 1960 or later.

Strike up the Band:
Teamwork is Key to a Successful Charity Auction

Financially successful people often respond generously to organizations that promote worthy causes. You may well find yourself caring passionately about the success of a particular non-profit group. You may donate financially, of course, but as you become more involved, you may seek out ways to benefit worthy organizations by offering the gift of your time.

Being involved with others in volunteer work benefiting a good cause can be short-term fun that may well have a lasting impact on the ability of a nonprofit to fulfill its mission. You might even find yourself agreeing to lead or to serve on a charity auction committee. That can involve some hard work and may offer an organizational challenge.

Planning the Event

One of the most exciting challenges of ensuring a successful event is finding ways to make every penny count. You’ll want to try to get everything donated. If you can secure a venue, food and wine at little or no charge – you’ve hit a three-run homer.

Many up-and-coming ad agencies will agree to apply their best talent to design a marketing campaign pro bono. It can be well worth the advance work of presenting several agencies the opportunity to be involved before accepting an offer.

Invite media to promote the event by offering in-kind sponsorships. However, as tempting as it may be to invite a local celebrity to do the auction honors, this is one role that may be best set aside in favor of a professional auctioneer. It takes an experienced person to get the highest bids, so bear in mind that saving a few dollars here will not necessarily pay off for the organization.

What your guests will ultimately remember about the event is how quickly they were able to leave with treasures in hand at the end of the evening, so collect credit card information at check-in and any required bidding details at the beginning of the evening, not after the bids are in.

Limit the live auction to the most attractive top 40 items, and place all others in the silent auction. A well-coordinated team should work together during the auction to document the individual bids, including item and price.

The party mood will be enhanced by hassle-free access to good quality wine or beer. Be sure you have an adequate sound system; otherwise, you may be unable to control key moments of the event.

LAYING A FOUNDATION FOR THE FUTURE

Your auction is over and the team is ready to raise a toast and move on to the next project – right? Not quite yet.

After an event, it’s a natural impulse to move on to the next project, but that bypasses a tremendous opportunity to solidify the camaraderie built up during the preparation of the event just concluded. Small gestures can work wonders to attract exhausted committee members back for one last meeting, so consider holding it at a unique venue and being generous in recognizing the outstanding work of individual committee members.

Documenting the process, the contacts and the insights learned in the planning and implementation of the event helps bring closure to the committee and provides future event planners a platform on which to build other successful events. Ask each committee member to review the event and put the details in a notebook.

It’s important for future event planners to know what your guests bid on and what they paid. Identify the high-demand items. Who were the top spenders? Who were the bargain shoppers? What about group bidders – those people who bid on things to do together? Future committee members, armed with this information, will know what to try to repeat and what to avoid.

Strategic Decisions:
Beware Mismatching Investments and Financial Goals

Sometimes investors find themselves in a temporary financial hole they might have avoided if they had carefully considered matching their investments to their financial goals. Failing to make the proper match can have very unpleasant consequences. Summoning up the discipline to act rationally by settling for a smaller but less risky return isn't always easy.

Most of us are attracted to the highest legitimate rates of return. If you are frantically saving for your child’s education, and he or she has just two or three years to go before the first year’s expenses are due, it may be tempting to opt for the highest return you believe is possible.

However, financial markets are unpredictable, and investing aggressively could ruin your plan. Let the current volatile market be a cautionary tale. Think of what likely happened to the finances of anyone who invested college fund money aggressively last October, with the market at its all-time high. That money may be worth 20% less today.

The unexciting fact is that if you have a short-term financial goal, the money you save should probably be in safe, principal-preserving high-yield savings accounts or certificates of deposit.