Now that the world’s economic outlook appears less gloomy than in months past, Black Enterprise wants to make sure you participate in the recovery. To do so, we talked to some of the smartest people we know, asking these “all-star†experts: “What’s the best advice you’re offering friends, family, and clients now?†The result is a collection of timely tips to guide you in making financial decisions.
INVESTING TIP
Rebalance your portfolio while sticking with your long-term investing plan.
Rebalancing means that sometimes you will be doing things that are counterintuitive but that will work to your advantage in the long run. Rebalancing forces you to sell things when they’re high and buy when they’re low. That sounds easy to do, but emotionally it’s hard. Most investors operate on a very short-term emotional basis, which is a recipe for disaster. That’s why a lot of 401(k) plans offer the option of automatic rebalancing. That’s something I’d take advantage of.
It’s important to have a mix that’s appropriate for your age, your risk tolerance, or how much you’re willing to lose. For example, a thirty-something may want to be 80% in stocks. But somebody near retirement may want to be 40% in stocks. Bonds tend not to go up and down in value as much. They’ve done much better than stocks during this downturn. Also, invest consistently. The worst thing you can do is not contribute to your 401(k) because the market has gone down. If you can’t sleep at night, instead of reducing your contributions, put them in a money market fund for a period of time.
REAL ESTATE TIP
Don’t rush to buy or sell because of housing market price projections. Do it when the time is right for you.
What I see a lot of these days are people worked up and anxious about market timing. Buyers are frantically trying to get in while prices are low–and in time to get the [up to] $8,000 first-time home buyer’s tax credit [which expires Dec. 1, 2009]. Would-be sellers are trying to figure out whether they can afford to sell and when they should list to get top dollar.
I advise my clients to decide what they want to do (e.g., buy, sell, hold, refinance, etc.) based on their life, their family’s needs, and their vision of how they want life to look going forward–not based on an effort to time the market. The time to take market considerations and timing into account is when you’ve decided what to do and you’re formulating strategies and plans for executing your decision. That includes questions such as how much to offer for a property, what type of loan to use to finance your purchase, and how much to list your home for. Most often, the data you’ll need in order to make smart, strategic plans is not the scary stuff of newspaper headlines. Real estate markets are hyper-local, so you need to rely on local, up-to-the-minute data like the ratio of list price to sale price of the homes in your neighborhood.
FAMILY FINANCES TIP
To generate income after a layoff, swallow your pride–then try consulting.
Now is not the time for pride. You must do whatever it takes to have some income coming into your household. One thing unemployed executives can do is consult. Small business owners are looking for expertise at reasonable rates, for people who can come in and help with certain aspects of their business. They don’t want to pay what it would cost to bring in a major marketing firm, for example. Charge a reasonable rate for so many hours, and raise their marketing efforts to the level they want. There are a lot more small business owners than major corporations. Show your track record, show the work you’ve done. When talking to prospective clients, don’t focus on the fact that you’re laid off and this is why you started consulting. Be confident, and have a portfolio. Maybe do some things for free first and get some testimonials–and walk into the meeting with that.
INVESTING TIP
When the time comes, dollar cost average your way out of investments.
I don’t think the current environment should dissuade anyone from investing. The economy highlights how critical it is to make sure you’re investing in a way that corresponds with your goals and the timing of those goals. One of the reasons people find themselves in a really precarious situation is they didn’t apply the principle of tying their investment choices to the time they would need the money. So, if you have plans for your money within five years or less, it needs to be more liquid. If you have money in the market, say in stocks or mutual funds, as you get closer to attaining your goal–just as people dollar cost average into the market, you should develop the practice of dollar cost averaging out of the market until you have the cash in hand to meet your goals. Do this in a stepladder sort of way–each year take out a little more and reduce your exposure to the market’s volatility. This is a great risk management technique and will prevent you from potentially liquidating investments at a time when you might actually lose money.
RETIREMENT PLANNING TIP
Use a combination of revenue streams, such as Social Security and insurance products, to provide guaranteed lifetime retirement income.
Since people are living longer, they’re concerned about outliving their savings. Will the money run out before I do? One of the things I try to do is put clients into guaranteed lifetime
income products and build from there. Social Security, for instance, has a lifetime guaranteed income stream and an inflation adjustment. Some folks have a defined benefit pension plan in which they worked so many years and now a check shows up every month in retirement for the rest of their lives. Those have become rare. Then we look to see if that’s going to cover basic living expenses. Will it meet your housing costs, food needs, clothing–your basic lifestyle expenses? I like to have those guaranteed with a combination of Social Security, pensions, and if we have a shortfall then I recommend annuities–basically a private pension. This is where you invest a portion of your retirement nest egg and you’re guaranteed a certain payment for the rest of your life.FAMILY FINANCES TIP
Pay down debt and use disability insurance to protect your emergency fund.
Have three to six months of expenses in your money market account. If you have a higher income, maybe you have six to 12 months, that’s when it may be a good idea [to dip into savings to pay down debt]. If you have six to 12 months of living expenses saved, get a disability insurance policy. That way, if you ever became disabled, you really wouldn’t need to dip into the money market funds anyway because your disability policy is going to help pay your expenses. If you don’t have six months’ worth–and it’s not the easiest thing in the world to accumulate money for emergency purposes–it’s not a good idea to start dipping into your money market to pay off credit card debt, based on the way the economy is right now. You do want to pay off debt, but you don’t want to rob your money market.
Make sure there’s a fine balance between the amount you’re putting away for retirement, the amount you’re saving for emergency purposes, and the amount you’re paying down in debt. You need to do all three.
FAMILY FINANCES TIP
Sharpen your financial knowledge and beware the subconcious thoughts affecting your relationship with money.
At its heart, the economic crisis is really a story of financial illiteracy. The most important thing people can do is learn how to speak the language of money and be aware of the scripts we recite in our heads. I use the term money scripts, because like actors we blindly act on them. ‘People like me have credit card debt.’ ‘I’ll never save money.’ ‘Investing is for rich people.’ And we all have the fear of not keeping up with the Joneses. Some people followed that script into a bad mortgage. We’ve been conditioned with these messages from birth. You need to understand how your family’s role modeling is playing out in your financial behavior. Unfortunately, so many of us didn’t learn about money in our homes growing up. Then we didn’t learn about it in school so we have no point of reference for making sound financial decisions as adults.
INVESTING TIP
Go global. Diversify your portfolio with a good mix of international stocks, natural resource holdings, and bonds.
If your time horizon allows, and you’re comfortable with a higher degree of volatility in your portfolio, then try more growth-oriented or small-cap stocks. I recommend having some international exposure, some bonds, and some investments in the area of natural resources. Those types of companies are in a growing phase. Your portfolio should reflect the fact that the world is changing and the U.S. doesn’t take up as much “space†as it used to. If you’re looking for more growth potential, look at companies in China, Brazil, and India. If you don’t know what a diversified portfolio should look like, it’s OK to seek professional help. For the 1% you might pay to a competent financial adviser, you will earn well more in additional value. Lastly, if you are really close to a goal, then you shouldn’t have your money in the stock market. If you’re about to retire you don’t want that type of volatility, so you need to look at more dividend-paying stocks. They’re not expected to grow, but they pay dividends.
RETIREMENT PLANNING TIP
When not working isn’t an option, consider a part-time career as part of your retirement plan.
I tell people to find it before you fund it. In other words, identify what it is that you want to do and try to fund that. Many people don’t know why they want to retire at a certain age or what they’re going to do, so start identifying your passions now. I have a 50-year-old client who loves to ride bicycles. When he stops working full time he plans to work part time at a bike shop. He won’t earn much money, but what he earns will supplement his retirement savings. Plus, now he has a social outlet.
A lot of older people were under the assumption that they could retire at 50 or 60, but now they probably can’t, given what’s happened in the market. If you retire at 60, what happens if you live to 90? Even if you’ve got $2 million, if you start taking out $100,000 a year at 60 you have a 35% chance of running out of money before you hit 90. Most people don’t have $2 million, and when you have a choppy market like this one it destroys the plan. Plus, our lifestyles have improved. People have to be willing to rethink their plans.
INSURANCE TIP
Life insurance is for the living–not the dead–so plan your coverage around their needs.
Acquire as much life
insurance coverage as you can afford while you’re relatively young and healthy. I tell my clients that life insurance is an expression of love. You’re making sure that if the unexpected happens your loved ones are provided for. Life insurance is a way of creating wealth, a financial foundation that is critically needed among African Americans. Regardless of the amount your employer is providing (usually equal to an annual salary), do not rely on this entirely. Leave a legacy for which you will be remembered.Let’s take a family in which the husband works outside the home. Especially when there are children, I’d like to see both adults carrying similar amounts of coverage–at least $1 million. Why insure them equally? The wife may not be bringing in an income but she is providing a financial value. Upon her demise, the husband won’t be torn between earning an income and handling duties at home. Life insurance provides a wide range of choices for surviving family members.
TAX TIP
Investigate and pursue all the new tax incentives that pertain to you.
Take advantage of tax credits, incentives, and rebates–especially any that are time sensitive. If you already own a home, invest in energy efficient equipment such as water heaters and furnaces. You can get a 30% tax credit of up to $1,500 for these appliances. There’s also the [up to] $8,000 new home buyer tax credit. In some instances, this credit can be used to offset some of your closing costs. You should also use the IRS withholding calculator (www.irs.gov) to adjust income tax withholding after life-changing events. Avoid too little withholding, which might result if a home was foreclosed on, for example. In that case, the mortgage interest deduction would be eliminated, thereby increasing taxable income. Also, make sure you don’t have too much withholding. If one spouse becomes unemployed, for example, the loss naturally results in a lower taxable income.
INVESTING TIP
Looking for a (relatively) safe investment? Try short-term municipal bond funds.
Short-term municipal bond mutual funds are a great investment for people who have excess cash reserves and who want to earn more interest than what their savings account provides. I recommend these bonds to conservative savers who don’t want to invest in stocks and who want to keep their cash fairly liquid. Short-term municipal bond mutual funds will earn 2% to 4% of tax-free interest, but to reap the full benefits you must give them a time frame of 18 months to two years–they’re not something you can jump in and out of. And although the principal is not guaranteed–it is a short-term fund–there is very little fluctuation of the principal.
Marcia Wade also conducted reporting for this article.
This article originally appeared in the October 2009 issue of Black Enterprise magazine.