Wednesday, February 25, 2009

All that Glitters is not Gold

As the world economy reels and markets around the globe plummet, gold has made a comeback as the darling of speculators and terrified investors alike. Some folks are so worried about the collapse of the economic system they are purchasing gold bullion and having it delivered to their homes. (See WSJ article).

Up more than 9.7 % this year, gold has been one of the few opportunities for positive returns in a dreadful period. So why aren't we jumping on the bandwagon and recommending gold to our clients?

Historically, gold has been a terrific hedge against inflation. As the dollar, or any currency, weakens, investors turn to commodities with perceived value, driving up their prices. In today's world, where long-standing institutions are failing and once-in-a-lifetime events seem to happen on a daily basis, many buyers are again looking to gold as a "safe" asset.

Unfortunately, it is anything but that. Contrary to popular belief, gold has no intrinsic value -- it is simply worth what the market will pay at any point in time. And that price has been extremely volatile over the years, rising and falling very dramatically over short periods of time. In the last gold rush, during the early 1980's, many speculators lost their shirts by mistiming the market. In fact, individual investors have been notoriously horrible at deciding when to buy and sell gold. With prices up so dramatically this year, it's not surprising that frightened buyers are piling in.


As with anything else, the smart time to buy gold is when the price is low, not at a high level. And the smart way to hold it is in a mutual fund or ETF and as a very small (2% or less) percentage of your total portfolio.

Gold pays no dividends or interest, and for those who choose to physically hold gold the costs of shipping, storing and securing their investment are very high.

Moreover, gold is best used as a hedge against inflation, yet most economists worry that the biggest risk we now face is global deflation.

On balance, we don't see gold as a panacea for an ailing portfolio, or even as a good buy at current prices. We're sticking to our boring mantra -- diversify, diversify, diversify -- and in these tough times adding a folksy adage: Patience is a Virtue.

Copyright 2009 Money Dames

Monday, February 16, 2009

How Much is Enough?


With the S & P 500 down more than 45% since October 2007, virtually every U. S. investor is holding a portfolio that has shrunk dramatically. Many boomers are asking themselves if they will ever recover their losses or be able to save enough to retire in their old age.

It all comes down to one question -- how much do you really need to maintain your desired lifestyle in retirement?

There has been a fair amount of academic research to determine how much you can continually withdraw from a portfolio over 30-35 years -- the length of the typical retirement these days. Based upon the range of historical returns in a diversified portfolio (pre-2008) a safe annual withdrawal rate is 4%-4 .5%, adjusted annually for inflation. In dollars that means that you can safely withdraw $40,000 - $45,000 from a $1 million portfolio in year one. In year two, if inflation is 3%, your withdrawl will increase to $41,200 - $46,350.

If you are spending $135,000 now and hoping to sustain the same lifestyle through 30 or more years of retirement you need to accumulate an investment portfolio of approximately $3 million unless you have a pension or other source of income in retirement.

Most people find this breakdown sobering, if not completely depressing -- and it doesn't even account for the likelihood that your savings are in pre-tax dollars (if they are in your 401(k), IRA or other retirement account). We'll deal with that gloomy aspect of the issue on another day.

The bottom line, for most of us in middle age, is that retirement, in the tradional, gold watch, puttering away your days in the garden or on the golf course model of the past is not in the future for us. But it's also true that it wasn't a realistic scenario even before the bottom fell out of the stock market in 2008!

Relatively few people had saved enough to achieve full retirement at age 60 or 65 . We have been a nation of spenders for years now -- almost no one, especially in the baby-boom generation-- has been able to pare back current consumption so that they are living a lifestyle they can reasonably sustain in retirement just by saving diligently. Most of the lucky few who are well-positioned for retirement received a windfall: an inheritance, stock options that paid off handsomely, or a cash settlement from a lawsuit or the sale of a business.

So don't beat yourself up. Retirement may not be a reality -- but work keeps us vibrant and engaged. You may not be golfing or fishing every day, but you can probably slow down and find work that feeds your soul and supplements your savings. That's the view we're taking.

Annette

Copyright 2009 The Money Dames

Monday, February 9, 2009

Are You Financially Literate?

We've been surprised by how little many otherwise sophisticated, successful people know about financial matters. The Madoff affair and the sub-prime credit crisis are both financial disasters that largely could have been averted if more Americans had a solid grasp of some basic financial concepts. Our hope is that the Obama adminstration recognizes this and will embrace the cause of increasing financial literacy.

Until they do so, here are a few questions to test your own financial literacy:

1. What is the difference between a stock and a bond?

2. How is investing in an IRA or 401(k) different from investing in a brokerage account or mutual fund?

3. What is the difference between term, universal and whole-life insurance?

4. Is $1 million enough to retire on?

5. How much income is too much to qualify for college financial aid?

6. Is real estate a better investment than "the market?"

7. How much can you reasonably expect to earn on a risk-free investment?

8. What is the average rate of inflation?

9. What are the basic estate planning documents everyone should have?

10. What types of insurance does everyone need to own?

11. What credentials, education and legal obligations are financial advisors required to meet?

12. How long will it take to repay your credit card balance making the required minimum payment each month?

13. Should avoiding taxes be your first priority in making financial decisions?

14. Which of these factors is the most significant determinant of portfolio performance: Security selection (which stocks and bonds you buy), asset class allocation (how much you have in stocks vs. bonds, large vs. small companies, etc.) or Market Timing (picking the right dates to move in and out of the market)?

15. How much cash do you need to keep in a checking/savings account for emergencies?

16. What is a mutual fund?

17. How much of current income do you need to save for a secure retirement?


If you can answer all of these questions accurately and confidently, good for you -- you have achieved an outstanding level of financial literacy.

The answers...? Oh you want the answers! We'll be addressing these questions and more in entries to come over the next several weeks. Stay tuned and submit your questions if we don't cover them.

Annette Simon

Copyright 2009 The Money Dames

Monday, February 2, 2009

Advisor=Scapegoat -- One More Benefit to Consider


A couple of weeks back we posted an article enumerating the benefits of working with a financial planning professional. Over the weekend, it occurred to me that we missed one of the valuable services we offer to our clients.

Many times clients tell us that they have no trouble holding down spending for themselves, but it's too hard to say "no" to their children and grandchildren. In many instances, we have become the go-to excuse for clients trying to get these expenditures under control. They don't want their kids to be mad at them, but can blame those witches -- Veena and Annette -- who won't let them shower the grandkids with gifts or pay for lavish family vacations .

We're happy to be the bad guys. The kids won't love us now, but may be grateful someday when mom and dad aren't eating dog food in their eighties!


Annette

Copyright 2009 The Money Dames