You can’t turn on a radio or TV these days without hearing someone telling you what to do and what not to do with your money.
“Sometimes the amount of information available on investments and financial planning can be overwhelming to someone trying to decide which steps to take with their own financial plans,” says Brad Stonecipher, executive vice president and managing partner of Peachtree Planning Corporation’s investment department. “Too much information can be harmful to even the best investors and the wrong advice can be devastating to an individual’s hopes of reaching a dream or goal.”
Smart Business learned more from Stonecipher about how to find an investment strategy that’s right for you and what products are getting a bad rap.
Are talk shows putting out incorrect information?
It’s not that the information you hear from a talk show host or read in a magazine is incorrect it just might be entirely the wrong advice for your situation. A host’s goal is to attract a broad audience so they can sell advertising. The host may recommend a strategy that works for 75 percent of his or her listeners, but what if you are in the other 25 percent? Financial planning is not one size fits all. Each person has different needs and goals, different tolerances for risk, and possibly different tax consequences for their actions. I cringe whenever I hear someone make an absolute statement telling you to ‘always do this’ or ‘never buy that.’
For example, if you have a portfolio that is 60 percent equity and 40 percent bonds and you pay out an income of 4 percent annually, you have more than an 80 percent probability that your money will last for more than 30 years.
If you used that plan to retire in 1984, then you are probably in your late 80s with more money than you started with. If you did the same thing and retired in 2001, you are probably entering your 70s with the real possibility you may be out of money before you turn 80.
How can too much information be a detriment?
It is not necessarily too much information as too much negative information. People have a long history of making poor financial decisions when they are afraid. Combine that with a news media that finds it much more profitable to publish a negative story than a positive one and it is not hard to understand why the average investor has such a poor track record.
The news media would much rather inundate us with stories of greedy corporate executives taking large bonuses than a story of a young widow who doesn’t have to sell her home or take her children out of school because her financial planner made sure her family had a plan in place to ensure she was properly protected.
What kinds of products do you feel are most often misrepresented?
Sometimes it is a product and sometimes a whole industry. For example, variable annuities, frequently one of the most maligned products, can have features and benefits that protect investors from large market declines. It is a product that is very easy to sell incorrectly or use improperly, but it is also an excellent vehicle for guaranteeing an income stream for a retiree.
Is it the right product for a 35-year-old saving for a child’s college education? No, but there’s a large number of recently retired investors who benefited greatly from those types of products last year.
Don’t variable annuities have very high internal costs and surrender charges?
There are a number of cost components to variable annuities. They can be very complex investment vehicles and investors need to be sure they thoroughly understand all of the costs and benefits of any contract before they purchase it.
Annuities can provide death benefits to beneficiaries and living benefits such as income and market guarantees to contract owners, but these all have costs and any investor needs to understand how these charges will affect their investment. This is true with any investment strategy. We have just come through one of the worst financial crises of the last 100 years, and it was caused in large part by some supposedly very sophisticated people not understanding the costs and risks associated with the investment vehicles they were using.
If the experts on Wall Street don’t understand what they are doing, how is the average investor supposed to make the right decisions?
Whether you are investing in a hedge fund with derivatives or making a decision on what type of insurance to buy for your family, you have to be sure you fully understand the product you are buying, its real costs and benefits, and how this decision affects your current and future financial picture.
We have listened to a generation of talk show hosts and talking heads trumpet strategies like ‘buy term and invest the difference.’ This advice has ultimately benefited the insurance companies that issue policies that never pay death proceeds far more than the investor who was left broke and uninsured.
In the end, most of us would be better served by paying a little less attention to the people we watch on TV and more attention to the people we can hire to watch over us. There are thousands of competent, knowledgeable and trusted financial professionals in the marketplace today. CPAs, financial planners, stock brokers, insurance professionals and investment advisers can look at your individual situation and help you find the strategy that is right for you.
Brad Stonecipher is executive vice president and managing partner of Peachtree Planning Corporation’s investment department. Reach him at (404) 260-1608 or email@example.com.