The stock market is volatile.
There's no way around it -- markets, like your business, are cyclical. While historically, the market has been more bullish than bearish, it does retrench more often than investors would like.
During the past 80 years, the market has dropped at least 10 percent eight times. The largest single day drop was 22 percent in October 1987. Recently, the Dow Jones Industrial Average dropped from a January 2000 closing high of 11,723 to a closing low of 9,655 in October 2000, a fall of more than 16 percent.
Even more astonishing was the decline of the NASDAQ, from a March 2000 high of 5,049 to lows in March 2001 below 2,000 -- a drop of more than 60 percent.
But the long-term odds of investing in the stock market to enhance your assets are in your favor. The market has experienced nearly twice as many bullish periods as bearish ones over time. Since 1926, it has, on average, been up two out of every three years.
So what can you do to protect your assets and help your employees protect theirs?
Invest for the long term
The stock market can be risky over the short term but it's important to realize that the risk decreases as your investment time horizon lengthens. A good rule of thumb is that investments in stocks should be funded with money that you don't anticipate needing for at least five years.
Do not try to time the market. Aside from the very real difficulty of identifying the end of one market phase and the beginning of a new one, the basic emotions of greed and fear work strongly against those who attempt market timing.
Don't attempt to avoid downturns by jumping out of the market. No one can accurately predict when it will rebound. Remembering why you invested in the first place will keep you calm during times of uncertainty.
Consider dollar cost averaging, the practice of investing a fixed amount of money in an investment at regular intervals. While this cannot eliminate the risks of investing or guarantee a profit, it does offer a disciplined method of investing in the securities market.
Invest in quality
It doesn't seem that long ago that investors were enamored with the idea of getting in on as many initial public offerings as possible. IPOs are risky. For those who know how to work with IPOs and understand the risks, they can offer outstanding opportunities.
But for other investors, it isn't wise to commit a large percentage of your portfolio to IPOs. Instead, consider companies with a history of consistent sales and earnings growth.
Diversify your holdings
Keep your assets spread among investments likely to perform differently under similar market conditions. This is called asset allocation.
Rely on professional advisers
Each investor brings a different outlook and level of sophistication to the markets. However, even the savviest business leader can benefit to some degree from professional advice.
During uncertain market conditions, it helps to have a coherent investment strategy worked out in advance by qualified investment professionals. Then, when the going gets tough, they can help you stick it out.
Arthur Weisman is a financial adviser for First Union Securities. He can be reached at (216) 574-7317.
Two-thirds of American workers surveyed by Matthew Greenwald & Associates in 1996 said they were confident they would have enough money for retirement.
Yet 36 percent of these same respondents had not saved any money for retirement, and only one-third had calculated how much money they would actually need. A second study revealed that 46 percent of all Americans have less than $10,000 saved for retirement, hardly a foundation from which retirement dreams are realized.
Its easy to put off retirement planning, but when you understand the long term costs of waiting, its easy to see that the best time to start planning for a comfortable retirement is now. Three major trends are making this even more important.
The U.S. population is aging and living longer, putting an increased strain on existing benefit programs. According to a 1993 Arthur D. Little survey, life expectancies were 71 years for men and 78 years for women. While living longer is desirable, it increases the chance that you will outlive your retirement savings.
Responsibility is shifting away from employers and the government to the individual. At best, you may be able to rely on Social Security to supplement your retirement income. Many employers are moving from defined benefit pension plans to defined contribution plans, such as 401(k) plans, putting the responsibility of fund accumulation and portfolio management on employees.
Poor financial planning
People are not saving enough, and what is saved is invested in low-returning options. Studies show less than half of 401(k) assets are allocated to equities. Inflation (increases in the cost of living) has the power to erode the value of your money over time, even if it remains relatively low in the short term.
If the annual inflation rate remains fixed at 4 percent, the value of your money will be cut in half in just 18 years. Historically, the most beneficial strategy to combat this problem has been to shift more of the savings into equities.
As a rule, you will need between 70 and 80 percent of your preretirement income, adjusted for inflation, to live comfortably in retirement. To bridge the gap between what you will need and what you currently have, disciplined investing should be initiated right away. One of the best ways to save for retirement is to take advantage of tax-deferred retirement plans.
Retirement plans are effective strategic business planning tools. Plan contributions are tax deductible for businesses and tax deferred for participants. Many businesses choose not to institute retirement plans because of the perceived administrative burdens associated with them. Thats because many retirement plans must meet special requirements, including special nondiscrimination rules which involve annual testing, and must file a Form 5500 annually.
Unfortunately, according to recent figures from the U.S. Department of Labor, more than 50 percent of small businesses with fewer than 100 employees do not offer a retirement plan to their employees. However, business owners who wish to compete for good employees can no longer afford not to have some form of retirement plan.
A Savings Incentive Match Plan for Employees (SIMPLE) can be an easy way to make contributions to provide retirement income without the administrative burdens associated with other types of retirement plans. Under a SIMPLE plan, employees can choose to make salary reduction contributions rather than receiving these amounts as part of their compensation. Employers make either a matching or nonelective contribution.
SIMPLE plans are easy to adopt, and can be set up using either individual IRA accounts for each participant or as a part of a 401(k) plan. Employers are eligible for a SIMPLE plan if:
1) The employer employs 100 or fewer employees who earned $5,000 or more in compensation during the preceding year; and
2) The employer does not maintain another qualified plan.
A SIMPLE plan is cost effective and easy to administer. Unlike many other retirement plans, it is not subject to annual anti-discrimination testing and a SIMPLE IRA is not required to file a Form 5500. The SIMPLE plan allows the employer to offer a retirement plan without the sole responsibility of funding it.
SIMPLE plans allow eligible employees to make a salary reduction contribution of up to $6,000 per year. Employers are generally required to match each employees salary reduction contribution on a dollar-for-dollar basis in an amount not more than 3 percent of the employees compensation.
In lieu of a matching contribution, the employer may elect to make a nonelective contribution of 2 percent of compensation on behalf of each eligible employee who receives at least $5,000 of compensation from the employer for the year.
If the employer chooses to make nonelective contributions, only $160,000 of employee compensation is taken into account in figuring the employer contribution limit.
The bottom line is that a SIMPLE plan is an attractive fringe benefit that you can add to your recruiting arsenal.
Arthur Weisman is an investment consultant with First Union Securities. He can be reached at (216) 574-7300.
There is no doubt that the Internet is having a dramatic effect on business and commerce and it continues to shape the global economy.
The explosion in Internet use has astonished almost everyone. It is having a dramatic impact on productivity and will help feed new ideas and products into the global economy.
The problem is that many of today's hot Internet companies may not have sustainable growth, long-term profitability or certain futures. While seemingly speculative in terms of potential return on investment, there is little doubt that the Internet as a business model adds value to businesses and consumers alike.
Some people have drawn an analogy between the Internet Age and the California Gold Rush of 1849. When gold was discovered, thousands rushed to California with expectations of striking it rich after hearing the occasional story of a lucky prospector. When the smoke cleared, only a few gold speculators ended up anything but broke.
The same can be said about many of the Internet companies and the people who speculate on them. The recent shakeout among unprofitable dot-coms is the tip of the iceberg. Like the gold prospectors, many of the speculators on Internet companies will end up broke.
In the Gold Rush, those who focused on infrastructure and supplied the miners with shovels, picks, pans and clothing slowly made their fortunes. A similar approach can be taken to investing in the Internet.
A more conservative strategy is to invest in companies that build the infrastructure needed to support the Internet boom. In other words, participate in the Internet without investing in risky Internet start-ups, many of which are volume-driven consumer e-commerce companies that lose money. This can be accomplished by identifying established telecommunications, media, technology and other companies that are strategically positioned to benefit from the expansion of the Internet.
For example, media organizations benefit from the recurring advertising dollars spent by e-commerce companies to build brand awareness. Telecommunications companies provide the backbone and network access points for Internet access. Technology companies provide both infrastructure and services to support the Internet. Freight companies benefit from e-commerce sales because they deliver the merchandise to the consumer, thereby helping to facilitate e-commerce.
These companies are focused on providing access, content, infrastructure and services for Internet companies and users. Some people refer to them as "Internet tollkeepers."
Internet tollkeepers are typically companies with recurring revenue streams that often dominate their industries, for which there are high barriers to entry. The goal is to identify superior long-term growth companies that are trading at fair valuations. You can attempt to identify these and invest in them directly, or you can invest in them through a mutual fund, thereby benefiting from the mutual funds professional management and diversified portfolio.
Fund managers typically use a growth investment philosophy, which seems to rule out investing in most of the hot companies in the Internet sector. Instead, they invest in established, superior long-term growth companies that are Internet tollkeepers.
The primary focus is on companies that provide Internet access, content, services and infrastructure. The holdings of these type of funds include such companies as CBS, Liberty Media, Time Warner, Walt Disney, America Online, Microsoft, Intel, First Data Corp., Cisco, AT&T, MCI WorldCom, EMC, Sun Microsystems, Oracle, Dell and UPS. For conservative investors who are afraid of missing out on the growth of the Internet, the tollkeeper strategy is an attractive way of capitalizing on the enormous potential of the Internet that makes long-term sense. Arthur Weisman is an investment consultant with First Union Securities. He can be reached at (216) 574-7317.
Sifting through this ever-growing volume of information to make strategic investment decisions has become more time-consuming, complex and, at times, more confusing than ever before.
Wealth management is a long-term commitment that requires a comprehensive strategy, implemented through a series of coherent investment decisions. Successful investing requires a significant commitment of time, energy and attention. Following a sound process is the surest way to success.
Most people manage their investments part-time because their business or career consumes them. What precious little time remains is often eaten up by other distractions. But dont pass on wealth management because of individual time constraints consider a professional money manager.
Professional money managers focus their entire careers on managing money; it is their full-time job. Their professional success depends entirely on their clients successes. When seeking an investment consultant, follow a three-step process to develop, implement and monitor a personalized portfolio management plan.
Develop a plan
The critical first step in the process is a thorough analysis of your current financial situation and the results you expect to achieve. The analysis begins with a series of questions designed to elicit important information, including:
For what purpose do you need these assets in the future?
What is your time horizon?
Is liquidity a concern?
What is your risk tolerance?
Given your goals and your time horizon for investing your assets, what is the rate of return you desire to achieve?
The answers will help determine whether your portfolio should be invested in stocks, bonds, or a blend of the two. Research has shown that asset allocation, the diversification of your investments among asset classes such as stocks, bonds and cash, has a more significant impact on overall performance than other factors, such as stock selection and market timing.
This balance enables you to reach your goals without taking unnecessary risks.
Prepare an investment policy statement that clearly defines your objectives and provides a road map for executing your plan. Finally, the strategy developed serves as the benchmark against which investment performance will be measured.
Select an investment manager
After establishing a plan, begin identifying a portfolio manager or managers whose style, philosophy and performance best suit your investment strategy.
Portfolio managers should be carefully screened, because they will be responsible for selecting and monitoring the individual securities in your portfolio. The screening process should include reviewing credentials; determining the managers investment style; examining the managers performance record; tracking the consistency of the managers returns in varying market conditions; and evaluating and monitoring the level of risk taken, measured against the value of the returns generated.
Chart the results
Your investment consultant should closely track the progress of your portfolio toward achieving your goals. Comprehensive reports should be prepared, generally quarterly, detailing your portfolios activity and performance. The information provided in these reports allows your investment consultant to evaluate the following issues:
How has the portfolio performed relative to your goals?
How has the portfolio performed relative to the market environment?
How much risk did the manager or managers take?
Did the manager or managers add value?
How did the manager or managers perform relative to the peer group?
This information allows you and your consultant to evaluate and control the management of your assets.
The end result is peace of mind in knowing that a carefully assembled team of experts is working to help you achieve your financial goals, through their systematic investment discipline, financial expertise and personal attention to your objectives. After all, its your money.
Arthur Weisman is an investment consultant with EVEREN Securities. He can be reached at (216) 574-7300.
Despite a recent softening in the market, the mutual fund industry continues to reach record highs.
In December 1999, the assets of the nation's mutual funds were nearly $7 trillion, an increase of more than $1.5 trillion from 1998. Just 10 years ago, total mutual fund assets were $1 trillion, and since 1990, growth in the industry has been explosive.
Mutual fund ownership grew faster than any other financial instrument over the 1990s, and the popularity of mutual funds makes them the core vehicle for many people's savings and retirement needs. The percentage of U.S. households owning funds rose from 25 percent in 1990 to nearly 50 percent in recent years. Among households with annual incomes of at least $50,000, 70 percent own funds.
There are approximately 12,000 mutual funds available, more than the number of individual securities listed on the New York Stock Exchange. With so many, sorting through them can be overwhelming.
Mutual funds offer many benefits. They provide diversification by pooling the money of many investors and investing it in a variety of securities to achieve a specified investment objective.
Diversification is one of the best ways to achieve investment success. It spreads your risk and earnings potential over a portfolio of various securities that provide increased potential for higher return and reduced severity of market volatility.
However, some people carry diversification to the extreme -- they invest in multiple funds with the same or similar styles, believing they are getting greater diversification. In reality, there is portfolio overlap, with many funds carrying many of the same stocks.
The success of mutual funds is, in large part, based on the fund manager's investment skills. The manager decides when to buy, when to sell and when to hold stocks in the mutual fund's portfolio. That person's decisions are based on extensive research and other information, such as the health of the individual companies and general market and economic trends.
Mutual funds offer investors the ability to purchase or liquidate shares at the current market value, which may be worth more or less than their original cost. Current per-share net asset values are calculated daily based on the market value of the underlying securities in the portfolio.
Investors in mutual funds, outside of retirement plans accounts, should consider the impact of income taxes on their returns. This is because each year, mutual funds must distribute substantially all of their dividend and interest income and realized capital gains to their shareholders.
Some mutual funds have portfolio turnover of 100 percent or more, which results in large capital gains distributions. Investors are taxed on these distributions, even if they reinvest the money in new shares. Since investors want to maximize after-tax returns, tax-managed mutual funds were developed to meet the needs of those holding mutual funds outside of retirement plan accounts.
Mutual funds are a good way to build a professionally managed and diversified portfolio. However, selecting the right funds can be time consuming and overwhelming. That's why it's a good idea to consult a financial adviser for assistance.
The bottom line: Don't put your money at unnecessary risk. Arthur Weisman is a financial adviser for First Union Securities. He can be reached at (216) 574-7317.
Individual Retirement Accounts (IRAs) and qualified retirement plans are designed to encourage saving for retirement during your working years. Contributions are generally tax deductible and assets grow tax-deferred.
But because assets can grow quickly, they sometimes far exceed the needs of their owners and become inheritance plans.
While the plans are great ideas, they can create significant estate planning problems with a dramatic tax impact. Retirement plans can be bad assets when they end up in an estate, because combined federal, state and estate taxes can consume up to 75 percent of the value of these assets, leaving a fraction for heirs.
Given the virtual certainty that tens of thousands of people will pass away with large retirement plan balances, the need for strategies is extremely high.
First, list your assets and liabilities to determine the net value of the estate in current dollars. The investment assets should be categorized as either retirement plan assets (IRAs and qualified retirement plans) or nonretirement plan assets, those held in taxable accounts. This allows you to determine a hypothetical estate tax.
Next, review the beneficiary designations for each retirement plan account. Keep in mind that assets held in retirement plans pass to the named beneficiaries under contract law regardless what any will might provide.
One way to stretch out the income taxes to be paid by the beneficiaries as they receive distributions from inherited IRAs is to use a multigeneration or stretch IRA. Heres how it works: When the plan participant dies, the surviving spouse, as the beneficiary, rolls the proceeds into different IRAs, each one with a child, grandchild or charity as the sole beneficiary.
When the surviving spouse reaches age 70-1/2, required minimum distributions must be made from each IRA. However, the distribution period is calculated based on the joint age of the spouse and beneficiary (maximum l0-year differential). When the surviving spouse dies, the distribution period is recalculated based on the beneficiarys life expectancy.
While the multigeneration or stretch IRA allows the IRA to continue to grow tax-deferred, it does not reduce the estate taxes due or replace the wealth lost to income and estate taxes. It simply defers the payment of the income taxes due on the distributions from the IRA.
If you want to replace the wealth lost to taxes, consider an irrevocable life insurance trust (ILIT). If the ILIT is properly drafted and managed, it will result in significant insurance policy death proceeds distributed to family, both income and estate tax-free.
A second-to-die life insurance policy, usually a universal life policy, is acquired by the ILIT. The beneficiaries of the ILIT can be children or grandchildren. Annual distributions are made from an IRA or qualified plan in an amount sufficient to pay the income tax due on the withdrawal and to fund a gift to the trust equal to the annual insurance premium due. This gift qualifies for the annual gift tax exemption.
Upon the death of the insured, the death proceeds are paid to the trust, which in turn distributes the proceeds to the beneficiaries of the trust, free of any estate or income tax. In effect, the death proceeds from the insurance policy replace the reduction in value of the decedents estate due to estate and/or income taxes.
This is an effective means of bypassing the estate and transferring wealth to ones heirs.
There are many other ways as well, and any financial investment consultant can outline which may work for your situation. The bottom line is this: It is important to recognize the potential problems inherent in retirement plans and take the steps necessary to preserve the wealth that has been accumulated in these plans. The method you choose is up to you.
Arthur Weisman is an investment consultant with First Union Securities. He can be reached at (216) 574-7317.