Investing For Your Future
Monthly IFYF Investment Message
August 2006
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Rutgers Cooperative Extension, host of the Investing for Your Future Web site, recently co-sponsored a two-hour public presentation and question and answer session with nationally renowned financial columnist, Jane Bryant Quinn. The author of Making The Most of Your Money and Smart and Simple Financial Strategies For Busy People , Quinn spoke about a variety of financial topics, emphasizing the use of simple, low-cost money management practices. "Simple ideas are best," she advised, noting a trend toward streamlining and simplifying money management practices. "You want to set up a plan to run automatically while you sleep." Following is a summary of Ms. Quinn's presentation, with particular emphasis on investment related topics:
- The future is always uncertain and nobody can predict what will happen. "You need to develop plans to keep yourself solvent under conditions that you can't foresee," Quinn advised. Her biggest causes of economic concern are the interruption of the oil supply from unstable regions of the world and financing the imminent retirement and health care of baby boomers.
- Quinn noted that many soon-to-retire boomers will have a difficult time maintaining their lifestyle due to the trend toward decreasing pensions and retiree health insurance in the private center. "We are reducing society's future obligation to boomers," said Quinn, who also predicted that "public pensions will be the last pensions standing."
- Quinn advised the audience to avoid interest on rolled over credit card debt, noting that only about 40% of people pay their credit card bills in full. She also recommended matching investment selections to financial goals by asking two key questions before you invest: What do I want the money for? and When do I want it back? For money needed within five years, Quinn advises keeping it in CDs or money market mutual funds. Between 5 and 10 years, consider bonds and bond mutual funds. For goals 10 or more years in the future, Quinn advised investing in stocks. She noted that, since 1965, not once did money placed in an all stock portfolio for 10-year rolling periods lose money according to Chicago investment research firm Ibbotson Associates.
- Quinn prefers investing in stock funds to individual stocks because of the diversification they provide investors. Nobody wants their stock to be the next WorldCom or Enron. The longer you hold a broadly diversified stock mutual fund, the lower your investment risk. However, the longer you hold an individual stock, the greater the probability the company will encounter problems. Quinn emphasized this point by referring to a 2000 Fortune magazine "Stocks for the Decade" article. To date, only one has outperformed the market. All the others have performed poorly, including Enron. She likened individual stocks to a "terrific hobby" and noted that mutual funds are "at the leading edge of the simplification movement."
- Two particularly simple types of mutual funds were discussed. Lifecycle (a.k.a., target date) mutual funds have a future date (e.g., 2020) in their title. Investors choose the date closest to the year that they turn 65. The percentage of stock in the fund portfolio decreases automatically as investors get older. Quinn likened this to "having a high-priced advisor automatically allocating assets for your age." At a certain point after the target retirement date, the fund becomes an income fund. The other type of low-maintenance fund is a lifestyle fund, which holds a mix of stock, bonds, and cash. Investors choose the mix that best matches their risk tolerance level. The portfolio doesn't change automatically, however. Investors would need to change their asset allocation themselves. Quinn advised investing with low-cost providers such as Vanguard, Fidelity, and T. Rowe Price. As a "wildcard" investment, with a small percentage of assets, investors might consider commodity funds.
- A big area of concern for current retirees and soon-to-be (baby boomer) retirees is making proper retirement income withdrawals. Quinn reinforced the frequently recommended advice to withdraw no more than 4% of assets during the first year of retirement with a 3% inflation adjustment thereafter. She also cautioned against buying investment real estate unless rent covers the carrying costs and tax-deferred variable annuities with high fees and surrender costs. Again, Quinn preached simplicity recommending, instead, a fixed annuity and/or stock index funds.
- In the question and answer section of the program, Quinn was asked what investments are appropriate for people with $25 or $30 a week to invest. She recommended having money deposited automatically into an employer retirement savings plan or mutual fund. "You can save more than you'd ever realize if you do it automatically and live on what's left," she told the audience. "Automation is the only magic in personal finance." Quinn also advised the audience to invest regular amounts at regular time intervals (e.g., $50 a month), a practice called dollar-cost averaging (DCA). She noted that DCA is very useful in a "zigzag" market (such as 2006) to catch the ups and downs.
- Hedging market uncertainty was also on the minds of the audience. In response to a question about the best hedge against fallout from an Asian Flu pandemic, Quinn advised conservative investments such as U.S. Treasury bonds. In the event of an oil emergency, good investment hedges are Treasury Inflation Protected bonds (TIPs), inflation-adjusted Series I U.S. savings bonds, and energy mutual funds. Quinn also discounted fear about a meltdown in U.S. stock prices caused by retiring baby boomers selling their stocks. She told the audience that she was not concerned about a market crash caused by demographics, noting that there is "lots of money in the rest of the world to buy the boomers' stocks. The stock market is a global market."