Understanding Bonds - Question 89

How do bonds work?

When a bond is issued by a corporation or a municipality, it is sold at face value. The investor usually pays $1,000 per bond. The par value also includes the amount that will be redeemed or repaid at maturity.

To calculate the market price of a bond, use the following formula:

current yield = amount of coupon / market price

If a 6% bond is issued at par or $1,000, the amount of
coupon interest = $60

.06 = $60 / $100

When the Federal Reserve raises interest rates to 8% in order to reduce inflationary pressures, the market price is reduced as follows:

current yield = amount of coupon / market price

current yield = .08
coupon (remains constant)= $60
market price = X

.08 =$60/X ; 08 X = $60; X = $601.08; X = $750 market price

When interest rates are lowered, the market price of a bond increases. Let's assume the Federal Reserve lowers interest rates from 6% to 5% to stimulate the economy. The effect of the market price is as follows:

current yield = amount of coupon / market price

current yield = .05
coupon = $60

.05 = $60/X X = $1,200 market price

Understanding Bonds

Many investors view bonds and bond mutual funds as conservative investments that provide a steady income and represent a minimal risk to principal. That’s because if you hold your bond until maturity, you get the full amount of your investment plus interest. (A bond is an obligation of its issuer to pay the interest and principal as promised.)

Zero-coupon bonds are very popular among parents and grandparents who are funding a child's education. A zero-coupon bond is issued at a discount from its par value (or face value). It only pays interest with principal at maturity or at the time the bond is called. Unlike other types of bonds, interest on zero-coupon bonds is not paid to you every six months; it is automatically reinvested or compounded at the agreed-upon rate at time of purchase. The combination of compounding and the discounted price means that a relatively small investment can multiply significantly before the bond matures. The longer the maturity length of the bond, the deeper the discount usually is.

In addition to being used to fund a college education, zero coupon bonds appeal to many individual investors who are planning for retirement. If placed in SEPs, IRAs or Keoghs, they are not subject to immediate taxation since these accounts are tax-deferred. By making an investment in a zero-coupon bond today, investors know exactly how much they will receive at maturity.

Municipal bonds are debt securities issued by public authorities (such as states or municipalities) to raise funds for building or repairing schools, highways, prisons, bridges, tunnels and other public works. The interest payments you receive on municipal bonds is free from federal income taxes. The higher your tax bracket, the more you will benefit by investing in “munis” and earning tax-free income.

If you live in a high income tax state you may also derive additional benefits from owning in-state bonds that are also state income tax-exempt.

Interest on bonds issued by the U.S. Virgin Islands, Guam and the Commonwealth of Puerto Rico are exempt from federal, state and local taxes in all fifty states.

Corporate bonds complement many investment portfolios especially retirement accounts and accounts with low marginal tax rates.

Many reputable companies raise capital by issuing corporate bonds to purchase or update equipment, build plants, and replace outstanding debt with lower cost issues. Credit rating agencies such as Moody’s and Standard & Poor’s (S&P) study the creditworthiness of the issuer of the bond, and assign a rating to that bond as a general guideline for investors.

Investment grade ratings used by agencies are:
Moody's S&P
Aaa AAA
Aa AA
A A
Baa BBB

These agencies revise their ratings when they feel the creditworthiness of an issue changes.

United States government securities are among the most\ secure of all income-producing investments. They are available in two forms: direct obligations of the U. S. government and those issued by various agencies which are indirect obligations of the U.S. government.

All bonds (U.S. Treasuries, federal agencies, zero-coupons, corporate and municipals) are subject to market fluctuations if you sell them before they mature. Investing in bonds has become more complex in recent years as the choice of taxable and tax-exempt bonds has expanded and volatility in bond prices and interest rates has increased. (Question 89 to 102)

Understanding Equities - Question 88

Should I invest in retail company stocks?

Your question is very general and, while there are many dynamic retail corporations, there are also retailers who have either been unable to find their markets or have lost them.

An excellent way to judge retail sales is to make a “samestore sales comparison.” To do this, you need to compare sales at-stores that have been open for at least one year. By looking only at stores that have been open for a year or more, you eliminate the effects of increased sales caused by recent new store openings.

When analyzing a manufacturing company, use comparative unit sales rather than dollar sales to get a better indicator of demand for the company's products.

Understanding Equities - Question 87

What are defensive stocks?

Defensive stocks are stocks that are less vulnerable to the savings of the business cycle than most other stocks tend to be. Some defensive stocks include utilities, tobacco and food stocks. They are considered defensive because consumers need to buy these products or services regardless of changes in their personal incomes or job situation.

Understanding Equities - Question 86

What is the difference between “technical analysis” and “fundamental analysis” in evaluating stocks?

Fundamental analysis studies the basics of a company’s finances and its economic prospects before making a decision to buy, hold, or sell its stock. Fundamental analysis studies a company's prime earnings ratios, dividend history, rate of return, sales, and profitability history and trends.

Technical analysis uses past and current stock price movements to predict future prices of a company's stock. It relies heavily on charts to plot the price movement of stocks. No consideration is given to any of the components used in fundamental analysis.

Understanding Equities - Question 85

What is the difference between a limit order and market order?

A “limit order” specifies the highest price you are willing to pay for a stock, or the lowest price you will accept for the sale of a stock you own. If you make a “market order,” you are not specifying a price; your order will be executed for the best price available at the time you place the order. You'll learn the price after the order has been executed.

Understanding Equities - Question 84

How do analysts evaluate a stock? How accurate are they?

Analysts evaluate stocks by examining the earnings of a company and its prospects for the future. They also analyze the prospects for growth for the industry and economy, and look at the historical data of the company’s finances. They may meet with the company's management and discuss its growth and operations to get a feel for the effectiveness of its leadership. Some analysts meet with the company's competition, suppliers, customers and clients, and look for trends within the industry as well as the company. It is crucial that the analysts study the demand for the company's products or services (both domestically and overseas) so that they can accurately forecast growth prospects. In addition, they must have thorough understanding of the company's finances, profit margins, and areas for improvement.

Analysts who are not accurate in their predictions usually have to change jobs because they're replaced. Analysts stick out their necks by making forecasts and predictions, in black and white, in written reports. They are held accountable.

Understanding Equities - Question 83

Do you recommend reinvesting the dividends I receive from blue chip stocks I own?

Definitely. The return you get by reinvesting dividends is much greater than you get by receiving cash dividends. The Standard & Poor's Composite Index of 500 widely held common stocks (commonly know as the S&P 500) has increased more than 400% during the past 15 years. If dividends from these stocks had been being reinvested in purchasing additional shares during this period, the return would have soared to 851 %.

Understanding Equities - Question 82

How can I time the stock market just right?

Trying to time the stock market is something that you should avoid. Historically, it has been proven that individuals cannot time the stock market well. It’s much more important in order to get a high return on your investments over the long term, and to have the proper asset allocation. The proper asset allocation has counted for 91 % of investment returns whereas market timing has only accounted for 2-3%.

Understanding Equities - Question 81

Florida Power and Light (FPL) cut my dividend by 34%. Is there any indicator that could have alerted me in advance? I don’t have a broker.

One of the indicators that is commonly used to warn investors that a company is going to cut the dividend is that the dividend becomes greater than the earnings of the company. When the dividends of the utilities are approaching 90% or more of its earnings, that dividend may be in danger of being reduced or eliminated. This was the case with FPL.

Understanding Equities - Question 80

Why were my utilities stocks down almost 30% from a year ago?

Utility stocks are very interest rate-sensitive. Because they borrow heavily to finance their operations as interest rates go up, the value of utility stocks tends to go down, because they have historically, paid a higher percentage of dividends than other stocks do. During the year you mentioned, there had been six increases in interest rates; that had adversely affected the value of utility stocks.

Understanding Equities - Question 79

What is the origin of the stock market terms bear and bull?

In 18th century England, bear skin traders frequently sold their skins before they had actually caught them. “Bears” came to refer to speculators who sold shares they did not own; hoping for a price drop. They would then buy the stock after it had fallen and would immediately sell it for a higher price. Bull probably came to mean the opposite of bear.

Understanding Equities - Question 78

What is the difference between the “bid” and “asked” prices I see in the stock quotation listings in any local newspaper?

The “bid” is the highest price an investor is willing to pay for the same security. The "asked" is the lowest price at which an investor is willing to sell a security at a specific time.

Bid and asked confuses many investors. To avoid confusion, rephrase them as, respectively, “What can I buy it for?” and “What can I sell it for?”

Understanding Equities - Question 77

What does P/E mean? I see it in the paper when I look up my stocks.

PE stands for the price-earnings ratio. To calculate the P/E for a particular company, divide the market price of one share of stock by the annual earnings of one share of stock. For example, if the market price of a specific stock is $30 and the earnings per share are $3, then the P/E = 10.

Investors use the PE ratio as a yardstick in evaluating a company's comparative worth. Some analysts recommend buying stocks with low P/E ratios (under 10) because it may be undervalued. It's a good idea to understand what PE is and realize it is one of many measures to use when deciding whether to invest in a particular company.

Understanding Equities - Question 76

When should I sell a stock?

This is a common question that has no simple answer. When to sell a stock depends upon your investment objectives. Many people buy a stock and have no idea when they plan to sell it. In other words, they really have no investment goal. What happens is: the stock goes up and they don't want to sell it because they'll have to pay capital gains tax on it. Then, the stock starts to drop below the purchase price, causing great concern. They don't want to sell the stock then because they’ll have a loss. So they decide to wait until it rises up to breakeven and then at that point they plan to sell it. What happens? The stock continues to drop below the lows and reaches new lows.

For fear of paying the tax on the capital gain, these investors have missed a profit opportunity and incurred a loss.

This loss could also have been avoided through the use of a stop loss order. You determine at the time you purchase a stock that if it drops 10-15% below the purchase price, it is automatically sold. So, by having a selling discipline in place, you will limit your loss. As stocks starts to rise and reach new highs, you keep reestablishing your selling discipline to 15% below the new high and when it reaches that new low, the stock is automatically sold. This is one method of locking in a profit and not riding a stock without a plan.

Understanding Equities - Question 75

What stocks make up the Dow Jones Averages?

The Dow Jones Averages consist of 30 industrial companies (the Dow Jones Industrial Average), 20 transportation companies (the Dow Jones Transport Averages) and 15 utility companies (the Dow Jones Utilities Average).

The breakdown (as of 4-95) is as follows:
Industrials Transports Utilities
Union Carbide Santa Fe Pacific American Electric Power
IBM Alaska Air Detroit Edison
Alcoa XTRA Corp. Peoples Energy
Caterpillar Consol. Freightways Unicorn Corp.

Understanding Equities - Question 74

What are the various indices listed in the financial section of the newspaper? What do they mean?

- The most commonly quoted index is the Dow Jones Industrial Average (Symbol DJII). Thirty of the largest blue chip common stocks traded on the Big Board (NY Stock Exchange) comprise the Dow Jones Industrial Average.

- The Standard &Poor 500 (S&P 500) consist of 500 blue chip stocks. The S&P 500 symbol is SPX. This is the gauge used by most portfolio managers to compare and measure their performance.

- Dow Jones Transportation Average (symbol DJIT) is used to track 20 large transportation common stocks.

- Dow Jones Utilities Average (symbol DJIU) tracks 15 utilities stocks.

- American Stock Exchange (symbol AMEX) is the third largest stock exchange in the United States. This index tracks stocks on this exchange.

- NASDAQ Composite Index (symbol COMP) consists of smaller, usually more volatile companies traded on NASDAQ's National Market System.

- Wilshire 5,000 (symbol WSX) offers the most comprehensive view because it tracks all major NYSE, AMEX and NASDAQ stocks.

- The index for foreign stocks is The Morgan Stanley Capital International Europe Australia Far East Index (EAFE). It tracks 1,080 stocks in 20 countries.

Understanding Equities - Question 73

What is the Dow Jones Average? I hear it mentioned on evening news and I don’t understand it.

The Dow Jones Average is an index of 65 stocks. These 65 stocks, (30 of which are in the industrial category) are large companies such as General Electric, Coca Cola, AT&T, General Motors, DuPont, and Merck. 20 transportation stocks and 15 utility stocks are also included - for a total of 65 stocks.

The Dow Jones Industrial Average is the only price weighted index commonly reported. This means that movements of higher-priced stock affect this average more.

The 15-stock index of the Dow Jones Utilities will give you additional insight because utilities need to borrow more heavily than to finance their capital-intensive operations. That's why this index is such an effective barometer of interest rates.

Understanding Equities - Question 72

What stocks do you recommend that I buy?

It would be presumptuous for me or any other investment advisor to recommend specific investments to you without knowing anything about you. Unless I know your personal background; your name; if you are single, married, divorced or widowed; number of dependents', your occupation, annual income and investment objectives, I couldn't begin to recommend a stack to you. In addition to making specific recommendations, I need to know your investment experience, level of expectations, the types of investments you have and your tolerance for risk. Also, what is the value of your assets? Retirement assets? Debts (including mortgages)? Is there anything unique about your situation? Any health concerns? Legal concerns? Potential inheritances or proceeds for sale of a business or practice?

Obviously if you won a $25 million lottery last year and it is payable over 20 years, your financial situation will have changed dramatically.

These are only some of the reasons why investments that are appropriate for some people are completely inappropriate for others. When a complete stranger telephones you and tries to sell you an investment without discovering fist if it suits your needs, you should politely say “no thank you” and end the conversation.

Understanding Equities - Question 71

What is the difference between preferred stock and regular stock?

Preferred stock and common stock are issued by companies to investors who wish to own part of the company. Preferred stock holders get preference in payment of dividends and in case of bankruptcy or dissolution of the company. Preferred stocks normally pay a fixed interest or dividend; its price varies inversely with interest rates. An exception is when a preferred stock is convertible into the common stock. Then, there will be more of a direct relationship between the price of the common and the price of the preferred stock. Both preferred stock holders and common stock holders have voting rights.

Understanding Equities

Investments in common stocks have proven to be the best long-term protection against inflation. Numerous convincing studies have concluded that proper asset allocation is responsible for more than 90% of the return for individual portfolios. Asset allocation is the process of determining which classes of assets to invest in. Dividend reinvestment plans are an excellent way to improve returns.

Many investors are apprehensive about the ups and downs of the stock market and want a “safer, less-risky investment.” They believe the safest investments for them, as conservative investors, are insured bank accounts, CDs, and United States Treasury bills. But the fact is this: These investments are not designed for growth or inflation protection; they are secure only in that you will be guaranteed return of your principal.

Stocks usually perform better than bonds over the long run even though their value tends to fluctuate more over the course of any given week or month or year. There are various types of stocks designed to meet the needs of all investors: conservative, moderate and aggressive.

- Blue-chip stocks comprise large, well-established corporations that have more predictable earnings. Ironically, these are companies that have been reducing their work forces to try to become more globally competitive.
- Growth stocks are more volatile than blue-chips, but offer higher potential for appreciation.
- Small company stocks have the greatest risks and potential for appreciation.

You can offset your,risk by the following:

- diversifying among several classes of stocks
- having proper asset allocation
- staying invested over the long run in spite of temporary down markets
- being diversified in your employer sponsored 403(b) or 401(k) plan.

Value Line and Morningstar are rating services that, respectively, publish comprehensive one-page reports on common stocks and mutual funds. These reports are usually available in your local library or from your brokerage firm. (Question 71 to 88)

Retirement - Question 70

What do you suggest that I do with my 401(k) plan distribution if my job is eliminated through downsizing?

The best option is to retain the tax-deferred status of your retirement plan by opening an IRA rollover account.

Another option is to take personal receipt of your 401(k) plan distribution and arrange to deposit these funds into your IRA. (If you choose to receive the funds directly, your former employer is required to withhold 20% for federal income tax.) You then may roll over the remaining funds (80%) into your IRA. You are required to roll over these funds within 60 days of receipt. When you file your income tax return, you then file for a refund of the 20% of your distribution withheld.

By electing the first option (a direct rollover), you will avoid the mandatory 20% withholding and have your total lump sum distribution fully invested. Approximately 70% of individuals eligible to receive a lump sum distribution because of a change or loss of jobs elect to receive these funds.

The amount received is considered income and taxed accordingly. If you are younger than 59-112 when you receive this distribution, there is an additional a 10% penalty.

Retirement - Question 69

How can I make sure that I get all of the Social Security benefits to which I'm entitled when I retire in four years?

You can request a statement listing your estimated benefits and total annual earnings. Request a "Personal Earnings and Benefits Estimate" (PEBES) form by calling 1-800-772-1213. The Social Security Administration will send it to you within one week.

Retirement - Question 68

Why is it that some people do not purchase long term care insurance?

Many people believe that Medicare will cover their nursing home costs. The fact is Medicare pays. less than 3% of these costs. It was established to provide for short-term medical attention and not intended to be used for basic care such as bathing and dressing. In rare cases that Medicare covers skilled care costs it pays only up to 100 days. In the United States, the average stay in a nursing home exceeds 450 days.

Some people think they will qualify for Medicaid coverage if they transfer their assets to family members and thereby, become reduced to a state of poverty. But Medicaid has strict regulations against transferring assets to others in order to qualify for Medicaid benefits. In addition, many people would prefer not to see their-life savings wasted to pay their nursing hone bills.

Others do not wait to face the prospect 0f.needing long term care insurance and deny this possibility by saying “it won’t happen to me.” It is estimated that approximately 50% of all Americans age 65 and over can expect to reside in a nursing home at one time or another.

Retirement - Question 67

What should I look for when checking out the facilities of adult communities?

If you know people who are living at a community you’re considering, you have an excellent source of information. Visit at different times of the day and week, talk to the residents, and ask what they like. Ask them if they had to do it over again, would they select this community? If there was anything they would like to change, what would it be?

- Find out what happens when and if health problems occur. What facilities are available? What are the costs?
- Learn about annual fees and the rate of increases for these fees.
- What transportation facilities are available when residents can no longer drive their cars?

The more information you have, the mo.r. e comfortable you will probably feel making a decision.

Many senior citizens, when visiting a community for the first time, say, “This is a great idea, but I'm just not ready.” Once they make their move, though, they are likely to say, “I wish I had done this sooner.”

Senior communities provide people with adult cornpanionship and help eliminate anxiety about being victimized by crime or being alone when one becomes injured or ill. As baby boomers enter their 60s, these living arrangements will probably grow in popularity.

Retirement - Question 66

What do you think of senior life care centers for retirees?

Today's senior citizens are very different from their parents. Technological, medical, and social changes occurring during the past generation have modified the lives and expectations of senior citizens in the 1990s. When many of us were growing up, it was common to have one's grandmother living with the family. As grandmothers became widows and grandfathers became widowers, they moved in to their children's homes. This was the norm.

During the past 20-30 years, more families have become two-working-parent households. Both parents struggle to keep up with the increasing costs of living, the uncertainties caused by down-sizing or lack of job security, and galloping cost of medical services and college tuitions. These people are less able to take care of their elderly parents than prior generations were. Coupled with this dilemma, people are living much longer these days.

The major concerns of today's seniors are:
1. Maintaining their independence and not being a burden to children or spouse.
2. Outliving their savings.
3. Not being able to sustain their standard of living as they become older.
4. Not being able to drive, maintain their home, or feel safe and secure in their home.

Today's economic realities have created a need for life care centers for senior citizens to live in while they are healthy. These are not nursing homes designed for those unable to care for themselves, but are adult communities that provide complete freedom for its residents. The arrangement seems to satisfy a need for companionship. The responsibilities and hassles of home-ownership are eliminated.

Since many retirees relocate to warmer climates, their children may be more than 1,000 miles away. These communities provide a way to be independent for those having the financial means and good health.

Retirement - Question 65

Can I open an IRA (Individual Retirement Account) for my infant daughter?

Yes, you can open an IRA for your daughter- if she earns income. For instance, if she earns income as a child model or actress that would be considered earned income. The amount of her earned income (up to $2,000) could be used to open an IRA, and the portion up to $2,000 would be deducted from her taxable income taxes.

Because of the benefits of compounding, opening an IRA account for children who have earned income is an excellent idea. For example, let's look at a grandparent with a grandchild who earned $2,000. If this IRA was opened when the child was 14, and every year $2,000 was contributed to this IRA for the next six years, the total contributions would be $12,000. Through compounding, and earning a 10% return annually, the earnings would grow tax-deferred. When that grandchild becomes 65 years old, he or she will have earned more than $1 million.

Retirement - Question 64

What happens to my 401(k) retirement plan if I change jobs?

If you wish, you can leave your 401(k) retirement plan in place at your former employer or you can roll over your retirement plan into an IRA rollover plan. In order to avoid a tax consequence, it is essential for you to roll over your 401(k) plan directly to an IRA rollover at a brokerage firm, mutual fund, or bank. If you take a distribution, twenty percent will be withheld for taxes.

Retirement - Question 63

If I withdraw funds from my retirement plan, what are the tax consequences?

If you are under age 59 1/2, there is a 10% penalty on the amount withdrawed plus regular income tax on the amount withdrawn. In addition to the tax consequences, premature withdrawals from investments earmarked to provide for your retirement deny you the benefits of compounding - and of feeling financially secure about your future.

Retirement - Question62

We have a 401(k) plan at work and I haven't participated because I just don't understand it. It seems so complicated. Would you explain what a 401(k) plan is and how it works in simple terms so that I can understand it?

A 401(k) plan is a voluntary retirement program sponsored by your employer. It provides you with an opportunity to save for your retirement through payroll deductions, which are made before taxes are withheld. In addition to deferring taxes on the amount of your contributions, the earnings on these amounts will compound even faster than they would otherwise because all taxes are deferred until you start withdrawing them from your 401(k) retirement plan.

Some companies match employee contributions up to a certain amount or percentage. This is an excellent opportunity to double your money instantly. According to Kiplinger’s Personal Finance magazine, approximately 25% of eligible employees do not participate in their companies’ 401(k) plans.

Retirement - Question 61

As a retiree, how can I maintain my current income (while interest rates we declining) without increasing my risk?

This depends upon what your current investments are. If your current investments are CDs and money market funds, and you wish to increase your return, you will have to increase your risk. There is a strong relationship between risk and reward. You can’t avoid some risk of principal if you try to increase your return. However, if you have no risk of principal and your return is less than the rate of inflation, you will lose money each year.

Retirement - Question 60

I work for a Fortune 500 company and have enrolled in its 401(k) retirement plan. There are about a half dozen investments for me to choose from. What should I do?

A lot depends upon your investment objectives and your age. If you have five or more years until retirement, you may wish to look for growth. Don't keep most of your money in money market funds, government obligation or bond funds. Rather, invest your money in growth funds (both domestic and international). This will keep you ahead of inflation.

Since there are more than 5,600 mutual funds available on the market today, it is very hard to recommend funds without knowing first which funds are offered on your 401(k) selection menu. But if you do have a financial consultant, let him or her knows about your 401(k) plan and ask for recommendations. Even though your consultant does not directly benefit from your 401(k) plan, I believe that he or she will probably extend the courtesy of helping you since you give him other business.

Retirement - Question 59

What is a SEP Retirement Plan? Does it require a lot of paperwork to open?

SEP stands for “Simplified Employee Pension Plan” (it is sometimes referred to as a SEP-IRA). A SEP is an employer-sponsored retirement savings program; the paperwork required to open one only consists of a one-page agreement.

SEPs are much less complicated to establish and maintain than traditional pension plans are, and they offer more benefits than a standard IRA. A standard IRA only allows annual tax-deductible contributions of up to $2,000, whereas a SEP permits contributions up to 15% of annual compensation (up to $22,500).

Contributions to a SEP are a tax-deductible expense. Even if you are in a one-man or one-woman business, you're eligible for a SEP.

Retirement - Question 58

What would happen to my IRA (Individual Retirement Account) if I died before 1 cashed it in? What about taxes?

After your death, your beneficiary will have several choices for receiving the proceeds from your IRA. The 10% penalty tax doesn't apply to these distributions, regardless of your age or your beneficiary's age. The distribution is subject, however, to income taxes (except for amounts that represent a return of nondeductible contributions). Thus, how your beneficiary elects to receive the proceeds can have a significant effect on the tax bill.

For example, if you had already started taking the required distributions because you were over age 70-112, your beneficiary could continue to take periodic distributions on the same schedule. If distributions had not yet begun, the relationship of the beneficiary to the owner will determine how the funds can be withdrawn.

The greatest number of options is available to surviving spouses. Your spouse can cash in all or part of the IRA without paying the 10% penalty. Or your spouse can roll over the IRA to his/her own IRA, making the money subject to the same rules as their own IRA. (Thus he or she would pay a 10% penalty tax if the funds were withdrawn before the age of 59 - ½ and withdrawals must start by age 70 – 1/2.) Another option is to allow the funds to remain in your IRA. The funds can remain in your IRA until the year you would have turned 70-1/2, at which time your spouse would have to start taking distributions based upon his or her life expectancy.

If your beneficiary is not your spouse, he or she has two basic options. Either funds can be withdrawn from the IRA within five years, or the beneficiary can start to take withdrawals within one year of your death (based upon his or her life expectancy). It is important that you name a beneficiary for your IRA in order to make these options available to your heirs. If you don't have a beneficiary and someone inherits your IRA under a will, their only option is to cash in the entire balance in the IRA within five years.

Retirement - Question 57

I am48 years old, self-employed, recently divorced and have been unable to start saving for retirement. Is it too late to start a retirement program?

It’s never too late. Many people have been interrupted in their retirement planning due to divorce or loss of a job. Start saving now. If you look at your alternative, you can’t afford not to start saving for your retirement.

Retirement - Question 56

What is the cost of procrastinating in beginning an investment plan?

Many people intend to contribute to their retirement plans or establish a college education for their infant son or daughter but fail to follow through.

The price of this procrastination can be staggering. The chart below shows the difference in growth between an individual who makes a one-time $10,000 contribution to a retirement plan at age 25 and an individual who makes that $10,000 contribution10 years later, at age 35. (This assumes a tax sheltered investment with an annual rate of 10%). In addition, the benefits of compounding are severely reduced by procrastinating.

Retirement - Question 55

What can I do so that I don’t outlive my retirement’s sets?

This is the #1 concern for most investors. People are living longer and longer, and they're rightly afraid that they might outlive their savings.

To put it in a nutshell, if you can ensure that your retirement assets grow faster than the rate of inflation, then you will never outlive your retirement assets.

One way to ensure that you will not outlive your retirement assets is to have long-term health care insurance, so that your assets are not depleted in order to provide living expenses in case you’re ill or incapacitated. You need to get this insurance while you are healthy and insurable.

Retirement

In the last decade, we have been forced to assume more and more responsibility for our comfortable retirement as employers have increasingly switched from retirement plans with defined benefits to defined contribution retirement plans. Most of these plans are different than government pensions – they lack cost-of-living adjustments (COLAS). Under these plans, you- not your employer- are solely responsible for ensuring that your investments will adequately fund your retirement.

With the average retirement now spanning 20 to 30 years, the major concern for most investors is the danger of outliving one’s assets. Taxes have increased and investors are concerned about reduced earnings on their future income. Increased taxes have affected Social Security recipients; 85% of Social Security benefits are currently taxed for retirees with joint incomes of $44,000 or more and individual incomes of $34,000 or more.

The most-asked questions at these seminars at libraries and book stores are from retirees and pre-retirees. Many are exasperated by the effects of inflation but are too risk-averse to put a major part of their portfolios in investments that normally grow faster than the inflation rate. Playing it too safe by investing in CDs is threatening their purchasing power.

Many brochures printed by banks, mutual fund companies and brokerage firms are entitled “How Can I Afford Retirement?” or “Are You Prepared To Live To Age 85, 90 or 95?” “Are You Saving Enough Or Investing Enough For Retirement?” “Will You Be Able To Afford To Send Your Children To The College Of Their Choice?” We recent ad by a major brokerage fm caught my attention with its dramatic message. “Imagine the cost of putting 15 kids through an Ivy League college and you'll have some idea of what you’ll need for a comfortable retirement.” By taking advantage of 401(k) and other employee-sponsored plans, you reduce your taxable income by the mount you invest via payroll deductions.

If you are self-employed, take advantage of the benefits of establishing a qualified retirement plan such as an Individual Retirement Account (IRA), Simplified Employee Pension Plan (SEP) or a Keogh Plan. (Question 55 to 70)

Economic Influences - Question 54

Can you recommend some magazines H can read to be better informed about my investments?

A lot depends upon your background, education, investment experience, available time and financial situation.

Some of the magazines to which 1 subscribe are Forbes, Fortune, The Economist, Florida Trend, Consumer Reports, US News & World Report, Barron's, South Florida Business Journal, Business in Broward magazine, Wharton, Newsweek and Bottom Line newsletter. In addition, I read two local newspapers and The Wall Street Journal each morning. At my office, there are company publications that help keep me informed about the markets.
I confess that I am frequently frustrated because I don’t have enough time to read all of them. If you’re just starting out and have no prior investment experience or knowledge, Kiplinger’s Personal Finance magazine is an excellent choice. I suggest you attend seminars that are not pushing a specific product, and try watching the CNBC channel on cable television or the Nightly Business Report on public broadcasting television stations.

Economic Influences - Question 53

Can yon recommend any books on investing?

“Making The Most Of Your Money” by Jane Bryant Quinn is an easy-to-follow step-by-step guide about organizing your financial affairs. (You can even learn while commuting; it is available in four audio cassettes which are read by the author.) Ms. Quinn is a columnist for Newsweek magazine and is syndicated in 250 newspapers nationwide.

There are many other excellent books on investing, such as Peter Lynch’s “Beating The Street.” He writes in an easy-to-understand manner, avoids jargon-and makes sense. Mr. Lynch earned his reputation as a manager of the Fidelity Magellan Fund.

Another book is "St n: A Guide For Selecting Markets for Lo Jeremy Siegel, professor of finance at the Wharton School, University of Pennsylvania. The book makes a strong case for investing in stocks rather than bonds over the long run, by showing that a 40-year old saving for retirement can expect much higher returns from stocks than bonds. Dr. Siegel was recently voted “Best Business School Professor” by Business Week magazine.

“The Great Boom Ahead” by Harry S. Dent, Jr. is an upbeat forecast for investors on the reasons they will prosper during America's protracted boom. After reading this book I felt very positive about our economy. Dent believes that as the baby boomers reach their peak spending years (ages 45-50), this spending wave will result in a Great Boom. Dent presents a very persuasive case for investing in equities to capitalize on “The Great Boom Ahead.”
In addition to reading these books, you may wish to enroll in an adult education course at your local high school or college.

Economic Influences - Question 52

How can I learn more about investing so that I don’t have to depend upon others for my financial well-being?

Attend more seminars, enroll in a basic adult education course in your community; get an overview by reading some of the “How to” books in this store or from your local library.

Economic Influences - Question 51

Would you explain the difference between growth stocks and income stocks?

Growth stocks, as their name suggests, offer above-average growth that exceeds the rate of inflation. If you are seeking to benefit from your investments in five years or more and don’t need current income, you'll probably benefit more by investing in growth stocks, especially if they are in a tax-sheltered retirement account such as IRA or 401(k) plan.

Income stocks provide relatively high-paying dividends; utilities used to be in this category until 1993-1994. There is a trade off between income and growth. Many retirees in their 60s mistakenly seek to maximize their current returns or current incomes by forsaking growth in their portfolios. These retirees are positioning themselves to be victimized by inflation if they live a normal or longer than-normal life span.

Economic Influences - Question 50

I’ve heard the term “sandwich generation.” What does it mean?

The “sandwich generation” refers to the generation (usually in their 40s or 50s now), who are supporting elderly parents as well as providing financial support for their children (usually by paying for their college educations). This generation is sandwiched between an older and younger generation.

In addition to be sandwiched between parents and their children, many are trying to provide for their own retirements. They may also be faced with the possibility of downsizing within their own companies and are concerned about the possible loss of their livelihoods. All this pressure to balance conflicting demands creates considerable stress. To compound this problem, their adult children may be part of the “baby boomerang” generation. (These are adult children who have left the family nest and later return to live with their parents.)

Economic Influences - Question 49

Do you think Social Security will be around when I am ready to retire? I am 29 years old.

A recent survey asked Americans in their 20s - your age group - about their attitude and opinion of Social Security. More of them believed in the existence of UFOs than that they would someday receive Social Security benefits. Social Security will survive - but benefits will probably decrease as older eligibility ages are established. The normal retirement age of 65 years will begin to change in the year 2000. This will affect those born after 1937 and the eligibility age will gradually increase to 67.

You must take responsibility for your retirement by realizing Social Security will provide only a base level of income during your retirement years. It was never intended to function as a retirement plan but only as a supplement. You need to shoulder your retirement needs by starting to invest in tax deferred investments such as IRAs, 401(k) plan, SEPs, and Keogh when you are young so that time and compound interest will make your retirement nest egg multiply. Never before has a comfortable retirement depended more on personal financial planning and disciplined savings.

Economic Influences - Question 48

Isn’t most of the U.S. national debt in the hands of foreigners?

No. Approximately $750 billion worth of U.S. Treasury bonds are in the hands of foreigners. This figure seems immense, and it is. But it is only 15% of the national debt, which is currently about $5 billion. The largest holders of the national debt are domestic pension funds.

Economic Influences - Question 47

What is the relationship between the budget deficits, the national debt, and the stock market?

The budget deficit (which is computed annually) is the difference between the amount of receipts and expenditures of our federal budget. (By the way, the sum of the annual budget deficits since this country was founded equals the total national debt of our nation today.)

As the debt service (interest payments to bond holders) of our national debt increases (representing a bigger drain on our economy), the stock market suffers. Currently, one out of six dollars raised in taxes is used to pay interest on our national debt. As this debt increases, we will have less money to pay for capital investment and to rebuild the infrastructure of our country. That threatens to reduce our standard of living, and will certainly depress the stock market.

Economic Influences - Question 46

How does indexing work?

Indexing is a way to remove the effects of inflation when calculating benefits for special groups, or when measuring real results from an investment.

For example, benefits for both Social Security recipients and military retirees are indexed to the Consumer Price Index (CPI).

By using indexing to compute the real rate of return, some tax reformers suggest that home owners will not be penalized when selling homes that have appreciated solely because of inflation. Others recommend that indexing be used to calculate capital gains for all investments.

Economic Influences - Question 45

What is the NASD?

“NASD” stands for the National Association of Securities Dealers. The NASD operates under the supervision of the Securities and Exchange Commission (SEC), and under fair and equitable rules of securities trading.

Economic Influences - Question 44

How does the stock market perform during pre-election years?

Since 1940, pre-election years have been, by far, the best performing years for the market. Realizing that past performance is no indication of future results, the numbers for the past 50+ years for the S&P index with dividends reinvested are:

pre-election year average +21.05%
election year average +12.40%
post-election year average + 7.81%
mid-term election year average +10.23%

Economic Influences - Question 43

What will happen when baby boomers begin to retire?

It is estimated that in 2010, when baby boomers start to reach age 65, the number of retirees will soar. During the next decade, the overall population growth in the U.S. is expected to grow at approximately 2% while population growth for retirees is expected to exceed 25%. Currently, about five working Americans support one retiree. When the baby boomers begin to retire, it is estimated that three working Americans will support one retiree.

Reducing Social Security or Medicare benefits is a hot potato that almost all politicians refuse to touch because they fear that retirees in their districts will vote them out of office at the next election if they do take a position.

The more politically palatable remedy will be to increase the age when retirement benefits begin. Complicating this formula are unknowns such as increasing longevity due to medical advances like genetic engineering and discoveries of cures for diseases (especially those affecting the elderly).

If the aging process can be delayed by medical advances and discoveries (as some foresee), the retirement age in 25 - 40 years may be 75-80 years.

Economic Influences - Question 42

My son is a sophomore in college. Recently he asked me which career would provide the best job security. What should I tell him?

Tell him that job security is an oxymoron. It is an anachronism not only in America, but also in almost all modem societies. Even U.S. Military and U.S. Naval Academy career officers who were combat veterans in the Persian Gulf are being separated from the service prior to retirement.

The concept of working for one company for 30-40 years and then retiring is outdated. Companies that were known for never laying off employees (like IBM) are using all sorts of euphemisms to verbally soften the impact of firing employees for economic reasons. “Downsizing,” “out placing,” “de-jobbing,” and “discharging” are some of the terms used.

The dwindling size of Fortune 500 Corporation work forces has motivated many displaced employees to operate small businesses out of their homes. These small businesses are frequently linked electronically (by fax, e-mail, and Internet) which enables these entrepreneurs to benefit from flexible working time and more creative environments. They have been the fuel that's fed our economy's most recent recovery.

What can your son do to prepare himself so that he has job security when he graduates? He must realize that he really is in business for himself, and needs to market himself on a temporary basis to his employer, knowing that his position is temporary. Realizing this temporary state of employment, he must be constantly improving his marketable skills and must always be ready to adapt to changes in the workplace.

Tell your son that he needs to develop public speaking skills become computer proficient and (especially if he wishes into business in an internationally diverse region like California, Arizona, Texas or Florida) be able to speak and understand Spanish. He can learn public speaking at schools or at Toastmasters clubs. Why Spanish? Within 4-5 years, approximately 20% of the U.S. population will speak Spanish as a primary language. Spanish speakers represent one of the fastest growing segments of our population.

Economic Influences - Question 41

I’m a recent window. My husband managed all of our investments for more than fifty years - while I raised our children. I am afraid to manage these investments because I have no experience in financial planning. I can’t afford to lose this money. But I also don't want to have to depend upon a stranger for my financial well-being. What should I do?

Many women are in your situation because many women have, historically, married men five to ten years older than themselves. Also, women outlive men by six years on the average. This means that many women are widows for fifteen to twenty years. Many women who are currently in their sixties or seventies never worked outside of their homes. They raised their children while their husbands earned a living and managed the family’s investments. They had no preparation, knowledge or experience of financial matters because their husbands took care of everything. Unfortunately, they have no choice now that they are widows. They must assume responsibility because no one else will. You must recognize that no one is more concerned about your money than you are.

You can start to become knowledgeable by attending seminars, reading some basic books on investment, or enrolling in a local adult education course. And don't be afraid to ask questions. If you have a relationship with a broker or financial consultant, insist that this person explains everything that you feel you should know about. If you are uncomfortable with anything about an investment, make sure it's clarified to your satisfaction. If you have a broker who wants to take over and asks you to sign a discretionary account, be aware that you are giving that person limited control over your finances.

By having some basic knowledge about investing, you will be able to ask the right questions. You’ll feel confident that you are making good decisions about your own well-being, and are not dependent upon others for your financial health.

Let me stress once more the importance of not being afraid to ask a question about your portfolio because you feel “it’s a dumb question.” The only dumb question is the one you were too embarrassed to ask. Remember, it is your money, so go ahead and ask that question!

Economic Influences - Question 40

I’ve heard it mentioned that women need to earn higher returns on their investments than men. Why?

Some analysts say that, because women usually earn only 60-70% of what men make, they have to catch up by making sure they earn higher returns on their investments. This may be valid in many situations, and I do not dispute their answer. However, even if we assume there is no difference in pay between genders, women still need to earn a higher return simply because usually they live about six years longer than men do.

According to the National Council for Health Statistics, among all Americans born in 1950 who attain age 65, men are projected to live to age 81 while women are projected to live to age 87. This means that because many women often care for the children, they spend fewer years in the work force and enjoy fewer pension benefits.

Economic Influences - Question 39

What is the “retirement gender gap?”

Very simply, women outlive men, and need their retirement assets to sustain them for six years longer. That’s the “retirement gender gap.”

According to KPMG Peat Marwick, women over age 25 are employed an average of 4.8 years for every 6.6 years that men work. Frequently, full vesting in corporate pension plans requires five years of continuous employment. Since women tend to earn 63% of the salary of a male colleague, and receive fewer pension benefits, they will be forced to save a greater portion of their incomes in order to have the same standard of living as men do when they retire.

Economic Influences - Question 38

What prompts the Federal Reserve Board to raise or lower interest rates? Are there any indicators that can help individual investors like me anticipate the moves of the Fed?

Fears or concerns about the economy prompt the Federal Reserve to adjust interest rates. Fear of inflation can cause the Fed to raise interest rates, and fear of recession or economic slowdown prompts the Fed to lower interest rates. Some of the indicators you may wish to keep an eye on are:

- T Producer Price Index (PPI) is an excellent indicator of future price increases or decreases.
- Consumer Price Indexes (CPI) is a survey of housing prices, utilities, consumer products and services.
- Gross Domestic Product measures growth or business activity. (Generally, when GDP is above 3%, it is considered inflationary.)
- Capacity Utilization is a measurement of the rate in which plants and utilities operate as a percent of total capacity.
- Employment and Unemployment Data. As employment figures go up, more employment creates more demand for workers. This results in higher wages, which is considered inflationary.

Economic Influences - Question 37

Whenever there is a negative economic report (like an increase in unemployment), the stock market seems to go up. Why is bad news good for the stock market?

Wall Street has a tremendous fear of inflation. When reports say that the economy is doing well, analysts fear that the economy will be heating up and that inflation will start to rise. Since that tends to have long-term negative effects upon the stock market, analysts tend to agree that the Federal Reserve will have to step in and raise interest rates. The Fed may also reduce the economy's money supply. This tends to slow the economy and prevent expansion - and can almost create a recession. This has a detrimental effect upon the stock market in the long run.

When there is economic bad news (which indicates that the economy is growing slowly or not at all), then the Federal Reserve is likely to stimulate the economy by encouraging businesses to borrow by lowering interest rates. This has a positive effect upon the stock market.

Economic Influences - Question 36

I watch Wall Street Week every Friday on PBS and enjoy it. However, I’m totally confused after seeing this panel of experts disagree - some are bearish and others are bullish. Do you have any suggestions for making sense of dl of this?

These days we have a surplus of information - and much of that information is contradictory. It is very confusing to hear one expert give cogent reasons for the economy to perform in a certain way and then hear another expert argue forcefuI1y about why the economy is likely to move in the opposite direction. The credentials of each expert are apt to be very impressive, and this only adds to the frustration.

I sympathize. And I am reminded of a recent year-end Wall Street Week program. Each of the guests on the show was dressed formally as if he or she were attending a New Year’s Eve Party. The host reviewed each of the expert's predictions for the past year and then invited them to predict the highs and lows of the Dow Jones Industrials for the next 12 months. (The variation among the guests in predicting the year-end for the Dow varied by more than 1,000 points)

We need to keep these short-term views in perspective. The truth is, smart investors take a long-range view and invest for the long-run. If you invest over the long-run in solid companies and solid investments, then the minor ups-and-downs of the market (and of the opinions of commentators) have a minimal impact on your portfolio.

Here are some rules for long-term success: Invest in companies that are leaders in their industries and enjoy a 15% or - more annual increase m earnings over the past five year. Reinvest the dividends. Companies that are able to increase their earnings consistently regardless of the economy are usually well-run. Avoid being enticed by “bargains” in the stock market that offer “a quick killing.” Review your monthly financial statements, and do not worry about monitoring your investments every day. Remember, you're in it for the long run.

Economic Influences

It is estimated that two thirds of all Americans do not pay their Visa or Mastercard bills in full when they receive them. Many simply make the minimum payment and let the annual interest charges of 18% plus escalate.

Interest rate charges for consumer debt are no longer tax deductible. This means that people in the 28% tax bracket must earn 25% before taxes to be able to afford to pay 18% in interest charges after taxes for their credit card debt. Where can you find an investment guaranteed to pay you a 25% annual return? By eliminating your credit card debt you will have avoided a minus 25% annual drain on your assets.

Many investors feel that the greatest risk to their portfolios is economic and financial volatility. It is not. Inflation is the greatest risk.

If inflation averages 4% annually, how much will your purchasing power shrink?

After 5 years of 4% inflation, the value of $1 is just 82 cents
10 years, the value of $ l.66 cents
15 years, the value of $1.54 cents
20 years, the value of $1.44 cents
25 years, the value of $1.36 cents

This means that a 4% annual inflation rate will reduce the purchasing power of $100,000 as follows:
Number of years Purchasing power
5 years $82,000
10 years $66,000
15 years $54,000
20 years $44,000
25 years $36,000
30 years $30,000

As we examine these figures (assuming that inflation will only average 4% annually), today’s retiree will need to double his or her income every 18 years to maintain the same standard of living they currently enjoy. (Question 36 to 54)

Brokerage Firm - Question 35

I am 74 years old and have account at three brokerage firms. Do you advise that I consolidate these three accounts into one?

I recommend that you do whatever you feel most comfortable doing. If you can manage three different accounts, and each of the accounts is enabling you to achieve your investment objectives, there may be no need to consolidate them. However, many investors who maintain different accounts may be creating a tremendous amount of unnecessary paperwork for themselves.

If you are one of these people, consolidate your investments with the financial advisor with whom you feel most comfortable and believe is most able to help you obtain your objectives. Consolidation of brokerage accounts facilitates timely settlements and helps to prevent late fees and interest charges. Remember, it is important for you to streamline your portfolio and eliminate unnecessary paperwork while you’re in good health. Can you imagine the hassles and added expenses that your loved ones will have trying to unravel your affairs if you are not able to help them?

Brokerage Firm - Question 34

How does a discretionary amount work?

In a discretionary account, you authorize a financial consultant or broker to make investment decisions without consulting you first. The broker has the authority (or “discretion”) to buy or sell investments that he or she thinks are in your best interests.

Brokerage Firm - Question 33

What kind of questions should my financial advisor be asking me when we meet for the first time? What should I tell him or her?

Some of the questions your financial advisor should be asking deal with your objectives for investing: the reasons why you are investing, the level of risk that you are able to assume, and the amount of money you have to invest. Remember that your financial advisor is a consultant. In order to help you, he or she needs as much information as possible about your expectations, your prior investment experience, your assets and liabilities, and your time horizon. This person should treat everything you say as confidential -you need to be clear about that with this person before divulging any information. You should tell your financial advisor everything he or she needs to understand about your finances (including your prior investment successes, disappointments and expectations). If you have accounts held at other firms, let this person know. If you or members of your family have any major health or interpersonal problems, your financial advisor may need to know this information. This way he or she will be able to better advise you about health and estate planning matters.

Brokerage Firm - Question 32

How do I calculate my net worth?

Your net worth is a balance sheet listing of your assets (what you own) and your liabilities (what you owe). The difference represents your net worth.

Your bank can give you a “Statement of Net Worth” forms that are used by loan applicants. Fill in values for assets using the appropriate market value (not your cost price). Separate your assets by liquid and non-liquid investments. (Retirement plan assets such as 401(k) plans are considered non-liquid assets.)

Brokerage Firm - Question 31

How can I be more knowledgeable about investing so I don’t need a broker?

Without being facetious, all you need to do is have as much knowledge, judgment, and up-to-date information as a competent full-time broker or adviser. In addition, you need to be willing and able to spend 40-50 hours weekly managing and monitoring your investments.

Obviously, if you're asking this question, you have reason to feel that the commissions you have paid in the past to a brokerage firm or broker have not been justly earned by that broker or firm.

Brokerage Firm - Question 30

Mow would you describe an ideal investor or client?

An ideal investor does five things:
1. Is willing to invest without procrastinating.
2. Consistently adds to his/her account.
3. Communicates clearly his/her risk tolerance, and has reasonable expectations.
4. Expects the market to fluctuate, and takes advantage of any fluctuations via dollar cost averaging.
5. Doesn't get discouraged when things get tough. That means having the long-term perspective to ride the ups and downs of the market, and doesn't sell at the first down-turn.

Brokerage Firm - Question 29

What happens if my broker becomes bankrupt? Are my securities protected?

If your brokerage firm is a member of the Securities Investors Protection Corporation (SIPC), the account is insured for balances up to $500,000.

Ask your broker for information.

Brokerage Firm - Question 28

What is the difference between the prime rate and the discount rate? Or are they the same?

No. They’re not the same. The discount rate is the interest rate that the Federal Reserve charges member banks when those banks borrow money using government securities as collateral. The raising or lowering of the discount rate is one of the tools the Federal Reserve has to try to stimulate the economy or to reduce inflationary pressures.

The prime rate is the interest rate that banks charge for loans to their most creditworthy customers. It is considered a key benchmark because other rates are tied into it. For example, the interest rate for many credit cards (home equity loan and automobile leases) is based upon the prime rate plus a set number of percentage points.

Brokerage Firm - Question 27

What are the pros and cons of placing my securities in a brokerage firm's vault versus keeping them in my safe deposit box?

Many people are reluctant to out securities in a brokerage firm’s vault. By leaving them in their own safe deposit boxes, they feel they're safer and under their own control. Unfortunately, many securities are misplaced this way. And if you ever lose a stock certificate or a bond, it is a problem to replace it. Also, if you become incapacitated, ill, or die, then access to the securities in the safe deposit box may become very difficult - or even denied - in certain states.

Securities placed in a brokerage firm's vault are insured by SIPC (Securities Investor Protection Corporation) for up to $500,000. Some firms also carry additional insurance for their clients’ accounts.

Securities held at a brokerage firm are probably safer and easier to track than securities held in a safe deposit box.

Many retirees are not enjoying their retirements because they are spending 2-3 or more hours daily managing their investments. Much unnecessary paperwork could easily be computerized and done more accurately by a brokerage firm.

Brokerage Firm - Question 26

I get bombarded with annoying telephone calls from brokers who are trying to sell me the latest stock or bond of the day. They usually call around dinner time. Is there anything I can do to be removed from these cold-calling lists?

Yes, there is. For instance, if you live in Florida and don’t wish to receive sales solicitation calls, get your name added to the “No Sales Solicitation Calls” list maintained by the Florida Department of Consumer Services. (Call the Division of Consumer Services at 1-800-HELP-FLA.) The list is updated quarterly. Your number will remain on the list for one year. The one-year fee is $5. Businesses that solicit calls from numbers on this list can be fined $10,000.
In other states, call the State Attorney General's office or the Department of Consumer Affairs.

Brokerage Firm - Question 25

I have an account at a brokerage firm and I like my broker a lot. However, I read stories in the newspapers about brokers embezzling money from their customers. How can I protect myself against being ripped off?

First, never forget that no one cares about your money as much as you. Get involved in understanding your financial affairs - do not delegate this responsibility completely to a broker, financial advisor, accountant, friend, family member, or even your spouse.

You are responsible for:
1. Reading and understanding your statements, and looking for errors or omissions. Ask your broker or branch operations manager to explain anything you do not understand.

2. Examining your Bade confirmations to make sure they are accurate. File your statements in a loose-leaf notebook separated by month or quarter, and look for my changes in security positions.

To check whether a broker has been disciplined by a regulatory agency or by the NASD in the past, call the NASD toll free hotline at (1-800-289-9999). To find out if the firm is a member of SIPC (Securities Investor Protection Corporation) call SIPC-1-202-371-8300. All brokers and dealers registered with the SEC and with national stock exchanges are required to be members. The SIPC insures customers accounts in case the firm fails. The overall maximum is $500,000 per customer, with a limit of $100,000 in cash or cash equivalents. In addition to the $500,000 protection, provided by SIPC, some firms provide additional insurance. SIPC does not provide insurance against market risks.

Brokerage Firm - Question 24

I get a monthly brokerage account statement and I do not know how to read it. What suggestions do you have for helping me to understand my statement?

Many clients do not understand their monthly statements and are reluctant to ask for help. (They also may not check their checking account statements from their local banks each month.)

Meet with your financial consultant and have him or her explain your entire brokerage account statement so that you fully understand it. If there is any part of the statement that you don't understand, make sure it is explained to you.

If you are not comfortable approaching your financial consultant, you can speak to his or her customer service assistant and have that person explain it to you. You owe it to yourself to understand the monthly statement from your brokerage firm because you are ultimately responsible for what happens in your account. It’s your money!

Brokerage Firm - Question 23

Wow do you find a good broker?

Much the same way you’d find a good lawyer, a good accountant, a good doctor or a good mechanic. Ask friends, and people whom you trust. Find out what they value about that person, and use that as the basis for making your decision. Then meet with that person and discover if he or she is compatible with you. Does his or her viewpoint of the economy and market make sense to you? Does he or she understand your risk tolerance? Your investment objectives? Are the levels of expectations for each of you in harmony? Also, does he or she fully answer the questions that you ask? Is that person condescending or patronizing to you? If so, you will want to work with someone else.

Brokerage Firm

Most Americans feel financial pressures from all sides and must also feel that their personal financial situations have not improved during the past five years. It’s also true that most Americans do not have clear financial plans. By developing a realistic financial plan and paying yourself first, you will be in a better position to achieve your goals. Seek the assistance of a competent financial professional to advise you on investment choices that suit your expectations and tolerance for risk.

Since I am associated with a major brokerage firm, many of the questions asked at my seminars are about whether or not to have a broker, how to find a “good broker,” the problems that may occur if your broker goes out of business, and the ways an investor can use the professional services of a brokerage firm.

When you visit your accountant or tax-preparer, what type of client are you?

Do you drop off a shoe box or shopping bag full of last year’s receipts with the expectation that they will be sorted, compiled and used in preparing your tax returns?

or

Do you have last year's income and expense files neatly prepared and documented so that your records are easy to follow and self explanatory?

Many people realize that they have neither the time, energy, inclination nor financial expertise to act as money-managers. They seek the services of a professional. These investors are not giving up control of their investments; they are using a broker as a financial consultant or investment advisor. In this age of specialization, it usually pays to “do what you do best and hire out the rest.” Successful people know how to use “OPB” (“other people's brains”). If you are a biologist, automobile dealer, orchestra cellist or realtor, then how are you going to find the time, money and energy to be a do-it-yourself money manager? (Question 23 to 35)

Evaluating Investments - Question 22

Could you explain the “Rule of 72?”

The “Rule of 72” is used by investors to compute the amount of time it will take for an investment to double in value. If you take the rate of return you want and divide it into the number 72, the result will be the number of years it takes for the investment to double. For example, if you assume an investment will have an 8% rate of return (compounded annually), divide 72 by 8. Since 72 divided by 8 equals nine, it will take approximately nine years for that investment to double.

If you divide the number of years it takes for an investment to double into 72, you will get the compounded annual rate of return. For example, if you could double an investment in five years, and you divide five into 72, the result is about 14 plus percent (compounded annually). This is the “Rule of 72.” Many people are fascinated by this rule. It works in the same way that 3.14 (pi) works in computing the area or circumference of a circle.

Evaluating Investments - Question 21

How much do you recommend I maintain in cash for quick access? I am 63 years old.

A good rule-of-thumb is to maintain three to six months’ worth of living expenses in cash or money market funds. As one becomes older, there is a tendency to maintain larger amounts in cash. You should maintain an amount that you feel comfortable having in cash. Some retirees take this to an extreme and maintain two to three years' worth of living expenses in cash or money market. It's probably not a good idea to maintain this much money in cash or money market funds because it will not grow as fast as the rate of inflation.

Evaluating Investments - Question 20

I have an investment account managed by the trust department of a major bank. Most of my assets are in municipal bonds, and the rest is in stocks that I've owned for many years. I cannot afford to sell them because of the capital gains taxes that I would have to pay. Should I maintain this account even though I have to pay approximately one percent on the value of my assets in this account annually, and also approximately one percent on any income I receive from this account?

If you are maintaining an investment account at the trust department of a bank and the account is being warehoused or stored, you may want to reevaluate the account's cost structure with the person handling your account at the bank. You may be in an excellent position to renegotiate your fee structure if there are no transactions within your account and your account is static. That same account in a brokerage firm would not be charged a set percentage fee just to store municipal bonds and securities.

Evaluating Investments - Question 19

Any suggestions for a person who wins the lottery?

First of all, it is vital that you tell no one of your winnings, because your life will change dramatically and immediately if you do. You will most likely be besieged by people soliciting you for causes and investments you never dreamed of. By maintaining an extremely low profile, you can avoid being taken advantage of.

Another good idea is to change your telephone number and have it unlisted. Meet with an attorney as soon as possible and set up a trust agreement or partnership so that you can minimize the tax effects of receiving a large sum of money. Do not sign the winning ticket until after you have met with your attorney because there can only be one name on the winning ticket. It may be advisable to name as the winner a trust or partnership suggested by your attorney.

It is vital for you to meet with some professionals so that you make the right moves with your new-found wealth. If you have a winning lottery ticket, it is essential that you safeguard it. Put it in a safe place and tell only those you trust of its location.

There was a $17+ million lottery winner in Melbourne, Florida, on Sept. 4,1993. She owned a local beauty salon and her husband was an air force sergeant. This woman told no one about her winning ticket, not even her spouse or grown children. She put it in a bank safe deposit for safekeeping. At Christmas, she gave her husband a gift-wrapped present containing this winning ticket. But that could have been a big mistake. If she had become ill or incapacitated, the expiration date could have passed (six months and one day after the date on that winning ticket) and the ticket would have become worthless.

In 1994, more than 120 people were struck by lightning in Florida and less than 40 people won the lottery. A Florida resident has more than a three-times-greater chance of being struck by lightning than winning the lottery.

Evaluating Investments - Question 18

What are derivatives? Are they a good investment?

Derivatives are financial investments whose value is derived from another security. An option is one type of derivative. The value of an option is derived from the value of the underlying stock. A derivative enables the investor to have considerable leverage. By investing in derivatives, the returns are much greater in up-markets, but the risks are also worse in a down market. But leverage works both ways. When the markets go down, you can lose everything very quickly.

Many professional investors who have been very successful in good times incurred major losses when the market turned against them, because they invested in derivatives. Remember: “There is no free lunch.” There is a definite relationship between risk and reward.

Evaluating Investments - Question 17

What about investing in commodities?

If you are able to invest in high risk investments such as commodities and can afford to lose the money without it affecting you, your lifestyle, or your retirement plan, then go ahead and invest in high risk investments. But if you can’t afford to lose any principal or find it too stressful to lose money, then do not invest in high risk investments such as commodities or options.

Evaluating Investments - Question 16

What is the “contrarian” investment philosophy?

When everyone else seems to look with disfavor upon an investment, contrarians start to buy it. In order to “buy low, sell high” you have to buy in adverse times and sell in robust times. When a company reports disappointing earnings (causing investors to dump a stock), contrarians view this unfavorable event as a buying opportunity.

Evaluating Investments - Question 15

Won’t I get a better return by investing in a no-load mutual fund since I will not be charged a sales commission?

A study of investor behavior was conducted by DALBAR Financial Services of Boston and published in April, 1994. DALBAR studied 1,000 mutual fund investors for almost ten years. (This is called the Quantitative Analysis of Investor Behavior.) DALBAR measured the average returns that these 1,000 investors received to determine if investors who pay a sales load and receive advice from a financial consultant, enjoyed better, the same or worse returns than no-load investors do. DALBAR’s findings were:

1. Equity mutual fund investors who used a financial consultant outperformed no load investors by 19%.

2. Fixed-income fund investors who used a financial consultant outperformed no-load investors by 17%.

According to DALBAR, “investors who do not seek advice were more likely to panic and sell when the market dived. With the advice and knowledge of a financial consultant available when market conditions are volatile, clients were more likely to hold on to their investments during market downturns.”

Many investors who claim to be long-term investors sell at the first downturn. Without someone steady to reassure them that this negative situation is only temporary, investors do not reap the benefit of stable, long-term investments.

Evaluating Investments - Question 14

I've heard a lot about the attractive returns from overseas investing, but it sounds risky. Cm I benefit from overseas investing by buying stock in blue chip American companies?

Yes. Foreign sales represent approximately an average of 41% of total sales for the thirty companies comprising the Dow Jones Industrial Average (shown below).
The percentage of sales from international sources ranges from a low of 2% for Bethlehem Steel to 79% for Exxon.

The source for these figures is each company’s Investor Relations, Media or Public Relations Department and their annual reports. These figures represent the most recent data available as of April 1, 1995.

Evaluating Investments - Question 13

To diversify my portfo1io through overseas investments, which do you recommend: developed markets like Western Europe and Japan or emerging markets such as those in Latin America and Asia?

According to Morgan Stanley, the annual average rate of return for 1940-1993 was 17% in emerging markets and only 13% in developed markets. The highest growth rates are found in emerging markets. The P/E (price-earnings) ratio is generally lower in emerging markets (reflecting a better value).

I suggest you consult your financial advisor about investing in an emerging market fund with a solid track record. Some of the possible risks of investing in emerging markets that are not encountered in U.S. funds are: fluctuation in currencies, restrictions on foreign investment, the possibility of exchange controls, less publicly available data, less liquidity, and differences in government regulation and supervision. There also may be concerns about political instability, hyperinflation, and market instability.

Evaluating Investments - Question 12

Is there a difference between global funds and international funds?

Yes. Global fund managers invest in stocks of companies throughout the world - including those of the United States. International fund managers invest in stocks of companies outside of the United States or its domestic economy.

More and more, we hear about America being part of the global economy, and about American workers and firms having to compete in the global economy. U.S. businesses, both small and large, have been adapting to this global economy by restructuring their assets, personnel and marketing focuses. Many American companies and brands are globally accepted by consumers worldwide.

In the same way, many foreign companies have plants in the United States and their products are widely accepted by American consumers. The world is becoming smaller through a global economy that provides mutual benefits through increased trade and improved standards of living. Nowadays, nations have more of an incentive to get along economically, and therefore need to maintain harmonious relations. Can you imagine a business offending or upsetting an important customer? The same holds true for nations dependent upon each other for their economic well-being.

Evaluating Investments - Question 11

Isn’t it cheaper to buy no-load mutual funds because you don’t have to pay any fees?

It's a misconception that “no-load” means “no fees,” even though many no-load mutual funds maintain toll-free numbers for shareholders and produce elegant brochures. The cost for these services is paid by shareholders in fees. The “no-load” refers to the no-sales load or sales commissions.

Historically, no-load mutual fund shareholders tend to switch out of these funds more quickly than owners of “load” funds. This is because the sales charge acts as an incentive not to bail out at the first market downturn. No-load mutual funds have a much higher redemption rate than “load” mutual funds. When investors start to try to time the market, they usually penalize themselves by buying high and selling low.

Most investors are better off buying a mutual fund and holding it for the long-run, rather than redeeming it at a downturn and buying more at the upturn.

Evaluating Investments - Question 10

What is the difference between closed-end and open-end funds? Which is better?

Open-end funds and closed-end funds are both mutual funds. Open-end funds issue more shares when shares are purchased. When shares are cashed in or sold, open-end funds redeem these shares and then cancel them. Closed-end funds have initial offerings of a limited number of shares. It's very similar to a stock issue; there are a limited number of shares. The price is determined solely by the market. The price of closed-end funds can be more or less than the net asset value.

Which is better? It depends upon your objectives. Usually a closed-end fund invests in a specific sector (such as country funds). With open-end mutual funds, you can transfer from one fund to another within a family of funds without incurring a sales charge.

Evaluating Investments - Question 9

You mentioned the need to be diversified in order to minimize risk. Wow many stocks do I need to own to achieve diversity?

Although that answer will be different for every investor, the benefits of diversification level off when there are more than ten stocks in a portfolio. Take a look at this diagram:

Evaluating Investments - Question 8

What is the difference between rate-of-return and real rate-of-return?

As an investor, the true test is not what you make on your investments but what you get to keep after inflation and taxes. Let’s assume you have invested in CD that is returning 5.5%. What is your real rate of return?

Total return = 5.50%
less 28% Fed tax = -1.54%
less Inflation = -4.00%
Real rate of return = -0.04%

Evaluating Investments - Question 7

Can you explain “asset allocation?”

“Asset allocation” is the process of determining which classes of assets to invest in. For example, you may invest 50% in stocks, 25% in bonds, and 25% in cash money market, so the asset allocation would be referred to as # “50,25,25.” The way you allocate your assets determines the return over the long run for your individual portfolio. In 91% of all cases, asset allocation was the key influence on portfolio returns.

Evaluating Investments - Question 6

As a retiree, how can I maintain my income without losing purchasing power?

This is a dilemma confronting many retirees. Do you realize that, considering today's increasing life spans, you can spend more time being retired than you spent working? If we look at the Ibbotson chart and we see the different performance of stocks, bonds, and Treasury bills over 50 years, we realize that retirees who put their savings in bonds will lose a lot of their purchasing power and will not be able to keep up with inflation. So you need to anticipate not only income needs but also growth needs. That way, your portfolio will grow faster than the rate of inflation, and you will be able to maintain your purchasing power during retirement without being in danger of outliving your savings.

Evaluating Investments - Question 5

Am I better off investing in stocks or bonds? Which is safer?

It depends upon your investment objectives – whether you are looking for short-term or long-term gains. If you look at the chart provided by Ibbotson Associates, you will see the performance of stocks and bonds over a 50-year period. Obviously, stocks have done much better.

Which are safer? Bonds used to be safer than stocks; but in 1994, the volatility of the bond market made bond funds less safe than stock funds.

Evaluating Investments - Question 4

Are volatility and risk the same?

No. Volatility is a two-way street. A volatile investment tends to go up or down more than the market as a whole does. Examples of possible volatile investments are long-term treasury bonds or zero-coupon bonds. As interest rates rise, the value of these investments will decrease. As interest rates drop, the value goes up. Market risk is the downside of volatility.

Liquidity risk is a concern for an investor who is planning to use the proceeds of the sale of an investment for another purpose (paying for a child's tuition, his/her income taxes, the closing costs of a new residence, etc.).

Almost all of us have seen the effects of liquidity risk among people who have lost their jobs, been faced with divorces, or need to relocate when there seems to be no market for their current homes.

Evaluating Investments - Question 3

How do I measure risk when evaluating an investment?

There are major causes of risk.

Volatility is a sudden shift in value from high to low or from low to high. The more volatile an investment is, the greater profit you can earn. That's because there is a bigger potential spread between the price you pay for it and its market price when you sell it.

Demanding high yield -When the economy is down and interest rates decline, many investors still expect the same rate of return, and seek therefore investments of lesser quality in order to achieve it. Seeking a higher return can result in higher losses as well.

Playing it too safe -The more money you have in the safest investments (like CDs, bank accounts, and treasury bills), the smaller your chances are for substantial rewards. When you play it too safe, there is always the risk of outliving your assets because they won't keep up with inflation.

Evaluating Investments - Question 2

I understand the weed to be diversified. I'm invested in four different mutual funds. Is this being diversified?

It may not be. Many times individuals invest in three different diversified funds hoping that these funds will provide the variety they need to spread their risk, but upon careful examination, we can see that the major holdings of each of these funds is practically identical. So in the guise of diversifying they have triplicated their portfolios and not really achieved their goal. Diversification means not putting all of your investment eggs in one basket. If the basket falls, you've not only lost your investments, but also the time benefit of compounding.

Evaluating Investments - Question 1

With all these different investment choices available, how can I select the best one?

First determine how much money you need to accumulate by a certain date to accomplish your financial goal. Don't forget to factor in a certain rate for inflation. Based upon your time horizon and tolerance for risk, you will be able to narrow your investment choices and select those with which you are most comfortable. A competent investment adviser, financial planner or broker should be able to suggest suitable investments.

Evaluating Investments

Structuring an investment portfolio is an individual matter. Each investor has his or her own unique financial goals, tolerance for risk, time frame, investment experience, and different amount of money he or she wishes to commit. Your portfolio should be the product of a well-executed investment plan that you've reached by consulting with professionals who are thoroughly familiar with your personal circumstances and expectations.

Many of the questions and concerns voiced at my "Informed Investor" seminars deal with the exasperation of investors who are attempting to structure their portfolios. The source of this frustration is the vast number of options investors must choose from. However, by managing risk through diversification and asset allocation, and by maintaining a long term perspective while still focusing on short-term needs, your investment journey will be smoother and less stressful. And, when you look back after reaching your goal, the trip will have been worth it.

What are your most important long-range goals? Building wealth? Total financial independence? Planning for retirement or college for your children and grandchildren? As your personal situation changes, so may your investment objectives. Realize that you are the author of your plan for financial security, and you can modify this plan as your long-term prospects change. (Question 1 to 22)