INVESTMENT CHOICES

The November 9th issue of USA Today had an interesting article about investments. Our choice of investments can have a profound effect on whether or not there will be any money remaining in later retirement years.

First, you have to determine your level of risk. If you will only sleep well at night with your money in bank CDs, then you must be content with a 6% or 7% rate of return in today's market. With bank CDs, your deposits are guaranteed by the FDIC.

The next level of risk is mutual funds. Your deposit is not guaranteed, and you could potentially watch your assets go down. Within each mutual fund family is everything from very low risk to high risk. If someone is very conservative or elderly, I recommend a fund that buys U.S. government securities. They usually return about 5%, although at times in the past the return has been higher.

After that would be a fund that blends bonds and stocks, called a balanced fund. They usually have about 30% bonds, 60% stocks, and 10% cash. When stocks go down, bonds tend to go up, and the reverse is true as well. This provides at least some protection in a volatile market such as we have today. In fact, if you have limited investment funds, I consider the balanced fund to be the ideal investment. Historically, a balanced fund will return 8 to 10%

If you like to take risks and are young, then you can take your chances and invest in a mutual fund that invests in anything from overseas emerging markets to gold. The risks are high, and the potential for gain (and loss) is greater. It's not unusual to have a 50% gain or loss in one year.

The place to begin saving for retirement is in a Roth IRA. You can start one for as little as $50 monthly, and choose the mutual fund you want to use. There is a cap, however, on how much you can put into a Roth IRA. For tax year 2008, the maximum is $5,000 if you are under age 50, and $6,000 if you are over 50. Each spouse must have their own IRA. The money that accumulates will never be subject to income tax. It's the best thing since sliced bread!

I don't recommend buying individual stocks unless you are committed to following the advice of Warren Buffett--buy and hold forever. Otherwise, the risk of loss is too great.

I especially don't recommend getting into options, or paying money to go to a seminar to learn how to day trade. They are appealing to your greed, and they are the ones making money on you.

Once you have reached retirement, you can calculate how much you can safely withdraw by following the 4% rule. That is, never take out more than 4% of your total assets in any given year. That will safeguard your investments over your lifetime, and you will most likely be able to pass on money to your children.

Don't delay planning your future.

MONEY

The concept of money has always intrigued me. It is a medium of exchange that represents a unit of worth. In days past it was tied to gold. Thirty five dollars would buy one ounce of gold. Today the unit of worth of the dollar is whatever we collectively agree to be its value. Of course the government has a big say in its value by controlling how many dollars are in circulation at any given time. If too many dollars are printed, the value of the dollar goes down. Inflation over the years has decreased its value. In 1968 the lumber mills paid wages of about $3.50 per hour. Today, if you can find a lumber mill, your pay might be closer to $22 per hour. That doesn’t mean we are richer today. Everything else has also inflated. In 1960 my father purchased a small two bedroom rental house in Bandon, Oregon for $5,000. Today that same house sells for at least $150,000.

The art of handling money correctly seems to be a great mystery in our culture. Many families have a negative balance in their net worth. If they paid off their credit cards and sold all possessions, they would still owe money. I am a constant witness in my business to poor spending decisions. I see people purchase $35,000 trucks on a $35,000 annual income, with no health insurance on their family, and no life insurance on the breadwinner.

One solution is to spend less than you make. It seems to be a principle that few understand. It is easy to do if you have no credit, but hard to do if you are addicted to credit cards. As a culture, we tend to spend money based on our standard of living instead of on our income. Of course the entire advertising industry doesn’t want you to be successful in your goals to spend less money, and the government lives in fear that simply the lack of confidence we have in the economy could be enough to throw us into a national recession. Think what would happen if we all woke up tomorrow and anyone who watched a new car advertisement on television would get physically sick. In addition to needing a lot of baggies, the other impact would be the ripple effect of negative new car sales on our economy. However, if one family makes an individual decision to always purchase a used vehicle instead of a new vehicle, they would be putting literally tens of thousands of dollars in their pocket over a lifetime.

Another key to handling money is education. Mutual funds have proven historically that they can be a safe investment returning between 8 and 20 percent on a consistent basis. Unfortunately, many of the Americans who do save money are not choosing to learn how to invest. It only takes one magazine subscription and an earnest desire to learn. The difference it can make over thirty years is phenomenal.

Perhaps the greatest hindrance to financial success is a consumptive lifestyle. Consumption is a great tie-in to the advertising industry. The problem is that if I buy an unnecessarily expensive item, it can create a desire in you that wasn’t there before. You may have been very happy with your plastic blender, but seeing the bells and whistles of my stainless steel blender makes you much more likely to want your own. You could have gone all your life blissfully enjoying your ugly blender. I should have never invited you over. That does bring up an interesting moral question, however. Do I have an obligation to spend my money in such a way that it does not create unnecessary need in others? Or, do I proudly drive my metallic purple Corvette to get groceries, knowing I am making you salivate? The truth is that Corvettes do make me salivate. I alone am responsible for how I spend my money. I can’t blame the way I was raised. I can’t blame you for having a nicer car. I can’t blame the Democrats or Republicans. I have to take responsibility for my actions and for my judgment or lack of judgment. However, I would not recommend flaunting your wealth. Wealth can be a relative concept. If you go to Africa, do not wear your diamonds. It’s just common sense. However, you can wear diamonds around me, because it doesn't bother me. I also don’t care if you have a nice car, because I like to admire nice cars, and if I want one, I’ll buy myself one. I think I’ll just admire yours and keep my money in mutual funds.