A Workable Plan

Hope and Reality

Frequently I meet with people whose finances have been devastated by the recent recession and stock market crash or who are elderly and nurturing a tiny nest egg. Sometimes I can’t do much. The seeds of this distress were usually planted years if not decades ago. People often ignore basic tenets of financial affairs like proper diversification. They often invest haphazardly or simply don’t pay attention or lack financial knowledge. But with most people steps are available that can put them on an improving path. Many people actually have enough assets and just don’t know it. They may only need to put their records together and come to a new understanding of their position. Often, though, I wish that I could have met with them in their 20s, 30s or 40s. At that point, it’s much easier to develop a workable plan and help people to understand how to achieve their goals. No matter what your predicament or situation, it doesn’t pay to sink into despair. The view of an objective professional who is trained in finance can outline the tradeoffs and opportunities and bring hope and reality back into the equation.

Chasing Yields

 The Right Risks

Interest rates are at historic lows and this presents challenges for investors. Recently, money market accounts yielded an average of 0.18 percent. At that rate it takes 450 years – five centuries – to double your money. After the recent financial crisis, investors are justifiably scared. In their search for guarantees and desire to avoid risk, many investors actually seek out higher returns and end up taking on greater risks that they don’t understand. Higher yields come in only two ways – credit risk (the risk that you won’t get repaid) and duration risk (lending money for a longer time). Both risks have their place as long as you understand the risks and take them as part of a balanced approach. It’s the same with stocks. We know that the stock market can crash and sometimes individual stocks never recover. But over time, the broad market has done well. On average for the last century, the stock market has returned 10 percent a year and doubles in seven years. That average rarely happens in the short run but in the long run, it has historically worked. Having a well constructed portfolio means taking the right risks – not pretending that you don’t take any.