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Investments

The 10% Solution – Growing Profitable Credit Union Investment and Insurance Sales Programs

I have written frequently about the correlation between member participation in the credit union investment and insurance sales program and increased revenue. While that may seem intuitive the question remains, “why don’t more credit unions make the effort to increase member participation in this time of increased need for revenue?”

According to the recent Ken Kehrer and Callahan Credit Union Investment Program Benchmark Reports, the average member penetration is around 5% compared to 10% for banks. According to Ken Kehrer, one of the reasons for the discrepancy between banks and credit unions could be that banks have offered investment services for about four years longer than credit unions. So they have had a head start on developing household participation in their programs. Another useful benchmark for determining how much attention management should pay to their investment programs is profitability. Many CEOs state that it doesn’t make sense to throw more resources at the Program if it isn’t profitable. My response is, “well, then let’s make it more profitable.” Before we can do that we have to gauge the profitability of the program. Let’s look at two ways to gauge profitability.

Revenue Margin

This is one of the more universal ways to gauge profitability in the brokerage business. It takes into account gross revenue minus direct and allocated expenses before corporate overhead allocation and taxes as a percent of gross revenue. This is sometimes called contribution to overhead. Since allocations for the investment program vary so much throughout the industry this measurement has become somewhat standard versus comparing income. In the recent Kehrer report the average credit union Program contributed 19% of its gross revenue to the overhead of the credit union.

 

Brokerage is a volume business which is another reason credit unions need to increase participation to enjoy higher revenue margins. The more the credit union can spread fixed costs over a larger sales force and revenue base the more contribution it can make to the bottom line.

Profit Penetration

This is perhaps a better way to measure the profitability of the Program. According to the Kehrer report, the average credit union Program contributed $444 of pre-tax profit per million of share deposits.

What are the key drivers that will help grow the profitability of Investment ans Insurance Sales Programs? As I have discussed in my previous articles and White Papers there are two factors, credibility and awareness. Ken Kehrer has broken those factors down into four drivers that credit unions need to constantly address to achieve and surpass the 10% member participation threshold.

Key Drivers

Financial Advisor Coverage – this benchmark has been debated for many years. There is no one standard for every Program since geographic and socioeconomic factors of the credit union must be taken into account when determining how many advisors a Program needs to provide optimum service. The numbers range from $150 million in deposits to $350 million. The average credit union in the Kehrer study had one advisor for every $313 million in member deposits. Again, I would not recommend using that as the standard for your credit union. That figure tells me that there is room to increase coverage by adding more advisors and still increase revenue and profitability. Most advisors will resist splitting territories but the Program management has to constantly consider the question, “are our members being optimally served with the current coverage?”

Referrals– This is a good gauge for the effectiveness of the Program. If the branch teams are fully engaged in a robust referral Program then that is a sign that the Program is well integrated into the credit union; a key determinant of Program success. It is difficult to establish a benchmark for this since every Program seems to have a different definition of what counts as a referral. This has to be determined by such things as closing ratios of referrals submitted and cross-sell success i.e. is the credit union receiving referrals from the financial advisors?

Product Mix – What is the mix of products that the Program is selling to its members? Credit unions typically sell less fixed annuities, individual securities and managed money products than their bank counterparts. According to the Kehrer study the difference in fixed annuity sales can be attributed to the fact that credit unions are still struggling to embrace Platform Programs where licensed employees are trained to sell fixed annuities and mutual funds. The Platform reps tend to focus on selling fixed annuities. Financial Advisors have also been somewhat slow to the game of managed money. Historically bank and credit union advisors have been more transaction focused. This is a result of a lack of training and a lack of hiring advisors who are knowledgeable about managed money products. This is changing as members become more concerned with commissions and fees.

Sales Assistants – The proper use of sales assistants can make the Program run more efficiently and profitably. Unfortunately there has been no universal benchmark to determine when a Program needs to add an advisor. Much depends on the individual advisor’s organizational skills. I have managed programs where as soon as an advisor reaches $200,000 in GDC they request an assistant while I have had advisors doing over $500,000 in GDC without the benefit of an assistant. As with most situations there is a happy medium. According to the Kehrer study credit unions have been more generous than their bank counterparts on average using one sales assistant for every 2.6 advisors while banks have an assistant cover an average of 3.6 advisors. Again, there are differences in advisor organizational skills but Program managers should be looking to spread the cost of an assistant over as many advisors as makes sense. The process can also be used as a training opportunity. If the assistant is supporting 2 advisors then those advisors should be doing in excess of $500,000 each or you are not getting your money’s worth. Perhaps spending time to develop organizational skills may be a better investment.

What Next?

Increasing awareness of the Program and establishing credibility will move the investment and insurance sales program closer to and beyond the hallowed 10% member penetration benchmark. CEOs tend to focus on the revenue number and then decide whether or not there is merit in throwing more support behind the Program. I contend more attention needs to be placed on the revenue margin and profitability potential of the Program. Sometimes this can be achieved by simply determining what meaningful revenue does the credit union need from the Program? Once that is determined then the executive team should engagee outside expertise to help determine if that goal is achievable and how. Once there is agreement of the viability of the Program then it needs to receive a seat at the management table, become a core product and receive all the support that any other core product receives. Then and only then will the Program become a significant contributor to the institution’s non- deposit income.

What percentage of your members are taking advantage of this important member service? Is it 10% or more? If not, then why not? Your members deserve to know.

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Investments

Professional Financial Investment Advisor – Why Didn’t You Sell Me a Fixed Annuity Income?

A professional financial investment advisor sounds like a great title. Yet few “professional financial advisors” seek the right people to sell a fixed annuity income investment. To sell a fixed annuity income plan to an already qualified prospect is easy.

You did not ask me. Your guideline statistics ruled me out as being a fixed annuity income plan Your assumptions got you into trouble as you had no competition where spreadsheets and company comparison analysis was needed. You would not have had to fight off any objections to making a decision. You cannot have a sales opportunity when you do not know how to spot one. After all this, can you still call yourself a qualified professional financial investment advisor?

Your first wrong assumption   When you decided or were directed by your sales manager to sell financially related products, you were told the style of people not to waste your time on. Almost all true advisors to investors, along with agency crowned financial representatives are headquartered in the more prosperous suburbs of large metropolitan areas. This way the rep is in close proximity to where their key clients work and live.

WRONG   Pounding out freezer burned cold calls and mailers could provide a steady stream of willing investors with sizable assets. However, representative after representative is virtually knocking down their doors. Did ever think that the more unique businesses owners can choose to operate out of any location in the United States. To get away from the concrete jungle, their business is easily located in a smaller town, and still easily accessible. As their business location avoids rush hour traffic, likewise the home is also in a less populated zip code. You want to go by the teachings of your predecessors so you avoid prospects in more remote as they do not appear to fit the mode.

 

Your second wrong assumption    As an advisor selling financial investments you want to work exclusively with executives, and business owners of a certain asset level. A list broker gets instructions by you to target zip codes where the average income is over $100,000, the house worth more than $500,000 and personal liquid assets a similar amount. Zip codes can be very deceiving for giving pinpointed fixed income information. Averages can be misleading, as a $50,000 income and a $200,000 income average out to be $100,000. There could be a large number of manufactured home communities with residents averaging $25,000 income hiding higher earning individuals. You might be wrong that using zip code selection is a good fixed annuity income strategy.

Your third wrong assumption   You receive purchase a guide or lists showing the highest income workers in an area. Attorneys, physicians, and physical store owners would be among the top prospects listed. It is natural to assume that not anyone not on your occupational list or wealthy senior over 65 is worth pursuing. The non-workers as they must be bums, stuck in the middle class, or sliders on other people’s income. What about people that are social security disabled or who inherited money? You completely ignore that possibilities exist.

I failed all your assumptions – I do not live or work in a large affluent metropolitan suburb. My zip code contains a few manufactured homes, many hometown USA houses, along with an abundance of beautiful lakefront small lake homes. Since I am on Social Security Disability, my income puts me in a lower bracket.

How you could have wisely spotted me   My homestead is on 55 acres in a zip code of lots averaging a half to full acre. From the county office, you could have located me on a plat mat by acreage. Likewise, the tax rolls would show the excessive homestead taxes that I paid. You could have spotted dividends earned on mutual funds, when I formerly had twice as much value in them. From an internet search, you would have discovered that I own more than one piece of property. You could have checked for Corvette owners and found that I own a few.

These are all simple clues, which a flood of professional financial investment advisors could not figure out. Before the economic downturn, if even one had figured this out, he or she would have made a worthwhile fixed annuity income sale. Here is another underground method to finding overlooked leads. Look at the newspaper obituaries posted where services take place at upscale funeral facilities. This is digging, not grave digging. Right there are a listed supply of names and cities of people who may come into inheritances, or be soon changing their lifestyles.

Remember that to make money in insurance or as a financial investment advisor, adapt to conducting business in a different manner than everyone else.

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Investments

Financial Investment For Newbies

Investment refers to savings or deferred consumption, which is made by the individual to risk his savings in the hope to gain some returns. Investment is viewed differently in terms of economics and finance. In terms of finance, the goal of investment is to produce future cash flows and in terms of economics, investment is the production of goods for a period which are not consumed but utilized for further production.

Why investment?

The most important reason to invest your savings is to beat the inflation, to achieve financial goals and to plan for retirement. Inflation means paying more for the same goods and services in future. When trying to achieve financial goals like buying house or paying education you need your money also to earn along with you in order to beat inflation. You also need to invest in order to fund your needs when you become old and not capable of earnings (i.e.) plan for your retirement.

 

How to invest?

The type of investment option to choose depends on what you are trying to achieve. Those were the days when the marriage or education of child were expensive but were affordable and investment avenues of that days earned you a good rate of return. So they were manageable with minimal planning. But these days with rise in inflation and with lower rate of return has worked against parents in their mission for a better quality of life for their children. Commencement of planning at an early stage of the life is an important step in the process. Investment avenues like equity funds that offer tax-free returns over longer time frames to manage child’s education/marriage or retirement.

Choosing the right investment product is a difficult task for investor. This task is even more difficult when it come to senior citizens as they will have limited amount. Life will become miserable if they does not have regular source of income. As a result senior citizen should do the balancing act between the return and risk of his investment. For senior citizen, the risk element should be low as much as possible.

For individual investor the objective is to maximize the return on their investment. An individual can maximize return at cost of high risk. The investment options available to investor are equities, fixed income securities, debt, foreign securities, real estate and e-currencies. While investing the constraints of the government rules and regulations and that of investor financial capability and availability of time should be kept in mind.

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Finance Services Investments

Financial Investments For Low-Income Families

It may seem like an impossible task to invest on a low income, but the benefits far outweigh the sacrifices. Unlike savings, which serve short-term financial goals like buying a new car or establishing an emergency fund, investments are intended to meet your long-term financial goals, including providing for a child’s college education or your retirement.

Regardless of income, the money that you do have needs to be managed. The best investment products for you will be determined by your long-term financial goals. Discuss these with a financial advisor who may be able to assist you with finding investments that best serve your goals – even if they seem small or insignificant compared to the figures you read about or see on television.

Types of Investments

Retirement plans: 401(k) and IRAs Many people choose to invest through their employer, taking advantages of the matching funds and tax benefits that accompany many 401(k) plans and IRAs (Individual Retirement Arrangements). Contributing at least the amount your employer will match is one way to get a significant return on your investment. Because the employee typically decides the contribution, you can begin with a small amount each paycheck, gradually raising your contribution as your salary increases. If your employer does not provide a retirement plan, you can still set up an IRA as an individual, and reap the tax benefits.

 

Stocks, Bonds, and Mutual Funds When you purchase a stock, you are buying a share of ownership in a company. A bond is a loan of money to a company, or government, that promises to pay back the principal plus interest. Mutual funds pool money from many investors to buy a variety of stocks, bonds, or other securities. Investing through a mutual fund, rather than purchasing stocks and bonds on your own, provides several benefits, such as being able to choose from a variety of professionally managed funds tailored for different levels of risk and rates of return. Some mutual funds have an initial investment of as little as $50, making them an ideal place to begin investing on a tight budget.

Beginning Investing

Consider your long-term financial goals, and determine what type of investment combination, or portfolio, will best serve those goals. Then, begin investing. No matter what the initial investment is, the important thing is to start. A financial advisor may be able to help you find areas in your budget to cut back in order to increase your ability to invest, and direct your investments so they may best serve your long-term financial goals.

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Investments

Beware the Latest Investing and Trading Traps

While most of us, concerned investors that is, have been glued to CNBC and other screens for information and explanation on what is happening with the markets, our 401(k) and IRA, there has been a surge in activity on the part of the brokerage houses promoting trading tools and new offerings. Investors BEWARE! In a bear market like this one, brokerages are naturally playing the investors’ fear and disappointment by offering “better” and “more sophisticated” tools, concealing their intent for more risky and expensive trades. Most of those tools are either screening, back testing tools or more advance trading methods, via futures and options. Don’t fall for the trap and do your homework first!

Let me start with the screening. After checking over ten paid and free screening tools I can summaries that they give you so many options that will definitely confuse you more than help. And what good does it do if you have the tools but do not have the knowledge on how and what to search on? The search education offered is rudimentary teaching you to execute a search on low P/E, good dividend yielding, high growth companies. So the screener pulls two unknown firms that fit the screen. Would you invest in them without spending time to read the financials, annual report, message boards and the info on the internet? Well, no, so then you are back to square zero. With or without a screener you are doing the homework. However, if you invest blindly and get lucky, do it a second time, lose your investment in its entirety, you will forget about the screener forever.

What about the back testing programs? All sounds good, until you realize that the past does not predicts the future. Imagine that you are sitting comfortably in front of your computer in August 2008. You know that there has been this financial crisis looming, but the Fed is dealing with it. Cool! You decide to back test some strategy, be it in options, futures or any other instrument. Most probably you will be seeing a bull bias depending on how far back you go to source your data in the back tester. Well, guess what? The back tester did not hold information with such dare consequences that would come in the two months ahead and you will make information based on the wrong inputs. The back testers and statistics behind such programs have played a nasty trick to all these sophisticated investors as well, including financial PhD trying to outsmart the market via statistical arbitrage, black box, algorithmic trading and so on and so forth. What the back testing will do to an investor is set him her for a “Black Swan” event, that is unknown unknown, to lose trillions of dollars as is happening right now.

 

And last, beware the newly pitched products. Options and futures I mean. The majority of the marketed products and brokerage houses offer you many and better ways to LOSE big! And they charge way too much for what they offer. I have signed up and used over five brokerage houses to find out that just one of them that I have been customer of does bring value. Not only in fair and disclosed commissions, but also in education and care of their customer base they provide. Others make you feel comfortable and cozy and charge four times what you expected to pay. Creative marketing and presentation I call this.

This post is not to bash the brokerages direct, but to point out more about the traps they are setting up to the regular and scared investor. Do not fall for them! Do your homework, ask questions and start small to figure out where the trick is. Good trading and investing and wish all the best!

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Investments

The Difference Between a Financial Advisor and a Registered Investment Advisor

According to a survey performed by the Security and Exchange Commission, most individuals are not aware of the differences between a financial advisor and a registered investment advisor. There are several key differences though, and it is important for anyone placing their trust and hard earned cash in the hands of one of these advisors to be aware. If you are considering seeking the counsel of a financial planner or investment advisor, here’s an explanation of the differences between the two.

The Financial Advisor

A financial advisor buys and sells securities on behalf of his or her client. They may set up retirement plans for individuals, or 401(k)s, IRAs, or other types of and pension programs for corporations. Financial advisers may also offer stocks, bonds, mutual funds, and assist with end of life wealth distribution plans.

 

Financial advisers have detailed knowledge in accounting, finances, and an understanding of the way the market works. Other responsibilities of the financial advisor include:

  • Instructing clients on investment opportunities
  • Keeping up with the financial market
  • Assessing the risk in an investment
  • Helping clients cope with the loss of an investment

These advisors may obtain additional certifications and continue their education in order to serve their clients better and obtain more knowledge about the ever-changing financial market.

Financial advisors, wealth managers, investment analysts, and other similar titles are often paid by receiving commissions directly related to the financial products they advise clients to purchase. Financial advisors may also charge fees for portfolio management. This can be a flat fee or a percentage of the value of the client’s investments.

The Registered Investment Advisor

A registered investment advisor has many of the same job duties as a financial advisor. However, there is one key difference between the two, and this difference can mean a lot to potential clients who are seeking help with their financial investments. This difference is what is known as fiduciary.

Investment advisors are registered and governed under the Investment Advisors Act of 1940. While some financial advisors may be simply working to push financial products to earn a commission, registered investment advisors are held to a much higher standard. Being fiduciaries, and held to a fiduciary standard, a registered investment advisor (RIA) is required to place the best interests of the client ahead of their own or the interests of any brokerage firm. RIAs avoid conflicts of interest by charging a flat fee instead of earning commissions on products sold.

When choosing between a financial advisor or a registered investment advisor, the best way to do so is by asking for a fee disclosure. If your financial advisor earns commissions and bonuses from the sale of mutual funds or other financial products, they may run into conflicts which could skew the advice provided to clients.

A registered investment advisor, held to the fiduciary standard, avoids these conflicts by setting rates according to the work completed, not according to product sales.

When it comes to protecting your wealth and your financial future, the all important first step is to know who you are dealing with. Sound, impartial financial advice is key. Who are you listening to? Is your wealth manager a financial advisor or a registered investment advisor? It may be time to find out.

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Investments

Gold Bullion is a Great Form of Financial Investment

Since the days of the discovery of gold, it has been attracting men and women across several cultures, geographical boundaries, and many centuries and civilizations. In the earlier ages, gold was used extensively in jewelry and even in utensils and artifacts. Even today after several hundred centuries, gold is being used in jewelry and on many other products. The popularity for gold has not even withered for a day!

But off late, a new trend has emerged and that is of investing in bullion. More and more financial advisors believe that their clients should invest in gold bullion because the prices are always on the rise and it is much safer than stock market. Another important aspect of gold is that it retains its luster over time and doesn’t corrode. But before you start investing in gold, it is important to understand the fact that gold will never become worthless although its price might decline somewhere in the near future.

At the close of the market on February 01, 2010, gold futures on the COMEX rose $21.20 to $1,105 per ounce and this has also boosted all and any type of investment associated with the price of gold. Price of gold bullion at close on February 1, 2010 was $1,104.00. This might sound Greek to someone who is new to gold investments and the gold index or market. Hence, it is extremely important that before you jump into gold investment, you should gather enough data and information regarding gold and how the market has been performing in the last two decades. Here are a few pointers regarding investment in gold bullion:

 

– First things first; in order to invest in gold bullion you need to identify your investment budget. You will need to also consider the size of the gold position that you are planning to take. At this point, you need to bear in mind that making small investments in gold bullion will not lead to bigger benefits. If you want bigger benefits then you need to make bigger investments as well.

– Once you have decided upon your budget and your limits, you will need to focus on storage options as well as transport of the gold bullion. If you are looking for something that is less cumbersome then alternatives include gold ETFs and gold exchanges.

– One of the most important aspects of gold bullion investing is that you should never invest if you can’t afford it.

– Before you purchase gold bullion, you need to check the market and compare gold prices. Each dealer will have a different price on offer and all you have to do is find the right price.

– Last but not the least, be informed whether it is about the market or about gold bullion and it rising and falling prices.

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Investments

Government of India in Full Swing to Develop Renewable Energy Investments and Projects

In India, the establishment of renewable energy projects is going in full swing. The banks of Japan and Germany have agreed to provide energy investments to the Indian Renewable Energy Development Agency for fostering their clean energy project. Indian Renewable Energy Development Agency, leading agency which renders financial assistances for the companies, that are executing renewable energy projects and the banks of Germany and Japan have planned to furnish around 630 million US dollars as energy investments to IREDA. The government of India has adumbrated challenging goals for developing the renewable energy infrastructure, in the upcoming decades. Government is also planning to endorse new projects on wind energy, solar energy and several types of clean energy projects. Recent reports declared by the International Energy Agency portrayed that, if the energy investments for the fossil fuel industries and production of fossil fuels are ceased, then it would significantly decrease the problems which are caused by the climate change.

The financial ministry of G20 recently mentioned that, around 550 billion US dollars have been allotted as energy investment to the fossil fuel industries. Many people across the world think that, the environmental concerns such as global warming and climate change would reduce the investments allocated for this sector, but it was false. For the past couple of years the amount of investments has increased drastically. In the recently held G20 summit at Pittsburgh, the president of the United States planned to phase out the energy investments and other benefits to the fossil fuel industries, which were welcomed by respectable number of people. Iran, leading supporter of fossil fuel in the world has furnished more than 100 billion US dollars to subsidize fuel industries. In 2008, Iran has delivered more than one-third of the budget of the nation towards the development of fuel sector.

National Solar Mission is established to provide assistance for promoting the infrastructure of solar energy projects in India. Additionally it aims to implement methods which would intensify the energy efficiency on several market-based approaches. The various sectors of the clean energy receive subsidies from the government and these subsidies are furnished to the project developers via premium tariff rates or incentives or by tax benefits. To fasten the development and implement critical technology the subsidies and tax benefits are offered to the power distribution companies and equipment manufacturing companies respectively. Financial guidance is provided to the costumers who are implementing special attempts to develop the clean technology. Many plans are carried out by the government to provide solar lighting system which would be helpful for poor people.

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Investments

Your 401(k) Investments And The IGVSI

Smack, right up alongside the head. Your 401(k) investment program deteriorated rapidly as the stock market and the economy weakened. Who would have thought that there was so much risk of loss in those mutual funds, and ETFs? Fortunately, the pain is most often temporary, but the timing of the recovery could alter some participant retirement schedules and benefits— not to mention the hefty confiscation level retirees can count on from Uncle Sam.

The popularity of self-directed 401(k) benefit plans is understandable. Employees typically get an instant profit from generous employer matching contributions, a variety of investment products to choose from, and portability between jobs. But the benefit to employers is far greater— an easy, low-cost, employee benefit plan with virtually no responsibility for the safety of the investments, and no lifetime commitment to benefit payments. In some instances though, employees are required to invest too large a portion of their account in company stock— a situation that has caused major problems in the past (Enron, for example).

401(k) plans have virtually replaced the private pension system, and in the process, have transferred total investment responsibility from trustee caliber professionals to hundreds of millions of investment amateurs. Employees get little professional guidance with regard to selecting an appropriate mix of investment vehicles from the glossies provided by 401(k) fund providers. Few Employee Benefit Department counselors have degrees (or hands-on experience) in economics, investing, or financial planning, and wind up using the “unbiased” counseling services of the funds’ salespersons. How convenient for them. Interestingly, most salespersons also have no hands-on investment experience either— go figure.

 

Similarly, the financial planning and accounting communities seem to have little concern about such basic investment tenets as QDI (quality, diversification, and income). If they did, there would never be instances where individual investors lose everything in their one fund, one stock, or one-property investment programs. QDI is the fire insurance policy of the investment plan, but few 401(k) participants hear about anything beyond: past market value performance numbers, future performance projections, and the like. They are not generally aware of the risks inherent in their investment programs.

This is where an understanding of investment grade value stock (IGVS) investing, the IGVSI and related market statistics becomes important to 401(k) participants, company benefit departments, accountants and other financial professionals. IGVS investing is just perfect for long-term, regular-deposit-commitment investment programs.

Somehow, we’ve got to get 401(k) investors to understand the framework of an investment/retirement program and, then, we have to get participants and/or their professional advisors to look inside the products being offered. As much as I hate the idea of one-size-fits-all investment products, they are generally accepted as the best way to deal with larger employer 401(k) programs— most employers don’t even know that more personalized approaches exist.

Only when some form of company, sector, or economy melt down occurs, does the head scratching (and the investigating) begin. 401(k) participants need to understand that they are not immune to the vagaries of market, economic, and interest rate cycles. Along with their employee benefit plan comes total responsibility for the long-term performance of the investment/retirement program. Are you in good hands?

Historically, IGV stocks fluctuate enough (both in general and by sector) to allow for mutual fund and ETF investors to select the less risky offerings from among the 401(k) product menu at the most advantageous times— but all individual investors need to learn how to identify the risks and to learn how to deal with them. Typically, 401(k) participants buy the higher priced, last-year-best-performing, and hot sector offerings while they sell or avoid the various products they feel have “under performed” the market.

Nowhere else in their lives do they adopt such a perverse strategy. And nowhere else in their thinking would they blindly accept the premise that any one number represents what is, or should be, going on in their personal investment portfolios. Risk minimization begins with quality, is enhanced through diversification, and is compounded with realized income.

The first two steps require research, greed control, and discipline. The income part just requires discipline, so it should be much easier to manage. If you cannot identify and understand the individual securities within an investment product, and assess the overall quality (economic viability and risk protection), don’t invest in it. If you have more than 5% of your portfolio in any one individual security, or 15% in any one sector (industrial, geographical, social, political, etc.), make some changes.

Since 401(k) plans are almost exclusively mutual fund shopping malls, it is difficult to assess the income or cash flow component of the risk minimization function. Product descriptions, or your benefits representative, should provide the answers. You can stay away from products that refuse to share the income with you, but the best way to benefit from a fund based benefit plan is to establish selling targets for the products you select. If your Blind Faith Fund Unit Value rises 10%, sell all or part of it and move the proceeds to another opportunity that is down 20%. Profit taking is the ultimate risk minimizer.

So long as we are in an environment where retirement plan income (and principal in the case of all private plans) is subject to income taxation, 401(k) participants would be wise to establish an after tax income portfolio invested in tax exempt securities— or to vote more selfishly.

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Investments

Why Invest and How To Do It: Avoiding Landmines In Your Investing Life

At the beginning of the New Millenium, the concept of
investing, of “doing something” with your excess capital, has
never been stronger. While this applies to citizens
everywhere, nowhere has it hit home as much as in the U.S.
where many of our clients live and do business.

SAVINGS SHMAVINGS

Various “analysts” and “experts” have moaned that the
savings rate of the U.S. citizen has gone negative. What
they fail to understand…or choose to ignore…is that savings
no longer represents anything in the United States. First,
there is inflation, always understated by the government,
usually by at least 50%, which uses various tricks and
numbers games to convince the unwary that all is well. The
value of savings is constantly going down.

Additionally, the American Internal Revenue Service has
chosen to tax even the negligible rate of return on savings,
actually punishing sound savers for doing so. The “market”
has responded by pulling savings out of the banks and
risking it on what is arguably one of the strangest bull
markets in history.

KEY QUESTIONS

 

But two questions come to mind: (1) Why should anyone
invest? and (2) how should they go about it?

While we would not claim to have the definitive answers to
either question, we feel we have enough background to at
least offer some suggestions.

WHY DO IT AT ALL?

1. To get a better rate of return than one can get on bank
savings.

2. To create a large enough egg to retire on without having
to sacrifice your current quality of life, particularly if you
happen to live longer than expected.

3. To provide for the ever growing cost of your children’s
university educations.

4. To safeguard yourself should major illness strike.

5. To ensure that your spouse and children are not left
destitute should you die.

6. To provide funds for travel, study, rest and recreation.

7. To pay off debts and obligations and to live as credit-free
as possible.

8. To take full responsibility for your life and not rely on
government doles, pensions and/or Social Security
Systems should they fail, a distinct possibility in the
future.

9. Add

10. Your

11. Own

How?

Here we’re going to explore a lot of possibilities. Some of
the thoughts are ours; others came from sources whom
we’ve come to both admire and respect. In any case, you’ll
need to choose what works for you.

First, we believe you need to work out who you are
as an investor. Much of what you do should be based on
your own personality, knowledge and what makes you feel
comfortable.

We suggest that you honestly evaluate the kind of person
you are. Do you really like risk? Are you the kind of person
who likes to plunk down $20 to $100 bets on impulse at the
racing track or casino?

Or are you the kind of person who, 50 years ago, would have
been exclusively into blue chips, utilties and similar “safe”
investments, holding on for the long haul? And who, if he
does visit a casino, plays quarter slot machines and avoids
the expensive games?

Maybe you are a combination of these, wanting solid
investments, but willing to take a risky flyer now and then?

Whatever the case, we feel you need to consciously
recognize who you are as an investor, what kind of player
you’ll be at the table, no matter in which country that table
may be set up. (There is nothing “wrong” with being at one
end of the spectrum or the other. One is not “better” than the
other.) The reason is simple: If you invest contrary to your
nature, you are not going to be happy with your investment
strategy nor will you sleep well.

CONSERVATIVE?

If you’re strictly conservative, making a lot of high risk
investments will leave you feeling out of control, nervous
and very out of sorts. You won’t trust your choices, will trade
emotionally, getting out of those which frighten you because
of their volatility, just when you should be letting some of
them ride. Or, worse, remaining in losers long after they
should have been dumped, buying more of that stock on the
downhill run, desperately trying to recoup your losses. Your
emotions will seriously colour your choices, never a good
investment method.

GAMBLER?

At the opposite end, if you’re risk taker, trading slow moving,
stodgy and conservative stocks will leave you totally bored
and unsatisfied with what you’re doing. You’ll miss the
excitement of the game and will constantly be wanting to get
out of the slow movers into something with more pizzaz, as
the Americans put it.

So, to quote the old adages, “Know Thyself” and “To Thine
Own Self Be True.” Only in this way will you find satisfaction,
happiness and peace of mind.

Secondly, we believe you need to work out a
philosophy of things in which to invest. Find areas of
investment which interest you. If you understand energy
issues, for instance, there are plenty of both high risk and
conservative stocks and commodities in which to invest.
You’ll enjoy continuing to study the field, happy that you are
working with known values.

If you have a good background in technical or biomedical
issues, you’ll be far more knowledgeable in your investment
choices sticking to these areas.

One group which we’ve studied, relies on what they call
“freedom” issues, companies which produce goods or
services which empower individuals, which makes things
either cheaper to buy or easier to use. They scour the world,
willing to make investments anywhere they find solidly
managed companies which are making a difference in the
way we live, “freeing” us up to expand our lives. We find this
particular philosophy a sound one. However, you may have
an entirely different one which suits who you are and what
you know. Keep to it.

Thirdly, you need to plan some constant study.
Never before in the history of humankind has there been
such a rate of change as we’re experiencing now. And the
rate itself is increasing. What was sound six months ago is
unworkable today, simply because some new technology
has entered the picture. Old industries, once considered
financially sound, are being overtaken by newer
technologies…or being undercut by the same industries
located in other countries with a far lower labor rate and
materials cost.

Technology changes even the old. Robotics, really
instituted by the Japanese whose “old” infrastructure was
completely destroyed during WWII, almost totally overtook
the American auto industry which was relying on 1930s
technology in old and very outmoded factories. That
particular US industry either had to change…or fold. They
changed. Note, however, how that changed the fate of the
autoworkers unions. They, too, had to adapt, to go with the
new realities.

CONSTANT EDUCATION

So you must keep constantly educated as to the newest
developments in your field of interest. And no longer can
you restrict your education to just what is happening in your
own country. Changes and improvements in other
countries will rapidly impinge on world markets. Keeping
up with such changes is your best insurance that you’ll stay
ahead of your investment game.

GLOBAL VISION

Fourthly, Learn to Think Globally! It would be
difficult to overstate this critical strategy. Virtually all markets
are now international. India, as an example, has some of
the best computer programmers in the world. Their
software products are world class. They can compete with
anyone. And they do it at wages lower than most of the
“developed” nations. If you’re investing in technologies and
ignore the information and products coming out of India,
you’re playing with a short deck.

Other countries, too, are growing in their competitive
structures. Individuals, as never before, are acting as
corporations, able to do business from anywhere in the
world which connects to a modem….or a satellite. Creative
entrepreneurs, carrying six pound laptops, are complete
businesses, able to compete with anyone, anywhere.

ADAPTATION

And Fifth, learn to adapt. Even if you’re a
conservative, work to become used to the idea of being
ready to change your game plan quickly when new
information becomes available. Sticking with the old, which
has already become outmoded even though it’s only a few
years – or a few months – old, is a recipe for financial
disaster. Think of being a chameleon, ready to shift to the
new background while still maintaining your sense of who
you are and how you best work.

We wish you happy and successful investing.