This week, Gail reviews a book that aims to help you achieve your financial goals — and she's giving away free copies to 20 lucky readers.
Thomas Moore is a man on a mission. A rather ambitious mission. By reading and following the advice of his book, "Last Chance to Get it Right!," he aims to help you "create a minimum of $100,000 of additional financial benefits for you and your family."
Unlike a lot of financial professionals who write books like this, Moore isn't looking for clients. He retired last year after a 30-year career training advisors at the brokerage firm A.G. Edwards (search). Moore sees his role as more of a "pre-advisor," someone who can walk you through some honest financial soul-searching so you can identify your financial weaknesses and strengths, have reasonable expectations about investment returns, and a clear sense of what your goals are.
If you know where you are and where you want to go, you stand a much better chance of getting there, whether you opt to go it alone, or hire a trusted advisor.
While just about everyone says "I'm saving for retirement," what does that mean? How much have you saved already? How much time do you have? What kind of retirement do you envision? More importantly, what is it going to cost? The more specific you are about your intentions now, the more likely it is that you will arrive at the goal you've set for yourself.
The biggest obstacle standing between the average investor and his/her financial goals, according to Moore, is our inherent human nature. We get very emotional about money issues. (I wrote about these tendencies in a previous article on behavioral finance.)
"We often invest on an emotional basis and that gets us into trouble," Moore says. "For instance, we're constantly investing at the wrong time and getting out at the wrong time."
Just take a look at mutual fund sales. When the stock market's down, sales decline. When stock prices are soaring (think "late 1990s"), money is pouring into funds. So we end up "Buying high and selling low" — just the opposite of what we ought to be doing.
Another case in point: since the (admittedly brutal) stock market decline we experienced from 2000-2002, people have been contributing less to their 401(k) accounts. In Moore's view, that's completely crazy. "Baby boomers know they ought to be saving," he says. "Sure, the market's been nasty, but we're missing a hell of a buying opportunity. The NASDAQ has marked everything down more than 50 percent!"
Our experience with the financial markets has a direct impact on the emotions we attach to them. Just ask your parents or grandparents or anyone else who lived through the Depression. "Depression babies hate the stock market, hate it," says Moore. (In fact, most people of this generation consider the 1929 stock market crash the cause of the Great Depression, when the crash was simply another consequence caused by a multitude of factors.)
He says the lesson this generation came away with was that: "Investing is dangerous. You could lose everything." As a result, they missed a tremendous opportunity. "The Dow Jones Industrial Average went from a low of 40 back in 1932 and to around 10,000 today. That's a huge move! Sure, there were dips along the way. But historically, the stock market has been the best performing asset class in the past 75 years."
Moore's implicit message: Don't let recent market history scare you away from the next 75 years of returns.
In fact, my favorite chapter in "Last Chance" is the one where Moore recaps previous periods of significant stock market declines, starting with what really led up to the Crash of '29. (By the way, no one ever jumped out of a window, so can we puleeese put that myth to rest?!!) Then he walks us through the 1973-74 sell-off, the Crash of 1987, up through the more recent stock debacles.
You come away with the knowledge that these events didn't just mysteriously happen. The Stock Market Genie didn't suddenly wake up one day and order stock prices to fall. Everything from government policies (increasing interest rates), to external forces (OPEC), to investor greed (they didn't call it "irrational exuberance" back in the 1920's, but it was a major factor), and more played a role.
Understanding the dynamics of previous market sell-offs can make you smarter about recognizing potential declines in the future. At the very least, you realize that there were rational reasons that these things happened, that they were the result of a a confluence of events. Understanding the contributing factors makes a market sell-off less scary.
But, let's face it, sometimes we scare ourselves. Just think of all the ways we can get financial information these days- the Internet, TV, magazines, newspapers. Has the explosion of information made us any more successful at managing our money? Or has it just led to more confusion, as Moore suggests?
Think you're smart?
Quick! What is the S&P 500 Index? Why do some critics maintain that it is not a fair representation of the market? Where did the Dow Jones Industrial Average come from? (By the way, what is the only stock still to be included among the 30 names ever since the index was created back in the late 1800s? *) What's the longest stretch of positive performance the stock market's every had?** (Answers to * and ** at the bottom of the column)
The movement of these and other market measures can make us either flinch or jump for joy on a daily basis depending upon their direction. While not suggesting you ignore them, Moore helps you put the numbers into perspective.
One key is to realize that today's stock prices are only an issue if you're planning to sell. For someone who is amassing funds for a use at some point in the future, what happens next month or next year in the stock market is immaterial. In fact, even retirees need to have a significant exposure to equities, though Moore admits most would probably not be as comfortable as he is with 75 percent of his retirement savings invested in equities.
With "Last Chance to Get it Right!" you get a grip on historical rates of return. This, in turn, helps you set realistic expectations about what various investments — over time — ought to deliver. These days, nobody with a pulse and half a memory is going to tell you that they're counting on 20 percent-plus from their stock portfolio every year. "Oh, we knew the good times back in '99 weren't gonna last." (Sure.) "No, siree, all I'm asking for is a modest 7-8 percent annual return." But that, according to Moore, a CFP, is also too optimistic.
"The thing that scares me is that people think their investments are going to generate cash flows of 6 to 8 percent forever. All of the computer simulations indicate that withdrawing an income of more than 5 percent a year raises your probability of running out of money in retirement."
He's right, folks. While 10 percent is about the average annual return the stock market has had in the past 100 years, some years it did better and some years it posted a loss. And the crucial element in looking at a retirement withdrawal program is what the market's doing when you start. If the market's going down and your investments are losing value and on top of that you are taking an additional 6 percent out of your account you are going to be seriously depleting your nest egg. Most studies conclude the safest withdrawal rate is 4 percent per year.
Don't forget, this nest egg has got to supply you with income — increasing income — for probably 30 years. Guess what? The longer your life expectancy, the bigger the nest egg you need. Maybe instead of "leaving it all to the kids and grandchildren," you'll need to spend down your principal.
Moore's goal of helping you saving $100,000 isn't all that far-fetched provided you're willing to revise your goals and maybe sacrifice a little. "Everyone has this gnawing feeling that they should be doing some planning, but they don't want to. It seems like such a chore and they're worried they'll fail at it. But the average person spends more time planning a one-week vacation than they do planning the rest of their financial life."
While not exactly making it more fun than munching on a hotdog as your home team clinches the playoff spot, or running barefoot through fresh grass, Moore does make retirement planning seem less onerous than other books on the topic.
Planning — be it for a vacation or your finances — starts by having a clear sense of where you are today and where you want to be in the future. Along the way, there are choices to make: do you stick to your road map or indulge yourself with a scenic detour?
Or, as Moore would say, "The price of a new car isn't the $30,000 sticker price. It's the lost investment the the $30,000 could have bought which, over time, could really add up." Translation: If a 30-year-old bought a used car for half that price and invested the remaining $15,000 at 8 percent a year, it would grow to nearly a quarter million dollars by the time he/she retired in 35 years.
Consider this a small contribution toward your dream retirement: Send a brief (please, no diaries!) explanation of why you could really use this book to: firstname.lastname@example.org and we'll select 20 lucky readers to receive their very own copies.
*General Electric **Nine years. From 1991-1999 the S & P 500 had positive annual returns.
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