| Sargent & Lundy Savings Investment Plan |
| A ROAD MAP TO A WINNING PORTFOLIO |
| The following excerpts are from an article in the September
1998 issue of "Mutual Funds" magazine. The opinions of the author,
Barbara Mlotek Whelehan, may or may not reflect those of the SIP Committee.
Five of six adults have less than $100,000 saved for their retirement. Less than one in three Americans within 15 years of retirement has saved that much. Senior citizens aren't any better off. The median annual income of retirees is only $12,000, half of which is typically supplied by Social Security. But creating financial security is not as easy as it looks. Experts universally agree: To succeed in the market requires a plan - a road map, if you will - in which you carefully consider each crucial step. 1. Set Your Destination Identify the points along your investing journey when you will need cash. Too obvious? Perhaps. But you'd be surprised how many people carelessly ignore it. Some cash needs are predictable - your children's education, for example. The earlier you begin investing for that event, the more likely you'll be to send them to the educational institution of their choice. Another certainty is retirement, which could span several decades. Other prospective needs may be less obvious - caring for a disabled parent, for example. Or they could be shorter term, such as accumulating cash for a new home. "A lot of people live past 90," observes Connie Brezik, a CPA and personal financial specialist at Far West Financial in Casper, Wyoming. "I ask my clients what's paying for all their living expenses right now, and they say, 'Well, my salary of course,' And I tell them, 'Just think for a minute if tomorrow, all of a sudden, there's no more salary. Where's the income going to come from' It's a question many don't ponder." How much will you need at retirement? The answer differs for each individual and depends on the lifestyle you want. Say you're 30 and you plan to retire in 35 years, after which you'd like to have a pretax income of $50,000 a year (in today's dollars). One of your grandparents lived to age ninety, and you hope to live that long, too. Assuming an inflation rate of 4% and a conservative investment return of 8% a year during your golden years, you'll have to accumulate about $2.2 million in a tax-deferred account by the time you turn 65. Sound impossible? If you start today, you'll need to invest $5,930 each year for 35 years to meet that goal, assuming an investment return of 11% during that period. "It's very simple," says Brezik. "The person that's going to get ahead is the one with the discipline to save and invest on a regular basis." 2. Plan Ahead Before you embark on your investment journey, allot time to educate yourself about the things you'll encounter on the way. To create a winning portfolio, you need to determine your objectives, time horizon, and the level of risk you're willing to take. An integral part of the planning process involved learning as much as you can about investments. Take a personal finance course, spend a few weekends at the library - anything, but learn. But even if you spend some time attending seminars, reading personal finance literature, and researching individual investments, it may not hurt to run it by a financial planner, broker, accountant, life insurance agent, or other financial professional, says Christine Fahlund, a certified financial planner with T. Rowe Price. "It could be that you've got a beautifully designed portfolio that really fits for you, but you forgot about the estate planning issues." 3. Choose Your Vehicles "Asset allocation is the primary determinant of portfolio performance," states Jeff Schwartz, a senior consultant with Ibbotson Associates in Chicago. Investors with very long time horizons need to choose aggressive growth-oriented funds - not merely because they may want to accumulate more capital, but because risk fades over the long term. Even after inflation, for example, the S&P 500 Index has never had a losing 25-year period. hence, you can afford to lose money in the short run as the cost of reaching long-term goals. But investors of any age with shorter-term goals must choose funds that will help them preserve capital. They may need to overweight bond or balanced funds in their portfolio. Most mutual fund investors today have never been through a bear market. But historically, the stock market encounters a drop of between 20% and 45% about once every four years. What's the optimal mix for your portfolio? Financial planners say it should reflect your goals, risk-aversion level, and time horizon. Once you come up with a mix, stick with it, unless one those three variable changes. 4. Pack Your Portfolio Say you've decided to allocate 60% of your portfolio to domestic large-cap stock funds, 15% to small-cap funds, and 25% to international stock funds. Now, it's time to plug in your fund selections. "If you line ten fund experts up against a wall and ask them to pick their favorite fund, you're going to get 13 different answers," quips J. Andre Weisbro, president of STAAR System Financial Services In Pittsburgh. He advocates diversifying among four to twelve different funds, depending on the size of the portfolio. Investors should choose small, mid, and large-cap funds reflecting both growth and value styles. However, there is a danger to spreading your risk like this, he warns. "While diversification reduces risk, it also reduces the chances of a huge return." The fund selection process should focus on long-term performance, management tenure, risk factors, tax efficiency, and loads and fees. Each fund should be compared to other funds in the same category. Ultimately, you have to make the final decisions. If you don't have time to give it much thought and attention, there's an easy alternative: put more money into index funds representing the various market sectors. 5. Hit the Gas The sooner you start investing, the more you'll accumulate, thanks to the long-term growth of the economy and the magic of compounding. Life is a series of tradeoffs. In a poll of 1,200 people conducted by the nonprofit Public Agenda, 68% agree with the statement, "I don't want to worry so much about saving for my retirement that I end up not enjoying my life now." There's nothing wrong with enjoying life now. But one way or another, at one time or another, you'll have to make some sacrifices. The punchline: In investing, sacrifices made early in the game are nearly always smaller than ones that have to be made later. 6. Defensive Driving What's the worst thing an investor can do when the market crashes? "I pretty much know when the bottom of a correction occurs," says Gene Balliett, a financial planner in Winter park, Florida. "I have certain clients who will call me that day and urge me to take them to 100% cash." A good way to drive defensively is to dollar cost average - invest a fixed amount of money in funds at regular time intervals. That way you'll take advantage of the market's dips to buy more shares when prices are low, and you'll buy fewer shares when prices are high. 7. Avoid Potholes Potholes in the road serve as a metaphor for investor pitfalls, and they are plentiful. Two relate to human emotions, fear and greed, which can wreak havoc in any decision-making process, especially those pertaining to money. "When people are uninformed, they have fear. That's normal," says Brezik of Far West Financial. "If they can acquire a basic level of knowledge, a lot of that fear will disappear." Greed sinks a lot of investors, too. Set realistic aims. The market's historical return over the past fifty years approaches 11% - far less than what new mutual fund investors have experienced. Other potholes to avoid: buying too few funds (not enough diversification) or too many (more than you can follow), paying unnecessary loads, ignoring tax consequences, failing to take advantage of all tax-deferred investing options before investing in taxable accounts, failing to take full advantage of employer 401(k) matching, buying a fund just before it makes a taxable distribution, basing purchase decisions on limited fund performance history, owning too many of the same type of funds, and blindly following hot tips. The best ways to avoid them are to use a qualified investment professional or to stay on a steady diet of investment self-education. 8. Watch the Tolls Taxes and investment costs are the tolls you pay on the road to riches. Of course, you want to pay as little as possible, but you don't want the tolls to prevent you from investing in the first place, or to miss out on great funds. Gene Balliett recommends no-load funds to his clients. "Load funds and no-load funds in study after study aren't appreciably better or inferior to each other as a group." Other tolls to watch out for: high annual expense ratios and 12b-1 fees, both of which come right out of fund performance. Taxes don't generally come into play within traditional IRAs, 401(k) plans, or other tax-deferred accounts until you begin withdrawing money at retirement. Just make sure you take advantage of all plans available to you. Taxable accounts, however, deserve special scrutiny. Brezik recommends a passive buy-and-hold approach in such accounts, since frequent trading can generate excessive capital gains taxes. One good way to minimize tax liability: Keep track of the cost basis of all shares of your funds, and sell first the shares that appreciated least. 9. Tune-ups Once you've constructed your portfolio, you can't just put it on autopilot and forget about it. Just as your car requires an occasional tune-up, so does your portfolio. Most experts advise that you rebalance your portfolio at least once a year. But regardless of how frequently you rebalance, periodically reassess your personal financial situation and goals. Financial needs change continually, sometimes as a result of external forces beyond control, and sometimes merely because we advance to another stage of the life cycle. The portfolio of funds you select at age 50 is unlikely to be optimal at age 70. A periodic portfolio reassessment and tune-up will keep you on the road to financial security. 10. Arrival You've reached your destination. It's time to celebrate. But it's also time for another reassessment. Your arrival doesn't so much signal the end of a journey as the beginning of another. Assume you've arrived at retirement. Account distribution decisions are often irrevocable, and wading through the rules and regulations without expert assistance is like trying to navigate hairpin turns blindfolded. For instance, how you calculate (or recalculate) your life expectancy and that of your beneficiary will directly impact your financial affairs for the rest of your life - and beyond. Make sure you're familiar with all the options and rules governing account distributions, including minimum required distributions, penalties, and which accounts you can make distributions from. Finally, to ensure that your nestegg lasts as long as you'll need it, and that any excess will be disbursed according to your wishes after your death, be sure to consult a professional advisor or an estate planning attorney. |
This page updated on 8/24/98