Frank Armstrong, CLU, CFP, and Jason Doss, arbitration attorney, have written an excellent book with chapters keyed to more than 75 free online calculators and tools at Frank's website: www.Sink-Swim.com. These are a few of the book's valuable lessons for investors:
Thank you Frank Armstrong and Jason Doss!“All too often, investors choose their advisor based solely on personality. This is a big mistake because con-artists or simply incompetent salespeople always have a likeable personality.”
“In the good old days, the entire cost and responsibility for providing retirement was assumed by the employer. – Just 15 years ago, 70% of America’s workers were covered by a defined benefit plan.”
“The standalone, employee-funded, self-directed 401(k) plan is the last step in a long progression that shifts responsibility for retirement from the employer to the employee.”
“The employee-funded retirement system—with some notable exceptions, is such a swamp that in many cases, the employee decides not to participate.
“The kindest possible interpretation of the 403(b) system is that many of the people who administer it are hopelessly inept. – The National Education Association (NEA) collected nearly $50 million in royalties in 2004 on the sale of annuities, life insurance, and other financial products.”
“The commission-crazed sales system taints the entire advice model. You can’t rely on getting either competent or objective advice there.”
“You are on your own. You must educate yourself, take responsibility for your financial future, and design and execute a viable investment plan for yourself.”
“As a rule of thumb, you should aim to put a total of 15% of your pre-tax income into a retirement plan and savings.”
“Wall Street sharks are the most vicious kind, world famous for their remorseless search for unwitting prey.”
“One definition of retirement is that over one-third of your life is without a paycheck.”
“By far the biggest risk investors face is their own behavior. Many people are financially illiterate, yet at the same time, grossly overconfident of their skills.”
“Many investors fail to match their portfolio to their risk tolerance, time horizon, and objectives. If you don’t take sufficient risk, you will never obtain any reasonable objectives. If you take too much risk, your portfolio may implode.”
“Someone is always going to beat the market. But, it’s most likely that they did so through pure dumb luck or worse yet, by taking excessive risk.”
“Investors chasing those ‘hot’ managers with their juicy returns leads to an endless cycle of buying high, selling low, and wondering why you are not making money.”
“Trading has direct and indirect costs that reliably reduce returns. It won’t matter whether you do it, or your manager does it for you. High trading reduces average returns.”
“One recent major study indicates that broker-advised clients do relatively worse in all investment types than self-directed clients. In other words, for a variety of reasons, the value of a stockbroker’s advice may be far less than zero.”
“You shouldn’t get hung up on endlessly studying whether to contribute to a Roth or traditional 401(k).” The differences in after-tax, disposable income later are not very significant for most employees.”
“Rebalance once a year. Otherwise, over time, your plan will grow so far out of balance that you won’t recognize it.”
“IRAs don’t get enough respect. They are an extremely powerful wealth accumulation vehicle for individuals or families. “
“It’s important to understand that if your tax rate remains the same, it doesn’t make a penny’s difference to your retirement income picture whether you use a traditional or Roth IRA.”
“Non-Tax-Deductible IRAs? The short answer is: Don’t bother. With no tax deduction going in, and full income tax treatment coming out, you would be far better off investing in a reasonable tax-efficient index fund.”
“The Department of Labor publishes a concise table comparing Self-Employed Retirement Plans at www.dol.gov/elaws/pwba/plans/final.asp.”
“The Enron example provided a stark lesson in the importance of avoiding company stock in your retirement plan. Losing your job and having your 401(k) crater at the same time is the financial equivalent of the perfect storm.”
“It’s not possible to overemphasize the importance of an early start. The magic of compounding rewards is compelling for those who keep time on their side.”
“Just two index funds, like the Vanguard Total Stock Market and Total International Stock Index, provide effective, economical, tax-efficient, global equity diversification.”
“Whatever you do, don’t invest in an individual fixed or variable annuity for your retirement investment account. That’s a product that exists only to make insurance agents and stockbrokers rich.”
“Delaying retirement by just a few years can enhance benefits substantially, turning the prospect of a threadbare existence into one of abundance and security.”
“As more and more people reach the age where they contemplate early retirement, more and more unscrupulous investment salespeople come out of the woodwork to take advantage of that dream.”
“Consider liquidating personal accounts first before you tap into qualified money. – In all cases, if you have Roth IRA accounts, use them last. Roth accounts have the most favorable tax treatment both while you are alive and in your estate.”
“Just because you are a CPA doesn’t mean you know the first thing about investing.”
“Retirement plans have two equally important components: 1. Building an adequate nest egg. 2. Making the nest egg last forever. Use the www.Sink-Swim.com calculators.”
“Late in life, retirees often find that medical expenses and assisted living arrangements require additional income and resources that put their expenditures far above their pre-retirement income.”
“As a rule of thumb, you should be very comfortable with a 4% rate of withdrawal, reasonably comfortable with a 5% rate, uncomfortable with a 6% rate, and scared out of your mind with any rate higher than that.”
“There are no fewer than three cable TV networks devoted exclusively to covering the market. Listening to them will fill your head with garbage.”
“There is no credible evidence anywhere that active management can consistently add value to the investment process. In fact, the overwhelming weight of the evidence shows that it reduces returns while adding risk.”
“Let’s say that you just left college at age 22. You put $3,574 away each year and net 8%. By the time you are 62, you have your million.”
“Your first step toward financial independence is to eliminate all consumer debt and keep free of it.”
“There is an entire world of no-load, low-cost index funds that provide exposure to every market in the world. Never pay a sales load. Deal directly with a fund family like Vanguard or purchase through a discount brokerage.”
“Taxes are the biggest cost investors face. They are a dead drag on performance. Maximize use of tax-favored vehicles like IRAs and pension plans. Use tax-efficient funds with low turnover in your personal accounts. Buy and hold.”
“There are no high-return, low-risk assets. Markets are far too efficient to allow that to happen.”
“Risk management is more important than trying to increase returns. – It’s hard to impossible to beat the market, and you can destroy your portfolio in the attempt.”
“Today’s market offers a mind-boggling menu of choices to build your portfolio. Only a few of them are worth considering, and some are truly toxic.”
“Forget what Jim Cramer says. Individual stocks and bonds have no place in your portfolio. It’s delusional to believe you can beat a half billion of your closest friends in the game of trying to outguess the market.”
“Trust Wall Street to come up with a bundle of really bad ideas and toxic products for the unwary. Stay away from index-linked annuities and CDs, hedge funds, and venture capital funds.”
“I once represent a retired elementary school teacher in arbitration where $480,000 of her IRA funds were invested in a high-risk, equity-based variable annuity. The arbitrators found in her favor and awarded her $353,000.”
“Because you can buy every traded Real Estate Investment Trust (REIT) through the Vanguard index fund, an allocation to real estate should improve your portfolio risk-return characteristics.”
“Bonds provide a store of value to meet known future expenditures and to lower the risk of the portfolio. Anything they earn is a bonus.”
“A natural and painless time to rebalance is whenever there is a cash flow to the account. Whether you are depositing or withdrawing, check to see which classes are out of line and use the cash flow to move back toward perfect.”
“The game changes at retirement. Both economically and psychologically, the stakes get higher. Time is no longer on your side. With no more salary coming in, there is no way to make up for investment mistakes.”
“Although, over the long haul the market generates enormous wealth, in the short term it can get pretty ugly. Investors must assess both the probabilities and the potential consequences of their strategies.”
“The world of investment advice is dominated by sales organizations including brokerage houses, broker-dealers, insurance companies, mutual funds and banks. These firms hire salespeople to sell high-profit (for the firm) products. There is only one ethic: Sell more!”
“It is possible to get objective competent advice, but you need to know where to look. Look for a fee-only advisor that has no financial arrangement with any product provider.”
“Budgeting sounds great in theory, and someplace there is a highly disciplined ascetic monk who can stay within his budget. But, for the rest of us, there are just too many temptations. Have money direct-deposited from your payroll account into a mutual fund company.”
“The real trick is to plan and have the discipline to save. Hope is not an action plan! You and only you can make it happen.”
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