Author Archives: Danielle

Market Turmoil–here we go again

Posted on by

You remember the last time, right? For me, it’s actually which last time–the tech bust in 2002, the October crash in the 80s, the flash crash, the hyper-inflation during the Carter administration?–and since I’ve been around long enough, I’ve heard at least a dozen times, “This time it’s different”. Uh, no, it’s not. It’s still scary. The market will always be unpredictable. In your investing life you can absolutely count on several dramatic crashes. You will see your net worth and investment value take plunges worse than an unmoored elevator.

My nomination for dumbest guy on the planet was interviewed in the Wall Street Journal this morning. Apparently, he was watching the ticker when Apple stock took a plunge, so he sold a chunk. But according to the WSJ, when it began rising later in the afternoon, he was off line and missed buying it back on the upswing, for which he was regretful. Dumb as a box of rocks. Has this idiot never seen the advice to sell high and buy low? Sadly, he has had plenty of company in the last few days.

For about a year now, I’ve heard people bemoan how they shoulda’, coulda’ bought in March, 2009 (instead of going to cash or bonds, as most did) and what a great stock market run up they therefore missed. And so what is the average investor doing since Monday? Going to cash and bonds. I don’t know why people can’t get this right–maybe it’s the same as learning to steer into a skid–just too much against instinct.

What you should be doing right now is laughing at the market. If you follow the advice of your friendly neighborhood financial planner (me!) you’d have an appropriate asset allocation plan in place–a diverse basket of investment types, including a cash emergency fund, stocks, bonds, real estate, and internationals. And some of them would be sinking like a stone. In fact, I can pretty much guarantee that your net worth has dropped in the last few days. No one can diversify out of all market risk and in our very interdependent world, it’s next to impossible to find investments that are negatively correlated. But diversification can limit and protect that risk as much as is possible in a turbulent world. If the zombies arrive at the gates, nothing will help. Short of that, my guess is that the U.S. government and Apple computer (along with a lot of other cash heavy companies) aren’t going bust anytime soon.

Unfortunately, what’s good for the individual bill payer and investor isn’t exactly what’s good for the economy right now, but do it anyway. Economists want us to spend right now. But in periods of uncertainty, individuals paying individual bills need to cut those and hang on to their dough. So probably you should put off the world tour, the brand new car, or the McMansion purchase for now, unless the family chariot is up on blocks.

Don’t sell your investments and go to cash. In fact, put any investment cash into whatever part of your asset allocation is doing the WORST, that’s called rebalancing or buying LOW, which is what you’re supposed to be doing, right?

I don’t recommend any significant investment in individual stocks in a prudent investment plan, but I know some of you like to dabble anyway (okay, I do too, but only a little). If you’re going to do this, I highly recommend Better Investing’s recommended methods of evaluating investments (they used to be NAIC–National Association of Investment Clubs) and if you follow it, you already have a wish list of stocks you’d like to own. Well, take a look–maybe they’re “on sale” right now.

That’s really it–sit tight, turn off the tube, get off the internet, and try to calm down. With a decent asset allocation plan, you’ve done all you can to influence the universe. And if you don’t have a plan, well, ahem, you need a financial planner. I’ll look forward to hearing from you. But take a deep breath, okay?

The Value of a Side Gig

Posted on by

You’re already too busy. Either your primary career demands more than the old standard 40 hours (how long ago was that!) or your so-called freelance life leaves you free to work 24-7. Or you’re out of work and the ennui is killing you.

Get a side gig! A side gig is something you’ve always wanted to do, or a brilliant business idea you’ve had but never tried out, or something you think might make money and be fun, too. Maybe it’s producing a food product, or writing articles, or dog training, or some craft product, or consulting. Here are 10 reasons why:

  1. It stretches your brain. Even if you’re a busy, successful professional you can get stale by only concentrating on one thing. A side gig potentially introduces you to a whole different group of people, ideas, and ways of looking at the world, and gives you an opportunity for cross fertilization.
  2. It gives you new contacts. Instead of the same old colleagues doing the same old things, you can meet people from worlds you never encounter in your main job, and perhaps friends you never would have met in your primary circle. When people are unhappy in retirement, one of the reasons why is that they lose their “friends” along with their job. A side gig can widen your circle of friends, and they won’t all be based on shop talk.
  3. The extra money can be important. A good side gig makes at least $500-$1,000 per month. For some, that can be the difference between the basics and the luxuries; for others, it’s chump change or, better, fun money. But for most people, saving an extra $1,000 per month wouldn’t be a bad thing for either their emergency fund or their retirement. Even if you don’t need the money, setting a goal to actually make money forces you to test your great idea or refine it, all good. Or just give it away—I can think of one or two charities that would welcome a $12,000 yearly donation.
  4. You can laugh a little more at the boss. You know you have at least a little money coming in on the side.
  5. It gives you something else, hopefully fun, to think about. Even if you are the boss.
  6. You can employ your kids. This has the benefit of transferring cash for college to them in a potentially tax advantaged way, as well as teaching them a lot about entrepreneurship, another good thing.
  7. It can be very successful. More than one side gig has morphed into at least as good or better business than the main one. Think Paul Newman or Scott Turow.
  8. It can tide you over in an emergency. It’s a lot easier to cope with a job change or loss if you have a little coming in on the side, and something else to think about.
  9. You can test a new business on the side, with far less risk than quitting and starting from scratch. Similarly, you can dump a bum idea and try another one. You’re less likely to waste time and effort, and even if it’s a bust, you haven’t invested everything in it.
  10. It’s an excellent retirement plan. If you pick a side gig that doesn’t require a great deal of physical labor, it can go on as long as you wish, and promote your engagement with the world—you’ll have to keep your “edge”. Also, it can be financially significant in retirement. To generate a $12,000 per year withdrawal from investments, you need an extra $300,000 in principal.

Obviously, I’m not talking about bagging at the grocery store or delivering pizza, although I admire people who make those efforts, too. Go out and create something new and useful—we’ll all be better for it.

College savings: Why bother with a Coverdell?

Posted on by

Say college savings and most people will think of 529 plans. (Okay, if you’re thinking  “what savings?” keep reading anyway.) But what about the lonely and unloved Coverdell? Might it be worth incorporating  in a savings plan?

Neither the Coverdell (which used to be known as an Education IRA) nor 529 plans give you any tax deduction when you put the money in. The advantage of both of them is that, as long as the money is used for qualified educational expenses, the principal you deposited and any money you’ve managed to make on it comes out tax free.

Most planners, including me, will extol the benefits of a 529 plan: you can sock away a great chunk of money (maybe even enough to actually pay for the college expenses) and if you start early enough and we don’t have another market like 2008-2009, you might actually see significant gains in the account. If you live in a state that gives you a deduction on state income taxes, you might want to give some thought to the quality of that state’s plan and the worth of the deduction to you. However, there are at least one, and possibly two drawbacks to 529s: your investment choices are limited, and some management fees are excessively high.

If you’re used to wrestling with the investment choices in a 401(k) plan, you might be unfazed by the limited range of choices in some 529s. Before choosing a specific plan, be sure you know the range of investments offered. I’d advocate plans that offer a large variety of mutual funds with a company known for low costs (for example, Vanguard or TIAA-Creff), and, consistent with my investment philosophy, I’d choose index funds or ETFs in almost all cases.

So when might you look at a Coverdell? Well, the sad truth is that many people don’t save at all. If you are over 40, I strongly encourage you not to save ONE DIME for college costs unless you are already maxing out your 401(k), 403(b), Roth, SEP-IRA, traditional IRA and any other retirement savings open to you, are saving at least 10% of your income and have at least 3 months of living expenses (6 would be better) squirreled away. Actually, I’d say to do this even if you’re 25, but I know you won’t be scared enough until you’re waving at 40.

If and only if you’ve done that, then start a college savings program. A Coverdell has a limit of $2,000 in contributions for the year, and there’s an income ceiling as well, beyond which you cannot contribute. But for many people, $2,000 might be a do-able amount, an achievable goal, or even a palatable amount to touch the grandparents for.  Two other advantages—a Coverdell can be invested in individual securities, so if you already have a good core portfolio of index mutual funds in a 529, the money segregated in a Coverdell might be used to play “casino”. Note that I would still advise that an index mutual fund portfolio is a far better and more prudent choice, but there’s always a few of you who like to take a gamble. Also, unless Congress changes things in two years, Coverdell funds can still be used to pay K-12 expenses, so if junior ends up at an expensive private school, you might already have funds saved.

Is it worth it to sock any money away if your little angel is already in high school? Probably—if you stagger withdrawals, the money might still be parked for 4 or more years, and can grow during that time. And if he or she decides to get a graduate degree in English or art history, well, you still may need it after that B.A. is in the leatherette case.

Is a Coverdell right for your family? Contact us for information on how an individualized college plan can give you answers.