The first lesson in Ways to Conserve Cash 101: Plan.
“Some people sit out there and think, ‘Oh, I just need a mutual fund.’ So they start buying mutual funds without investing the time to understand what type of exposure they need in their portfolios,” said Barron Beal, executive vice president in wealth management at Bank of Oklahoma.
Learning how to control risk and limit losses runs a close second to drafting a financial plan, said Don Hardcastle, investment manager and financial strategist at Coachwise Solutions, 4500 S. Garnett Road, Suite 920.
“Some people think it’s not a loss until you sell it. Well, what do you mean? If your stock is 40 percent underwater, and your money is just sitting there not going anywhere, you could be using that money to make returns somewhere else,” Harcastle said. “So it’s a double whammy.”
A huge hurdle in learning to limit losses is to detach the emotions from investments, Hardcastle said.
“It’s not something you recover from quickly. That control of risks and losses is so critical, and I think that it’s the most important thing people can do from an investment standpoint,” Hardcastle said.
Tulsa’s wealth management industry has ideas on how seal the leaky trapdoor in wallets and investment accounts — from learning to hang on while riding the emotional roller coaster of investing to planning for retirement now.
Don’t wax romantic
about your investments.
Barron Beal said he sees the trend all the time – clients develop emotional attachments to investments because they yielded great returns, but then they can’t bring themselves to sell when the investment isn’t performing.
“That emotional attachment can cause you to make bad decisions,” Beal said.
Scott Cooksey of Scott Cooksey Financial at 2828 E. 51st St., Suite 300, said he helps to keep his clients objective about their investments by forcing a reality check beforehand.
“You should never buy a stock when you don’t know what your criteria is for selling it,” Cooksey said.
Don’t get star struck
by hot stocks.
Chasing performance is one of the fastest ways people lose money, according to Beal.
In 1999 and 2000, people began to run after technology stocks because they performed so well – not because they understood the cash flow and strengths of the balance sheets of companies in the industry, Beal said.
People shouldn’t pursue investments they don’t understand just because they’re lauded in the marketplace, said Jay Matlock, portfolio manager at Longbow Asset Management Co., 415 S. Boston Ave, Suite 800.
“If an investor is not well-versed in certain industries or individual companies, it is difficult to know when the good times are coming to an end – until it’s too late,” Matlock said.
Cooksey advises against buying into hyped-up new funds, recommending instead funds with track records.
“I look for consistency of returns and how well the funds do in down markets. If you don’t lose as much as the average market index, you don’t have as much to recover,” Cooksey said.
Don’t look a gift
horse in the mouth.
“Every financial adviser who is worth their weight will tell you to maximize your 401(k),” Beal said.
Not maximizing an employer match on a 401(k) is a common way many investors lose opportunity – and returns, said Donnie Davis of Coachwise Solutions.
“By default, the investor buys into a buy-and-hold strategy,” Davis said.
Managing a 401(k) account is like going to the gym.
“It’s not something a lot of people like to do, but you feel good afterward, and it’s good for your body. Likewise, it’s good for your money to go in and rebalance and allocate it,” Davis said.
Don’t be tempted to withhold 410(k) contributions this month for the sake of a bigger holiday shopping budget, Matlock said.
“If the company offers a matching contribution as an incentive to its employees, the consumer misses out on free money as well as tax incentives,” he said.
Check your egg-to-basket ratio.
A great way to risk losing a lot of money is by not allocating assets and by keeping a large chunk of them in one spot, Beal said.
“Think of Enron,” he said. “Many people will lose their wealth because they have a concentrated position in a given stock. And largely it’s a concentrated position in the stock of the company they work for.”
“The ‘don’t put all of your eggs in one basket’ analogy still applies in 2006,” Matlock said. “An investor never knows which company could be the next Enron, Tyco or WorldCom. Investing all of one’s money in just a few stocks could prove disastrous.”
Don’t be a wallflower.
While investors are trying to time the market, they’re not making any money – meaning also that they miss the opportunity to reinvest and increase their returns, Beal said.
“Staying invested is an important element of realizing the best long-term return,” Beal said. “When 9/11 hit, people sold everything and went to cash. Then the market came back. They sold at the bottom versus if they had ridden through the valley.”
Investing too conservatively is almost as dangerous as being too aggressive, Matlock said.
“If your retirement date is 15 years away and you have the majority of your investments in low-interest paying money market funds, CDs, or bonds, you will suffer years of missed growth opportunities in the stock market,” Matlock said.
Prepare for some
Beal cautions against taking the advice of anyone who claims he has all the answers for retirees.
“For some people, retirement means starting a company, or maybe buying another one,” Beal said. “Others may want to become a coach or a teacher – maybe they want to travel the world.
“The financial implications of traveling the world versus becoming a teacher are very different,” Beal said. Thus, retirement plans should vary from person to person according to their individual goals.
But planning for retirement must start today. Most Americans are not saving enough for retirement, said Gary Stanislawski, president of Regent Financial Services, 6119 E. 91st St., Suite 300.
“Social Security will not take care of anybody. I really encourage people to see a financial planner, no matter what their income level, because the planner can help them organize their finances and come up with creative strategies to help them save for retirement,” Stanislawski said.
Though inflation is hovering around 3 percent, most people don’t factor it into retirement planning, said Todd Welsh of Merrill Lynch.
“If you leave money in a savings account, and if the rate increases 3 percent and inflation also increases 3 percent, your return is zero,” Welsh said.
“Stock investments typically outperform inflation,” Welsh added.
Jake Dollarhide, CEO and co-founder of Longbow Asset Management Co., said investment advisers are around to protect people’s money, “and we protect it from inflation.”
Realize early: It takes a village.
Though Beal and his team consider the tax implications of their advice, “you really need an independent party considering the tax impact of your investment decisions. I’ll direct people to their tax adviser – their CPA, their tax attorney – to make sure that all options are presented to the client,” Beal said.
Beal agreed that it takes a village to manage the money of a wealthy individual in a way that is tax efficient and conscious of legal implications of investment decisions and estate planning.
“When you talk about generating a relationship with a client, it includes creating a relationship with his or her advisers,” Beal said. “You cannot do a good job for an individual without working with the partners who have helped advise a client up to that point.”
Give Santa some job security.
Maxing out credit cards on holiday shopping sprees isn’t what Stanislawski would call an investment strategy.
“People overspend, and they lose a lot of money that could have been invested to credit card companies,” Stanislawski said.
“Don’t buy on impulse,” Stanislawski said. “Establish a 24-hour rule. Promise yourself that if an item costs over a certain amount – say, $50 – you won’t buy it right away. If after 24 hours you really have to have it, then buy it.
“Before you do, though, check the Internet and see if you can get it cheaper. Make a game out of it,” Stanislawski said.
Money isn’t the only thing that seems scarce at this time of year. Time is precious, and it’s better spent with friends and family than paying credit card bills.
“Even for consumers who pay off their credit card each month, it is easy to become busy at this time of year and forget to make the December payment on time,” said Matlock. “Consumers then incur additional fees, and they could lose a good interest rate on their credit card.” ?