We received an incredible amount of e-mail questions this past month. In this segment we took some of the more frequent questions and answered for all. Remember our Q & A e-mail line is always open, if you have any questions send it to me at CHRIS@MINVEST.COM.
EVERYONE HAS AN OPINION ON ASSET ALLOCATION MODELS, WHAT IS YOUR OPINION ON THE BEST MIX OF STOCKS AND BONDS?
Asset allocation is a phrase that is haphazardly tossed around on commercials and financial talk programs on a regular basis. Every analyst has his or her take on how you should proportionally weigh stocks and bonds in your portfolio. I cannot stand nonsense like this. It confuses investors and tricks them into consistently changing their plan and ends up costing them too much in fees. There really is no right or wrong model for asset allocation. The proper asset allocation model is completely dependent on the wants, needs, risk tolerance, age, etc. for each and every investor. No two investors are alike so it is stupid to think that there is some magic formula that will work wonderfully for everyone. Another problem with these blowhard one size fits all asset allocation models is they neglect assets like preferred stocks, real estate, gold, municipal bonds, corporate bonds, and insurance. All these assets play an important part in a properly balanced portfolio
HOW MANY MUTUAL FUNDS SHOULD I OWN TO BE DIVERSIFIED?
When I was a kid I used to love to collect baseball cards. I still have them and will someday give them to my son. When we are helping people get their finances and portfolio in order I am constantly amazed on the amount of mutual funds people own. It reminds me of my baseball cards. People have a bad habit of collecting mutual funds. Investors every year buy into the hype and purchase the latest and greatest mutual funds according to some stupid magazine article or advertisement. In turn, many investors end up having an over-diversified and under performing portfolio. Mutual funds, for the most part, are already diversified, too many are overkill. Why own Microsoft ten different times? There is no magic number for the amount of funds one should own, just as there is no one size fits all asset allocation models. However, once you have your asset allocation model fulfilled with high quality investments, do not become a mutual fund collector. Avoid all these latest and greatest sales pitches and focus on your long-term goals.
MY COMPANY’S RETIREMENT PLAN ALLOWS ME TO PURCHASE SHARES OF MY COMPANY AT A DISCOUNT, SHOULD I OR SHOULDN’T I?
Many companies offer this in their retirement programs and I have no problem with it in moderation. Unfortunately, many investors take this “opportunity” and turn it into a disaster for their finances. I don’t care if you think that the company you work for is the greatest thing ever. Enron employees thought this very same thing and loaded up on the stock all the way up and all the way down while the executives at the company sold. You must handle any retirement account with the same due diligence you would handle any other account. Retirement accounts can be tremendous for growth in your financial plan if handled properly. If not, you might end up like the employees of Enron who recently won a class action lawsuit this past month awarding them pennies on the dollar of what they lost.
SHOULD I BUY THE GOOGLE IPO?
Good question. Quite frankly there is just not enough information out to place a fair valuation on this stock just yet. The process that the company has decided on to distribute the shares is a called a Dutch auction. This process allows greater access to a wide array of shareholders. However, it could lead to a purchase price that is too high. I have a sinking suspicion that investors may be able to purchase the stock below the offering price in a short period of time anyway. Another item about Google that worries me is the fact that the insiders of this company have issued themselves a special class of stock that will allow them to vote on matters of the company many times over. One of the neat things about stock ownerships is your ability to have a say in the direction of the company. With Google you can vote, but in essence it will not count. The founders did this because “public ownership may jeopardize the independence and focused objectivity that have been important in Google’s past success.” When I heard this, my “BS METER” went off immediately. What this really means is the insiders want to cash in by selling you a piece of the company but they don’t trust you, like in most public companies, to vote for the best interest of the company you now own. In my opinion if you don’t like the fact that shareholders vote in public corporations, don’t go public!
HOW MUCH MONEY WILL I HAVE TO SAVE TO RETIRE?
This question comes up all the time when we are helping people put their financial plans together. This number is critical when planning for retirement. We use this simple formula…
For every $1,000 of monthly income you will need $230,000 in assets. ($230 for every dollar of monthly income.) This is assuming a very safe 5.2% payout rate during your retirement years. To collect $5,000 a month you will need to save $1,150,000, at $10,000 you will need $2,300,000.
The bottom line is that we are living longer and healthier lives. Pre- and early retirees are just starting to realize that there are serious financial implications in living longer. For these people there is an implicit necessity to have more assets than their parents did if they want to have true financial security late in life. Who wants to return to the workforce at age 80? Plan now or pay later!