Kessel™s Top Ten Tips For Staying Safe, Sane, A nd C alm ...

Kessel's Top Ten Tips For Staying Safe, Sane, A nd C alm In A ny E c onom y

The hardcover version of this book was published on April Fools' Day 2008, and since that tim e the financial m arkets seem to have forg otten that this annual day of trickery was always m eant to be a twenty-four-hour affair, having proceeded to play som e very painful tricks on us over the ensuing m onths. S ince M arch 2008, several of the larg est financial services firm s in the U nited S tates have been bailed out, sold, or m erg ed, including M errill L ynch, L ehm an B rothers, and, in the larg est bank bailout ever, W ashing ton M utual.

As I write this, world's stock m arkets have lost m ore than half their value since O ctober 2007 . M any people have lost, or have a very real fear of losing , their jobs or their hom es.

B ut all is not lost. Y ou can thrive in this econom ic environm ent. In fact, it is precisely when our finances are m ost in turm oil that we have the g reatest opportunity to g row our portfolios, chang e our habits, and discover true financial freedom . H ere are the top ten pieces of advice I've been g iving m y clients in this chaotic econom y.

1 . D O N 'T H O L D A N Y A SSE T JU ST B E C A U SE Y O U 'V E L O ST M O N E Y O N I T.

O ften, people m ake the m istake of thinking they need to hold on to their hom e or stock portfolio because it's worth less than they paid for it. This is based on the old adag e that it's not a real loss unless you sell the investm ent. The ex ception to this rule is if you're g oing to use the proceeds from the investm ent to buy a sim ilar investm ent that is better suited to you. For ex am ple, if you're buying a new hom e, sell the old one even if the fact that you've lost m oney on it m akes you feel resistant. R em em ber, while you're selling " low," you're also buying low. The sam e log ic holds true for stock investm ents. If this econom y (or this book) has taug ht you that you need a m ore diversified or lower-cost portfolio, don't hold on to what you've g ot hoping that one day it will be worth what you paid for it. The investm ents you're g oing into, assum ing they're in the sam e g eneral asset class, are also m uch cheaper than they were when you invested in the assets you're about to sell.

Not About the Money_9.3p.indd 303

1 2 /1 1 /08 4 :2 2 :1 9 P M

304 | Kessel's Top Ten Tips

2 . GET SMART ABOUT RETIREMENT.

Shift your 401(k) allocation more into stock index funds. Use the tables on pages 205 ? 6 to determine what percentage should be in bonds versus stocks, and for the stock portion, try to get your allocation as close to the one listed on page 19 6 . International stocks should be a minimum of 3 0 percent of your total stock allocation, and ideally 40 percent. If you have (or can switch to) a V anguard account, use one of the allocations on pages 247? 48.

If you're still employed and thinking of a career transition, try to go into something you will enjoy doing well past normal retirement age. The vast majority of people will have to earn income until five to fifteen years prior to their life expectancy. A husband and wife who are sixty-five today have a 5 0 percent chance of at least one of them reaching age ninety. What will you enjoy doing as a healthy eighty-five-year-old?

If you're eligible to collect Social Security but are not yet at your full retirement age (which ranges between sixty-five and sixty-seven depending on when you were born), wait until you are that age so that earned income doesn't dramatically reduce your benefits, unless you're absolutely sure you won't work.

3 . FIGURE OUT HOW MUCH IS ENOUGH.

It's very natural for all of us to wonder if we have enough, and especially when the media and our investment statements are all screaming, "You don't have enough, and it's going down further!" While having a trained C FP ? crunch the numbers for you is still the best alternative, another option is to use this simple formula: you'll need twenty times your annual spending (to never run out of money once you stop (or scale back) your earned income. This assumes that you'll follow the investment recommendations in chapter 12. If not, you're likely to end up like the typical investor who earns less from his stock funds than he pays would in a safe bond portfolio (see the shocking study on page 188). In this case, you'll need either something more like thirty times your annual spending, which usually req uires a big cut in lifestyle, or a doctor willing to practice euthanasia at an age well before your natural life expectancy.

4 . P UT YOUR HOUSE IN ORDER.

If you're now renting out a house you used to live in, you should keep it only if it's earning at least 5 percent of the eq uity you still have invested in it. In other words, if the house is worth $ 3 00,000 and your mortgage balance is

Not About the Money_9.3p.indd 304

12/11/08 4:22:19 PM

Kessel's Top Ten Tips | 305

$200,000, then your annual positive cash flow (after all expenses are paid) should be at least 5 percent of $100,000, or $5,000. If it's not, sell the property and reinvest the money in a diversified, low-cost mutual fund of RE ITs (if you're partial to real estate) or a diversified portfolio like those I recommend in chapter 12. And by the way, don't wait for it to be worth what you paid for it. Once you've decided to reposition an asset, make your move.

If you're in the market to buy a house, consider renting unless the price of the home is less than seventeen times the an n u al rent you'd have to pay for a comparable home. In other words, if you can rent a place for $2,000 a month that is comparable to one you'd have to pay $600,000 to own, you're better off renting (under current interest rates and tax assumptions). Conversely, if you can sell your house and rent something for less than oneseventeenth of its value, go ahead and list it today.

Lock in a low interest rate on your mortgage. Unless you're positive that you're going to stay in your present house for more than seven years and have no plans to remodel or use home equity for some other purpose (starting a business, financing college, or buying a second home) get a five-year fixedrate loan instead of a fifteen- or thirty-year loan. Under no circumstances should you accept a negative amortiz ation loan (one where your monthly payment is less than the monthly cost of the interest).

5. BREATHE DEEPLY TO MANAGE FEAR AND ANXIET Y.

E ven if you're doing all the right things practically, from time to time your inner demons may still get the best of you. Do the Worst-Case Scenario exercise on page 56, or try this yoga-inspired practice: Take a minute right now and breathe deeply into your lower abdomen. We always have our breath as long as we're alive. It's the cycle of death and rebirth. It is the foundation of our life force, of which money is but one manifestation. Don't force yourself to hold your breath, and don't breathe too slowly; just relax all tension and let gravity pull the oxygen into the lowest part of your lungs. As you do this, totally relax your stomach muscles and solar plexus. It is virtually impossible to be fearful or anxious with a relaxed solar plexus and belly.

6 . STICK TO YOUR GUNS.

N o matter how certain you (or the talking heads on TV) are, do not sell appropriately diversified assets unless you absolutely have to. In times like these, people are often tempted to pay off their mortgage, put money into Tbills or bank CDs, or keep large amounts of cash or precious metals around

Not About the Money_9.3p.indd 305

12/11/08 4:22:19 PM

306 | Kessel's Top Ten Tips

the house. Don't sell stocks, investment real estate, or bonds unless they were inadequately diversified to begin with or you're just shifting them within the same asset class (that is, from one U.S. large-value stock mutual fund to another). Otherwise, the temptation is to sell what's just gone down and to buy what's gone up, which is what costs investors so dearly over time. See chapter 12 for other costly investor mistakes to avoid and use the emotion-managing techniques taught in this book to help you stay the course.

7. CUT YOUR UNNECESSARY SPENDING.

Write down everything you spend money on in the next week. Rank each expenditure as follows:

A: Essential to your survival and/or brings great fulfillment or pleasure that lasts for several days or more

B: A customary part of your standard of living and/or brings some pleasure that lasts at least one day

C: A discretionary expense or brings pleasure that usually lasts less than one day

D: A luxury expense or an expenditure primarily motivated by wanting others to admire either you or your purchase

Add up all your A expenditures. This is what you must spend in order to obtain 95 percent of the fulfillment that money can buy you. Add up all your B expenditures. This is optional spending that you should continue only if you can afford it. But if you're worried and anxious, don't hesitate to take a sabbatical from these purchases. Your C and D expenditures should continue only if you're truly financially secure and your spending, giving, and investing are balanced.

8 . PREPARE FOR THE WORST.

Economic uncertainty makes us feel closer to death. Scrambling for a cure, we are anxious, jittery, irritable, and mistrusting. In contrast, we spend most of our time avoiding facing the risks of life, including our own death. This is why only 43 percent of Americans have a signed will or revocable living trust. Now is the time to reevaluate all of the risks in your life and make sure that:

Not About the Money_9.3p.indd 306

12/11/08 4:22:19 PM

Kessel's Top Ten Tips | 307

? You have adequate disability, term life, and umbrella liability insurance

? Any and all concentrated assets in your portfolio (real estate located in one city or area, employer stock, or that stock G randma left to you) are adequately diversified

? You have an up-to-date will, revocable living trust, and appropriate powers of attorney and living wills (medical directives) in place

9. MAKE SURE YOUR SAFE ASSETS ARE TRULY SAFE .

Many people fall into the trap of going for extra yield from their "safe" assets by assuming more risk. Examples of this include buying junk bonds, investing in trust deeds on real estate that are too high a percentage of the property's value, or buying exotic financial instruments. Focus on bank savings accounts covered by FDIC insurance or on money market funds. If you invest in bonds, make sure they mature in less than five years, on average, and are investment grade. If you want to take more risk, invest a higher percentage of your assets in real estate and/or stocks. Don't take risks with the part of your portfolio that is meant to provide the ballast in a storm.

10 . IF IT SOUNDS TOO GOOD TO BE TRUE, IT IS.

Today's financial markets are very transparent and efficient. If you've found an investment, a way to get out of debt, or a tax loophole that you can't believe no one else has discovered, 999 times out of 1,000 there's a risk to it that you just haven't identified yet. Even the most sophisticated investors often get burned when they venture into uncharted territory. Follow the K ISS rule-- K eep It Simple, Stupid. Although I prefer this kinder way of saying much the same thing: "Be simple and easy about things." You can have a great financial life by following the time-tested rules taught in this book.

REMEMBER , IT'S NOT ABOUT THE MONEY.

The most important thing to do during this turbulent time is to keep things in perspective and understand that a healthy relationship to money is about so much more than how much or how little you have. Please use the tools and practical advice contained in these pages to stay calm, and you will survive the current economic volatility with less stress and more money!

Not About the Money_9.3p.indd 307

12/11/08 4:22:19 PM

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download