One of the major concerns many of us have is about our financial status.*
What do we have? How do we keep what we have? Should we change our investment strategy? Do we have enough for ourselves and for our beneficiaries? What about government retirement plans? How do I pay for medical costs? Where should I live? Are there other sources of income I could access? How do I safeguard my assets? What do I do about a will and my estate? The questions seem to go on forever.
This is, obviously, too long a list to deal with in one attempt, so let us address what seems to be one current concern, given the international financial climate; should I change my investment strategy?
We live in a time that for most of us is unprecedented financially. For the first time in generations, the current financial climate is causing us to consider the possibility that the future generations may not be as well off as we are. We fear the impact of growing national debt worldwide that must be paid by future generations, possible climate changes, political unrest, and global terrorism. These and others may mean that our children and grandchildren will face an environment that is not only greatly different from the one we have spent our lives in, but not necessarily a better environment.
Given that we see a degree of uncertainty in the financial climate for ourselves as well, what do we do about it? We no longer have forty years to smooth out and recover from financial downturns like the one we are currently experiencing. Many of us have lost a great portion, or all, of an investment portfolio that was meant to fund retirement or, at least, be the difference between subsistence and comfort.
You can use any search engine to access numerous financial institutions that are rife with advice, many of them in direct opposition to each other and requiring a great deal of faith in people who, just a few years ago, were predicting unlimited future growth. So what are we to do? What are the basic parameters that should underlie our decisions?
In broad general strategies, several things seem to be fundamental for safeguarding our finances.
Pay off debts and live within your means.
I know that your accountant will tell you the virtues of keeping a home loan or taking out a new one and writing off the interest from your taxes (if you live in the United States), but is this deduction something that the government will continue to allow in the face of rising national debt? Who knows? Do you want to bet on it? Will countries be seeking ways to increase revenues by further taxing banking and lending institutions? If so, where will those institutions look to pay those taxes? Of course they will be passing those increases on to you if you are the debtor. Some of these have already been implemented recently through the addition of creative fees and increased annual membership costs on credit cards, bank accounts, and elsewhere.
If you pay off your debts, starting with credit cards that charge onerous interest rates, you will avoid increased fees passed on to you. Once you are debt free, make a budget and keep to it. In other words, take a lesson from various governments and avoid living as if the fountain will never run dry.
Diversify your investments.
If you are one of the fortunate few who have not lost money in their investments in the past, you are possibly either prescient or under indictment. In either case, you need read no further. If, however, you have found yourself with considerably less today than you had in say 2007, maybe it is time to seek to minimize your risks by diversifying your remaining assets. Some things to consider:
No matter what size, your stock portfolio should be diverse. Putting all your funds in a single company or one type of fund is, at best, risky. The recurring cycles in any market can severely impact specific families of stocks, whereas diversifying investments lessens and spreads that risk. The money you place in stocks might be best placed in a variety of different mutual funds-one that targets growth, one that targets conservative companies, one that targets international companies, one that targets bonds, etc.
Seek funds that have a good track record over the past ten years and compare fees. Generally avoid investing in single stocks to avoid having a specific adverse impact directly affect that one company. Think of how many seemingly robust companies during the years 2000 to 2006 are either no longer in business or worth pennies on the dollar currently.
A good summary of stock diversification can be found here:
The importance of estate planning and determining your net worth
Why diversification in investments is important
The importance of diversification
Keep some cash on hand or easily accessed (maybe 10% of your portfolio or six month‘s worth of living expenses). Unless you live in a hyper inflationary economy, having ready access to cash enables you to deal with short and longer-term emergencies, to take advantage of an unforeseen opportunity, or fund a major purchase. You could put this in money market accounts that invest in short term Treasuries which are, in turn, backed by the US government, so your investment is relatively safe. Or you could have some cash on hand in a safe place for easy and quick access. The risk you have is that inflation could start and the value of what you hold would diminish quickly.
For further research on cash and cash equivalents you might start with:
Realize the importance of good cash management in achieving your goals
The role of cash equivalents
Holding gold, precious metals, and coins. This is an area fraught with schemes, misinformation, outright lies, emotional buying, potential upsides and general uncertainty (actually this sounds a lot like other investments). There are advantages to having a small portion of your portfolio in the form of gold or silver coins on hand or within reach.
First, they are easily transported and can be used to barter for goods and services almost anywhere. (An enterprising jeweller in my area advertises that anything in his store is for sale for 10% of the price, if that 10% is paid in US pre-1964 silver dollars.)
Second, it is relatively easy to verify the value of most coins through tests and readily available book values. Third, in the worst of times you may be able to trade silver or gold coins for essentials when paper money has lost its value. These would be coins or bullion without numismatic (collection/investment) value and are, in large, worth only the value of the bullion they contain. There are several countries that currently produce coins solely for the bullion they contain (both gold and silver), including Canada, South Africa, the US, Austria, China, Australia, etc. Occasionally these coins acquire a collectable value as well, but usually they are only a convenient and anonymous form of owning and transporting bullion.
If you are considering purchasing rare coins for their collection value, instead of solely for their bullion value, it is essential that you have a trusted dealer with whom you can personally view and discuss your purchase. Television shows and the internet are usually not great sources of well-priced coins and often tend to over-hype the value of the wares they are selling. If you are thinking of buying rare coins for collection value, you are usually better off investing in one coin of high grade than several of lower grade. There are nationally recognized grading services that certify the authenticity and condition of coins (but not the value), and we would recommend that you purchase coins authenticated by one of these.
Next time we will look at protecting your assets by recognizing and preventing financial frauds.
* We are not investment advisors, nor do we wish to take the place of one. The information here is general and we strongly recommend that you seek and utilize the advice of specialists for each decision you make. Where we have included links for further research, we are by no means endorsing the authoris of these links. They are for your own research and while informative, they usually provide this information with an interest in securing your custom.