Making good investment decisions is always a challenge. At every stage of life, at every stage of success, regardless of which categories of assets seem to be in vogue or out of style, it’s tricky to make good decisions.
It’s a good idea to touch base with the pros from time to time, so The Lane Report decided to ask several investment advisers around the state for some guidance on how to handle that wealth you’ve been building up. Offering their expertise here are Tom Dupree, president and owner of Dupree Financial Group in Lexington; Nancy Barron, president and CEO of Nancy Barron and Associates in Lexington; Edmund Nasief Jr., senior vice president of UBS Financial Services in Louisville; and Richard Reams, senior vice president and branch manager for Hilliard-Lyons in Ashland.
What is your investment advice based on current market conditions?
Barron: Review your portfolio and mentally balance out gains with an eye toward the current favorable tax treatment of long-term capital gains and make sure you have some international exposure. Don’t panic.
Dupree: In any market, there are bargains. There is work involved in finding them. Sometimes it is best to look at areas of the market that have been under heavy selling pressure to find potential bargains. Look at the thing people are throwing away. It is cheap for a reason. Find out the reason, then decide if it makes sense to invest.
Nasief: The basis of sound investment advice has always been and will remain asset allocation. This methodology has served my clients well during good times and bad. Asset allocation isn’t a static process, but evolves based on changing client circumstances and changing investment conditions. Two recent changes have taken place in the allocation discipline: one, client-centric, the other based on evolving investment perspective. People are living longer and their allocation needs to reflect this. The world is getting smaller; investors can no longer confine their choices to only U.S. securities. Investors must broaden their perspective.
Reams: It is not the ‘timing of the market’ that counts; it is ‘time in the market’ that makes the difference. You must put money to work when you have it, so it will be there for you when you need it back. Today is still a good time to invest in the market for the long term. Consider these newspaper headlines: ‘Ford Joins GM in New Round of Plant Closings,’ ‘Six out of Seven Economists Predict Recession Next Year,’ ‘More Banks are Likely to Fail Next Year,’ and ‘Israeli Gunboats Hit Lebanon Camp.’ Sound familiar? Those were from… 1974! I urge clients to invest in the equity market long term, as much as they can afford emotionally, since it provides you with an inflation hedge and a rising income stream from increasing dividends over time, rather than fixed or decreasing income with bonds.
What is the No. 1 investment mistake you see people make? What issues do many people overlook?
Barron: People tend to overreact to news, earnings, President Bush, Iraq, terrorism, etc., and 95 percent of the time the knee-jerk financial action turns out to be wrong. Most people overlook that in their entire financial picture a paid-for home is a non-performing asset.
Dupree: Many people do little research before investing. This is a mistake. If you are smart enough to buy a car, groceries, or plan a vacation, you can figure out something about investing. After all, it is your money.
Nasief: It is difficult to say that there is a single mistake made by investors. Not being well diversified among different classes of assets, U.S. and international, and having a much too short investment time horizon are the biggest obstacles I see to efficient investing.
Reams: The big mistake is to believe what you see and hear on television business shows and panic when things go against you. I see people make snap decisions based on short-term outlook in businesses that should be looked at on a long-term basis. Would buy a house with the idea you will try to sell it for a 30 percent gain in three to six months? That is speculating, not investing. People tend to overlook the value of dividends. Good, established, well-run companies pay dividends and increase them from time to time.
Is now a good time to buy or sell real estate?
Barron: Interest rates are low, and may be going lower. Credit scores are going to loom large in a lender’s decision. I would personally sit out the next nine to 13 months, but if you see a house you flat-out love, it’s always a good time to buy.
Dupree: Residential real estate and income-producing real estate are two different things. Income-producing real estate is good if you can make it pay after your expenses of owning it. Residential real estate is good if you like the house and the price is right.
Nasief: I can’t speak to this question as I have never owned investment real estate. Those alternatives provided by the stock market – i.e., REITs (real estate investment trusts) – require less attention to timing of transaction by the investor.
Reams: Now is a good time to buy real estate if you need a roof over your head, or you need a place to house your business. It is a good time to sell real estate if you need the money for other investment purposes. As far as timing is concerned, only three years from now will we be able to tell if this was a good time to speculate in real estate, one way or the other.
What is the best way an investor can benefit from a volatile stock market?
Barron: Dollar cost average – invest some of your core holdings money on a regular basis in a mutual fund. You’ll hit lows and highs, and that discipline will serve you well in the long term. That being said, if the market has a honking downer day, invest next month’s money early.
Dupree: Stay out of it! Volatility is the friend of professional traders. If you are good enough to compete with them, then go ahead. If you are an investor, then use the down days to accumulate the securities you like. You increase your chances for success a good bit by being a long-term investor, because you don’t have to be “right” immediately.
Nasief: Because news is disseminated so quickly, volatility is here to stay. My advice is to not get too wrapped up in the moment.
Reams: In a volatile market you can reap the most benefit by buying a little on the ‘dips’ and ‘keep the powder dry,’ – i.e., have some cash available to take advantage when we see large sell-offs, like the one we saw from mid-July to mid-August (1,400 points, or 10 percent). Again, don’t speculate but invest for the long term.
For investors nearing retirement age, what can they put their money into that is is the safest asset with a reasonable return?
Barron: A balanced (growth and income) mutual fund with a steady historical rate of return with a special look at the 10-year performance to gauge the fund’s resilience in the 2000-2002 market. Individual stocks with consistent dividend increases and continuous payments are also good. Just because you’re growing towards retirement is no reason to plunge into an unfavorable bond market. There’s market risk and there’s interest rate risk.
Dupree: There is none. That asset or group of assets varies with the individual. You must find it for yourself, or with the help of a financial advisor. Then, depending upon price, it may change. In other words, there’s no real financial destination or perfect product. You must stay engaged in the process and remain flexible.
Nasief: Safety means different things to different investors. When a client begins to think about retirement, the concern is having enough income. I suggest additional concerns should be protecting an income stream from inflation and outliving your assets. Translation: Don’t abandon a growth strategy in its entirety; you will need that growth 15, 20 to 25 years hence.
Reams: When nearing retirement, some advisors suggest heavily weighting CDs, bonds and such. Unfortunately this will keep your income at a fixed level. While one must have some such investments, I like to have equities so that my income will rise over time, and the value of my holdings will increase over time to keep pace with inflation.
Do you give advice to your clients about life insurance? If so, what is it?
Barron: Only in relationship to their age, offspring and ability to sleep at night without it.
Dupree: We give advice to our clients about every detail of their financial lives, including life insurance. The two best uses for life insurance seem to be income replacement and estate planning. Aside from those two, we rarely recommend its use. However, it can be extremely effective in those situations.
Nasief: Part of what a wealth manager does is to recommend insurance as an effective means to provide income protection to loved ones and to transfer wealth to the next generation. Insurance is an important component of estate planning and the wealth management process.
Reams: I do advise clients on the value and use of life insurance in a diversified portfolio. In the early years I use it to build an estate, and later, as a buffer against taxation. It is one of those things that you wish you didn’t have to have, but your beneficiaries will be so thankful that you do.