Why the Notion of “Risk Tolerance” Is a Complete Myth

Why the Notion of “Risk Tolerance” Is a Complete Myth 

If you have encountered a conventional financial advisor, you have probably heard about the concept of “risk tolerance.” This basically refers to the level/degree of risk you – as an investor – can and should bear with your invested funds.

The major consideration in determining this so-called “level” is your age, which relates to how long it will be before you begin accessing your invested dollars for their intended purpose – most likely, retirement income. The supposed allocations are often already computed and charted out for you in colorful pie charts or via computer software that tells you the desired percentages of stock, bonds, cash, etc. your portfolio should contain.

The generally accepted wisdom – with which I vehemently disagree – is that younger investors, who have longer time horizons, can and should take more risk by investing a larger chunk of their money (or, in some cases, everything) in stocks, while older investors who are nearing retirement, on the other hand, should be more conservative by tilting their allocations more toward bonds and the like. There are dozens of models out there. Perhaps you’ve even answered a few questions via the Internet, in a brochure, or from your financial advisor to arrive at your personal suggested “risk tolerance model.”

I completely disagree with the bizarre idea that it’s OK, based on someone’s age and the length of time before they will access their funds, for them to take more or less risk. Just because an investor is, say, 35 years old today and plans on retiring 30 years from now, it’s a perfectly good idea for them to be heavily invested in stocks? Really? That’s the only meaning you can derive from this kind of advice.

Can anyone say or even imply that the risk inherent in investing in stocks dissipates with time? Absolutely not. The only explanation these so-called advisors usually offer for advocating such a position is that since they have so much time, even if this 35-year-old takes a huge hit (which happens more often than you might think), there will be enough time for them to “recover.” Says who? Can any of those advisors promise that such a recovery will actually take place? Does anyone have even the way of knowing when the stock market will dip? Of course not! So how can they then promise recovery?

You probably know someone – or have heard horror stories from people – who followed these “risk tolerance” maps and whose portfolios still today remain crushed by the market’s recent plunge. If these risk tolerance models work so well, why are people still suffering the effects of the big market shift? Some investors may in fact “recover,” but many will not. As an investor, you must constantly remind yourself of the fact that no financial guru can accurately predict the future of the stock and bond markets, regardless of how savvy or convincing they may appear to you.

Pursue a Strategy That Reflects Reality – LINK Your Portfolio to the Stock Market Instead

By linking your portfolio to the markets, rather than investing directly in them, you first protect all of your principal dollars. Then, when the market does well, your portfolio gains – up to a contracted cap – and those gains are locked in. But when the market plunges – the timing of which no one can predict – your investments are safe because your portfolio is not tied to the market’s risk and volatility.

What a beautiful option – and above all, it’s much more realistic than those fancy gambling gimmicks that could potentially destroy your retirement. Think about it for a moment and ask yourself where the portfolios of millions of devastated investors would be today if they had pursued this proven strategy.

My question for those advisors who continue to aggressively teach “risk tolerance models” as the solution for investors is this: Why in the world should an investor take such a risk and potentially lose a large percentage of their investment when you know perfectly well – or should know – that there is no guarantee they’ll ever gain it back, let alone grow it? Especially when such a risk is completely unnecessary? 
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Call us today at 301-949-4449 or visit us on the Web to schedule your complimentary consultation. We will evaluate your needs and help you explore the best options for you - none of which involve pursuing a risk tolerance model.

A CRITICAL Retirement Lesson from BP’s Oil Spill

A CRITICAL Retirement Lesson from BP’s Oil Spill

Unless you’ve literally been living under a rock, you have already heard plenty about the politics/PR aspects related to the horrific BP oil disaster in the Gulf of Mexico. However, buried amid all the media coverage of this story is a very important lesson that investors, perhaps like yourself, who may be planning for retirement (as well as their financial counselors) should and must heed.

According to a Bloomberg report, BP’s shares have slumped 45 percent since April 20, the day the rig exploded, effectively wiping out roughly $81 billion of the company’s value.

Also this week, Yahoo! News reported that after agreeing to cough up a $20 billion relief fund – for starters – as well as another $100 million to pay out-of-work employees, “BP said in a statement it would cut three-quarters of dividends, significantly reduce its investment program and sell $10 billion of assets to create the fund.” The company “would cancel the first-quarter dividend due for payment on June 21 and would not declare interim dividends for the second and third quarters of 2010. The payouts were expected to be about $2.6 billion per quarter, in line with recent quarters.”

The Hidden Lesson?

Those dividends are paid to shareholders of BP, some of whom are individual investors just like you, folks who are retired and seriously count on receiving the income from those checks. Based on the reported estimates, $2.6 billion per quarter, aggregated across three quarters, comes out to $7.8 billion of income that will not be paid to those investors – again, some of whom are retired.

What Are They Supposed to Do NOW?

Unfortunately, the most honest answer I can offer is that they’ll simply have to suck it up and suffer in the meantime. And remember, this could very well be just the beginning, as most reports point out that these cost estimates appear low – which mean we just don’t know how bad things could get for those depending on BP’s dividend checks.

For the life of me, I don’t understand how any financial professional could think it’s okay to put any portion of their clients’ retirement income at the mercy of unpredictable dividends or stock prices. In my opinion, this is simply imprudent planning.

I can honestly say that not a single one of our clients will ever face such a predicament, because we never gamble – even slightly – with their retirement incomes. You see, we understand – as should everyone – that no matter how “solid” a company like BP has been in the past, or may look today, ACCIDENTS HAPPEN. And because accidents happen in real life, you and your financial counselor need to answer this question: Are you at risk of losing any portion of your retirement income if something unforeseen were to occur?

And as you digest that answer, remember that your bills do not stop just because an accident has happened. Please do yourself a very big favor and make sure that your retirement strategy is solid and realistic.

Schedule your complimentary session today and find out how to safeguard your retirement income against unforeseen events. Call us at 301.949.4449 or visit us on the Web at LaserFG.com.

Would a Tax Hike Ruin Your Retirement?

Would a Tax Hike Ruin Your Retirement?

On April 27, 2010, the National Commission on Fiscal Responsibility and Reform – which you probably know as the Debt Commission – held its first official meeting. This commission is charged by the president to figure out how to get a handle on America’s humongous national debt, which currently stands at a staggering $13 trillion+. According to a recent report issued to Congress by the Treasury department, the debt is expected to reach – hold onto something – $19.6 trillion by 2015.

What exactly has this got to do with your life, and why am I even discussing this topic on a personal finance blog? Well, the straightforward answer is because this is YOUR debt and YOU have to pay for it. And, the only currency to pay for it – as far as I know – is called tax revenue (or expense, from your standpoint as the taxpayer).

It’s Not All That Complicated

If you read this blog regularly, you know that I don’t care much for political ideologies – because I think they often make people say and/or do things they very well know are dishonest or make no sense. So, politics aside, this is the deal: As a nation, we’re in debt up to our eyeballs because for quite a while now, we have been spending w-a-a-a-a-y much more than we collect in tax revenue.

Fact is, regardless of the way any pundit words it, there are only two ways to fix the problem: reduce spending or bring in more revenue (i.e., increase taxes) – or some combination of the two.

Now if you were to take a wild guess as to which of these two options is the most likely to happen, which would it be? Do you believe that Congress will significantly reduce entitlements like Social Security, Medicare, and Medicaid? Or significantly cut other forms of spending? The thing is, we’ve tried this several times before, and after all the “cutting,” spending still finds a way to increase every year.

Actually, President Obama made some remarks to open the Debt Commission’s first meeting, during which he spoke about some spending remedies his administration has ALREADY implemented in an attempt to fix the problem. And then he said this: 

But these steps – while significant – are not enough. …this alone will not make up for the years in which those in Washington refused to live within their means. And it will not make up for the chronic failure to level with the American people about the costs of the services they value.

There’s not much to say about spending cuts, except that anyone would be incredibly naïve to believe that anything significant will happen on that side of the equation.

Regarding the possibility of increased taxes, this is what the President said, word for word: 

Now, I have said that it’s important that we not restrict the review or recommendations of this commission in any way. Everything must be on the table.

Can you guess what “everything” means? Folks, I predict taxes, including YOURS, will increase!

Okay, I could be completely wrong. But is it preposterous to think that it’s only a matter of time before someone who drives while heavily intoxicated will cause a major fatality? Or to predict a strong possibility of rain when the skies above me turn dark and full of zigzagging lightening streaks?

May I Recommend You SERIOUSLY Reexamine Your Retirement Strategy?

Every day, I see people planning for their retirement income using tax-deferred accounts that simply postpone taxes into the future because their financial advisors tell them this is what they should be doing. I really wonder:

• If any of the clients of those so-called advisors, who followed their advice and are actually retired, are now truly happy with that advice?
• If these advisors ever bother to do the math and show their clients some realistic numbers to depict what might happen once they are actually retired?
• Or if they just show their clients how much money they’ll have BEFORE-tax and send them on their way, as if that matters more to investors than how much they get to spend AFTER-tax?

Why not plan for your future retirement using income-tax free alternatives, rather than gambling that your taxes will be lower, when any honest professional in this field is predicting higher taxes?

Call us today at 301-949-4449 to schedule your complimentary session or visit us on the Web.

Tough Financial Love – Knowing When to Say “No”

Tough Financial Love – Knowing When to Say “No”

Let me start by asking you a big favor: Please put your emotions aside as you read today’s post, because that may be the only way you will be able to fully appreciate the discussion.

“Bad things happen to good people.” “We are one another’s keeper.” “That’s what family is for.”

All of these sayings – or similar ones – underscore the fact that family members, at the minimum, are supposed to “be there” for one another in times of need. For the sake of this discussion, let’s focus specifically on financial need.

Here at Laser Financial Group, we pride ourselves on teaching the concept of “true wealth,” which basically teaches that to live a truly fulfilled life and enjoy long-lasting wealth, one must maintain a strong balance among family and social life, maintain the highest ethical standards, and give back to society.

Does this mean we should have an open checkbook to assist our kids, grand kids and other family members? If not, where – and how – do we draw the line and say “NO”?

As retirement planners who maintain very close relationships with our clients, we are sometimes consulted in instances when parents/grandparents are called upon to assist their family members financially. Honestly, there is an extremely thin line between a truly unfortunate situation that might be salvaged with a little help, and continual bad financial moves that simply and frankly cannot be sustained. Regardless of what your emotions may tell you, the latter always has only one ending:  wasting your assets in the name of “helping” someone you love dearly.

There have been situations where our only suggestion (not our answer, but our suggestion) was NO – as in “Do not help anymore.”

I always advise our strategists to tell our clients what they need to hear, not what they want to hear. Think about it this way. For those of you who have raised children –especially teenagers – rarely do they agree with you, but does that mean you were wrong?

Consider These Scenarios

Situation 1:

Son calls mom.”Mom, if you don’t help me, my home will be foreclosed.” The true story behind this – after we probe just a little bit? Son purchased a five-bedroom, single-family home in a gated community a little over 4 years ago. He drives the latest model of a luxurious SUV. He has not lost his job nor had his salary reduced. His negative amortization loan rate recently reset from the teaser rate of 1.25 percent to the true rate of 6 percent.

Emotions aside, this clearly is a case of someone’s son (who will always be her baby boy) who made a conscious decision to leave beyond his means. It really boils down to two options:

1. Mom tapping into her retirement assets to help Son continue living beyond his means, potentially spending down her assets, after which Son’s house will still be unaffordable.
2. Mom saying “no,” and speeding up the process of teaching Son to be a bit more financially responsible.

In this case (a real Laser Financial client, I might add), Mom decided to stop helping after nine months, and coincidentally following her annual review meeting with yours truly. Guess what? The home was foreclosed, Son is now renting a smaller house and still owns his beloved SUV, but he’s able to support himself. As for Mom, she wishes she could get back the money her emotions drove her to sink into the house trying in vain to save it.

Situation 2:

Daughter asks Mom to pay the tuition for her 7-year-old granddaughter’s private school. A few months earlier, Daughter decided her family of three needed to upgrade her perfectly running car for a 6-seater SUV, increasing her payments to more than double the monthly payments on her previous car. It’s important to note that Son-in-Law also drives a huge SUV.

Don’t you think it’s every parent’s responsibility to make sensible sacrifices for the betterment of their children? Just because Grandma has been retired for four years and is now receiving additional income from Social Security does not mean she should pay the private school tuition for her 7-year-old grandchild whose parents are living irresponsibly large.

Personally and professionally, I believe that before you jump into assisting someone financially, you must understand their lifestyle and be sure that they really deserve the help. Then, there must absolutely be a plan of action to improve the situation so that they can eventually become self-sufficient. Sure, we are one another’s keepers – but we all have to learn to live responsibly. And sometimes, pain helps in that department – a lot!

Call 301-949-4449 for your complimentary consultation or visit us on the Web.

If the Stock Market is Depleting Your Investments, Your Strategy Is WRONG

If the Stock Market is Depleting Your Investments, Your Strategy Is WRONG

Let me first agree with the fact that our economy and stock market – and the global ones as well, in some respects – are not in a good shape, at present.

But here is what I find fascinating: investors like you are made to erroneously believe that, given the current economic situation and wild rides of the stock market, the evaporation of investment values is understandable – and, worse – unavoidable. Haven’t you heard so-called expert after expert, advisor after advisor (probably yours included), and one publication after the other creating that impression? The thing is, this impression is completely bogus and false. Personally, I believe the problem boils down to one thing.

How Realistic and Savvy Is Your Financial Advisor?

As pointed out by famed investor Warren Buffet, “Only when the tide goes out do you discover who’s been swimming naked.” In effect, the economic/stock market meltdown will do just that, exposing those investors with unrealistic and unsustainable strategies. How does yours stack up?

As an investor, would you place your nest egg into an investment if your advisor told you that it would do great as long as the economy/market did well, but was SURE to wither up your investment, without any limitations, should the economy fall into a recession? Savvy investors would have nothing to do with such an investment strategy!

The reality is that the economy and the stock market will do well sometimes and perform poorly at other times. That’s the nature of the process. No expert knew the market would crash in September 2008, and today the market is again struggling. My point is, the market goes up and comes down. And since we cannot ever know in advance when the ups and downs will occur, it makes sense to purse a simple, proven strategy I recommend which:

• Guarantees that your portfolio will not lose value as a result of stock market declines.
• When times are good and the markets are performing well, allows you to earn interest based on a stock market index – up to a predetermined cap.

Just imagine where your own nest egg – as well as those of the millions of other devastated investors – would be today if they had followed our counsel.

Frankly speaking, many investors seem to be following advisors who naively believe it’s okay to speculate and WISH it’ll all end up well when they’re finally ready to retire. How can I respond to that, except to say that it just doesn’t make any sense whatsoever! Don’t you agree?

As we celebrate Memorial Day, all of us here at Laser Financial would like to applaud and honor the heroism of those who have risked their lives and fallen, as well as those who continue to fight to protect our nation and freedom.

How Much of Your Retirement Money Do You Want to Keep Safe?

How Much of Your Retirement Money Do You Want to Keep Safe?

Today let’s take a moment to hypothetically compare two investment strategies that you might employ in growing your retirement nest egg. Let’s call them Strategy X and Strategy Y. Strategy X imposes no caps or floors – you simply earn whatever the stock market returns, whereas, with Strategy Y, your gains are capped at, say, 12 percent with a guaranteed minimum of, say, 2 percent. So in this example, you would make unlimited gains with Strategy X, along with unlimited losses, while with strategy Y, you’d be guaranteed 2 percent even if the stock market tanked, but your upside gains would not exceed 12 percent.

Which Strategy Would You or Your Financial Advisor Pursue?

Most so-called experts would likely implore you to go with Strategy X, with this explanation: “You never want to cap your gains. Besides, over the long haul, the stock market will deliver and your retirement nest egg will be fine. Simply make sure your portfolio is ‘well-diversified.’” Isn’t this exactly what most worried investors are being advised to do today?

Sure, this may sound good, until you actually start doing the math. Let us try to mimic what usually happens with the stock market – ups and downs. Assume that in Year1, the stock market index gains 20 percent. All other things being equal, a $100,000 investment would have grown to $120,000 under Strategy X, and it would have grown to $112,000 (capped at 12 percent) with Strategy Y.

Now assume the index loses 10 percent the following year. Strategy X would drop to $108,000 ($120,000 less 10 percent). Strategy Y, on the other hand, would increase to $114,240 ($112,000 plus the 2 percent guaranteed gain).

Wait to See Year 3 Before Making Any Conclusions

If in Year 3 the index were to gain 10 percent, Strategy X would grow to $118,800 (10 percent gain on $108,000), while Strategy Y would grow to $125,664 (10 percent gain on 114,240).

How soon, easy, and likely is it that Strategy X’s balance would catch up and overtake Strategy Y? Of course, no one knows with any certainty, but if the trend in the example (an up-and-down market) were to continue, it might take some time. Don’t you agree? I hope that the millions of diligent investors who are looking for a better retirement receive a little more information and wider options before making their investment decisions.

How many hard-working Americans are sick of losing sleep over the markets’ wild rides of late and could benefit from something like Strategy Y? Your traditional financial advisor has likely created the impression that your only viable option, as an investor, is Strategy X, but you now see there is another way. I wish every investor knew of all the other viable options available to them.
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To receive your free consultation and learn how something like Strategy Y might work for you, please call Laser Financial at 301-949-4449 or visit us on the Web.

Why Stock Diversification Doesn’t Work

Why Stock Diversification Doesn’t Work

In the aftermath of the 2008 stock market meltdown, many investors – perhaps yourself included – have rightfully begun to seriously question the validity of the strategies they have been pursuing with their nest-eggs, courtesy of the advice they’ve been receiving from their financial advisors, books, magazines, websites, TV, and radio shows.

In their usual attempt to calm frayed nerves, so-called investment experts claim that investors could have somehow magically escaped the beating their portfolios received if they had “diversified” among different classes of stocks and bonds, both domestically and across the globe.

What About Those Investors Who Did Exactly That and Still Suffered Significant Losses?

My common-sense view is that the only viable solution is to not invest your serious cash (like your retirement money) directly in the market, period! None of our clients had to change anything of their strategies because their portfolios did not suffer any losses. In fact, they actually EARNED money during the exact same period that other investors could barely muster the courage to open their investment account statements.

One thing I know for sure – and that every rational investor and advisor also knows, or should know – is that stocks fluctuate, and no one – I repeat, no one – knows exactly when the market will turn south. The sad truth, though, is that most peoples’ portfolios reflect the exact opposite position.

Three Baffling FACTS

First, those same advisors/experts advised, encouraged, and designed the “diversified” portfolios their clients owned just before the bottom fell out. Then, after the disaster which no one saw coming, they claim that if the investors had better/differently/more smartly diversified, their portfolios would not have been devastated. No wonder they call it Monday-morning quarterbacking – who can’t assess what went wrong in hindsight?

Second, in 2008 the S&P 500 lost 38.5 percent, the Dow dropped by 33.8 percent, and the NASDAQ fell by 40.5 percent. But the majority of the investors whose retirement portfolios were devastated had already diversified, so why did they still suffer such huge losses? It is extremely important for you to understand that every major market in the world dropped significantly at the same time. Actually, European and Asian stocks did even worse than U.S. stocks. So what does that say about those gurus who insist that investors should have diversified across multiple geographies in order to avoid the beating their nest eggs received?

Finally, the other critically important thing that 2008 taught – or should have taught – investors is that bonds are not safe haven either, because the largest bond fund on the planet lost about 36 percent.

Diversification could reduce the impact of your loss in the instance that you owned Enron stock in a proportion small enough that when it collapsed, those losses were overshadowed by gains from other well-performing stocks in your portfolio. But why would you take the chance of ruining your retirement by investing directly in the market, when it is completely unnecessary?

At the end of the day, it’s as plain and simple as this: You can diversify your stock portfolio all you want to, but you’ll also have to pray that the market doesn’t experience any massive losses like it did in 2008. The harsh reality is that millions of Americans lost significant portions of the retirement savings it took them years to build. Meanwhile, the stock market continues to fluctuate as you read this, and will continue to do so. Don’t you find this platitude of “just diversify, and you’ll do great” offensive? I do.
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Call Laser Financial at 301.949.4449 or visit our Web site to set up your personal consultation with a strategist who can explain why diversity may or may not be the best option for you at this time.