The cost of a European vacation may seem daunting. However, with some careful planning you can travel to Europe for little more than the cost of a domestic vacation. Two major factors in saving money on European travel are when and where to go. Several countries, such as Romania, Slovakia, Hungary, Portugal, Greece, Spain and Poland can be considerably less expensive than others. If you are trying to save money, avoid Norway, Sweden, Switzerland, Finland, Denmark and Luxemburg. Consider avoiding the big touristy cities such as London, Paris, Amsterdam, Geneva, Rome and Venice until you have more money to spend.
You can reap tremendous savings by avoiding travel during the peak summer season. Airfares and lodging prices are generally very expensive between mid-May and mid-September. You can find great deals on airfare and lodging between October and April. You can also save money by flying on a Tuesday or Wednesday.
Additionally, you can save money by flying across the Atlantic into less popular European cities. Once you arrive in Europe, you can take a train or a discount European airline to your target destination. It is also easier to use frequent flyer miles for flights to less popular destinations. Frequent flyer miles can be a great way to save money on air travel.
Once in Europe, it is inexpensive to get around using trains, buses, subways and discount airlines. If you have a long distance to travel, consider a sleeping train or a discount airline such as easyJet or RyanAir. You will be pleasantly surprised by how inexpensive airfare within Europe can be. A sleeper car enables you to cover large distances while you sleep and save the cost of a hotel for the night. There are places that you just can’t reach by train or bus. In this instance, rent a car for a day or two to visit these special out of the way places.
Save money on lodging by staying at an apartment, Bed and Breakfast or locally owned hotel. You can get better deals by staying in small towns or just outside the city center; this works well in cities with a good subway system. There are numerous resources on the internet to research and read reviews on lodging options. Some of my favorite on-line resources include TripAdvisor, VRBO (Vacation Rental by Owner), Fodor’s and Rick Steve’s.
Finally, don’t pay unnecessary fees to convert money or to pay for travel expenses. Many credit cards charge between 1-3% on European purchases. Use a credit card, such as Capital One, that doesn’t charge extra fees for European purchases. Generally, you can get the best exchange rate on local currency by using your ATM card at a major European bank. With ATMs, you are charged a fee every time you pull out money, so minimize your transactions. Avoid Change Bureaus; they usually have unfavorable exchange rates.
A variable annuity is an investment contract with an insurance company where you invest money into your choice of a variety of sub-accounts. Sub-accounts are similar to mutual funds, where money from a large number of investors is pooled and invested in accordance with specific investment objectives. Like mutual funds, sub-accounts may invest in different categories of stock or interest earning investments.
One characteristic of a variable annuity is the tax deferral of gains until the funds are withdrawn. However, upon distribution the gains are taxable at regular income tax rates, as opposed to capital gains rates that may be available for mutual funds. Additionally, there is no step-up in basis upon death for assets held in variable annuities.
Variable annuities are generally more appropriate for non-retirement accounts because gains within a retirement account are already tax deferred. Traditional retirement accounts and Roth IRAs meet the tax deferral needs for most investors. However, in some cases a variable annuity may be attractive to a high income investor who has maximized his traditional retirement options and needs additional opportunities for tax deferral. This is especially true for an investor who is currently in a high tax bracket and expects to be in a lower tax bracket in retirement.
When investing in variable annuities, with non-retirement money, there is no requirement to take a Required Minimum Distribution at 70 ½. However, there is generally a 10% penalty on withdrawals made before 59 1/2. Trades can be made within a variable annuity account without immediate tax consequences. The entire gain will be taxable upon withdrawal. There is no annual contribution limit for variable annuities, and you can make non-taxable transfers between annuity companies using a 1035 exchange. However, you may have to pay a surrender charge if you have held the annuity for less than seven to ten years, and you purchased it from a commissioned adviser. Before buying an annuity, read the fine print to fully understand all of the fees and penalties associated with the product. Most variable annuities have early withdrawal penalties and a higher expense structure than mutual funds.
A variable annuity may be an option for someone who wants to purchase an insurance policy to buffer the risk of losing money in the market. For many investors, due to the long term growth in the stock market, this guarantee may be come at too high a price. Some investors are willing to pay additional fees in exchange for the peace of mind that a guaranteed withdrawal benefit can provide. Guaranteed minimum withdrawal benefits (GMWB) can be very complex and have some significant restrictions. Additionally, some products offer a guaranteed death benefit for an extra fee. Read the contract carefully and make sure you understand the product before you buy.
Due to the high costs, lack of flexibility, complexity and unfavorable tax treatment variable annuities are not beneficial for many investors.
The first step toward financial fitness is to understand your current situation and live within your means. Review your actual expenses on an annual basis and categorize your expenses as necessary or discretionary. Compare your expenses to your income and develop a budget to ensure you are living within your means and saving for the future. The next step is to pay off high interest credit cards and personal debts. Once you have paid off your credit cards, create and maintain an emergency fund equal to about four months of expenses, including expenses for the current month. Your emergency funds should be readily accessible in a checking, savings or money market account.
Now it’s time to look toward the future. Get in the habit of always saving at least 10% to 15% of your gross income. Think about your goals and what you want to accomplish. If you don’t own a home, you may want to save for a down payment. When you purchase a home make sure you can easily make the payments while contributing toward retirement. Generally, your mortgage expense should be at or below 25% of your take home pay.
Contribute money into retirement plans, for which you qualify. Make contributions to your 401k plan, at least up to the employer match and maximize your Roth IRA. If you are self-employed, consider a SEP or a Simple plan. If you have children and want to contribute to their college expenses, consider a 529 college savings plan. Do not contribute so much toward your children’s college fund that you sacrifice your own retirement.
As you save for retirement, be an investor not a trader. Investing in the stock market is a long term endeavor, forecasting the short-term movement of the stock market is fruitless. Avoid emotional reactions to headlines and short term events. Don’t overreact to sensationalistic stories or chase the latest investment trends. Establish a defensive position by maintaining a well-diversified portfolio, custom designed for your unique situation. Slow and steady wins the race!
Don’t invest in anything that you don’t understand or that sounds too good to be true. If you really want to invest in complicated products, read the fine print. Be especially aware of high commissions, fees, and surrender charges. There is no free lunch; if you are being offered above market returns, there is probably a catch. Keep in mind that contracts are written to protect the insurance or investment company, not the investor.
It is impossible to predict fluctuations in the market or to select the next great stock. However, you can hedge your bets with a well-diversified portfolio. Establish an asset allocation that is aligned with your goals, investment timeframe, and risk tolerance. Your portfolio should contain a mix of fixed income and stock based investments across a wide variety of companies and industries. Rebalance your portfolio on an annual basis to stay diversified.
One of the biggest decisions associated with saving for retirement is choosing between a Roth IRA and a Traditional IRA. The primary difference between the two IRAs is when you pay income tax. A traditional IRA is usually funded with pre-tax dollars providing you with a current tax deduction. Your money grows tax deferred, but you have to pay regular income tax upon distribution. A Roth IRA is funded with after tax dollars, and does not provide a current tax deduction. Generally, a Roth IRA grows tax free and you don’t have to pay taxes on distributions. In 2013 you can contribute up to a total of $5,500 per year plus a $1,000 catch-up contribution if you are over 50. You can make a contribution into a combination of a Roth and a Traditional IRA as long as you don’t exceed the limit. You also have until your filing date, usually April 15th, to make a contribution for the previous year. New contributions must come from earned income.
There are some income restrictions on IRA contributions. In 2013, your eligibility to contribute to a Roth IRA begins to phase-out at a modified adjusted gross income of $112,000 if you file single and $178,000 if you file married filing jointly. With a traditional IRA, there are no limits on contributions based on income. However, if you are eligible for a retirement plan through your employer, there are restrictions on the amount you can earn and still be eligible for a tax deductible IRA. In 2013 your eligibility for a deductible IRA begins to phase out at $59,000 if you are single and at $95,000 if you file married filing jointly.
Generally, you cannot take distributions from a traditional IRA before age 59 ½ without a 10% penalty. Contributions to a Roth IRA can be withdrawn anytime, tax free. Earnings may be withdrawn tax free after you reach age 59 ½ and your money has been invested for at least five years. There are some exceptions to the early withdrawal penalties. You must start taking required minimum distributions on Traditional IRAs upon reaching 70 ½. Roth IRAs are not subject to required minimum distributions.
The decision on the type of IRA is based largely on your current tax rate, your anticipated tax rate in retirement, your investment timeframe, and your investment goals. A Roth IRA may be your best choice if you are currently in a low income tax bracket and anticipate being in a higher bracket in retirement. A Roth IRA may also be a good option if you already have a lot of money in a traditional IRA or 401k, and you are looking for some tax diversification. A Roth IRA can be a good option if you are not eligible for a deductible IRA but your income is low enough to qualify for a Roth IRA.
Are you concerned that you don’t have the financial means to fully retire anytime soon? That may not be such a bad thing. There is much more to retirement than reaching some magic number where you will be able to cover your living expenses. Your personal identity may be closely aligned with your career. Personal identity plays a huge role in your self-esteem and happiness. Your sense of accomplishment and purpose can also be tied to your work. The structure, responsibility and expectations from your job give you a sense of purpose and help you feel appreciated. Retirement may have a dramatic impact on your personal identity and sense of relevance. Make a plan to transition into your retirement adventure with a new sense of direction and purpose.
Many of your relationships are connected to your career. Relationships with colleagues, clients, co-workers and suppliers account for a lot of your social interactions. These are people with whom you have a common understanding and intertwined social connections. Think about the impact retirement may have on these connections. How will you replace this sense of community and nurture these relationships after retirement?
Another consideration in retirement is keeping your mind stimulated. At work our minds are fully engaged as we juggle several different tasks at once. This may be exhausting, but it keeps our minds stimulated and energized. A study conducted by the Rand Center for the Study of Aging and the University of Michigan found that early retirement can have a significant negative impact on the cognitive ability of people in their early 60’s. The study concluded that people need to stay active to preserve their memories and reasoning abilities. As you transition into retirement, be sure stay mentally active and engaged.
You may be looking forward to retirement in anticipation of doing all the fun things you currently have no time for. Retirees frequently enter retirement with tremendous enthusiasm and fill their first few years with exciting trips and activities. However, after a while you tire of these activities, the activities lack the substance to make you feel truly fulfilled. You start missing the sense of affirmation, self- identity and purpose you found in your job. You have time to engage in fun activities every day, but it’s just not enough, you aren’t fully satisfied.
It doesn’t have to be this way. Before you jump into retirement, give some serious thought about what you will do in retirement. How will you stay socially and emotionally engaged in a way that is truly meaningful and rewarding? Engage in activities that will feed your self-esteem. Consider a new, part-time career, set some fitness goals, engage in volunteer activities, or take up a meaningful hobby. Decide how you will develop new social networks. Once you are retired, what will you say and how will you feel when someone asks – What do you do?
One of the most common questions I hear from clients is whether they should invest in a traditional IRA or a Roth IRA. Let’s start with an understanding of the difference between the two. The biggest difference between a traditional IRA and a Roth IRA is when you pay taxes. I like to think of it…
Read the rest of this entry »
Jane M. Young CFP,EA
A 529 Savings Plan is a tax advantaged college savings plan sponsored by a state or educational institution. The plan is named after section 529 of the Internal Revenue Code, created in 1996. Every state offers at least one 529 plan. Investment in a 529 plan enables the owner to save money, tax free, for future college expenses on behalf of a student or “beneficiary”. Although 529 plans are generally sponsored by specific states, they may be used at any eligible college, university, or trade school throughout the country.
Funds invested in 529 plans grow tax free if they are used for qualified education expenses. Qualified education expenses include tuition, required fees, room and board, required books, and required supplies. Although contributions are made with after tax dollars, residents of Colorado can deduct contributions made to the Colorado plan from their state income taxes.
The owner of a 529 plan has full control over the account. The owner has the freedom to select or change the beneficiary and select from the investment choices. Many find 529 plans preferable over custodial accounts for minors where the assets are held in the child’s name, and are irrevocable. Once funds are transferred to a custodial account, the funds must be used for the benefit of the minor. This can have unintended consequences. Here is an example, your daughter reaches the age of majority and decides she would rather have a corvette than a college education. Unfortunately, the money is hers to spend however she pleases.
Additionally, gains on custodial accounts are fully taxable. Custodial accounts can also be detrimental to financial aid because they are viewed as assets of the student. In comparison to a custodial account, a 529 plan has less impact on a student’s eligibility for need-based financial aid. A 529 plan is viewed as an asset of the parent rather than an asset of the student.
A common concern with 529 savings plans is your child may not need the funds for college expenses. Fortunately, if your designated beneficiary gets a scholarship or decides against a college education, you can change the beneficiary to another family member or to yourself. If you don’t need the money for college expenses, you can withdraw the money from the 529 plan. However, if the funds are not used for qualified education expenses you will have to pay a 10% penalty and taxes on the gains. This in not entirely bad, you have a lump sum of money that may have been spent years ago, if you weren’t saving for college.
Investing in most 529 plans is simplified by using age weighted portfolios. These portfolios gradually transition into less risky investments as the beneficiary reaches college age.
When purchasing a 529 plan, be aware of high fees and commissions. Most states offer direct programs that don’t charge sales commissions. Colorado offers the choice of an inexpensive program directly through Vanguard, without a sales load.
Jane M. Young, CFP, EA
When investing in mutual funds it is important to be aware of the associated fees. High fees can significantly impact your total investment return. All mutual funds have operating expenses and some have sales fees, commonly known as a load. When you invest in mutual funds you have a choice between load and no-load funds. A mutual fund load is basically a commission charged to the investor to compensate the broker or sales person. As the name implies, no-load funds do not charge a sales fee.
The first type of load fund is an A share fund, where you pay a front end sales charge plus a small annual 12b-1 fee. A 12b-1 fee is a distribution fee that covers marketing, advertising and distribution costs. The typical front-end load is around 5%, but can go as high as 8.5%. Class A shares offer breakpoints that provide you with a discount on the sales load when you purchase larger quantities or commit to making regular purchases. The 12b-1 fee associated with most A shares is generally about .25% annually.
The second type of load fund is a B share, where you pay an annual fee of around 1% plus a contingent deferred sales charge (CDSC), if you sell before a specified date. The CDSC usually begins with a fee of 5% that gradually decreases over five years. After five years or so the fund converts to an A share fund. The actual percentages and timeframes may vary between fund families. Most mutual fund companies have stopped offering B share funds because they are usually the most expensive option for the investor and the least profitable option for the mutual fund company.
The third type of load fund is a C share that charges a level annual load, usually around 1%. This is on-going fee that is deducted from the mutual fund assets on an annual basis.
Generally, any given mutual fund can offer more than one share class to investors. There is no difference in the underlying fund. The only difference is in the fees and expenses that the investor pays.
All load and no-load mutual funds charge fees associated with the operation of the fund. The most significant of these expenses is usually the management fee which pays for the actual management of the portfolio. Other operations related fees may include administrative expenses, transaction fees, custody expenses, legal expenses, transfer agent fees, and 12b-1 fees.
These annual fees are combined and calculated as a percentage of fund assets to arrive at the fund’s expense ratio. The expense ratio is an annualized fee charged to all shareholders. The expense ratio includes the fund’s operating expenses, management fees, on-going asset based loads(C shares) and 12b-1 fees. The expense ratio does not include front-end loads and CDSCs. According to Morningstar the average mutual fund expense ratio is .75%.
Jane M. Young CFP, EA
It’s time to move but you hate to sell your house when the market is down. Maybe you should rent your house for a few years? Or, on second thought, maybe not.
There are many factors to consider before deciding to rent your home. Do you have the temperament and the time to be a landlord? Are you comfortable with the idea of having someone else living in your home? Do you want to manage the rental yourself or do you plan to hire a property manager? If you manage the property yourself do you have time to learn about fair housing laws, code requirements, lease agreements, escrow requirements and eviction procedures? Who will take care of repairs and maintenance and are you ready for tenant calls in the middle of the night? If this sounds a bit daunting, a property manager may be your best option. A property manager will cost you about 10% of the rent. Be sure to include this in your cash flow analysis.
Before renting your home do a realistic cash flow analysis. Add up your projected expenses and deduct them from your projected rental income to see if renting will result in a profit or a loss. If you project a loss, does your projected appreciation on the home while it’s rented compensate you for the time and money it will cost you? Do you have funds to cover a negative cash flow? Your expenses may include your mortgage payment, property taxes, insurance, home owner’s association dues, maintenance and repairs, legal and accounting fees and property management fees. A rule of thumb for maintenance and repairs is about 1 – 2% of the market value of your home, depending on the home’s condition. You may need to spend money up front to attract good quality tenants.
When calculating your rental income, you need to decrease your projected rental income by about 8% to allow for vacancies. In Colorado the average rental vacancy rate has been around 7-9 percent over the last five years, based on U.S. Census data. When a renter moves or is evicted it can take several months to get a new renter in place.
If you rent you can take a tax deduction for depreciation against your rental income. To calculate your annual depreciation, take the value of your home, on the date you begin renting, less the value of land and divide it by 27.5. Unfortunately, this is just a temporary gift from the IRS. When your home is sold you must recapture all of the depreciation at 25%.
Other potential drawbacks to renting your home include the possibility of major damage inflicted by a tenant, drawn out eviction processes, negligence or safety lawsuits and costly maintenance issues.
An additional consideration, if you have a capital gain on your home, is the loss of the capital gain exemption of $250,000 for individuals and $500,000 for a couple if you haven’t lived in your home for 2 or the last 5 years.
Jane M. Young
As we approach retirement, there is a common misconception that we need to abruptly transition our portfolios completely out of the stock market to be fully invested in fixed income investments. One reason to avoid a sudden shift to fixed income is that retirement is fluid; it is not a permanent decision. Most people will and should gradually transition into retirement. Traditional retirement is becoming less common because life expectancies are increasing and fewer people are receiving pensions. Most people will go in and out of retirement several times. After many years we may leave a traditional career field for some well-deserved rest and relaxation. However, after a few years of leisure we may miss the sense of purpose, accomplishment, and identity gained from working. As a result, we may return to work in a new career field, do some consulting in an area where we had past experience or work part-time in a coffee shop.
Another problem with a drastic shift to fixed income is that we don’t need our entire retirement nest egg on the day we reach retirement. The typical retirement age is around 65, based on current Social Security data, the average retiree will live for another twenty years. A small portion of our portfolio may be needed upon reaching retirement but a large percentage won’t be needed for many years. It is important to keep long term money in a diversified portfolio, including stock mutual funds, to provide growth and inflation protection. A reasonable rate of growth in our portfolio is usually needed to meet our goals. Inflation can take a huge bite out of the purchasing power of our portfolios over twenty years or more. Historically, fixed income investments have just barely kept up with inflation while stock market investments have provided a nice hedge against inflation.
We need to think in terms of segregating our portfolios into imaginary buckets based on the timeframes in which money will be needed. Money that is needed in the next few years should be safe and readily available. Money that isn’t needed for many years can stay in a diversified portfolio based on personal risk tolerance. Portfolios should be rebalanced on an annual basis to be sure there is easy access to money needed in the short term.
A final myth with regard to investing in retirement is that money needed to cover your retirement expenses must come from interest earning investments. Sure, money needed in the short term needs to be kept in safe, fixed income investments to avoid selling stock when the market is down. However, this doesn’t mean that we have to cover all of our retirement income needs with interest earning investments. There may be several good reasons to cover retirement expenses by selling stock. When the stock market is up it may be wise to harvest some gains or do some rebalancing. At other times there may be tax benefits to selling stock.
Jane M. Young
Generally the typical investor is better off investing in stock mutual funds than in individual stocks. A mutual fund is an investment vehicle where money from a large number of investors is pooled together and invested by a professional manager or management team. Mutual fund managers invest this pool of money in accordance with a predefined set of goals and guidelines.
One of the primary benefits of investing in stock mutual funds is the ability to diversify across a large number of different stocks. With mutual funds, you don’t need a fortune to invest in a broad spectrum of stocks issued by large and small companies from a variety of different industries and geographies. Diversification with mutual funds reduces risk by providing a buffer against extreme swings in the prices of individual stocks. You are less likely to lose a lot of money if an individual stock plummets. Unfortunately, you are also less likely to experience a huge gain if an individual stock skyrockets.
Another benefit of stock mutual funds over individual stocks is that less time and knowledge is required to create and monitor a portfolio. Most individual investors do not have the time, expertise, or resources to select and monitor individual stocks. Mutual funds hire hundreds of analysts to research and monitor companies, industries and market trends. It is very difficult for an individual to achieve this level of knowledge and understanding across a broad spectrum of companies. Mutual fund managers have the resources to easily move in and out of companies and industries as investment factors change.
Most individual investors appreciate the convenience of selecting and monitoring a diversified portfolio of mutual funds over the arduous task of selecting a large number of individual stocks. Stock mutual funds are a good option for your serious money. However, if you really want to play the market and invest in individual stocks, use money that you can afford to lose.
For diehard stock investors, there are some advantages to investing in individual stocks. Many stock mutual funds charge an annual management fee of between .50% and 1% (.25% for index funds). With individual stocks, there is a cost to buy and sell the stock but there is no annual management fee associated with holding stock.
Another advantage of individual stocks is greater control over when capital gains are recognized within a non- retirement account. When you own an individual stock, capital gains are not recognized until the stock is sold. In a high income year, you can delay selling your stock, and recognizing the gain, to a year when it would be more tax efficient. On the other hand, when you invest in a stock mutual fund you have no control over capital gains on stock sold within the fund. Capital gains must be paid on sales within the mutual fund, before you actually sell the fund. Mutual funds are not taxable entities, therefore all gains flow through to the end investor.
Jane M. Young
Let’s compare some differences between stocks and bonds. When you buy a bond you are essentially lending money to a corporation or government entity for a set period of time in exchange for a specified rate of interest. When you invest in the stock market you assume an ownership position in the company whose stock you are purchasing. As a result, the value of your investment will fluctuate based on the profit or loss of the underlying company. With the purchase of a bond the value of your investment hould not fluctuate based on the financial performance of the issuer, assuming it remains solvent. You will continue to receive interest payments according to the original terms of the agreement until the bond matures. Upon maturity the amount of your original investment (principal) will be returned to you along with any interest that is due. As a general rule, stocks are inherently more risky than bonds, therefore investors expect to receive a higher return.
Bonds may appear to be safe but they are not without risk. Currently, there is some risk associated with low interest rates that may not keep up with inflation. This is especially true with many government bonds. Two additional risks typically associated with bonds include default risk and interest rate risk.
Default risk is the risk that the issuer goes bankrupt and is unable to return your principal. Most bond issuers are assigned a rating to help investors assess the potential default risk of a bond. Generally, investors are compensated with higher interest rates when taking a risk on lower rated bonds and receive lower interest rates on higher rated bonds.
Interest rate risk is based on the inverse relationship between interest rates and the value of a bond. When interest rates increase the value of a bond will decrease and when interest rates decrease the value of a bond will increase. If you hold an individual bond until maturity your entire principal should be returned to you. You have the control to keep the bond until maturity and avoid a loss. However, if you need to sell before maturity you may lose some principal. The loss of principal is greater for longer term bonds. This needs to be weighed against the benefit of a higher interest rate paid on longer term bonds.
Bond mutual funds can provide diversification and reduced default risk because your money is pooled with hundreds of other investors and invested in bonds from a large number of different entities. If one or two entities within the mutual fund go bankrupt there will be minimal impact on each individual investor. However, with mutual funds you have less control over interest rate risk. When interest rates increase, bond fund managers often experience a high rate of withdrawals forcing them to sell bonds at an inopportune time. This usually results in a loss of principal, the severity of which is greater for longer term bond funds.
Jane M. Young, CFP, EA
Build a Portfolio to Support Your Investment Timeframe
Investment timeframe is a major consideration in developing an investment portfolio. Start with an emergency fund covering about four months of expenses in a cash account with immediate access. Next, put aside money that is needed over the next few years into fixed income vehicles such as CDs, bonds or bond funds. Invest long term money into a combination of “stock based” mutual funds and fixed income investments based on your tolerance for investment risk and volatility. Historically, stock has significantly out-performed fixed income investments but can be volatile during shorter timeframes. Stock is a long term investment; avoid putting money needed within the next five years in the stock market.
Diversify, Diversify, Diversify
Once your emergency fund is established and funds have been put away for short term needs, it’s time to create a well-diversified investment portfolio. We cannot predict the next hot asset class but we can create a portfolio that will capitalize on asset categories that are doing well and buffer you from holding too much in asset categories that are lagging. Think of the pistons in a car, as the value of one asset is increasing the other may be falling. Ideally, the goal of a well-diversified portfolio is to have assets that move in opposite directions, to reduce volatility, while following a long term upward trend. It is advisable to diversify based on the type of asset, investment objective, company size, location and tax considerations.
Avoid Emotional Decisions and Market Timing
The best laid plans are worthless if we succumb to our emotions and overreact to short term economic news. Forecasting the short-term movement of the stock market and trying to time the market is fruitless. We can’t control or predict how the stock market will perform but we can establish a defensive position to deal with a variety of outcomes. This is accomplished by maintaining a well-diversified portfolio that supports our goals and investment time horizon.
The stock market can trigger our emotions of fear and greed. When things are going well and stock prices are high we become exuberant and want a piece of the action. When things are bad and stock prices are low we become discouraged and want to get out before we lose it all. The stock market is counterintuitive, generally the best time to buy is when the market is low and we feel disillusioned and the best time to sell is when the market is riding high and we feel optimistic. We need to fight the natural inclination to make financial decisions based on emotions. Don’t let short term changes in current events drive your long term investment decisions.
No one knows what the future holds so focus on what you can control. Three steps toward this goal are to create a portfolio that meets your investment time horizon, create and maintain a diversified portfolio and avoid emotional decisions and market timing.
Jane M. Young, CFP, EA
I have met with numerous widows over the last few years to get a better understanding of what they are experiencing and to learn how I can best support and assist them. Below I have shared some of the most meaningful and consistent messages and comments I heard from these brave women. I hope this is helpful to both men and women who have recently lost a spouse and family members of someone who has recently lost a spouse.
- Avoid making major decisions during the first year. I think I heard this from everyone I spoke with and it is very wise advice.
- Be obsessively selfish, after the loss of a spouse it is especially important to focus on you and physically take care of yourself. Later, once you are feeling better you can help others.
- Grief is very sneaky, one moment you feel fine then it sneaks up on you. Expect some irrational behavior.
- Be easy on yourself, it is normal for grief to last three years. The fog will begin to clear after the first year but things will still be fuzzy for up to three years. This can be difficult because friends and family expect you to heal more quickly than is realistic. Everyone grieves differently but three years is very normal.
- During the first year you feel like you’re operating in a fog, it is easy to forget key dates. You frequently feel lost and confused and forget how to do things.
- Grief can consume hours and hours of your day. It’s hard to focus and get things done. There is very little energy to learn new things. It’s normal to feel apathetic.
- The loss of a spouse is a huge tragedy in your life. Everyone else seems so focused on themselves. Try not to get upset at others who go on with their own lives as if nothing has happened. They are busy and they don’t want to open themselves to the pain.
- It’s very important to take the time to select a trusted team of professionals. Your team should include an attorney, financial planner and an accountant, if your financial planner does not prepare taxes.
- Being a new widow can be very scary, it is scary to be alone. You have a tremendous need for encouragement and acknowledgement that you are making progress. Try to spend time with positive and supportive friends and family.
- It’s hard to shift from making plans and setting goals together to making plans and setting goals on your own. You don’t have to do everything the way you had planned with your spouse. You need to set your own course and reach for new hopes and dreams.
Please join us for lunch, at Pinnacle, for our next Fireside Chat on July 11th at 11:30. We will discuss Long Term Care Insurance. As always this is purely educational and free of charge. Please call Judy at 719-260-9800 to RSVP. Please let us know if there are any topics that you would like us to discuss at future Fireside Chats.