Read The 9 Steps to Financial Freedom Online
Authors: Suze Orman
The 9 Steps to Financial Freedom (38 page)
If these are not funds you are investing within a retirement account, the best way to buy a Treasury bill or note is by contacting the Federal Reserve office nearest you—or by calling 800-722-2678 or visiting
www.treasurydirect.gov
and setting up what is called a
Treasury direct account
. This is where you buy your Treasuries directly from the Federal Reserve absolutely free of charge. You could also, if you wanted, buy your Treasuries from a broker, either a discount or full-service broker; but this would cost you about $30, and why spend $30 if you don’t have to? The other reason to buy your Treasuries directly is to get used to them and the way they work (they’re simple!). When it comes time to stop investing for growth, many people transfer some or all of their money from the market into Treasuries and draw the money they need to live on from the interest. This might be part of your overall plan, too, and it’s a great idea to become familiar with how they work right now.
So $16,000, or 80 percent, goes into Treasuries or is just
kept safe. The other 20 percent, in this case $4,000, is what you’re going to invest in the market.
When Do I Buy?
Now you have $4,000 and you’re ready to invest. If you were asking me for advice right now, I’d tell you to sign up for a free one-year subscription to
The Money Navigator
. This is a newsletter I launched in 2011 with economist Mark Grimaldi that provides recommendations on mutual funds and ETFs for your retirement funds. The newsletter highlights funds and ETFs that match your appetite for risk as well as your life stage; typically the younger you are, the more you will want to have invested in stock funds and stock ETFs. You can learn more at
suzeorman.com
. Enter “financial freedom” as the gift code to receive your free one-year subscription.
You are not going to plunk down this $4,000 all at once, remember; you’re going to use dollar cost averaging. Divide the amount you have to invest by 12; in this case, your figure would be $333.33.
Now you’re going to take this monthly sum and, on the same day each month, put it into a good no-load mutual fund or ETF month in and month out for the first year, using the dollar cost averaging technique.
You can choose either a managed fund or an index fund or ETF; and with dollar cost averaging the beauty is that when the market goes down, you’ll simply be able to buy more shares. So don’t be afraid. You have plenty of time to let that money sit. Buy, too, when the market is up, because next month—who knows?—it might be up even more. Just buy, each and every month.
After the year is up, you will have a sense of how you felt about investing, whether it felt right to you or not. I have to tell you that nearly everyone I’ve dealt with feels truly powerful
once they take the financial reins of their lives in hand in this way; in fact, most people say that if they’d known it was this easy, they would have done it long ago. When the year is up, they usually invest all the rest of their money as well, or whatever percentage they feel comfortable with. Before you know it, using AAII, other publications, and the Web, they have invested in other mutual funds they like, which means they have a diversified portfolio. They’re off and running.
What Do I Buy?
What you will buy will depend in part on how much you have to invest, because some funds have a very small minimum, while with others you need more to invest. The minimum will also vary depending on whether you’re investing in a retirement account or on your own in a regular account. Vanguard, for instance, which is one of the great mutual fund companies, has a minimum of $3,000 if you just open a regular account with them. If you open an IRA at Vanguard, the minimum drops to $1,000. Most mutual funds typically require $1,000 or so to get started.
You have a choice when it comes to buying mutual or index funds or ETFs. You can buy them directly through the fund company itself, or you can open an account at Charles Schwab, TD Ameritrade, or any of the other great, low cost brokerage companies and buy the same no-load fund through them. (Make sure there is no transaction fee involved; there shouldn’t be.)
Some of the great families of funds:
| V ANGUARD 800-662-7447 WWW.VANGUARD.COM |
| |
| T. R OWE P RICE 800-638-5660 WWW.TROWEPRICE.COM |
| |
| F IDELITY 800-343-3548 WWW.FIDELITY.COM |
W
HEN DO I SELL?
There is no harder question when it comes to the stock market. And there’s no single correct answer, because the market never stops going up and down. To answer the question of when to sell, don’t worry about what the market is doing. As always, just keep in touch with your inner voice and your time frame.
The answer will vary, depending on your individual circumstances. If you’re very lucky, you may never need to use this money or need the income it could generate for your retirement. If that happens to be the case, then the answer may be never; you can let your beneficiaries inherit it. Currently, when your beneficiaries inherit something, its cost basis for determining gain or loss for tax purposes is what the inheritance was worth the day they inherited it. So if you bought one thousand shares of stock at $10 a share years ago, and over the years the stock splits and the price rises so that you now own eight thousand shares at $40, this means that your $10,000 investment is now worth $320,000. If you sell it, you will owe capital gains taxes on $310,000, the difference between what you bought and sold it for. Now let’s assume that instead of selling it, you left it to your beneficiaries; because they inherited it, their cost basis is what the stock was worth when you died: $320,000. If they then sold it for $320,000, they would not owe one penny of capital gains taxes.
In all likelihood, however, you’re counting on this money for retirement. This means you will one day want or need to switch some or all of your money from growth-oriented investments to an income-generating investment, such as Treasury notes or bills. In any case, you will need to keep a careful watch on that ten-year time horizon.
Let’s say that you have had your money diversified among several mutual funds for nine years already, and you know you won’t need it for another ten years, if then. As long as those
funds are performing as well as or better than other funds that are similar to it, just leave it where it is.
Now let’s say you’ve had your money diversified among several mutual funds for seven years, but this time you know you will probably retire in about three years. At that time you will need this money to start generating income so you can begin to live off the interest that the principal will generate. You will have to make a change. With your eye on your timeline, it is time to start reevaluating right now. Let’s say, too, that you had a great run in the market over these seven years, and you’ve averaged about 15 percent a year on your money.
What do you do? It’s terrific that you’ve done well, but don’t try to outsmart the market. You do not have ten years ahead of you in which you can leave your money just to sit there. Consider taking some of your profits now.
It may turn out that the market suffers a setback, so that if you had ignored your nervousness, you would have been left back at square one. Or the market might skyrocket after you withdraw your money. Who cares? You have made your money. You have listened to your inner voice. You are far better off selling and ceasing to worry than you are letting your fear drain you and make you feel powerless. This is the money you intend to live on for the rest of your life, and you must trust yourself more than you trust others about where to keep the money safe that will keep
you
safe.
That said, please think through your retirement time horizon. Just because you may retire in five years, that does not mean all your money should be out of the stock market by the time you retire. The fact is, you could spend twenty to thirty years in retirement. Consider that the average life expectancy for a sixty-five-year-old male is seventeen years, and for a sixty-five-year-old female it is twenty years. That means that half of today’s sixty-five-year-olds will still be alive—and needing money—well into their eighties and a portion of those people will still be alive in their
nineties. With the prospect of such a long life, you should consider keeping some of your retirement money in stocks, even after you are retired. Not all, and certainly not most of it, but some of your money belongs in stocks. Because stocks, over the long-term, have the best prospect of generating inflation-beating gains for you.
If, however, you have ample money that you are confident you will be just fine living off the income generated by your bank accounts and bond investments, that’s great. Just make sure that you have accounted for the fact that over twenty years a 3.5 percent rate of inflation will reduce the purchasing power of $1 to about 50 cents. If your conservative investments earn less than 3.5 percent, you may have a hard time keeping up with the price of things in twenty years.
Plunging in Deeper?
Once you have invested for a year, you may decide, as thousands of other people have, that yes, you’re up to the task and ready to plunge in deeper. Watch carefully over what you are creating, keep in mind your time frame, and listen, always, to your inner voice.
If instead, after this first year of investing, you find you’re not comfortable with it, and your inner voice says that you would rather have professional help before you plunge in deeper, then again, you must listen to that voice. And you must find the very best help you possibly can.
FINANCIAL ADVISERS
If after I became a broker, any of my clients had ever asked me—and thankfully no one ever did—what I had done for a
living before I went to work for Merrill Lynch, I would have told them the truth: Before becoming a broker, I worked as a waitress at the Buttercup Bakery in Berkeley, California. My dream was not to become a broker, but to open a hot tub and sauna place, with a restaurant and haircutting salon built right in: one-stop shopping if you happened to want a meal, a haircut, and a sauna. I would go on and on about this dream to my regular customers, and finally one day a man named Fred Hasbrook gave me a check with a letter that read, “For people like you to have your dreams come true. To be paid back if you can at 0 percent interest in ten years.” I was stunned, and even more stunned as word got around and others of my regulars chipped in, too. Believe it or not, I soon had a $50,000 nest egg with which to start my business.
At the suggestion of one of my benefactors, I put the money into an account at Merrill Lynch and was assigned to a broker, a sweet guy whom I’ll call Rick. I told him I wanted to keep my money safe, and he had me sign some papers that I didn’t even read. Off I went, to have blueprints for my business drawn up. I still have those blueprints.
To make a long story short, that sweet Rick—knowing that the money wasn’t mine, knowing that I wanted above all to keep it safe, and knowing that it was being held there so I could open my business—had me investing in these things called options on oil stocks, the most wildly risky and speculative investments I could have been in. I felt funny about this from the beginning, but I didn’t know enough, or trust myself enough, to understand why or say no to Rick’s grand schemes. In the end, I agreed because I trusted Rick. With his nice office and pin-striped suits, he was the closest I’d ever been to Wall Street or big money. At first we were doing pretty great. In those early weeks we were up $5,000. I couldn’t believe it! I had never made so much money
without even trying, so I became totally intrigued with this new way to make money and thought that I had better study up on this great new moneymaking discovery.
This was in 1979, before anyone had computers at home, and I was trying to figure out about these options from reading the newspapers every day. I had stock quotes and options quotes pasted up all over my bedroom walls, trying to make sense of them. Finally I began to get the hang of it and understand what we were doing—and how what we were doing was very, very wrong for me. My understanding came too late, I’m afraid. The reversal of oil stocks happened quicker than you could say sauna and hot tub, and I lost it all, all the money I had put in and all the money I had made. Everything. My financial “adviser” had done me in, not to mention what he had done to all those people who had tried to help me.
It took me a long time to get a true understanding of what it takes to handle other people’s money. It is not like Monopoly, when after you’ve finished playing the game you simply take the houses off Park Place, pack up the money that comes with the game, and go on with your day. So much more is at stake.
Rick may have been my broker, and a reckless if not unscrupulous one at that, but I couldn’t have been luckier that he was at least with a reputable and nationally recognized firm like Merrill Lynch. Merrill came through in the long run and covered the losses in the account, after I demonstrated that he had misled me about the risks inherent in what we were doing, so in the end I was able to pay back all the money to my investors. I had picked the right firm, at least, if not the right broker at the firm—and both decisions are extremely important if you decide to go with a full-service brokerage firm.
Soon afterward, I joined Merrill Lynch.
Why would Merrill Lynch hire a waitress? They weren’t hiring a waitress. What they saw in me was that I would be an excellent saleswoman, and they were right.
At major brokerage firms, the brokers or financial advisers (which is what I became at Merrill Lynch) are mainly commission-based advisers who do not usually come up with the ideas of what you should buy or sell. Most of them take the recommendations of the financial analysts who work for the firm. Your adviser takes these recommendations, checks to see whether they’re suited to your needs and financial situation, and tries to sell these investments to you if they (and you) meet those criteria.