Save Smart, Earn More

The New Rules for Retirement Investing

Dennis Blitz

• Publisher: Adams Media
• Year: 2008
• ISBN:
  9781440515385
• Topic: Desarrollo personal
• Subtopic: Finanzas personales

Blitz writes in a conversational style that even a novice investor can understand. Believe me, his ideas and strategies will set you on the road to becoming a millionaire!"-John Slatter, CFA, author of The 100 Best Stocks You Can Buy. If you're one of America's 78 million baby boomers, you've seen the Doomsday headlines, warning you that you're not saving enough to retire. Are you really headed for poverty in your retirement? Expert author Dennis Blitz says no. You may be saving enough-but you may not be saving smart enough. But you don't have to scrimp and sacrifice to save more. Instead, you need to know the most effective ways to get a better return on your investment-what really counts in wealth creation. From this book you will learn: The Nine Rules of Smart Investors; A theory to help investors measure risk; The right way to diversify; How to determine a good value stock. With the help of Save Smart, Earn More, you can retire in comfort and security-no matter what your current financial situation.

Part 1:

WELCOME TO THE BACK PORCH

1: We Still Have Plenty of Time to Get Rich

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Don’t Bother Me with the Details; Just Tell Me Where to Get My Extra Million Dollars.

Several years ago, my wife and I bought a second home near a lake in a quiet town about sixty miles from our full-time home in Chicago. The only change we made to our lake house was to add a large and comfortable enclosed porch. Most weekends we drive there on Friday afternoon and stay through Sunday. Our favorite times are when friends join us for a “weekend in the country.”

In the evenings, after dinner is done, the grill has been cleaned, and the dishes put away, the evening air cools and the conversation warms. The exchange between friends takes on a familiar pattern. First is talk of family, followed by everyone’s comments about politics and the latest good book or movie.

Then the conversation sometimes takes a turn that reflects a problem troubling millions of Americans: How can we best manage our finances during the time leading up to and during our retirement? At some point in the conversation, it’s almost a certainty that someone will look skyward and voice one of the following:

• I just want to invest my savings to maximize return.

• I just want to invest my savings to maximize growth.

• I just want to invest my savings to maximize safety.

Some people will say all three.

As I’ve listened to my friends over the years, it has seemed almost as though they were waiting for divine intervention. Maybe they were hoping for a deep voice to issue forth from the heavens and intone, “Buy GE at $37 a share!” Please don’t misunderstand me: The people who gather on my back porch are not uneducated or simple. These are intelligent, successful professionals, and they are not unique. They are typical of so many Americans who “only” want better returns, better growth, and more safety from their investments.

These back-porch conversations about investing start out with a great head of steam, then slowly lose momentum as my friends shake their head over how disappointed they are with their current investment results. They begin to guess at what “perfect” investments today would be sure to give them great wealth in the future. Naturally, they never arrive at a conclusion, and the conversation eventually tails off, only to be replaced by a different topic.

But tonight, as we gather on the back porch, I suggest that we do something different.

After thirty years of writing for and lecturing to professionals on the topic of investing, I volunteer to lead a discussion on the proven rules of successful investing. Tonight, our sole focus will be on the topic of how to best manage our money for the future. I have assembled on my porch some of the smartest people I know, and I want you to join us.

Tonight, we will all ignore any past investment screw-ups that we may have made. We will forget, for the next few hours, that maybe our current investment portfolio is a disorderly mess that has provided disappointing results. Tonight, we will all be brilliant. Our thinking on the topic of how to best manage our money will be crisp and intelligent. We will come to conclusions that will be both elegant and usable. We will do all this before the sun comes up in the morning, before we can hear the golfers’ carts humming past the cottage on their way to their morning game.

As everyone gathers, I run off to the kitchen to get a fresh cup of coffee. Maybe I can find a little slice of the pie that was left from dessert. I tell the others that if pie and coffee don’t interest them, there are soft drinks and something a bit stronger in the bar. Get what you like, and let’s begin.

The Fundamentals of Sound Investment

As my friends return to the porch, I notice that, in addition to fresh drinks and seconds on dessert, a few have come back prepared to take notes. Even in this casual setting, people are serious when it comes to retirement savings. I suggest that we start the evening’s discussion by agreeing on a few basic concepts—ideas that are fundamental to any successful approach to investment.

Concept One: This Is Important Now

Investing is no longer the icing on our future plans; instead, it’s now the cake. I ask my friends if they’ve ever had thoughts such as these:

• “My investments today will not be adequate for me to live in the style that I hope for when I retire.”

• “As my income from work decreases in the future, I will need to rely more and more on my investments to pay for the things that I want for myself and my family.”

Carol laughs. “Boy, I think those thoughts all the time.”

Tim interrupts and says, “Not me; I only think about them when I’m awake.”

“Okay,” I say, as I raise my coffee cup in a toast. “Then you already understand that your investment portfolio performance will dictate your future lifestyle. But not to worry! Even if your current investments have generated disappointing results, a fix is not out of reach. You simply need to understand the Nine Rules used by successful investors.”

Lou, with tongue in cheek, asks, “Is there a successful investors’ clubhouse? Will I need to discover a secret handshake or password?”

“No,” I respond, “the secrets are all around us. In fact, I’ll share them with you tonight. But for now, let’s stick with the groundwork.”

Concept Two: You Are Your Own Best Investment Advisor

You are the one who must control how your money is invested. Although the need for intelligent investing advice has never been greater, there is a surprising lack of unbiased guidance for the average investor. Of course, people in the highest 5 percent of net worth have access to excellent investment advisors. The rest of us, however, must be our own best resource.

Concept Three: There Are Two Ways to Invest in Any Asset

The investment can be “do-it-yourself,” which will save you substantial fees and costs but requires some knowledge, as well as an investment of your time. Or you may choose to use a professional who will charge you fees for his management services. Although it may seem the easier choice, if you are paying heavy management fees for others to make all your investments in real estate, equities, retirement planning, and small businesses, it’s unlikely you’ll achieve your investment goals.

Concept Four: Life Expectancy Is a Critical Part of Investment Planning

Wouldn’t it be much easier if we knew exactly how long we needed to depend on our investment income? Wouldn’t knowing our exact life expectancy be helpful when deciding between long-term and short-term options for our investments? Well, life doesn’t operate on a set timetable, so we must depend on history to build a framework for planning our retirement finances.

According to the National Center on Health Statistics, in the year 2007, the average life span for Americans was 77.9 years. That’s a helpful place to start when trying to project our future, but it’s important to remember that everyone is unique. If any of the following is true about you, you are statistically likely to live longer than the average American:

• You have had generally good access to health care.

• You went to college.

• You are married or have a pet. (Some think that a pet is easier on your health than a spouse, but that’s a different book.)

• Your parents are still alive (or lived to a ripe old age).

• You are not morbidly obese.

• You remain mentally active.

• You don’t smoke.

As we can see, simple factors can make a difference in life expectancy.

Even things as basic as a positive attitude or a sense of humor have been shown to increase longevity. The longer we live, the more money we’ll need to finance our retirement—and the more time we have to make sound, long-term investment decisions. Hence, if you’re a healthy, middle-aged American, you don’t need to make quickie, bet-the-farm investments.

I look to my left at Mark, who has been taking notes. “What do we have so far?” I ask. As usual, Mark is to the point:

1. This is important now.

2. You can be your own best investment advisor.

3. There are two ways to invest in any asset (self-manage or pay a management fee).

4. We have plenty of time for our investments to mature.

“I agree with everything you say,” says Tim. “So, why don’t I feel rich?”

Eliminating Obstacles to Success

The room chuckles at Tim’s exaggerated misery, but I don’t want to dismiss his remark too quickly. He brings up an interesting question.

“Tim, there are five very specific obstacles that keep many people from being as successful as they would like with their investments. Once we can identify and understand those obstacles, we will be better able to avoid them.”

Lou leans forward. “If there are five obstacles, I’m sure that I’ve bumped into every one of them without even knowing it. What are they?”

“All right,” I say, laughing. “Here goes.”

Obstacle Number One: Believing the Half-Truth of Mutual Fund Diversification

Every mutual fund brochure loudly proclaims that we must diversify, diversify, diversify. You’ve heard it a million times. The implication, of course, is that “diversification equals safety” and that no poor sap of an investor can diversify his or her portfolio as competently as a mutual fund can diversify its holdings. Mutual funds emphasize this last point by proudly proclaiming that they are invested in 300, 400, or 500 different companies. “Can you do that?” asks the salesperson, letting you know that you’re Mr. Small Time compared to his company’s giant investing machine.

Millions of people have bought into the mutual funds’ diversification pitch. (In fact, I’ll bet that most of us have.) However, if diversification equals safety, why did millions of mutual fund investors lose billions of dollars in 2000 and 2001?

The answer reveals that the mutual fund industry is telling a half-truth about its “diversity.” Yes, if you invest in a mutual fund, your money is spread over hundreds of stocks. In the end, however, you still are invested in stocks and only stocks. That d...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Contents
• Introduction
• PART 1 | Welcome to the Back Porch
• PART 2 | Making Money with Stocks, Options, and Fixed Investments
• PART 3 | Investing Money and Time
• Conclusion
• Appendix A: Helping the Children and Grandchildren with College Costs
• Appendix B: Your Next Home