Diversification. Discipline. Long-term perspective. Realistic expectations. These were just some of the phrases repeated by speakers at the Road To Personal Wealth Financial Conference held in November 2002 at Rutgers University. Rutgers Cooperative Extension was one of about 25 exhibitors at this meeting. Below is a summary of some of the presentations:
Money magazine editor, Jean Chatzky, spoke about lessons learned from the current stock market downturn. She noted that picking stocks is hard and takes patience and that many investors have unrealistic expectations. A survey of investors in 2001 found a 15% average expected annual return, down from 19% in a similar survey conducted in 1999. Historical data from Ibbotson Associates, however, indicate a return slightly above 10%. History also tells us that there are years where the stock market "doesn't do anything" and years, such as 2000-02, where investors lose money. At a 7% average annual return, investors will double their money every 10 years. Chatzky urged participants to "have a menu of signals about when to unload stocks," rather than reacting emotionally to market news. For example, an investor might decide in advance to sell a stock if it is down 15%. She also cautioned about investing too much of one's portfolio in employer stock, especially in 401(k) plans. "Offset this risk with other investments."
Chatzky also spoke about preparing for retirement. She noted that many people feel stuck because there is too much information and too many retirement plan investment choices available. "The choice people make- and it is a choice- is to do nothing at all," she noted. Chatzky also noted that average work hours have increased 10% in the last 25 years and that many people simply don't have time to manage their money. Three steps were recommended for time-stressed investors: put goals on paper, assemble a diverse portfolio, and monitor your progress and get help when needed.
Certified Financial Planner, Michael McLane, presented a workshop about knowing when you have enough for retirement. He noted that the burden of preparing for retirement is on individuals and that the number one concern of retirees is outliving their income. He recommended getting started with net worth (assets minus debts) and cash flow statements and then calculating what you need to save. "If you don't put pen to paper and start a disciplined savings program, you won't have enough," he noted. There are three ways to improve one's net worth: contribution (additional deposits), appreciation (of asset values), and debt reduction. McLane advised those in retirement to limit annual investment withdrawals to 4% or 5% of their portfolio balance and to diversify across asset classes (e.g., stocks, bonds, and cash) and within asset classes (e.g., stock in different types of industries).
Ellen Hoffman, author of The Retirement Catch-Up Guide, spoke about ways that late savers or those who have lost money in the stock market downturn can make up for lost time. She noted that workers "can't throw money into an account, leave it there, and have it grow to the amount you need." She urged participants to learn how their employer's retirement plan works by checking its Summary Plan Description (SPD) and to take advantage of higher contribution limits and catch-up strategies available as a result of the 2001 tax law.
Money magazine writer Ron Insana noted that all manias in history, from tulip speculation to canal bonds, have ended badly. He urged participants to avoid salespeople who say, as many did about Internet start-ups, "it is different this time." Many investors also mistakenly assume that current trends will continue while manias, by their very nature, are temporary occurrences. Motley Fool Tom Gardner had similar advice. "Avoid any stock if you can't describe in a sentence how the company makes money." Gardner also had three simple rules for financial success: don't carry credit card debt, save 10% of your salary, and invest in a broadly diversified stock index fund.