4. Ten Common Mistakes
TABLE OF
CONTENTS
ABOUT THE AUTHOR ........................................................................................... 4
INTRODUCTION ................................................................................................... 5
M I S T A K E # 1 :
TOO MANY EGGS IN ONE BASKET .......................................................................... 7
M I S TA K E # 2 :
FAILURE TO RE-BALANCE ..................................................................................... 11
M I S T A K E # 3 :
USING THE WRONG GAS ....................................................................................... 17
M I S T A K E # 4 :
TOO MUCH TAX ...................................................................................................... 21
M I S T A K E # 5 :
NOT WATCHING THE FEES .................................................................................... 23
M I S T A K E # 6 :
NOT PROTECTING YOUR MONEY ........................................................................ 25
M I S T A K E # 7 :
RELYING ON GROWTH FOR INCOME ................................................................... 31
M I S T A K E # 8 :
NOT ENOUGH LIFE IN YOUR LIFE ....................................................................... 35
M I S T A K E # 9 :
NO ESTATE PLAN ................................................................................................... 41
M I S T A K E # 1 0 :
… AND THE BIGGEST MISTAKE OF ALL …? ............................................................. 45
CONCLUSION ............................................................................................................... 47
5. Ten Common Mistakes
ABOUT
THE
AUTHOR
A lan Haft is a nationally recognized investment
advisor who has been featured in a variety of media
outlets including Money Magazine, Forbes, Morningstar,
BusinessWeek, The Los Angeles Times, The Chicago Tribune
and many others.
His financial column “The Haft of It” appears in a variety of
newspapers around the country and he has two books soon
to be published including a compilation of his newspaper
columns and You Can Never Be Too Rich... simple and essential
investment advice you cannot afford to overlook (John Wiley Sons,
November 2007).
With his partners, he has conducted hundreds of financial
planning seminars and workshops that address a wide variety
of investing concepts. The firm currently services retirees and
pre-retirees in southeast Florida, southern California, the New
York Tri-State area and many other areas around the country.
For more information, please call 800-809-4699.
6. Ten Common Mistakes
INTRODUCTION
As the old adage goes, “The more things change, the
more they remain the same”.
When it comes to planning for retirement, this saying still rings
quite true. When I was a child, I recall sitting at my Certified
Financial Planning Mom’s side where I spent quite a lot of time
watching her create investment plans for people of all ages.
That happened several decades ago, but the concerns people
had and the mistakes they were making are still very much the
same concerns and mistakes I’m seeing and hearing today.
Some things, however, have changed and not always for the
better. These days, corporate pensions are quickly becoming a
relic and even Social Security has its own share of problems.
When I was a child, the markets seemed far less volatile and
less prone to turmoil. Furthermore, people retired and didn’t
seem all that concerned with something called “longevity risk,”
the risk that you will outlive your money. Today’s retirees
can likely live another twenty to thirty years past retirement,
sometimes even longer.
7. Ten Common Mistakes
As a result of these common issues and concerns, now more
than ever before, planning for retirement can be a frightening
thing and can bring up difficult questions to answer such as:
• Will I ever have enough to retire?
• How can I make sure I won’t outlive my money?
• How can I make sure I grow my money well ahead of
inflation while keeping it safe?
• How can I get the greatest amount of income with the
least amount of risk?
• How can I minimize taxes and ensure my family’s
well-being?
If you’ve ever asked yourself any of the above questions, then
this preview of the soon-to-be-published book The 0 Most
Common Mistakes People Make With Their Money …and how
to avoid them is for you.
I hope you’ll find this preview interesting and more importantly,
I hope you’ll come away with a few ideas so that your financial
journey to and during retirement will be a more pleasurable
experience.
8. Ten Common Mistakes
M I S TA K E
#
1
TOO MANY
EGGS IN ONE
BASKET
W hen it comes to giving yourself the best possible
chance for continued and sustained investment success, the
timeless law of “diversification” is the best place to start.
Many people think their portfolios are diversified simply
because they have many investments. But that’s not always the
case.
As odd as it may sound, when you think of a diversified
investment portfolio, imagine a Domino’s pizza. A properly
diversified portfolio includes many slices divided up into neat
little segments that don’t overlap. Each section represents a
particular sector of the market.
9. 0 Ten Common Mistakes
For example:
• Domestic stocks
o Large Companies (“Large Caps”)
o Medium-sized Companies (“Mid Caps”)
o Small-sized Companies (“Small Caps”)
• International stocks
• Emerging Market stocks (India, China, Latin America, etc.)
• Bonds
• Commodities
• Real Estate
• Technology
• Natural Resources
• Health Care
• Cash
• And others
A truly diversified portfolio:
• Takes much of the guesswork and stress out of
investing
• Minimizes market risk
• Recognizes that not everything will go up in value at
the same time
• Recognizes that with rare exceptions, one should
avoid selling a slice of the portfolio that is not
performing well
10. Ten Common Mistakes
• Recognizes that at various times, every sector will
have its day and with rare exceptions, very few people
can accurately predict exactly when that day will come
You may be reading this and thinking, “If slices of a diversified
portfolio go up and down in value at the same time, then how
can I end up ahead of the game?”
Great question. If such a thought came to mind, then that’s
excellent insight. The answer is that diversification alone won’t
win the game. Simply diversifying your portfolio and ending
the process there would be like spreading tomato sauce and
mozzarella on raw dough, then serving the “pizza” cold without
cooking it.
For a diversified portfolio to be efficient and reap the potential
rewards for success, one additional step needs to be taken and
this critical step is found in the second most common mistake,
“Failure to Re-balance”.
12. Ten Common Mistakes
M I S TA K E
#
2
FAILURE
TO
RE-BALANCE
I
n its most simplistic form, “re-balancing” a portfolio
simply means maintaining its original balance.
Let’s take a closer look at what this actually means.
Failing to re-balance a diversified portfolio is like forgetting to
cook that pizza mentioned in the last common mistake. Without
this critical step, what would typically be my personal all-time
favorite food could easily turn out to be the worst meal ever
consumed.
Here’s why:
Suppose we turn back the clock to the late 1990s. For simplicity,
suppose I listened to prudent advice at that time and diversified
my investment portfolio into five sectors of the market, dividing
my money up equally amongst them:
13. Ten Common Mistakes
• U.S. Stocks: 20%
• International Stocks: 20%
• Technology: 20%
• Real Estate: 20%
• Other: 20%
Given the gains and losses of various market sectors, suppose a
year later the value of my diversified portfolio (in percentages)
wound up looking like this:
• U.S. Stocks (up in value): 30%
• International Stocks (down in value): 10%
• Technology (surged in value): 40%
• Real Estate (down in value): 5%
• Other (down in value): 15%
True, I may have been diversified, but do I just end the process
there? Not if I want to give myself the best possible chances
for sustained and consistent investment success. If I just “held”
my portfolio above without re-balancing it, as the market later
crashed in 2001-2002, I would have very likely “given back” the
gains I made within the U.S. Stocks and Technology sectors.
But if I left my emotion out of the process, I would have realized
that I needed to re-balance the portfolio. With re-balancing
in mind, I would have noticed that Tech and U.S. Stocks had
gone way up in value, while the value of International and Real
Estate stocks were greatly reduced.
To re-balance the portfolio, I would have ignored my emotions
and mechanically sold the profits in the Tech and U.S. Stock
sectors to restore them to their original percentages, that of 20%
14. Ten Common Mistakes
each. And what would I have done with those profits? If I left
my emotion out of the process and didn’t listen to the neighbors
who might have thought I was nuts, I would have reminded
myself that every sector in a well-diversified portfolio will have
its day, we just can’t be sure when.
With that important thought in mind and some courage to boot,
I would have used the profits of the Tech and U.S. stock sectors
to “re-fill” those sectors that went down in value. In the above
example, I would have added the profits from the Tech and
U.S. Stock sectors to the Real Estate and International sectors.
Selling a percentage of the successful sectors, taking the profits
and using them to re-fill those sectors that went down in value
would have restored my entire portfolio back to its original
starting percentages of 20% each.
In doing so, besides the neighbors thinking I was a bit crazy
for selling profits in the red-hot Tech sector, what have I really
accomplished?
…A little while later, I would have realized that I accomplished
what every investor dreams of: sold high and bought low.
Let’s take a look:
After the re-balance was complete, Tech and U.S. Stocks
eventually wound up crashing and burning, the market finally
settled down and what happened next? What happened next
was something very few people could have ever predicted: stocks
within the sectors of Real Estate and International took off like
a rocket, earning highly impressive rates of return.
15. Ten Common Mistakes
Thanks to my mechanical dedication to re-balance my portfolio,
I would have reaped great rewards given that I not only held
those once ice-cold sectors, but also because I added money to
them while they were on sale.
I typically re-balance a portfolio just over a year after the last
re-balancing. The reason for waiting just over a year comes
down to one thing: minimizing taxes. Assuming some sectors
went up, when you sell profits after holding the stocks for a
year you will pay long-term instead of short-term capital gains
on the earnings. For those not familiar with taxes, long-term
gains are currently taxed at 15% whereas short-term gains are
taxed at your current tax bracket (which is typically higher than
15%).
Needless to say, a portfolio might need to be re-balanced
sooner than just over a year since the last re-balancing. Due to
significant market gains or downturns, it might make practical
sense to re-balance earlier as a result of unforeseen economic
conditions.
Sound easy? It is, but what makes re-balancing difficult for some
people is when they let their emotions get in the way. Just think:
late 1990s, you’re making significant paper profits in Technology
and I come along and tell you, “Time to re-balance. Sell off those
profits and invest them in sectors that aren’t performing well.”
It’s at this moment that your emotions could prevent a re-
balancing from taking place. Those who remember that what
goes up always comes down – we just don’t know when – will
not let their emotions get in the way. They will let the highly
efficient and timeless art of diversification and re-balancing do
the guesswork for them.
16. Ten Common Mistakes
The “Other” Sector
You might have noticed a line item in the simplistic diversified
portfolio above labeled “Other.” What is this sector? This is the
only sector within a diversified portfolio in which we can let our
emotions reside. This is the sector that allows us to “gamble”
our money in areas outside the diversified portfolio. Within this
sector, I sometimes deviate from the basic rule to diversify. It’s
within this sector that I invest in whatever I desire (more on this
in the next chapter).
So, the next time you post some impressive gains in your
account, you should not simply sit back and think about
whether that new car should be a Lexus or a Mercedes.
Instead, you should consider the critical and important need to
re-balance.
After all, as we all know, what goes up always comes down.
With rare exception, it’s the unemotional investor that
understands the importance of diversification and re-balancing.
Sticking with these timeless, fundamental rules gives all of us
the best possible chance to come out ahead of the investing
game.
18. Ten Common Mistakes
M I S TA K E
#
3
USING
THE WRONG
GAS
L
et’s go back to my very simplistic “diversified”
portfolio outlined in Mistake #2:
1. U.S. Stocks: 20%
2. International Stocks: 20%
3. Technology: 20%
4. Real Estate: 20%
5. Other: 20%
If the above portfolio met the investor’s requirements for
diversification, the next logical step would be to select
“something” to represent each sector within the portfolio. The
“something” I’m referring to basically comes down to one of
three possible choices:
19. 0 Ten Common Mistakes
1. Rocket fuel: individual stocks,
2. Watered down fuel: managed mutual funds
3. Diesel Fuel: stock indexes
Let’s take a quick look at each possibility:
Using individual stocks to represent a particular sector certainly
provides you with the greatest opportunity to make money.
However it also bears the greatest amount of risk. With scores of
companies to select from within each sector, how do you really
know which company offers the best chance for success? With
rare exception, very few people do. It’s for this reason I typically
recommend that most people refrain from using this method to
represent each sector within their diversified portfolio.
Some people rely on a professional to do the stock picking for
them and this is commonly done by investing in a managed
mutual fund. While there are certainly some very good funds
out there, reams of statistics prove time and time again that most
fund managers rarely beat the index they are benchmarking
their performance to.
For example, a mutual fund manager picking stocks within the
Large U.S. Company Stock sector is “benchmarking”, or “trying
to beat” the index known as the Standard Poors 500 (SP
500). For those who don’t exactly know what the SP 500 is,
it’s an index that contains the 500 largest U.S. companies from
various industries, and it is generally considered to be the best
representation of “the market” as a whole.
With the vast majority of fund managers failing to beat the
performance of the index they are benchmarking to, why do so
many people still invest in managed funds? Looking beyond the
20. Ten Common Mistakes
flashy mutual fund ads reveals my personal no-frills favorite
choice to fill up the sectors within a diversified portfolio.
I often say, “Instead of trying to beat the market, be the market”,
and the most efficient way to “be the market” is with choice
three above: using index funds to represent each sector within
a diversified portfolio. An index such as the SP 500 is a passive
investment – no one is trying to pick individual stocks within
the sector. Typically, based on certain criteria, all stocks within
the sector are chosen and are then very rarely traded.
It’s a silly question, but which would you rather have:
1. Higher fees and historically lower rates of return?
or…
2. Lower fees and historically higher rates of return?
If you prefer #2, which most people certainly would, then using
an index to represent each sector within a diversified investment
portfolio provides the most efficient way to fill up the portfolio.
Index funds are typically low-cost to the investor and often (but
certainly not always) deliver higher rates of return than the
mutual fund managers you might be paying to try and beat it.
One last thought:
If you are interested in investing in individual stocks, consider
investing only a small portion of your money. As mentioned in
the last chapter, this is what the “Other” sector in our Domino’s
pizza model of a diversified portfolio is there for.
21. Ten Common Mistakes
This “Other” sector is reserved for the companies we want to
invest in, the hunches we get, the evenings spent watching Mad
Money, CNBC or perhaps the stock a friend told us about. If
you have some of that gambler in you, allow this gambler to
live within the “Other” sector and let the art of diversification
and re-balancing reside in the rest.
22. Ten Common Mistakes
M I S TA K E
#
4
TOO
MUCH TAX
Have you ever had the unhappy experience of holding
a mutual fund that went down in value, only to discover that
you somehow wound up owing taxes on it? As strange as it
sounds, this could happen. How and why it happens is beyond
the scope of this preview, but the bottom line is this: sad but
true – when you invest in a managed mutual fund, you have
virtually no control of the taxes you pay while holding the
fund.
If you’re interested in reducing tax, one of the first things you
should do is take a look at whether or not you’re investing in
managed mutual funds outside an IRA. Holding managed
funds outside an IRA often results in taxable consequences
beyond your control. Paying taxes each year on a fund reduces
your return on the investment, and that’s certainly not very
efficient.
23. Ten Common Mistakes
How much tax does your fund cost? Your tax return should
certainly give you a very good idea as to how much you’re
paying on your funds. Another way of checking out the taxable
consequences of holding a fund (or funds) is to investigate
something called “turnover” and Morningstar.com is a good
place to do this.
“Turnover” simply means the amount of times a year the fund
manager replaces the portfolio with an entirely different set of
stocks. If the fund manager changes the entire portfolio once a
year, that’s a 100% turnover. If the fund manager changes the
entire portfolio two times a year, that’s a 200% turnover. If the
manager changes half the portfolio that’s a 50% turnover, and
so on. Each time the fund manager “turns over” a portfolio that
usually leads to one thing: paying tax, and in some cases, too
much tax.
Certainly, there are some funds out there that are more tax-
efficient than others, but as far as I’m concerned, the simplest
way to reduce taxes on managed mutual funds is to invest in
the indexes instead.
Remember: an index is a “passive” investment. There is no one
trading stocks within the index and given that there are typically
very few trades (if any) done within the index, there is often no
“turnover” that would cause unnecessary taxes. Investing in
the indexes puts you in control of when you pay the tax, not a
fund manager who makes those decisions for you.
24. Ten Common Mistakes
M I S TA K E
#
5
NOT
WATCHING
THE FEES
A
fter a careful analysis of his investment portfolio that
totaled close to $500,000, I asked “Jack” if he’d be interested in
having us manage his portfolio. If he was interested in taking me
up on the offer, I told him our requirements would be as follows:
• Write us a check for $10,000 just to get started
• Pay us approximately $15,000 per year regardless of
whether or not we made him money
• We wouldn’t pay any attention to the amount of tax he
pays each year
• And lastly, just to make sure we’re on the same page,
over the ten year period he’s trying to grow his money
for retirement, the total amount of fees he’d pay us
would be roughly $150,000… with no guarantees he’ll
ever make any money
Did Jack take my offer?
25. Ten Common Mistakes
Silly question, right? Even though he was unhappy with the
performance of his investments, he responded something to the
effect of, “Who’d ever take such a totally ridiculous offer?!?”
My response was simple: “You already did.”
What Jack wasn’t aware of was that over the many years he’s
held his portfolio of managed mutual funds he already took the
“offer” above, he just wasn’t quite aware of it.
While I’m not here to say all managed mutual funds, are “bad”
(there are most certainly some very good ones out there), what
I am here to say is that if you aren’t paying attention to the fees
you’re paying, you are doing yourself a horrible disservice.
Taking time to understand the fees you are paying is a critical
ingredient to investment success. To check the fees you’re pay-
ing, go to Morningstar.com or better yet, Lipper’s Personalfund.
com. Once you know this information, as opposed to the fund
companies taking out the fees for you, imagine you physically
have to write out a check to pay the fees. Doing so will produce
one of the following results: (1) make you feel a bit better given
the fees you’re paying are far less than what you’re earning,
or, (2) give you the incentive to get out of Dodge and find a
different place to invest.
When it comes to managed mutual funds, I often stay clear of
them and invest in the indexes that typically incur far less fees,
provide better tax control and historically speaking, earn higher
rates of return.
When it comes to investing (as well as everything else), it’s the
little things that count most. Failing to address the details could
easily make gourmet pizza wind up tasting like the frozen
stuff.
26. Ten Common Mistakes
M I S TA K E
#
6
NOT
PROTECTING
YOUR MONEY
H
ealth insurance protects against medical emergencies,
homeowner’s insurance protects against flood or fire, and
car insurance protects against drivers like me. What kind of
insurance protects your money?
Have you ever given that any thought?
It sometimes surprises us how little thought some people give to
this important subject. After all, you work really hard for your
money. Wouldn’t it make sense to protect your investments?
I suppose the next logical question would be, “Sounds good.
How can I do that?”
There are a number of ways you can protect your money and
I’m not talking about keeping it in a fireproof safe or watching
it on a daily basis. Certainly, those could be effective ways of
27. Ten Common Mistakes
protecting your money, but most of us have more interesting
things to do such as working, eating, going to the movies or
in my case, challenging my kids to Nintendo on a weekend
evening. If these activities or any others are more interesting to
you than watching your money on a daily basis, then here are a
few quick thoughts on how you can protect your investments:
Reduce Risk: We find that many people, especially those in
retirement, often have too much money in the stock markets.
One of the best ways to protect your money is to diversify stock
investments into safer places such as bonds, CDs or a number
of other possibilities not mentioned here.
For Stocks: When investing in individual stocks, one fantastic
way to “insure” against possible loss is to buy something called
“put options”.
When they hear the word “options,” many investors run for
the hills thinking there is great risk involved. Some types of
options have unlimited risk while others are very conservative,
and buying a “put option” is one of those. When you buy a
put option, all you are doing is giving yourself the chance that
someone will be obligated to purchase your stock at a price
above what it’s trading at sometime in the future.
Imagine this: you have a lot of money in a particular stock.
You’ve had some really nice gains and the price per share is
currently at $100. Over the next few months, for whatever
reason, the stock tanks and you now find it trading at $50 per
share. Sad day? Ordinarily it would be, but because you bought
a “put option,” someone out there is obligated to buy that stock
from you as if it were still trading at $100 per share.
28. Ten Common Mistakes
Needless to say, there is a cost to buying the put option and as
a result, there’s a chance you might have paid the “insurance”
for nothing. But when it comes to “insuring” individual
stocks against loss, buying a put option is often a fantastic
consideration, especially for those who want to protect large
gains concentrated in one stock.
Another way to protect an individual stock against loss is to
establish something called a “stop loss.” To keep it simple, think
of a “stop loss” as a safety net underneath your stock. Using the
example above, if a stock is currently trading at $100 per share,
you can “place” a safety net (stop loss) at $90. If the price of the
stock drops and hits the safety net at $90, the position would
be sold at that price, but bear in mind: there is no guarantee
the stock would be sold at $90. For various technical reasons
beyond the scope of this preview, the stock might “fall through”
the safety net and not get sold. Chances of this happening are
unlikely, but it could happen, thereby making the “put option”
a more reliable choice.
Exchange Traded Funds: If you like the idea of investing in index
funds, you may want to consider investing in index Exchange
Traded Funds. In general, ETFs are indexes that trade like a
stock. The primary difference between an index ETF and an
index mutual fund is that ETFs trade within the day (as opposed
to the end of day when mutual funds are actually sold). In
addition, given that ETFs “act” like a stock, you can also place
stop losses on them and in many cases buy options on them as
well – both benefits that you cannot do when investing in index
mutual funds.
So, if you are investing in index mutual funds and want more
control of your investment, you may want to consider investing
in index ETFs instead. However, bear one thing in mind: the
29. 0 Ten Common Mistakes
“negative” of an index ETF is that if you are investing on a
frequent basis, you would most likely be better off sticking
with index mutual funds. This is because when you invest in
an index ETF, you will incur trading costs every time you make
additional investments. When you invest in an index mutual
fund, typically it won’t cost you anything each time you add
more money to the account.
Variable Annuities: An investment into a variable annuity
provides tax deferment and direct investments into various stock
market indexes or sub-accounts (mutual funds). Most variable
annuities have death benefits as well as living benefits. These
offer a wide variety of guarantees to the investor at a cost.
Benefits could include features such as return of the original
investment to the heirs when the investor dies. Such a feature
obviously protects the heirs in the event the account goes down
in value. Other benefits could include the highest account value
paid at death and also various guarantees for income in case the
account goes down in value as well. Many companies offering
variable annuities have death and living benefits that will differ
widely, so be sure to closely investigate each option and its cost
before making an investment.
Growth CDs: The actual terminology for this type of investment
is Structured Products, but many refer to them as “Growth
CDs.” This type of CD is offered by banks and sold through
brokerages. They are actual Certificates of Deposits fully
insured by the FDIC, but there’s one major difference between
these CDs and those offered at the local bank: the interest these
CDs could earn is determined by the performance of various
stock market indexes. If a particular index goes up in value,
then you could earn more than the typical bank CD. If the index
30. Ten Common Mistakes
goes down in value and you hold the CD to maturity, you’ll
get your principal back, plus in some cases a minimum amount
of interest. If you are looking to invest in the market while
protecting your principal, “Growth CDs” could be something
to consider as part of your diversified portfolio.
If the concept of a “Growth CD” sounds familiar, it might be
because it’s similar to that of an Index Annuity. Similar to a
Growth CD, an Index Annuity offers stock market participation
without risk to your principal. Also, just like some Growth CDs,
market participation is typically “capped” or limited up to a
certain amount. Furthermore, earnings, if any, are “locked in”
on an annual basis. Lastly, as opposed to the CD, all potential
index annuity earnings are tax deferred.
There are far too many details about index annuities to outline in
this preview, but there are a handful of important provisions to
understand before investing. These include, but are not limited
to: the length of time you are required to hold the account; the
quality of the insurance company offering the annuity; the way
the potential earnings are calculated, and surrender fees.
32. Ten Common Mistakes
M I S TA K E
#
7
RELYING ON
GROWTH
FOR INCOME
For a brief moment, think of your money as water in a
bathtub. You spend your working years filling up the tub with
water so that one day, you can start to live off of it for the rest
of your life. At the same time, you will probably be trying to
preserve it as much as possible. After all, no one can really be
sure how long they are going to live so understandably, most
people want to be careful how much of the water they drink.
So, you withdraw a few cups of water every year hoping that as
you take some out, it’s replenished by more coming in from the
faucet. The only problem is, if there’s no water coming in from
the faucet, or worse, the drain is open while you’re taking water
out, you could very well accelerate the loss.
This potential for disaster is what I often refer to as “The Most
Dangerous Game”: relying on the speculative, uncertain growth
of stocks to give you the income you need.
33. Ten Common Mistakes
Take “Max and Wendy,” a retired couple who several years
back were relying on the growth of their stocks to give them
the income they needed. Their advisor showed them some
well-rated mutual funds with strong track records. For the first
year or two, they had no problem withdrawing roughly 6% of
their account to provide needed income. Then, out of nowhere,
disaster struck. The drain in the tub opened up and as they
withdrew their precious water to live on, some of it was going
down the drain. As the year came to a close, they withdrew
their 6% for income but an additional 10% went down the drain,
bringing their total loss to negative 16% for the year. When they
did the math, they saw that they now needed to withdraw much
more than 6% the following year. They did, and as bad luck
would have it, some of the water also went down the drain that
year as well, thereby accelerating the loss and throwing their
retirement income “plan” into a tailspin.
Unfortunately, this is a familiar story. While this is just one
example, I can think of many people we’ve met who have
suffered such a dire fate. When it comes to retirement, far too
many people such as Max and Wendy’s advisor rely on the
speculative growth of stocks or stock funds to generate needed
income.
Have you or your advisor ever asked the question, “What
happens if my stocks don’t go up enough in value to replace
the income I withdraw?” Worse, has anyone ever asked the
question, “What happens if I withdraw money and the value
of the account goes down at the same time?” In either case, you
could very well be digging a hole into your principal or worse,
accelerating the loss.
34. Ten Common Mistakes
To prevent this, you may want to strongly consider repositioning
portions of your money into income-producing investments
that do not rely on the speculative, possible growth of stocks to
generate the income you need.
Investments that generally provide reliable income include,
but are not limited to:
• CDs
• Bonds:
o Corporate (taxable interest)
o Municipal (tax free interest)
• Dividend stocks
• Preferred stocks
• Real Estate Investment Trusts
• Immediate annuities
Repositioning money into a diversified portfolio that includes
some of the above would provide income that is separate from
the growth portion of your investments. Through dividends and
interest, income generated from these investments do not rely
on the speculative and possible growth of the markets, thereby
helping you avoid playing “The Most Dangerous Game.”
How much do you need to invest into income-producing
investments to generate the income you need? It all depends
upon a number of factors including, but not limited to: the
amount of income you require and investments that are available
at the time the income is needed.
35. Ten Common Mistakes
If you are interested in avoiding “The Most Dangerous Game”
and creating reliable income that does not rely on the speculative
growth of the stock market, a careful analysis of your portfolio
and income requirements needs to be done by a qualified advisor
that well understands how to avoid this critical mistake.
36. Ten Common Mistakes
M I S TA K E
#
8
NOT ENOUGH
LIFE IN
YOUR LIFE
T
he subject of life insurance typically conjures up two
dark thoughts: death and pushy salesmen, both of which most
people would prefer to avoid.
However, as far as we are concerned, life insurance represents
just another slice of a well-diversified portfolio, especially since
we do not consider life insurance a cost, but an investment.
Yes, an investment. Little do most people realize that with the
right type of life insurance in place (Universal or Whole Life,
not Term Life), there is a likely chance that if you no longer need
the life insurance policy, you can potentially sell it for a profit
into what’s commonly referred to as life insurance’s “secondary
market.”
Not only do we see life insurance as an investment, but we
also know there could be many uses for including it within a
diversified portfolio such as:
37. Ten Common Mistakes
Tax Deferred Growth: An investment into a life insurance policy
will allow its cash value to grow tax-deferred. Universal Life
insurance policies typically increase cash value based on current
interest rates, whereas Variable Universal Life insurance policies
will potentially grow the cash value based on the performance
of various stock market investments. For those who need life
insurance and have contributed the maximum amounts to their
401ks or IRAs, investing in a life insurance vehicle is worth
considering. Just like the IRA, an investment into a life insurance
policy provides tax-deferred accumulation.
As far as we’re concerned, an investment into a life insurance
policy is often a more prudent choice than an investment into
its somewhat close cousin, an annuity.
Here are a few reasons why:
• They both offer tax-deferred growth.
• The cash value in a life insurance policy is almost
always far more “liquid” (accessible) than annuities
that often have limited penalty-free access to the cash
value during the term of the contract.
• Earnings in a life insurance policy could potentially be
withdrawn tax-free whereas earnings in an annuity are
taxable as ordinary income, the highest of all possible
taxes.
• The potential for earnings within a life insurance policy
is typically comparable to earnings potential within an
annuity (if not better).
• There is currently a very strong “secondary market” for
life insurance that could potentially allow an insured to
sell the life insurance policy to a third party for a profit.
There is a limited secondary market for annuities.
38. Ten Common Mistakes
• When a life insurance policy is passed to your heirs,
not only is the amount passed tax-free, but the amount
is almost always far greater than the cash value due to
the death benefit.
Tax-Free Income: Depending on how the life insurance policy
was designed, there could be significant cash buildup within
the policy. With cash in the account, as mentioned above, it is
highly possible that you could withdraw cash from a life policy
tax-free. Generating income from the cash value within a low-
cost, high-quality life insurance policy could make this one of
the strongest benefits of adding some life into your life.
Long-Term Care: Some life insurance policies allow the insured
to withdraw money from the death benefit in order to take care
of various long term care medical needs.
Private Pension: One of the strongest advantages of adding
some life into your life is to create what we commonly refer
to as the “Private Pension.” Imagine this: funding a “Private
Pension” that through the combination of an immediate annuity
and a life insurance policy creates a lifetime fixed income stream,
mostly tax free and typically at attractive rates of return that
you cannot outlive. The income will never change and is not
subject to stock market or interest rate risk. Best of all, because
you added a little life into your life, the amount that’s used to
fund the Private Pension gets returned to your family tax-free
upon your death.
There are many ways to design a Private Pension and only with
an evaluation of your personal situation and retirement goals
can a detailed plan be put into place.
39. 0 Ten Common Mistakes
On a final note, the earlier in life you plan for the Private
Pension, the higher the income will typically be at retirement.
If there is ever a strategy that benefits from early planning, this
one is definitely it.
Instant Wealth: Recently, we had a person approach us with
some cash on hand, wanting to make an investment in the stock
market that would provide the best possible returns for his
granddaughter. He had little need for the money, had plenty
of money outside this investment, and was quite clear that this
money was being put to use for one reason and one reason only:
to leave behind to his granddaughter. In his case, we told him to
stay away from the stock markets and instead invest the money
into a life insurance policy. Why? …
Well first off, the investment into the life insurance policy
instantly more than doubled his money and guaranteed it to
his granddaughter upon his demise. The risk of the market and
the time it would take to potentially grow the money to equal
the life insurance’s guaranteed death benefit were completely
eliminated, thereby making the investment into the life policy
well worth the effort.
Freeing Up Principal: We meet many people in retirement who
are saving as much as they possibly can for their family. For a
fraction of the estate value, they may want to consider investing
a small portion of their investments into a life insurance policy
that guarantees the value of the estate at death. Doing so often
provides the insured peace of mind knowing that if they wind
up spending all of their money down to the last penny, they
will still leave the value of the estate behind thanks to the life
insurance policy.
40. Ten Common Mistakes
Paying The Tax: In many cases, taxes are due at death, creating
a burden for those who are left behind. Estates can be taxed;
so can IRAs, annuities and a long list of other investments.
Needless to say, someone has to write a check to pay the tax,
and the “liquidity” of an estate is sometimes limited, especially
when one passes away with generally illiquid large real estate
holdings and relatively speaking low cash amounts. In many
cases, a quality life insurance policy can be a beneficial “gift”
to leave behind so that taxes are paid from the tax-free death
benefit the life insurance provides.
In our opinion, best of all, if you wind up not ever needing the
life insurance for any of the reasons above, you would simply
hold the policy and sell it at a future date. Although there are no
guarantees, chances are likely that you can later sell the policy
into life insurance’s secondary market, recoup your investment
and potentially make an attractive profit from the sale. Who are
the people that purchase these life insurance policies from the
insured? It’s not the local Mafia but some of the largest, most
reputable financial institutions in the world such as Warren
Buffet’s Berkshire Hathaway, Lehman Brothers, Credit Suisse
and a long list of many others.
42. Ten Common Mistakes
M I S TA K E
#
9
NO
ESTATE
PLAN
You spent your entire life doing everything right, when
all of a sudden, the inevitable strikes. You go out driving with me
and due to the distraction of my iPhone, we wind up not at the
IHOP for breakfast but floating on a cloud somewhere, hopefully
with Springsteen playing somewhere in the background.
After you chastise me for my awful driving, you simmer down
a bit. Now at peace with endless IHOP to eat and classic movies
to watch, everything seems just fine until you look far down
below to see your assets are going places you never imagined.
Furthermore, there’s the possibility that people are fighting for
your stuff and the courts are holding up the transfer of assets to
those who need it the most.
Certain you did all things right, you can’t figure out why there’s
a mess down there. It’s at this moment you learn that the Will
you created could be contested, you forgot to fund your trust,
43. Ten Common Mistakes
maybe you neglected to update the beneficiaries, or perhaps
you forgot to leave clear instructions as to who’s supposed to
feed the dog.
As morbid as it may sound, we often tell people to close their
eyes for a moment and imagine they’re resting on a cloud,
looking down and watching the aftermath of their life play out.
Dictate, or write out what you want to have happen, then take
that “script” to an estate planning attorney so that he or she can
make sure the plan you have for your assets is enforced and
cannot be contested.
Do you have an estate plan? Hands down, this could easily be
one of the most important mistakes of all. Many people merely
have a Will and while this important document can certainly
do a worthy job of providing instructions as to who gets what,
this document can be “contested”, meaning that people can still
fight over your assets long after you’re gone.
To protect against this happening and to ensure everything you
want to take place will transpire, you should strongly consider
creating a Living Trust. Once a Living Trust is established, assets
that belong in the trust “move” into the trust and remain there,
presumably for the rest of your life. While the assets are there,
the trustee (who is typically yourself) retains full control. At
death, assets within the trust are passed to whomever you want
without the possibility of your Will being contested or your
heirs going through “Probate”, which is the time-consuming,
frustrating and costly legal process that determines who gets
what.
44. Ten Common Mistakes
There are many other reasons to consider creating a trust and
the list is far too long to detail in this preview. Just know that
a Living Trust isn’t only “for the rich.” It could be worthwhile
for all estates regardless of their value. Meeting with a qualified
estate planning attorney will allow you to best assess whether
or not a Living Trust belongs in your life. We would highly
advise you to at least take a meeting to determine this.
46. Ten Common Mistakes
M I S TA K E
#
10
...AND THE
BIGGEST
MISTAKE
OF ALL
The common mistakes we’ve covered thus far are
as follows:
1. Too many eggs in one basket
2. Failure to re-balance
3. Using the wrong gas: stocks, funds or indexes
4. Too much tax
5. Not watching the fees
6. Not protecting your money
7. Relying on growth for income
8. Not enough life in your life
9. No estate plan
10. …and as for the last most common mistake, any idea
what this one is?
47. Ten Common Mistakes
As far as we’re concerned, the last most common mistake is
a potential whopper. Forget fees, diversification, taxes and
everything else up above. The last most common mistake can
easily be the worst one of all.
The last most common mistake actually has little to do with
investing. Furthermore, the last most common mistake has
basically been around since the dawn of time and perhaps even
before time itself.
Do you have any idea what it is?
Here’s a hint: The last most common mistake has everything to
do with you and no one else. You have total and absolute control
to prevent this most common mistake. Any guess?
Give up?
As far as we’re concerned, the most common mistake of all
comes down to one word and one word only: complacency.
“Should have,” “could have”and “would have” are words all of
us should avoid ever having to say. Whether you act on a few
good ideas expressed here or anywhere else, taking action is
the key to your success. If you’ve read a few good ideas in this
preview, take time to evaluate them for your personal needs
and goals. After all, when it comes to investing, or anything else
for that matter, it’s always the little things that count the most.
48. Ten Common Mistakes
CONCLUSION
I
hope you’ve enjoyed this preview of my full-length
book that is due to be published soon.
In the meantime, should you want to attend one of our
educational workshops or meet with me, my partners or any
of the other highly reputable advisors in our firm, feel free to
contact us at 800-809-4699.
In closing, we want to wish you and your family the very best
of luck and success on your journey ahead.
For more information, visit www.alanhaft.com
