Webinar: Investing in Today's Tough Economy

You’re invited to take part in a free USAA webinar, “Investing in Today’s Tough Economy.” It will feature Wasif Latif, USAA assistant vice president of equity investments, and Bob Wiedower, Certified Financial Planner™ practitioner.

 

The webinar will take place on Wednesday, March 25^th from 7-8 p.m. (CST).  You can listen in from the comfort of your own home.

 

The presentation is geared toward those with at least moderate investing knowledge and experience. Participants will learn strategies to invest in today’s tough economy. There will also be a live Q&A with USAA experts.

 

Topics to be covered:

§         How our economy got to its current state

§         The value of diversification and dollar-cost averaging

§         Historical market performance in context with recent market fluctuations

§         Now may be a good time to get into the market

§         Creating a plan for your financial future

 

Anyone may register by visiting the Newsroom section on the front page of usaa.com.  Simply scroll down to the bottom of the page and click on the word Newsroom. 

 

Once registered, participants will receive an e-mail notification with a link to the webinar.

 

In today’s challenging environment, it’s important to understand the best strategies for investing and what you can do to help lead yourself to financial success.

 

We hope you can take part.

Saving in triplicate

Q:  I have been a member of USAA since 1998.  I have a question on savings.  I deployed and during my deployment I paid off all bills and started saving money.  I have that in a money market and an emergency account with $500.  I know the rule is to have six to eight months of emergency funds.  Should I keep those accounts separate and build up the emergency funds and continue to put money in the money market?  I currently contribute the maximum to my Roth IRA.  Should I just rely on my Roth when I retire?

--Michele

A:  Talk about turning lemons into lemonade!  Good job using your deployment to your financial advantage.  First, your emergency fund should be a separate account to make it less easy (or tempting) to dip into.  And, yes, a money market or similar cash account works just fine.  I actually recommend adding to the emergency fund each month, even after you have the full six months worth of expenses socked away.  That way it automatically “refills” if you need to use it. 

Regarding your Roth IRA, please accept another well-deserved pat on the back!  It’s great that you are maxing out your Roth with $5,000 (2009 limit is $5,000).  However, your Roth IRA alone is probably not going to be enough to fund your retirement.  Once you get your emergency fund in ship shape and up to at least 3 months of living expenses, I would encourage you to supplement your Roth savings in two additional ways.  The first is contributing to the Thrift Savings Plan (TSP).  The TSP is just the opposite of the Roth in terms of taxes:  you save tax money currently and commit to paying taxes in the future during retirement.  Second, I recommend you invest for the long term in mutual fund accounts outside of the TSP and the Roth.  When you liquidate those funds down the road, your investment gains will be subject to long term capital gains tax which is capped at 15% currently (if the investment is held for a year or more).  The result of combining those three strategies achieves tax diversification which will allow for having some control over taxes in retirement.  

 

I know I don’t sound like much fun! Save in triplicate. But you seem like an effective financial manager, so you should have some money left at the end of the day for more fun stuff! Keep up the good work.  And, thank you for your membership!

 

 

Investing in a down market

Q:  We have been contributing to the government's TSP program for the past few years and are now concerned about the current economic crisis. Should we stop our contributions into TSP? Or should we ride out the crisis and take advantage of buying lower-priced stocks with our contributions? My husband is 40 and I am 36; we have no debt and a sizeable emergency fund.

--Cassandra, Naples, Italy

A:  Oh contraire!  You guys sound as if you’re building a great foundation: no debt, big emergency fund, and the capacity to save.  (And you’re living in Italy, too – my favorite country outside the United States!)  A financial planner considers that the dream scenario!  Based on your age, I think you have about 10 to 20 years until you retire and begin to use your retirement savings to supplement lifestyle expenses.  In the investment arena, we call that a long time horizon.  That means you have sufficient time for the market to go through its ups and downs and arounds. 

In fact, because of your long time horizon, the current markets may be offering you a tremendous opportunity to buy at cheaper prices.  Warren Buffett, arguably the world’s greatest investor said in a recent NY Times opinion piece, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.” 

I’ve been heard to say that your investment portfolio is kind of like a dress, you have to like it and it has to fit and make you feel good.  My recommendation would be to look at where the money is being invested; not wondering whether or not you should invest at all.  Choose an investment mix that suits your tolerance for risk and keep investing. 

In addition to what you’re currently doing, I recommend you look into investing in a Roth IRA. The IRS has income limits ($166,000 to $176,000), but if your modified adjusted gross income falls under that amount, you and your husband are afforded the opportunity to invest up to $5,000 each in the Roth ( for 2008 and 2009).  It works this way: you deposit after-tax money (I call it grocery money) into your IRA where it grows over time tax-deferred and then at age 59 and ½ and after you have held the account for at least 5 years, you can withdraw any earnings tax free!  It’s a wonderful way to have some control over your taxes in retirement.  I think your inclination of taking advantage of a down market is smart.  Keep up the good work and don’t lose the faith!

Wall Street Crisis

The current financial crisis has shaken up investors. Folks are concerned about their savings, investments and even their insurance coverage. Investors have struggled to save and now see account values declining.
Here are some tips:

*Don't Panic. If you sell on a down day, your portfolio could take a bath – a blood bath. It is likely best to swallow hard and hang onto your well-diversified portfolio. Remember investing is for the long term. By following panic sellers over the cliff, investors could compound the problem as aggressive selling drives prices down.
*Trust your fund managers. While they don’t have a crystal ball, allow them to make the tough calls as to whether it makes sense to eliminate or add particular stocks or sectors to your FUNDS. That’s why you hired them.
*Don’t time the market. Ten thousand dollars invested in the S&P500 in 1928 would have been worth over $800,000 at the end of 2006. Missing just the best 10 days over that same period would have cost a cool $500,000. Timing the market can cost you big.*
*Re-assess your tolerance for risk. A volatile market can serve to give investors a peek at their true risk profile. While now may not the time to sell, new monies could be invested in a more conservative manner including CDs, bond funds and cash.

*Source: “Black Swans and Market Timing: How Not to Generate Alpha,” Javier Estrada

In search of the silver bullet

Q: Yes, I'm trying to see what’s the best thing to invest in that will provide me a quick and large return. I currently have about $10,000 to $20,000 to invest. I would like to invest in something for less than 4 years and without any chance of losing money.
-Timothy

A: Isn’t that what everyone wants? Big returns and no risk. I’m sorry to tell you that it just doesn’t work that way. Wish it did, but it doesn’t. In fact, the higher the returns, the more risk you have to take (read: bigger chance of losing money). That’s especially true in the short term like, in your case, a less than four-year time horizon. So, for short-term savings I would strongly recommend you err on the side of being conservative and invest in something like a Certificate of Deposit or a high yield savings or money market account. No, the returns aren’t huge, but you minimize risk to the degree possible! Investing in the capital markets is a long-term proposition of at least five to seven years. The longer you have, the better your chances are to make a decent return, minimize losses and realize your goals.

Investing in Municipal Bonds

Q: I’m currently serving in Kuwait and I’m curious to know how someone might go about investing in municipal bonds. Do you go to the local courthouse or to a certified financial planner to invest? I’d like to get more involved in a community project and just wanted more information. Thanks for all you do.

-Ronald, Glen Allen, Va. 

A: Let’s start with Municipal Bond 101. When a state, city, or local government wants to raise funds for a project—from roads and schools to stadiums—they issue bonds as a way to borrow money from the public. The municipality, of course, pays interest to the investors on the money they borrow. To encourage this type of private investment in public projects, the federal government exempts the interest from federal income tax. This tax break allows the municipalities to pay less interest than a comparable quality bond issued by a corporation.

When does it make sense to invest in municipal bonds? From a financial suitability standpoint, this type of investment makes sense for someone in one of the top tax brackets. While you may want to make such an investment for personal reasons, it likely would not make sense particularly at this point in time when you are earning tax-free combat pay.

As a financial planner, I think it makes more sense to invest your combat pay in a Roth IRA. A Roth IRA allows you to save your tax-free combat pay into a tax shelter and growth is withdrawn tax-free after held for at least 5 years and withdraw upon reaching 59 1/2 – sweet, sweet, sweet. Opportunities like that are rare, so take advantage of it and tell your buddies about it! By the way, the IRS limit for 2008 is $5,000.

If you decide to invest in municipal bonds, there are a few ways to do it. With some projects, the municipality will offer the bonds directly to you, the investor. You can also buy individual bonds through a brokerage firm—both discount and full-service houses offer this type of investment. Finally, you can buy a professionally managed portfolio of municipal bonds through a mutual fund. Thanks for your overseas service.

Best Investments for Purchasing a Home

Q: My wife and I are looking to buy a house in just a few short years.  We need the best return on our investment, and I have heard rumors that I can put funds into IRAs and 401(k)s and withdraw them to buy my primary residence without paying penalties although I will have still to pay income taxes).

 

My wife says that retirement plans are for retirement, and suggests investing house funds into secure and insured investments. Do you think this is the right path to take?

 

-Kevin, Haslett, MI

A: Your wife needs to help me write this column!  She’s a smart lady! And I’m glad she’s sharing her wisdom with you. You’re right. – there is an option to withdraw up to $10,000 from an IRA without penalty if you’re a first time homebuyer. You may also be able to take a loan from your 401(k). However, the best option is to start to stash those funds away, now. Since you’re only a “few short years” from buying your home, I would recommend you start building a “house fund” that is invested conservatively. Set aside as much as you can each month in a money market fund or high yield savings account. You can use this fund for your down payment, closing costs, and all of the inevitable unplanned expenses that come with a new home (furniture, carpets, curtains, etc.). At the same time, you should continue to fund your retirement plan and IRAs, if eligible (to keep your smart wife happy and build your retirement nest egg). Before long you may have the best of both worlds: a new roof over your head and the beginning of a nest egg!