1 CHAPTER Getting Started If you are nervous of the stock market right now, no wonder. After recent events, many investors are feeling shocked and confused. Wall Street has plunged twice in a decade. (See Figure 1.1.) Those who hung on for dear life through the turmoil are wondering if they should get out. Those who bailed are asking when, if ever, it will be safe to get back in. But if you don t invest in the stock market, where should you keep your money? How can you rebuild your nest egg and get back on track? And where does this leave your long - term plans? Can you still retire in comfort? If so, how? If you are grappling with these questions, this book is for you. I write an online personal finance column for the Wall Street Journal. When the crisis hit in September 2008 I was suddenly swamped with desperate e - mails from readers around the country, and around the world, asking more basic questions. Was the economy collapsing? What had just happened to their life savings? Was their retirement nest egg safe? Would they ever be able to send their children to college? I was dismayed to discover how badly prepared so many people were and, in many cases, how badly advised. I heard from people in their seventies who had all their money in five stocks. COPYRIGHTED MATERIAL 1
2 STORM PROOF YOUR MONEY 1,600 1,400 S&P 500 1,200 1,000 800 600 12/31/96 12/31/97 12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 Year 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 Figure 1.1 Standard & Poor s 500 Index, December 1996 to June 2009 Source: S&P Indexes. And from those near retirement whose advisers had put their money into supposedly safe Fannie Mae and Freddie Mac preferred stock. (Value today: $ 0.) And from those who had just lost a fortune on their own employer s stock. And from those horrified to discover their so - called diversification strategy consisted of five mutual funds invested in the stock market. During the depths of the turmoil in 2008 and 2009, many investors couldn t withstand the losses and bailed often right near the market lows. (That always happens.) Far too much of the financial advice being doled out these days is painfully simplistic. There lots of books about how to get rich or how to be rich. For most people, the more important issue is how not to get poor. That s why I have written this book. The aim is to offer some help and guidance to get you back on track. It does not, obviously, replace a comprehensive financial plan. But it may help you understand what went wrong with your finances, why it went wrong, and what you can do about it. The aim throughout is to offer practical, oven - ready tools you can apply to your own life. And it s written for everybody. I avoid jargon, roundabout speaking, and unneeded complexity. It doesn t assume you know much about the financial markets. As Albert
Getting Started 3 Einstein said, one should try to make things as simple as possible, but no simpler. About Me I have been working as a financial journalist, in Europe and here in the United States, since the 1990s. I began my career with McKinsey & Company, the strategic business consultancy. I was educated at Cambridge and Oxford Universities, and I have the Chartered Financial Consultant (ChFC) and Accredited Asset Management Specialist (AAMS) designations. My columns for TheStreet.com received an award from the Society of American Business Editors and Writers in 2008. I have been writing for the Wall Street Journal since 2007. I never really trust somebody until I ve heard them say two things: I don t know and I was wrong. So let me say both here. I don t know what s going to happen next in the markets. Shares may boom or they may not. Inflation may take off or it may not. All sorts of things may happen. I don t know the future, and neither does anybody else. That s the reason for storm proofing your portfolio so you don t need to know. As for I was wrong : Although it s true I wrote a number of columns before the financial crisis warning about the dangers, I didn t predict a crash as spectacular as the one we had. I wasn t anywhere near bearish enough. Some of this book will sound critical of money managers and financial advisers. I should make it clear right here that this is not a blanket condemnation. There are many excellent managers and advisers out there doing a great job for their clients. I ve spoken to plenty of them in the course of my work. As in any industry, some of the practitioners are high - caliber and some aren t. About This Book This book will take you through a series of steps addressing each aspect of your financial rebuilding plan. It starts with Chapter 2 (Checking the Map). When it comes to their money, many people haven t even asked the most fundamental questions. Where are you going? How do you plan to get
4 STORM PROOF YOUR MONEY there? They have little idea how much they will actually need in order to retire in comfort, or to send the children to college. Many aren t even sure how to go about finding the answer, either. And no one seems to want to tell them, clearly and simply. This chapter addresses that need. It is designed to help you take charge of your financial situation. We ll start by looking at the scale of the problem: How and why so many people are so financially unprepared. Then we ll look at the basic tools you need to draw up your own financial road map. The focus here is on keeping things as straightforward as possible. It will help you calculate how much you will likely need to retire or send your children to college, what sort of investment returns you can rely on to help you get there, and how much you will need to save. Some of these answers may look alarming. Too many people, alas, have been told the road is much easier than it is. But the chapter will conclude with some other strategies to help you get to your destination. Chapter 3 (The Basics) covers three basic steps toward strengthening your financial position: paying off your credit cards, securing your emergency lifelines, and making sure you have the insurance coverage you need. If you are struggling under credit card debt, I ll explain why paying that off is the most powerful first financial move you can make. And we ll look at some tips and traps for doing that as fast as possible. The second key move is to secure your emergency lifelines. In this turbulent economy, families need to have emergency reserves they can tap at short notice if economic trouble hits. Many commentators will advise you to keep large amounts of cash in a bank account. I ll explain the hidden dangers in that approach, and alternatives that will serve you better. Third, we ll look briefly at insurance, and the importance of making sure your major risks are covered. It s easy to focus on other areas of your financial situation, only to get blindsided by sudden events. Chapter 4 (How Not to Invest) takes a look at the investment challenge ahead of you. It may seem odd to start by talking about
Getting Started 5 what not to do. But successful investing is like driving: Most of the battle lies in staying on the road and avoiding accidents. In this chapter we ll walk through the investment landscape and look at why so many investors end up in the ditch. Few financial topics are as misunderstood as investing. For all those trying in vain to win the jackpot through desperate speculation, there are many others sitting on the sidelines because they find the markets too dangerous, or simply incomprehensible. Some of my points may sound surprising. That s because they go against a lot of conventional wisdom. Many investors have been fooled into believing they could rely on pat investment rules and cheap nostrums to reach their goals. These ideas have been peddled by what I call the McMoney wing of the finance industry. They re a big reason so many people face such problems today. Chapter 5 (Storm Proof Your Portfolio) then looks at how to tackle your investment challenges. We ll consider how to build a new kind of investment portfolio that can weather all seasons. Too many people worry about what the markets are going to do next month, or next year. The challenge is to arrange your finances as far as possible so you don t have to care. We ll look at a range of options that can help you build a portfolio that is better protected against the elements. Finally, we ll look at other issues important to ordinary investors: how to ease yourself back into the markets, and how to handle a market crash. The only way to build your financial security is to become cash flow positive. And that means to stop burning cash, and start earning it. That s the subject of Chapter 6 (Cash Flow Positive from Right Now). To have more money, you need to save more; and to save more, you need to spend less. You d think that statement was a banality, wouldn t you? Instead, remarkably, a lot of people consider it controversial. So many people still desperately cling to the hope that they can save more without spending less, just as some people still hope to find a diet that lets them lose weight while eating lots of chocolate cake. Like a battle between gluttons and anorexics, the debate over spending is in danger of being drawn to the two extremes: We re apparently either on the Home Shopping Network buying gold Homer Simpson dolls or we re supposed to be making new clothes out of lint.
6 STORM PROOF YOUR MONEY The good news is that there is a happy medium. Spending less doesn t mean living like a pauper. It s about applying smart strategies. We ll look at some of the major hidden costs burning a hole in most families budgets, and how to beat them. We ll then go through the typical spending areas of a middle - class family, and see how anyone can turn themselves cash flow positive without serious sacrifice, and start building wealth. In these times we need all the help we can get, and that s the topic of Chapter 7 (Cover Your Assets). We ll look at some of the major breaks, loopholes, and shelters available to you, and see how to use them to maximum advantage to build your wealth and security. It s easy to overlook these breaks, especially in times of financial turbulence. But it s a mistake. Contrary to what some might tell you, these breaks are more important in a rocky economy than they are in a boom. Finally, Chapter 8 (Next Steps) looks ahead at how to start putting this plan into effect in your life. It recaps the basic steps to planning for a retirement, a strategy for rebuilding your investment portfolio, plans to boost your savings and to make the most of your loopholes and shelters, and thoughts on how to make sure you stay on track.