Dollars and Sense
Written By: Jack Maurer

Perhaps you are looking to save for your child’s college education or preparing for your own retirement. Maybe you are thinking about buying a vacation home for summer getaways or purchasing the sports car you have always dreamed of driving. In today’s volatile economy, such prospects can create nervousness and uncertainty.

Financial advisors agree that the United States is entrenched in the worst bear market since 1973. While experts believe the economy is rebounding from the recession, individual investors are still very cautious. They suggest you follow a few simple rules as you plan for the future.

Diversification
The top three rules in real estate are widely know – location, location, location. When it comes to managing your money, many experts say the top three rules are diversify, diversify, and diversify.

“Those people whose assets were heavily weighted in technology stocks or mutual funds have been taking a real hit,” said Jim Holtzman ’96, financial consultant with Legend Financial Advisors and a member of La Roche College’s Alumni Board of Governors. “Smart investors have their assets branched out across a variety of different investments and sectors. I advise clients to diversify their portfolio and manage what’s called the ‘standard deviation,’ or the total amount of risk in all of their investments.”

People who have suffered losses because they invested in growth stocks or mutual funds may have a desire to change their strategy. Holtzman says it is important to keep some money in those funds. To balance that out, he suggests putting some cash in small- or mid-cap funds, which are fixed investments.

John Schneider, an investment counselor with Bill Few & Associates, agrees.

“Our advice hasn’t changed. Stocks are certainly riskier than they were two-and-a-half years ago,” said Schneider, who is a member of La Roche’s Board of Regents and an adjunct economics professor. “Even treasury bonds are down a bit. But if your strategy is strong, your long-term goals are the same, and you’ve diversified your portfolio, you should be in a good position to weather the storm.“

History Lessons

Some financial experts prefer to study history rather than economics. Bob Fragasso is president of The Fragasso Group, Inc., a Pittsburgh-based firm specializing in investment management and financial planning. He says investors should stay the course and take comfort in what historical trends demonstrate.

“We modeled a theoretic investment in every economic downturn from 1929 through the current dip,” said Fragasso, also a member of the College’s Board of Regents. In each case, Fragasso invested at the top of the market. He then calculated how long the market took to recover and what the outcome was. “All of the portfolios recovered, usually within the first year or two,” said Fragasso. “We also learned that balanced portfolios of bonds and stocks suffered less downturn than stock portfolios, and they recovered more quickly.”

According to Fragasso’s research, history shows that people who stayed fully invested were the ones that reaped substantial gains. The only investors that lost were the ones who sold at the bottom.

“The most dangerous thing you can do is try and chase what you think will be hot,” said Fragasso. “You have a better than even chance of losing if you do that. No one is clairvoyant.”

Experts say how much you save and where you put your money should depend on your financial goals and how much time you have to save. For example, if you’re putting money away for your son’s college education, you would undertake a certain investment strategy if he is only three years old. You would follow a much different plan if he is a high school junior. The same applies to investing for retirement. A 25-year-old should be more aggressive, a 60-year-old more conservative.

Dollars for Diplomas

Tuition continues to rise at public and private universities across the country. Fortunately, changes in the tax laws in 2001 created investment vehicles designed specifically for education savings programs.

One of the most attractive new options is the 529 plan, which offers significant tax benefits to the investor. The state-sponsored programs come in two types: guaranteed tuition plans and plans based on mutual funds. With the guaranteed plan, you purchase college tuition credits at today’s prices. The state then invests your money in the hopes of making up the difference between what it costs to send someone to school now and what it will cost when your child is ready to go to college. Mutual fund-based 529 accounts give you the opportunity to make investment decisions on your own. Most states hire an investment firm, giving you the opportunity to select from a group of funds. What is most significant with both funds is that your earnings and growth are not subject to any federal tax. You will also not be required to pay taxes on the investment when you withdraw it to pay for tuition, room and board.

The Golden Years

When it comes to saving for retirement, the basics don’t change.

“It’s just as important to diversify your investments when it comes to retirement savings,” says Sue Ellen Fitzgerald ’98, Principal Financial Group. “Depending on your goals, you should never have money only in growth stocks, or only in value stocks.”

The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) has lifted many restraints formerly placed on 401(k) participants, making it easier to invest for retirement. Prior to the law, the total contribution limit for 401(k)s -- including any matching funds -- was 25 percent of compensation not to exceed $35,000. Now, you can contribute up to 100 percent of compensation not to exceed $40,000 if your earnings are less than $85,000. Changes made through EGTRRA also allow people to roll over money from 403(b) and 457 plans into 401(k)s.

What if you’ve already retired? Today’s economic environment can be particularly unnerving for people drawing from their retirement assets.

“As long as the funds withdrawn are coming from income, the fluctuation in principal won’t affect a retiree’s ability to live,” said Fragasso. “If you are taking the interest from your bonds and dividends from your stocks and leaving the principal to recover, you are not jeopardizing your financial future.”

Financial advisors say it is most advantageous to develop a long-range strategy rather than determining a course of action by the daily gyrations of the stock market. The other key is to develop a savings plan with risk factors that you can tolerate. Only then can you steer your ship through rough financial waters.