Haft 10 mistakes

Ten Common Mistakes �


MOST COMMONMISTAKES PEOPLE

MAKE WITH THEIR MONEY...

The

...and how to avoid them.

ALAN HAFT

� Ten Common Mistakes© 2007 by TriMark Press, Inc.

This book is intended for general information purposes only. While the publisher and author have utilized their best efforts in preparing this book, they make no claims or warranties with respect to the accuracy or completeness of the contents. The information may not be applicable to you and is intended for general demonstration purposes only. There are many exceptions to the general principles stated herein. Before you apply or act on this or any other legal, investment, funding, tax, insurance or other financial information, you should consult with a financial planner who can evaluate the facts of your specific situation and advise you on the proper course of action based on that evaluation.

All rights reserved. No portion of this publication may be reproduced or transmitted in any form or by any means, electronic, mechanical or otherwise, including photocopy, recording, or any information storage or retrieval system now known or to be invented without permission in writing from the author, except by a reviewer who wishes to quote brief passages in connection with a review. Requests for permission should be addressed in writing to the author.

ISBN: 978-0-9767528-6-8

Published in Boca Raton, Florida, by TriMark Press, Inc.800.889.0693

Printed and bound in the United States of America.

Alan Haftalanhaft.com

800-809-4699

*DISCLAIMER: Everyone’s personal situation is uniquely different. Investments, taxes and estate planning concepts addressed during the course of the book are complex subjects. With this in mind, please be sure to consult with a qualified tax, estate and/or investment advisor(s) before any action is taken.


ABOUT THE AUTHOR ........................................................................................... 4

INTRODUCTION ................................................................................................... 5

M I S T A K E # 1 : TOO MANY EGGS IN ONE BASKET .......................................................................... 7

M I S T A 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

TABLE OFCONTENTS

� Ten Common Mistakes

Alan Haft is a nationally recognized investmentadvisor who has been featured in a variety of mediaoutlets including Money Magazine, Forbes, Morningstar,BusinessWeek, The Los Angeles Times, The Chicago Tribuneandmanyothers.

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 columnsandYou Can Never Be Too Rich...simple and essential investment advice you cannot afford to overlook(JohnWiley&Sons,November2007).

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.

ABOUTTHEAUTHOR


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 hadandthemistakestheyweremakingarestillverymuchthesame concerns and mistakes I’m seeing and hearing today.

Some things, however, have changed and not always for thebetter. 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 retireescan likely live another twenty to thirty years past retirement, sometimesevenlonger.

INTRODUCTION

� Ten Common Mistakes

As a result of these common issues and concerns, now morethan 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 themisforyou.

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.


When it comes to giving yourself the best possible chance for continued and sustained investment success, thetimeless law of “diversification” is the best place to start.

Many people think their portfolios are diversified simply becausetheyhavemanyinvestments.Butthat’snotalwaysthecase.

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.

TOO MANY EGGS IN ONE

BASKET

M I S T A K E #1

�0 Ten Common Mistakes

For example:

• Domestic stockso 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• NaturalResources• HealthCare• Cash• Andothers

A truly diversified portfolio:

• Takesmuchoftheguessworkandstressoutofinvesting

• Minimizesmarketrisk• Recognizes that not everything will go up in value at

thesametime• Recognizes that with rare exceptions, one should

avoid selling a slice of the portfolio that is not performing well

Ten Common Mistakes ��

• Recognizesthatatvarioustimes,everysectorwillhave 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 cookingit.

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”.

�� Ten Common Mistakes


In its most simplistic form, “re-balancing” a portfolio simply means maintaining its original balance.

Let’stakeacloserlookatwhatthisactuallymeans.

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 foodcouldeasily turnout tobe theworstmealeverconsumed.

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:

FAILURE TO

RE-BALANCE

M I S T A K E #2


• 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%


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 itsday,wejustcan’tbesurewhen.

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 wassomethingvery 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.


Thanks to my mechanical dedication to re-balance my portfolio, I would have reaped great rewards given that I not only heldthose once ice-cold sectors, but also because I addedmoneytothemwhiletheywereonsale.

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 profitsinTechnologyand 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 alwayscomesdown–wejustdon’tknowwhen–willnot let theiremotionsget in theway.Theywill let thehighlyefficient and timeless art of diversification and re-balancing do theguessworkforthem.


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. Stickingwiththesetimeless,fundamentalrulesgivesallofusthe best possible chance to come out ahead of the investing game.


Let’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:

USING THE WRONG

GAS

M I S T A K E #3


1. Rocket fuel: individual stocks,2. Watered down fuel: managed mutual funds3. Diesel Fuel: stock indexes

Let’s take a quick look at each possibility:

Usingindividualstocks to represent a particular sector certainly provides you with the greatest opportunity to make money. Howeveritalsobearsthegreatestamountofrisk.Withscoresofcompanies 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 managedmutualfund.Whiletherearecertainlysomeverygoodfundsout there, reams of statistics prove time and time again that most fund managers rarely beat the index they are benchmarkingtheir 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 (S&P 500). For those who don’t exactly know what the S&P 500 is, it’s an index that contains the 500 largest U.S. companies from variousindustries,anditisgenerallyconsideredtobethebestrepresentation of “the market” as a whole.

With the vast majority of fund managers failing to beat theperformance of the index they are benchmarking to, why do so many people still invest in managed funds? Looking beyond the


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 indexfunds to represent each sector within a diversified portfolio. An index such as the S&P 500 is a passiveinvestment – no one is trying to pick individual stocks within the sector. Typically, based on certain criteria, allstockswithinthesectorarechosenandarethenveryrarelytraded.

It’s a silly question, but which would you rather have:

1. Higher fees and historically lower rates of return?or…

2. Lowerfeesandhistoricallyhigher 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 themutual 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.


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 youhavesomeof thatgambler inyou,allowthisgambler tolive within the “Other” sector and let the art of diversification and re-balancing reside in the rest.


Have you ever had the unhappy experience of holding amutual fundthatwentdown invalue,only todiscover thatyou 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–whenyouinvest inamanagedmutualfund,youhavevirtually no control of the taxes you pay while holding the fund.

If you’re interested in reducing tax, one of the first things you shoulddoistakealookatwhetherornotyou’reinvestinginmanaged 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 veryefficient.

TOO MUCH TAX

M I S T A K E #4


How much tax does your fund cost? Your tax return should certainly give you a very good idea as to how much you’repaying on your funds. Another way of checking out the taxable consequences of holding a fund (or funds) is to investigatesomething called “turnover” and Morningstar.com is a goodplace 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 theindexesinstead.

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 fundmanagerwhomakesthosedecisionsforyou.


After 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

whetherornotwemadehimmoney• 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 evermakeanymoney

Did Jack take my offer?

NOT WATCHING THE FEES

M I S T A K E #5


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.”

WhatJackwasn’tawareofwasthatoverthemanyyearshe’sheld 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” (therearemostcertainlysomeverygoodonesoutthere),whatI 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,gotoMorningstar.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 ratesofreturn.

Whenitcomestoinvesting(aswellaseverythingelse),it’sthelittlethingsthatcountmost.Failingtoaddressthedetailscouldeasily make gourmet pizza wind up tasting like the frozen stuff.


Health 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 itonadailybasis.Certainly, thosecouldbeeffectivewaysof

NOT PROTECTING YOUR MONEY

M I S T A K E #6


protecting your money, but most of us have more interesting things to do such as working, eating, going to the movies orin my case, challenging my kids to Nintendo on a weekendevening. If these activities or any others are more interesting to youthanwatchingyourmoneyonadailybasis,thenhereareafew quick thoughts on how you can protect your investments:

Reduce Risk: We find that many people, especially those in retirement,oftenhave toomuchmoney in thestockmarkets.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: Wheninvestinginindividualstocks,onefantasticway to “insure” against possible loss is to buy something called “putoptions”.

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 abovewhatit’stradingatsometimeinthefuture.

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.


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 gainsconcentratedinonestock.

Another way to protect an individual stock against loss is to establish something called a “stoploss.” 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” amorereliablechoice.

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 mutualfunds.

So, if you are investing in index mutual funds and want more controlofyourinvestment,youmaywanttoconsiderinvestingin index ETFs instead. However, bear one thing in mind: the


“negative” of an index ETF is that if you are investing on a frequent basis, you would most likely be better off stickingwith 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 moremoneytotheaccount.

Variable Annuities: An investment into a variable annuityprovides tax deferment and direct investments into various stock market indexes or sub-accounts (mutual funds). Most variableannuities 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 investmenttotheheirswhentheinvestordies.Suchafeatureobviously 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 beforemakinganinvestment.

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, thenyoucould earn more than the typical bank CD. If the index


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 aGrowth 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 understandbeforeinvesting.Theseinclude,butarenotlimitedto: 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.


Forabriefmoment,thinkofyourmoneyaswaterinabathtub. You spend your working years filling up the tub with watersothatoneday,youcanstarttoliveoffofitfortherestof 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 surehowlongtheyaregoingtolivesounderstandably,mostpeople 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,youcouldverywellacceleratetheloss.

This potential for disaster is what I often refer to as “The Most Dangerous Game”: relying on the speculative, uncertain growth ofstockstogiveyoutheincomeyouneed.

RELYING ON GROWTH

FOR INCOME

M I S T A K E #7


Take “Max and Wendy,” a retired couple who several years backwere relyingon thegrowthof their stocks togive themthe income they needed. Their advisor showed them somewell-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 withdrewtheir 6% for income but an additional 10% went down the drain, bringingtheirtotallosstonegative 16% for the year. When they didthemath,theysawthattheynowneededtowithdrawmuchmore than 6% the following year. They did, and as bad luck wouldhaveit,someofthewateralsowentdownthedrainthatyearaswell, therebyaccelerating the lossand throwing theirretirement income “plan” into a tailspin.

Unfortunately, this is a familiar story. While this is just oneexample, I can think of many people we’ve met who have sufferedsuchadirefate.Whenitcomestoretirement,fartoomany 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 oftheaccountgoesdown at the same time?” In either case, you could very well be digging a hole into your principal or worse, acceleratingtheloss.


To prevent this, you may want to strongly consider repositioning portions of your money into income-producing investments thatdonot rely on the speculative, possiblegrowthofstockstogeneratetheincomeyouneed.

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• Preferredstocks• Real Estate Investment Trusts• Immediate annuities

Repositioning money into a diversified portfolio that includes some of the above would provide income that is separatefromthe growth portion of your investments. Through dividends and interest,incomegeneratedfromtheseinvestmentsdonotrelyon 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 amountofincomeyourequireandinvestmentsthatareavailableatthetimetheincomeisneeded.


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 thatwellunderstandshowtoavoidthiscriticalmistake.


The 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 wedonotconsiderlifeinsuranceacost,butaninvestment.

Yes, an investment. Little do most people realize that with the right type of life insurance in place (Universal or Whole Life, notTermLife),thereisalikelychancethatifyounolongerneedthe 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 wealsoknowtherecouldbemanyusesforincludingitwithinadiversified portfolio such as:

NOT ENOUGH LIFE IN

YOUR LIFE

M I S T A K E #8


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 ofvariousstockmarket investments.For thosewhoneed lifeinsurance 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.

Asfaraswe’reconcerned,aninvestmentintoalifeinsurancepolicy is often a more prudent choice than an investment into itssomewhatclosecousin,anannuity.

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 valueduringthetermofthecontract.

• 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(ifnotbetter).

• 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. Thereisalimitedsecondarymarketforannuities.


• When a life insurance policy is passed to your heirs, not only is the amount passed tax-free, but the amount isalmostalwaysfargreaterthanthecashvalueduetothe 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 towithdrawmoneyfromthedeath benefitinordertotakecareofvariouslongtermcaremedicalneeds.

Private Pension: One of the strongest advantages of adding some life into your life is to create what we commonly referto 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 youcannotoutlive.The incomewillneverchangeand isnotsubjecttostockmarketorinterestraterisk.Bestofall,becauseyouaddedalittlelifeintoyourlife,theamountthat’susedtofundthePrivatePensiongetsreturnedtoyourfamilytax-freeupon your death.

TherearemanywaystodesignaPrivatePensionandonlywithan evaluation of your personal situation and retirement goals can a detailed plan be put into place.


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 somecashonhand,wantingtomakeaninvestmentinthestockmarket that would provide the best possible returns for his granddaughter. He had little need for the money, had plenty ofmoneyoutsidethisinvestment,andwasquiteclearthatthismoney 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 stayawayfromthestockmarketsandinsteadinvestthemoneyinto a life insurance policy. Why? …

Well first off, the investment into the life insurance policy instantly more than doubled his money and guaranteed it tohis granddaughter upon his demise. The risk of the market and the time itwould take topotentiallygrowthemoney toequalthe life insurance’s guaranteed death benefit were completely eliminated, thereby making the investment into the life policy wellworththeeffort.

Freeing Up Principal: We meet many people in retirement who are saving as much as they possibly can for their family. For a fractionoftheestatevalue,theymaywanttoconsiderinvestinga 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 willstillleavethevalueoftheestatebehindthankstothelifeinsurance policy.


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,chancesarelikelythatyoucanlatersellthepolicyinto 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 Suisseandalonglistofmanyothers.


You spent your entire life doing everything right, when allofasudden,theinevitablestrikes.Yougooutdrivingwithmeand due to the distraction of my iPhone, we wind up notattheIHOP for breakfast but floating on a cloud somewhere, hopefully with Springsteen playing somewhere in the background.

Afteryouchastisemeformyawfuldriving,yousimmerdowna 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 thosewhoneeditthemost.

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 youcreatedcouldbecontested,youforgottofundyourtrust,

NO ESTATE

PLAN

M I S T A K E #9


maybe you neglected to update the beneficiaries, or perhaps you forgot to leave clear instructions as to who’s supposed to feedthedog.

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 cannotbecontested.

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 creatingaLiving 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.


Therearemanyotherreasonstoconsidercreatingatrustandthe 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 forall 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 highlyadviseyoutoatleasttakeameetingtodeterminethis.


Thecommonmistakeswe’vecoveredthusfarareas follows:

1. Too many eggs in one basket2. Failure to re-balance3. Using the wrong gas: stocks, funds or indexes4. Too much tax5. Not watching the fees6. Not protecting your money7. Relyingongrowthforincome8. Not enough life in your life9. No estate plan10. …and as for the last most common mistake, any idea

what this one is?

...AND THE BIGGESTMISTAKE

OF ALL

M I S T A K E #10


As far as we’re concerned, the last most common mistake isa potential whopper. Forget fees, diversification, taxes and everything else up above. The last most common mistake can easilybetheworstoneofall.

The last most common mistake actually has little to do withinvesting. Furthermore, the last most common mistake hasbasically been around since the dawn of time and perhaps even beforetimeitself.

Do you have any idea what it is?

Here’s a hint: The last most common mistake has everything to dowithyouandnooneelse.Youhavetotalandabsolutecontrolto prevent this most common mistake. Any guess?

Give up?

As far as we’re concerned, the most common mistake of allcomes down to one word and one word only: complacency.

“Should have,” “could have”and “would have” are words all of usshouldavoideverhavingtosay.Whetheryouactonafewgood 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 andgoals.Afterall,whenitcomestoinvesting,oranythingelseforthatmatter,it’salwaysthelittlethingsthatcountthemost.


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 ofluckandsuccessonyourjourneyahead.

For more information, visit www.alanhaft.com

CONCLUSION

Haft 10 mistakes

Economy & Finance

Transcript of Haft 10 mistakes