Financial literacy is crucial, and investors need to follow the market trends and economic issues that affect their portfolios. However, it’s often risky to make investment decisions based solely on reports from the mass media or insight gained in an Internet chat room. The massive amount of financial advice online or in the press is often contradictory — and sometimes inaccurate — and rarely addresses your personal situation.
Here are several reasons to consider seeking professional guidance when building a successful investment strategy and choosing investments that fit your plan:
• Reliable Research. It takes time to analyze the various investment products available to you, including a universe of countless individual investment vehicles. If your career, family and personal commitments take up a majority of the hours in your day, you may want to consider the recommendations of a professional who has made a career out of finding and delivering your best options.
• Objective Advice. Emotions can sometimes get in the way of rational analysis. It is possible for individual investors to “fall in love” with an investment that may no longer meet their objectives. An impartial voice that is free of emotional attachment can often provide valuable perspective when times are tough or difficult decisions must be made.
• Discipline. You may already have a solid long-term strategy, but adhering to it over time may be easier with an adviser to help keep you on track. Having a professional by your side could make it easier to resist buying a trendy stock, chasing the performance of a hot sector or otherwise straying from your well-laid plans.
A long, post-bubble bear market and a period of low interest rates has caused the value of many private and government pension funds to shrink. A number of these organizations were left with a gap between the value of their pension assets and their current pension obligations.
• In 1985, U.S. corporations sponsored over 112,000 defined benefit (pension) plans. Since then, about 80,000 of these plans have been terminated.
To address the issue, companies are moving away from traditional pension plans that provide a guaranteed payout and moving toward defined contribution plans that shift the risk and responsibility to workers.
• The corporate shift to defined contribution plans is also evident in the decrease in the number of workers covered by pension plans. The share of American workers earning a pension has declined from about 35 percent in 1980 to less than 20 percent today.
• With defined benefit plans, the pension benefit is fixed and is typically based on a formula that factors in the employee’s age, years of service and compensation. Because the pension benefit is fixed, the employer bears the investment risk.
• In a defined contribution plan, employees elect to defer a portion of their salary into the plan. Contributions are typically made on a pre-tax basis and accumulate tax deferred. Distributions from these plans are taxed as ordinary income and, if taken prior to reaching age 59, may be subject to an additional 10 percent federal income tax penalty.
• As the traditional pension plan is being phased out, defined contribution plans are quickly taking prominence.
Although these plans don’t offer a guaranteed benefit, they do provide workers with a tax-advantaged way to save for retirement.
Craig G. Langweiler is president of the Langweiler Financial Group in Newtown. He can be reached at [email protected]