So says Jerry Gross, a chartered financial consultant based in Feasterville. Instead of full disclosure, Gross favors the Rule of 10, also referred to as the 10 Percent Rule.
“If you’re making $50,000 a year, tell anyone who wants to know that you make $45,000,” Gross suggests. “Convince yourself that you’re making $45,000. Whatever your income, take 10 percent of it, and invest in your future.”
Many in the financial field agree with Gross that the Rule of 10 is, well, an honest approach to financial planning. For them, as well as those who subscribe to different financial planning strategies, the dilemma is how best to invest available resources.
After a period so difficult that it has come to be known as the Great Recession, the U.S. stock market had an extraordinary — and largely unexpected — 2013, posting its best numbers of the millennium. The Dow Jones industrial average and the Standard & Poor’s 500 both experienced gains of more than 25 percent. With the arrival of 2014, the most pressing questions include:
• Will the market continue to soar?
• Have the economic problems that caused the Great Recession been solved?
• Will this be the year that consumer confidence in the economy, which has remained lukewarm even as stock prices soared, finally returns?
“Since last year’s stock market results were well above trend, and follow several other good years since the market lows seen in early 2009, it is reasonable to have reduced expectations after this kind of period,” says Neil Kauffman, a fee-only adviser at Kauffman & Drebing in Center City. “We’re pleased when returns are so robust, but cannot count on them. Since we view the capital markets long-term, however, caution does not suggest across-the-board reductions in stock market exposures. A wide array of stocks from small-, medium- and large-size universes is still called for, and we think that there is a good place for carefully vetted no-load mutual funds.”
John Solis-Cohen, managing director, investments, for Wells Fargo Advisors in Jenkintown, put it this way: “Last year’s stock market performance was outstanding due to a backdrop of positive economic data, generally favorable earnings comparisons, low interest rates and some political reconciliations in Washington. As we enter 2014, I do not believe that this trend will continue. I believe that concerns that the stock market is nearly fully valued, along with the specter of rising interest rates, will act as a damper on the market’s performance this year.
“I do believe the markets will move higher as I expect the economy to continue to expand, and I believe there will only be a modest rise in long-term rates this year,” he continues. “This investment environment can promote a positive return for stocks, but more likely in the single-digit range.”
Bruce Rader, an associate professor of finance at Temple University’s Fox School of Business, opines that 2014 is no time to abandon the stock market, even if overall gains fail to approach the near-30 percent levels of ’13.
“I anticipate a rise of perhaps 10 or 11 percent,” he says, “but I expect volatility to be an issue.”
Rader’s concerns about volatility in the market are hardly unique. Discussions with financial professionals from across the economic spectrum yielded similar warnings.
“I’m telling clients to expect volatility in 2014,” says Gary Klazmer, principal at Klazmer Financial Group in Jenkintown. “That said, I’m optimistic that despite the anticipated volatility, the market will have high single-digit returns in the coming year.”
It’s been said that it is impossible to use a yardstick to forecast the stock market. There will be downward surges during the best of times and northern spikes during down periods.
Even with that knowledge, the volatility some investors expect, even in the face of predicted gains, is troubling enough to some investors that they’d prefer alternatives to stocks.
Particularly for older and more conservative investors, tax-free municipal bonds “offer a great alternative to equities,” says Craig Langweiler, president of Langweiler Financial Group LLC, with offices in Center City. “Tax-free bonds currently provide tax-free returns up to approximately 5 percent and limit the downside that accompanies equity investing in the stock market.
“My only concern is rising interest rates,” he continues. “If we go into a period of rising interest rates or improved economy, these bonds, although guaranteed to mature at par, could temporarily lose short-term market value.”
Some financial professionals direct their clients to Treasury Inflation Protected Securities (TIPS), which is a Treasury security indexed to inflation in order to protect investors from the negative impact of inflation. TIPS are generally regarded as low-risk investments.
Still others favor fixed-index annuities, which enable the owner to enjoy stock market performance without incurring any loss of principal due to stock market downturns; or variable annuities, which are essentially insurance contracts through which, at the end of the accumulation stage, the insurance company guarantees a minimum payment.
The experts are not steering their clients toward the bond market, since rises in interest rates result in declining share values of bonds.
“In an environment where interest rates are increasing, the bond market is not the best place to be, so we’re underweighting bonds and overweighting equities,” meaning stocks, says Klazmer, whose traditional allocations are 60 percent equities and 40 percent bonds. “Our current allocations are 65 percent equities and 35 percent bonds.”
Yet numerous financial experts, among them Langweiler and Solis-Cohen, are recommending municipal bonds — also known as munis — particularly to investors in higher tax brackets. Munis are fixed-income investments that, depending on an investor’s tax bracket, may be able to provide higher after-tax returns than similar taxable corporate or government issues.
For those whose investment strategies include the stock market, Langweiler is especially bullish on technology and pharmaceuticals.
“The Internet should continue to be a main focus for most companies and risk-tolerant investors, and for this reason, I expect this sector to outperform the market,” he says. “Blue chip stocks in the predictable sectors, like pharmaceuticals and technology, continue to offer above-average total returns — Microsoft, Merck and Verizon, to mention a few.
“In addition to growth in the stock prices, these companies provide investors with 3 percent dividend returns in addition to any rise in stock price. Microsoft, in particular, has finally started to think outside the box and may surprise investors with double-digit returns in the future. Microsoft started to provide investors with estimated guidance and increased dividends. The 3 percent dividend offers a nice return, limits downside risk, and offers some protection to any downside in the market.”
When Solis-Cohen looks at economic conditions and Europe, he is struck by the similarities to the U.S. economy in early 2009.
“The valuations of European stocks today are in many cases cheaper than our market valuations,” he says, “and if one is willing to assume the risk of investing in that fragile economy, the reward may be worth the risk. I favor European companies that have a history of growing their dividends annually.”
The financial experts are in agreement that investors are best served by a soundly constructed, diverse portfolio designed with the specific needs of the client and his or her family in mind. Furthermore, the portfolio should be reviewed on a regular basis and modified as needed.
Experts also agree that complete economic recovery cannot become a reality if consumers remain skeptical.
“It’s actually a pretty simple concept,” says Rader, who intended to remain at Temple for one year and is now in his 18th year on the faculty. “It’s all about the current and future outlook. If people feel good about their own situations, they’ll spend more. If you feel things have been going well at work, you’re getting raises and your employer is hiring people instead of reducing the size of the workforce, then you tend to spend money you might otherwise be saving for a rainy day.
“It certainly would help if people felt Congress was more about the American people and less about special interests or themselves. It also would help if we could avoid the quick differential when it comes to rising prices. For example, look at oil prices. When they soar, people react strongly. When prices rise, but the rise is gradual, people are willing to adapt. It’s the same with virtually every product.
“Still, the most important factor is employment. The more people are working, the lower the budget deficit, and the happier everyone is.”
Matt Schuman is an area writer. This article originally appeareed in the special section, "Financial Health."