Expert: Paul Henneman - 1/11/2005

Question
Paul,

Sorry to bug you again. I mainly went in with an investment broker because my dad has one and it has really done fantastic for him. When I've seen the growth of his funds it really impressed my. He did lose a lot during that market crash in 2001 but he seems to have gotten it all back now and more. I don't think he ever thought it would come back again. He's 78 now! I just notice his and wanted to do something with my money that could have more action. I know it sounds like greed and maybe it is. It's just nice to be able to have your money work for you. I just got my statement back from Finntegra and my initial $70,000 minus the $5000 fee is now $72,000. So, I'm not sure if that mean I made $7,000 from July 1 or how it is figured.I've only been with them since July 1st. I guess I'n not too disappointed but I recovered the fee I think. I really don't know how it works or how much they would take if I cashed in the entire investment. They have an office right in my local bank so the only reason I chose them. I didn't do any research on it but hoped they would be good people to manage my money. I didn't want to tell the guy how much I wanted to invest right until I was ready. I know I had asked him about fees but I still couldn't tell how much it was going to be. I wish I would have flat out asked him, if I invest $70,000 how much will you charge me? I probably would have thought twice.

I only make $20,000 a year, so that is a lot of money to me. It would take me years to make that kind of money. This was why I wanted to invest what I had to possibly build more security. It just feels reassuring to have some money to fall back. Unfortunately, wh never know when were well off, were always striving for more. The only assest's I have are the money in that account, another $20,000 in a Merril Lynch 401k through work, which I've stopped contributing too, and my car (yes a Honda Civic)...that's it. I live with my father, so I'm able to cut expenses that way but like everyone I'm really worried about the future.

I don't have a problem with debt. I'm scared to death of it. I even paid cash for my car. I know most people can't. I'm already saving for my next car in a couple of years. I know that is unrealistic to pay cash, especially if you have a family, house and other bills but it is so nice to know you actually own something when buy it rather than making payment for 3 or 4 years. I pay off my credit card every month and to make the balance 0, granted I never have a large balance to payoff. I'm ok with the debt reduction...think that is what I'm trying to say.

I don't know if I have the patience to learn but, I need to try. It seems like I get really frustrated reading technical jargon and trying to understand. I get those Prospectus supplements with my investment. I don't begin to understand what it is all about. There is so much information in there and it could just as well all be in Greek. I could read through the first page and not understand a thing and be bored out of my mind. All along thinking how dumb I am for not being able to comprehend.

The Investing for Dummies sounds like a good idea. Maybe that would help me understand what is in a prospectus. I don't know if I would have the confidene to feel I was making wise decsions as far as investing on my own, like with the www.FOLIOfn.com.  I don't even think I've asked a question, but this is really overwhelming...the investing. I can see why many leave it up to someone else to watch their money. I really respect someone who can do this for themselves. I don't even think I've asked you a question...anyway thanks for your answer from before.

Lee

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Followup To
Question -
 Hello..I recently invested 70,000 with a financial advisor and his investment company. They charged me 5000 of the 70,000 as their fee. I really only have 65,000 in my account now. I was wondering if that was an average or acceptable amount for an investment fee. I was so tired of only earning less than a percent interest with my savings account. I was hoping to do better with something more aggressive. I don't know if I did the right thing or should have left the money in the savings account. It's my life savings. I would appreciate any comments. I don't much about investing and don't really understand it. Thanks!
Answer -
Lee,
  Thank you for your question! Normally I recommend to everyone that they not turn their investments over to a professional for two reasons: The fees that you mention, and that the professional will not care for your money as their number one priority. They have other clients and a business to run, so the actual time spent on managing your portfolio is incredibly small.
  Below is my usual advice for those interested in having their money 'work for them'. It is possible to double your investments every five years, carry that out a few decades and the wealth can be considerable. However, in the below advice I largely assume that you are willing and interested to research and learn about investments. You mention in your email that you don't much care for the topic. This is an important realization on your part, and if you feel strongly about this then yes, a professional managing your money is a good way to go. Just realize that you will lose a significant portion of your profits to fees, and also that most money managers are not that successful in getting you good returns. But they should still make you money in the long term.

Here is my usual advice: You can still perhaps use some of this, such as debt reduction and the continued process of adding to your investments each month. Perhaps reading "Inveting for Dummies" would be worth it, just to give the topic a chance and also so that you are more familiar with the options and can communicate more effectively with your financial advisor.

I believe that you should think of things in terms of three different categories, and I will offer further specifics on each:  1. Debt reduction to lead to debt elimination 2. Education 3. Action

1. Debt Reduction and elimination of debt:
Start immediately with this. It is key to the financial well being of everyone in the future. People in this country has a very bad habit of running high debt in the form of credit cards, car loans, and all sorts of credit for just about anything.  Credit is so easy to get, it is difficult for many young people to resist. By the time most of us are adults, the terrible cycle of high debt is already established. The first key to a wonderful lifestyle in the second half of life is to resist this.
Most credit cards charge 15% or more in interest. It does not make sense to invest when folks are paying so much extra for each purchase! If you have credit cards and/or car loans, pay them off. This usually frees up hundreds and hundreds of extra dollars each month that normally goes to these bills. This can be used to both invest and improve your lifestyle. If you can't pay cash, you can't afford it! The exception is real estate, as that is 'appreciating asset' that increases in value.  It is a good move to purchase and own a home if it is feasible.
There is nothing worse than paying high interest on a car, then having that car decline so rapidly in value as you use it, possibly the worst of ‘depreciating assets' that exists. Of course we all need cars, but if the money is not there, don't buy an Acura when a Honda will do so to speak. Put as much down as possible, and see about a 3 year or less loan. The goal is to pay it off as quickly as possible, then drive it 'free and clear' for as long as possible. Cars are perhaps the largest things standing in the way of most people having a truly wonderful second half of life.  We are conditioned to buy the most expensive car possible and this is a huge drain on our finances.
Good investors can double their money every five years. Take the $25,000 price tag of an average car these days, go out 40 years, and see how much that car actually costs!

2. Education
Successful investing takes discipline, education, and patience. A plan should be established and strictly followed for decades. My suggestion is to spend the next six months researching. Start with "Investing for Dummies", available at amazon.com and most major bookstores. This will give you the basics on most major forms of investment, and you can do further research on what appeals to you. In general, the higher the possible return of an investment, the more risky it is. As an example, a money market account will earn you about 2% a year; this is a very low gain. But it is perfectly safe and you would get that 2% every year without fail. A portfolio of stocks can earn you on average 20% or more each year. But some years will be good, and others bad. Many investors lost half or more of their worth during the bad markets of 2001 and 2002. However, over a long period of time, the risk evens out and the returns are much more substantial. An average of 20% return each year would double your investment every four years. (Not every five, as you have to account for the growth in the portfolio for the next year returns).
I believe that the ultimate solution is two fold. First, move slowly. While stocks and other investments can treat you well, they can also treat you very poorly if the wrong decisions are made. Start with a money market, this is a great place to 'park' your savings while you learn more. The one I like best, with the highest returns I have seen and FDIC insured (very important) is www.NetBank.com. Then I suggest mutual funds. Do your research. The book I mentioned above will help, and www.morningstar.com is perhaps the best-known source of mutual fund information available. Lipper is another. When you have more than $5,000 invested, branch out to several mutual funds that specialize in different areas such as real estate, technology, health care, utilities, or others. That way if a specific industry does poorly, you will not feel it too badly.
Only after a few years or whenever you feel confident should you venture into stocks. But start practicing right away. Begin researching possible stocks you would want to invest in (again the book I mentioned will help you learn what to look for).  Track your ideas on a free service such as yahoo.finance.com and see what your stock picks do.

3. Action
When you are finally ready, my suggestion would be to have 20% of your portfolio in safe investments such as bonds and money market accounts, 30% in stocks and 50% in mutual funds.  You will likely not have a large amount to start with, so begin with a mutual fund. Continue to contribute every month, and it should grow further in addition to the returns you get. When you have enough, buy into a second, then a third mutual fund. When you have at least 10 to 15 thousand in mutual funds, begin to think about a stock portfolio. Always hold a basket of stocks, not a single stock, as it is too risky if you are wrong in your decision. For trading services I like www.FOLIOfn.com the best, www.ScotTrade.com is also good.  These are discount brokerage firms that can make trades for you online for very low fees. You could establish an account with a major brokerage firm. I do not recommend this. They charge very high fees that come out of your returns. And their so-called ‘experts' do not have your concerns as their number one priority. Instead they are looking for the fees, and often push stocks or investments according to their organizations best interests, not yours. You will be much better served if you do the research yourself. Of course if you are not interested finance as a topic and the time needed (a few hours a week should do it), working with a full service brokerage may be more attractive.

The most important thing is to STICK WITH IT!! Even with a minimal income everyone in this country would retire wealthy if they avoided debt and planned for the future with at least a small contribution to their investments each month. I congratulate you on your interest and sincerely wish you the best. It takes work, but your finances should become a hobby, learn every chance you get. If I can be of any further service, please do not hesitate to follow up with me!

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
www.VEReports.com


Answer
Lee,
  Thank you for the follow up! I was pleased to read more about your finances. You are in a very good position! I congratulate you on staying out of debt. This is fantastic. You are perhaps the very first person out of hundreds I have communicated with through All Experts that is in a debt free position. Keep at this throughout life, and with your $70,000 you are perhaps in a great position. It is ok to buy stuff, just buy in cash. You say you are already saving up for your next car, perfect. This means you will not be reliant on large car loans.  Apply that kind of planning to all of your finances, and with your $20,000 salary you will live better than others making twice as much money. With your sizable investment of $70,000 already, your retirement could truly be very comfortable.
  The main thing is to have your extra money working for you, and you are doing that. The only question is how much effort you can spend to maximize how efficiently it is working.
  It sounds like your financial advisor is pretty good. Those are good performance indicators, and your funds are certainly off to a good start. Since you don't know much about finance now, I agree that the best thing is to have yoru money managed for you. The only recommendation I would add is to call up your money manager and ask what the charges for his services will be. You should know this moving forward.
  Then read 'Investing for Dummies'. This will give you the basic knowledge of investing, and you will hopefully develop more interest in certain areas. You will at least be able to communicate more effectively with your money manager.
  One of two things will happen after reading this book (it is a pretty easy read, not overly technical). You could find an interest in finance, and this will give you the leads to do further reading in the type of investments you find most attractive. Or, you may hate the book! This would teach you that you have no interest in finance at all, other than wanting to have your money work for you. If this is the case, having a professional money manager may cost you some fees, but would be the place to be.

I hope this helps! Always feel free to follow up with me, I enjoy communicating with investors and am always willing to discuss ideas or plans for your financial future.

Sincerely,
Paul Henneman
President
ValuEngine, Inc.
www.ValuEngine.com
www.VEInstitutional.com
www.VEReports.com