Seeking the help of financial professionals has become more important to investors according to a recent survey conducted by Harris Interactive on behalf of TD Ameritrade Holding Corporation, as nearly one quarter (22 percent) of investors report relying more on a professional investment advisor following the recession (1).

Even if you have a good handle on your investments, you may find that hiring a financial advisor — who can put the time and energy into making sure you and your family plan for a secure financial future — may be a worthwhile investment. By hiring an independent registered investment advisor — commonly referred to as an RIA — you can make sure your investments are managed on a full-time basis by a professional advisor, while still having control.

Of course deciding to put someone in charge of your hard-earned money is not a process to be taken lightly. TD Ameritrade offers these tips to consider as you choose an independent financial advisor or RIA:

• Just as it is wise to do research on the background of anyone who would take care of your children, you should investigate the person or company you enlist to handle your money. The Securities and Exchange Commission, Inc. (www.adviserinfo.sec.gov), Financial Industry Regulatory Authority (www.finra.org), Certified Financial Planner Board of Standards (www.cfp.net), National Association of Personal Financial Advisors (findanadvisor.napfa.org/Home.aspx), and Financial Planning Association (www.fpanet.org), as well as your own state securities agency all collect background information on financial professionals that can be accessed through their websites. Use these sites to make sure the advisors you are considering haven’t faced disciplinary action for dishonest practices and are in good standing with regulators.
• Know the difference between working with an independent RIA and a stock broker, or other financial services provider. Independent RIAs, for example, are bound by law to act in their clients’ best interest. Brokers, on the other hand, are held to a “suitability” standard, meaning the advice they give must be suitable to that client’s situation. If you are looking for objective, comprehensive money management, you might want to consider an RIA.
• While RIAs are required by law to act in your best interest, there are other ways that you can ensure they will do what is best for you. One is to ask how they are compensated. Fee-only compensation generally minimizes conflicts of interest and means that your advisor is paid only for the management services and advice he or she offers, and only by you, not by investment product providers. When an advisor is paid on commission, there’s a greater chance he or she will make choices with your money that serve not only your interests, but their own as well. That’s not to say that advisors do not work fairly under this model, but potential conflicts of interest are something to consider as you choose an advisor.
• When looking for referrals from friends or relatives, the most valuable referrals may come from those in similar situations. It’s also a good idea to ask potential advisors if they specialize in working with certain types of clients and choose one that fits your unique profile.
• Check to make sure your advisor’s firm is audited on a regular basis. A third party custodian should also handle all your deposits, to ensure checks and balances. An independent custodian can help ensure the safety and security of your assets, and will provide you with a clear, concise statement every month. A duplicate monthly statement is also sent to your advisor. Make sure this is also a legitimate and upstanding business.

Working with a trusted independent RIA can help you realize your financial goals, while allowing you to spend less time worrying about and managing your investments. If you need help finding a financial advisor through the TD Ameritrade AdvisorDirect program (2), visit www.tdameritrade.com.

Christianity and Capitalism

by Richard Doster

It’s been a rough couple of years for free-market capitalism.

In Business as a Calling: Work and the Examined Life, theologian Michael Novak wonders if capitalism is “spiritually empty and corrosive of virtue.” The evidence, perhaps now more than at any time in the past 70 years, may tilt the scales in that direction.

In response to the recent turmoil, French president Nicolas Sarkozy has said, “Laissez-faire is finished. The all-powerful market that always knows best is finished.” And the Washington Post has declared, “The worst financial crisis since the Great Depression is claiming another casualty: American-style capitalism.”

Such a negative view of capitalism might perplex those in the Reformed-Calvinist community. According to David Hall and Matthew Burton, authors of Calvin and Commerce: The Transforming Power of Calvinism in Market Economies, it was John Calvin himself who laid the foundation for today’s market-based economy.

As Calvin’s theological heirs we know that economic decisions, like those in every category, stem from a worldview. They reflect our values and fundamental view of man, and while the Bible doesn’t prescribe a particular economic system it does, Hall and Burton tell us, provide a moral framework within which to make our choices. As Christians, our challenge is to recognize and—to the extent we’re able—create the system that fits best with what the Bible teaches.

So, in a fallen world that’s populated by sinful people, what realities should an economic system address? What good should it aspire to? And what truths—about God, man, and money—should be brought to bear? The answers could (and do) fill books. For now we’ll glance at six features of a realistic, healthy economic system.

For the rest of this article go to Can Christians Reclaim Capitalism? in byFaith Magazine.

I am linking you to a short presentation that shows how the VAT works. The most important thing about the VAT that is not underlined in this presentation is the fact that the consumer never actually sees that tax that is embedded in the price of everything he will buy under the VAT regimen. I believe this is why some members of Congress like it so much; no visibility.

First, I believe we should be looking like starving hawks for ways to cut spending rather than raising taxes. But that being said, I also believe in full disclosure. There should be no secrets when it comes to government getting into the pockets of American citizens. The VAT does just the opposite, it attempts to hide the tax from the consumer. Oh yes, I know, anyone willing to look into it carefully can know what is being paid in tax, but the reality is that most won’t do that and everyone will eventually get used to the increase in costs and not realize how much of it is a tax. And, of course, once the VAT is in place, it can be slowly increased and, like the frog in the pot, we won’t realize that we are being boiled alive. As you can tell, I don’t like the VAT. But I promised you a link to a demonstration to how it works, so here it is. How Would a VAT Work?

April 1, 2010

by Bob Veres

Economic forecasters sometimes describe the investment markets as a leading indicator, which means that they believe returns can anticipate good or bad economic news.  Share prices fall when investors expect a recession, and rise when a recovery is expected–and last year’s stock market growth seems to fit that pattern.  The market rose last year harder and faster than anybody expected, and so too, later, did the U.S. economy.  On March 26, the U.S. Bureau of Economic Analysis reported that the U.S. gross domestic product increased at an annual rate of 5.6% in the fourth quarter of 2009, after a 2.2% increase in the third quarter.

Nobody knows how we, the community of investors, could have known, during the darkest hours of March 2009, that better economic times were around the corner.

The U.S. equity markets were generally higher across the board in the first quarter of 2010, which is a terrific contrast with where we were at this time last year.  Indeed, CNNMoney.com reported yesterday that the returns for the first three months of this year ranked among the best first quarter performances in more than a decade.

Wilshire Associates reports that the Wilshire 5000 total market index, the broadest indicator of U.S. stocks, was up 6.42% in the first quarter of this year.  Most of the action came in the month just ended.  The Wilshire index was actually slightly down for January and February, but March produced a 6.61% rise in the index.  The Russell 3000 index, another broad measure of U.S. stock returns, rose 5.94% for the first quarter of 2010, bolstered by a 6.30% return in March.

Wilshire’s U.S. large cap index rose 5.95% for the quarter, aided somewhat by a 6.36% return in March.  The Russell 1000 index rose 5.70% after gaining 6.14% in March.  The S&P 500 rose 4.9% for the quarter.

Wilshire’s Mid-Cap index was up 9.11% for the quarter; the Russell Midcap rose 8.67%.

Wilshire’s Small Cap 250 rose 9.00% in the first three months of the year, and the Russell 2000 returned 8.85% over the same period.

There are times when value stocks outpace growth and vice versa, but the results for this quarter were mixed, as, in fact, they were for most of last year.  The growth stocks in Wilshire’s large cap index were up 5.20% vs. 6.69% for value; Russell’s index data shows large cap growth gaining 4.65% vs. 6.78% for value.  Wilshire’s Mid-Cap showed 8.84% quarterly returns for growth and 7.90% for value; Russell’s numbers were 7.67% and 9.61% respectively.  Wilshire’s Small Cap Growth was up 8.97% while Small Cap Value offered the highest quarterly return at 11.80%.  Russell offered comparable figures: 7.61% for growth, 10.02% for value.  A generally rising tide–and signs of an improving economy–seems to have floated all boats.

All was not quite as positive on the international front, where stock returns of different countries seemed to be everywhere.  Alas, we missed the strong stock market rally in Estonia (up 44.7% through 3/25/10, according to the EmergInvest web site) and the 26% runup in Kenyan stocks in the first quarter.  But we also cleverly avoided the 32.2% drop in the Bermuda stock market in the first quarter (through 3/30).  Among the surprises: China’s A Shares Index dropped 2.6% while Japan was up 6.3% in the first three months of the year.

The EAFE index, the broadest measure of developing nations, reported a relatively calm-looking year-to-date return of 0.22% on the MSCI/Barra web site, and the Far East index was up a robust 6.29% for the quarter.  Emerging markets were up 2.11%.  Meanwhile, government deficit troubles in Greece, Spain and Ireland, and to a lesser extent in Italy cast a shadow over the European economies.  European stocks in the MSCI index were down 2.33% for the quarter.

All of these returns are in dollar terms, and it bears remembering that, due to the debt crises across Europe, the euro fell 6.23% vs. the dollar in the first three months of 2010–which means that in euro terms, to investors in Germany or France, the European markets are up nearly 4% so far this year.  If the euro strengthens against the dollar at some point in the future, foreign stock returns will be boosted accordingly.

Real estate continued a recovery that began in 2009 after two very difficult years.  The FTSE NAREIT Index, which is compiled by the National Association of Real Estate Investment Trusts, experienced a total return drop of 17.83% in 2007 and fell another 37.34% the following year.  But in 2009, the broad real estate index rose 27.45%, and recorded a 10.60% total return in the first quarter of this year.

Even bonds offered positive returns.  The Lehman U.S. Aggregate Bond index was up 1.64% for the first three months of 2010, and Treasury bonds started the year on a positive note.  Government bonds of 1-3 year maturity returned 0.93% on yields of 1.04%; 3-7 year Treasuries were up 1.24% for the quarter on yields of 2.52%.  10-20 year Treasuries were up 1.27% on 4.29% yields, while long Treasuries of more than 20 year maturities declined 0.51% on yields of 4.73%.

Commodities, as measured by the Dow Jones-UBS Commodity Index, were down 5.05% in the first quarter, but once again this overall trend masks a lot of varying performances.  Crude oil was up 3.44% for the quarter, gold was up 1.43%, but corn prices were down 19.43%.

Nobody knows whether this sunny investment climate will continue, or whether the strong market returns over the past 12 months will give way to a new bear market. However, one indicator suggests that we may not be walking blindly into another frightening meltdown like the one we all experienced in 2008 and the first two months of 2009.  The Chicago Board of Options Exchange measures volatility in the stock market by its VIX index–which is more precisely an expectation of volatility and risk over the next 30-day period, and is sometimes called Wall Street’s “fear gauge.”  On November 20, 2008, the VIX index hit a ten-year high of 80.86, according to data compiled by the IMCA-RC web site.  On March 23, 2010, the VIX index closing price stood at a more historically normal level of 16.35.

Thanks to a positive uptrend in March, this quarter’s market returns represent one of those unusual periods when just about everything went up.  Just a year ago, people were talking about the collapse of civilization, and six months ago there were worries that the economic stimulus package would not be enough to get the U.S. economy moving again–that the country was headed for a double-dip recession.

The economy won’t be fully recovered until jobs come back, and the recent stock market rises haven’t yet taken us back up to the levels before the Great Recession swept through like a hurricane.  But people who were nervously sitting on the sidelines over the past year, and the past quarter, missed out a nice rally.  Let’s hope it continues.

First quarter returns are higher than most others this decade: http://money.cnn.com/2010/03/31/markets/thebuzz/index.htm

Economic growth rate: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

Wilshire Indices: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.russell.com/indexes/data/daily_total_returns_us.asp

Bond returns: http://www.lehman.com/indices/dailyreturn.html

International indices: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html

Dollar’s rise and fall: http://www.fxstreet.com/rates-charts/

VIX data: http://www.icmarc.org/xp/rc/marketview/chart/2010/

Global Stock Market index returns: http://www.emerginvest.com/WorldStockMarkets/Countries.html

NAREIT (Real Estate) data: http://www.reit.com/IndustryDataPerformance/FTSENAREITUSRealEstateIndexDailyReturn/tabid/77/Default.aspx

Commodities data: http://www.djindexes.com/ubs/?go=index-data

Unemployment data:  http://money.cnn.com/2010/03/31/news/economy/ADP_private_sector_payrolls/index.htm?postversion=2010033109

Recent Market Volatility in Perspective

The US stock market has taken investors on a bumpy ride in recent years. This volatility has tested investor discipline and prompted some people to question their commitment to equities. While no one knows the future, looking at the past may help you gain a better view of long-term market performance and put the recent market volatility in perspective.

The above chart shows the historical distribution of US market returns since 1926. The performance years are stacked in ascending order by return range. This chart illustrates that:

•    Market performance over the past two years has been extreme by historical standards. In 2008, US stocks experienced their second-worst calendar return in eighty-four years. Then, in 2009, stocks rebounded strongly to deliver a return in the top quartile of the historical distribution.

•    Over the long term, the market’s positive return years have outnumbered the negative return years. Since 1926, the market has experienced a positive return in almost three-quarters of the calendar years.

•    Not only are the positive years more numerous, the chart shows a larger concentration of performance in the higher ranges of returns.

•    The sequence of calendar returns appears random, suggesting that accurately predicting future performance is a difficult task for any investor or professional manager.

Over time, the market has rewarded investors who can bear the risk of stocks and stay committed through various periods of performance.

This data was provided by Dimensional Fund Advisors.

The content of an investor’s faith includes faith in human nature. Human beings have a natural drive to want to do better for themselves and for the world in which they live. We easily understand the part about bettering ourselves, some would call it greed. For some people, this drive is greed, for others it is an honorable desire to provide for themselves and their loved ones.

The part about bettering the world in which we live may be altruistic or it may simply mean that I want the community in which I live to be more pleasant for my own enjoyment and my own enjoyment is hindered if my neighbors are in poverty and squalor, therefore I want them to do well also. That is part of why people move into “better neighborhoods.”

As an investor, whether I articulate it or not, I am counting on these kinds of forces to continue to be in effect in the corporate world where I invest my money. I count on the fact that the CEO wants to be “a winner” and wants his bonus – either because of his drive to provide for himself and his loved ones or to fulfill his insatiable greed. I also count on the fact that corporate leaders know that in order for their products to sell, they have to be making the community better in some way – or at least it has to be perceived that way, otherwise, consumers will not consume that product.

Economic policies and government programs come and go, but as long as human nature continues to be free to be expressed in commerce, I can invest successfully. This is a basic tenet of the investor’s faith. It doesn’t require religion; it just requires a realistic view of human nature.

This is basic to free market economics and is heresy in the economic theories of socialists or communists. Those economic systems have a different view of human nature.

There are other much more academic parts of the investor’s statement of faith and this magazine is full of those statements that have come from the work of men like Harry Markowitz, Eugene Fama and Ken French and others. Investing is not, in the short run, a sure deal. There are risks (another of the tenets of the investor’s faith) and there are techniques to mitigate risk. Just keep the faith.

An article in the December 31 issue of the Wall Street Journal makes a point that many of us in the financial planning world have long suspected.  It says that the CGM Focus fund was the top performing mutual fund, by far, over the past ten years, generating an annualized return of more than 18% a year since January 1, 2000.

Now here’s the punchline: the average investor in this top-performing fund lost an average of 11% a year over the same ten year period.

How is it possible for investors to lose their shirts in a fund that posted outsized returns?

Most planning professionals know the fund’s manager, Ken Heebner, as a swing-for-the-fences investor, somebody prone to huge runups and equally scary drops.  A Chicago-based investment research firm called Morningstar–whose data is used by most financial advisors–calculated what is called the “dollar-weighted” return of the CGM Focus fund, which gives a picture of what investors in the fund actually experienced.  If you had bought and held Ken Heebner’s portfolio throughout the 2000s, you would indeed have received returns of 18% a year.  But the fund was so up and down that investors were alternately panicked and selling out or optimistic and crowding back in.

The article says the most dramatic example came after the fund was up 80% in 2007.  Investors flocked in, putting $2.6 billion into the CGM portfolio–just in time to catch its equally-dramatic 48% drop through the end of 2008.

There have been credible studies showing that the average investor underperforms the market, and this illustrates exactly how it happens.  Right after an investment generates strong returns, people tend to jump on the bandwagon–and then they experience the subsequent return to reality.  When an investment is struggling, people tend to abandon it, and miss out on its recovery.  Missing the upside and catching the downside, consistently, is human nature, perfectly understandable behavior.  But it inevitably leads to dismal investment results–as it did for the battered, unhappy, money-losing investors in the best-performing mutual fund of the 2000s.

Is there such a thing as the “wisdom of Solomon” when it comes to investing? Well, you betcha! And, it has powerful contemporary application. Here it is, Ecclesiastes 11:1-6 (ESV).

1 “Cast your bread upon the waters,
for you will find it after many days.
2 “Give a portion to seven, or even to eight,
for you know not what disaster may happen on earth.
3 “If the clouds are full of rain,
they empty themselves on the earth,
and if a tree falls to the south or to the north,
in the place where the tree falls, there it will lie.
4 “He who observes the wind will not sow,
and he who regards the clouds will not reap.
5 “As you do not know the way the spirit comes to the bones in the womb of a woman with child, so you do not know the work of God who makes everything.
6 “In the morning sow your seed, and at evening withhold not your hand, for you do not know which will prosper, this or that, or whether both alike will be good.”

The first principle in verses one and two is diversification to reduce risk. In Solomon’s case, he was referring to sending “bread”, the wheat and other grains harvested in Israel, on ships to other ports as trade. Sending your grain on a ship was risky but was the most efficient way to participate in trade. Take risk and after many days your profits will come back after the grain is sold.

Now to the diversification part, “Give a portion to seven, or even eight, for you know not what disaster may happen on earth.” Interpretation: Do your shipping on several ships, not just one. If a bad storm comes up on the sea your one ship may go down and you will have lost all (Can anyone spell Enron, Bear-Stearns or Lehman Brothers?). So, spread your shipping across multiple ships and multiple routes and reduce your risk of loss.

Diversification is primarily a way to reduce your risk of loss, not a way to make more profits. However, if you compare the results of a shipper who always spread his risk across several ships versus the merchant who always used only one ship, eventually the diversifier would make more profit. That is because statistically, both will lose a shipment occasionally and the diversifier will only lose part of his crop whereas the non-diversifier will loose 100% of that year’s crops (like Enron, etc.).

Carry this forward to contemporary equity or stock investing and the same principles apply. Diversify broadly and you will reduce the risk of loss and the risk of volatility of returns.

If I construct an equity portfolio of three funds, one with US stocks, one with non-US stocks of companies in mature markets and one with stocks from Emerging Markets and each of these own virtually every publicly traded stock in their respective markets, then I have diversified away every conceivable risk except one; market risk. And, I would own virtually the entire world stock market. Every time someone buys or sells and makes profit, I own a little (very little) piece of that deal.

Principle number two: Risk is everywhere, you can’t escape it.

3 “If the clouds are full of rain,
they empty themselves on the earth,
and if a tree falls to the south or to the north,
in the place where the tree falls, there it will lie.”

When rain comes it may be a nice rain to increase crops or it may be an old fashioned “gully-washer” and wipe out everything in sight. We have no control over this. We can do our best to apply good agricultural principles in how we plant and how we plow but some things are just overcome by the rains.

None of life is free of risk. Regarding investments there is inflation risk, interest-rate risk, company risk, industry risk, country risk, money-manager risk, currency risk, etc. Here a risk, there a risk, everywhere a risk – risk. Old MacDonald had a risk. Sorry… got carried away there.

Proper diversification can eliminate all of these risks except market risk; that is one risk an investor just can’t eliminate.

Principle three: Don’t procrastinate because of risk.

4 “He who observes the wind will not sow,
and he who regards the clouds will not reap.”

The farmer who is always waiting for calm winds before planning seed so it won’t get blown away will never get around to planting his seed and the farmer who is afraid to begin harvesting for fear the clouds will bring rain and cause his crops to rot in the field will never get around to harvesting his crops – no profit.

Does it sound familiar? I can’t invest because:

• Of the war in Iraq/Afghanistan

• Of the credit crisis

• Of the real estate/mortgage crisis

• Of the failure of Lehman Brothers

• Of the failure of Enron, WorldCom and Tyco

• Of the bursting of the tech bubble

• Of the recession

• Of the George W. Bush administration

• Of the Barak Obama administration

• Of the Republicans being in charge

• Of the Democrats being in charge

History is filled with excuses for not investing and accepting the risk of the equity markets and yet, since 1926 the large cap stock market has averaged approximately 10.5% per year. If one was willing to accept more volatility risk and invested in small cap stocks instead, the average return was much greater than 10.5%.

5 “As you do not know the way the spirit comes to the bones in the womb of a woman with child, so you do not know the work of God who makes everything.”

The world is complex and just as we don’t understand everything about the development of a child in the womb, we don’t understand everything about how God oversees the economies of the world and allows for profits to be made fairly consistently over time. If I diversify broadly enough, I don’t have to understand the minutiae of the markets to profit from investing in them. I know God has placed in man the desire to produce, to make profit, the desire to do better for himself and for his family and as long as man has sufficient freedom to pursue those interests, there will be profit, and profit is a good thing (this will be the subject of another article later). Go capitalism!

Principle four: Keep on investing

6 “In the morning sow your seed, and at evening withhold not your hand, for you do not know which will prosper, this or that, or whether both alike will be good.”

The picture here, again, is a farmer in the ancient near east. He is encouraged to sow seed all day long, from morning to night, because he doesn’t know which seed and which part of his fields will have all the right conditions to produce an excellent crop – or if none of it will. This is another way to approach diversification.

Regardless of the great efforts of our finest young MBAs to research the markets and make the best most informed decisions possible, the track record shows that we don’t really know which stocks will perform best or if, as over the past couple of years, none of the seed will do well. This past market decline was characterized by stock market losses in all markets, domestic, international and emerging markets. That was not anticipated and it is unusual. Some have referred to this as a “Black Swan” event. When looking at a flock of swans, you don’t expect to see a black one, but occasionally you will. We did!

So, lets review quickly the Wisdom of Solomon regarding investing.

1. Diversify broadly to reduce risk.
2. Risk is unavoidable. There is no such thing as a risk-free investment.
3. Don’t procrastinate because of risk.
4. Keep on investing.

There is one underlying reason for anyone to own life insurance: If you die before you have been able to meet your desired financial goals for your family, the insurance proceeds will create an instantaneous estate for the use of those whom you love and care about after you are gone. This doesn’t say anything about what kind of life insurance you should buy, but it says why you want to buy it. The goals for life insurance proceeds may include paying off the mortgage so your family can live in the current home, providing sufficient income so the surviving spouse can stay at home or work part time while raising the children to adulthood, paying for the dreamed of college education and generally bringing peace of mind in regard to financial needs and maintaining an adequate life style.

If you have no one who depends on you for financial support (spouse, kids, parents, etc.), then you have little reason to own life insurance. You might want to have just enough so whoever is going to have to take care of your final details will have adequate funds. There may be significant final medical expenses, not to speak of funerl arrangements, that could be problematic if you don’t have a fair estate outside of insurance.

The second major reason for owning life insurance is for business purposes. If you own a business or are a partner in a business, one contingency that should be considered is what would happen to the business of you were to die “prematurely”? What is prematurely? Sooner than you have planned for. This really works in essentially the same way as for family insurance but the direct beneficiary is the business.

• Partnerships: When one partner dies prematurely, it usually means the surviving partner either has a new partner (the surviving spouse) or he is in a position to buy out the half that belonged to his now dead partner. If the partnership is flush with cash, that may not be a problem. But if the business is like most, paying off a deceased partner’s spouse would be a real set back and could mean the end of the business.
• Corporations: This is very similar only here either the other shareholders or the corporation is buying back the shares of the deceased shareholder.
• Estates: A third reason for life insurance is to provide liquidity to pay Estate Taxes without having to liquidate the “familly farm” or whatever assets the family won’t want to have to sell in order to pay the Estate Taxes.

Each of these “reasons” for owning life insurance have different technicalities about how to properly set up beneficiary designations and ownership and a good life insurance agent should be well trained in those technicalities. In the case of business and estate planning, you should also consult with an appropriate attorney and/or accountant.

Bottom Line: The bottom line of the WHY of life insurance is it is a risk management tool to mitigate the risk of negative consequences resulting from death. The real WHY of life insurance has nothing to do with the build up of cash value inside a policy. It all has to do with the death benefit. Keep this in mind whenever talking to an insurance salesman.

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“Investor Education for Main Street America”

1. Don’t Make Saving a Habit. Young workers may think they have plenty of time to save later, but setting aside a little bit of money on a regular basis throughout one’s working years produces a greater nest egg than setting aside a large amount of money later on.

2. Leave Matching Funds on the Table. Not taking advantage of an employer’s matching contributions to a 401(k) account is like turning down a raise. An employee who turns down a dollar-for-dollar 401(k) account match of up to 5 percent of his salary is passing up a 5 percent bonus paid with untaxed dollars.

3. Borrow against 401(k) Savings. This is a surefire way to set back one’s retirement plan by several thousand dollars through lost compound interest. A $25,000 loan today can cost more than $175,000 in lost interest retirement income over 30 years!

4. Cash Out 401(k) Savings. Cashing out a 401(k) account when changing jobs means that more than one-third of the balance can be eaten up in taxes and penalties.

5. Jump In and Out of the Market. In 2008, 401(k) plans lost an estimated $2 trillion in value. But this “loss” would have been on paper only, were it not for the fact that many workers essentially locked in their losses by selling their equity funds during the recent downturn.

6. Rely on Home Equity. Purchasing a home and selling it years down the road does not always produce a significant profit on which to retire. Even before the housing bubble burst, the average home was a mediocre investment. One dollar invested in stocks in 1963 would have grown to $12.36 by 2006, while the same dollar
invested in a house would have grown to only $1.79.

7. Do not Diversify Savings. Relying on one type of investment is a recipe for disaster. It is important to consider diversifying among asset types (stocks, bonds, money market funds), as well as diversifying
within each type of asset (rather than holding one stock or bond).

8. Underestimate Longevity. More people are living longer. This means that retirees should have strategies to ensure they don’t outlive their money, including working past retirement age, annuitizing
retirement account money, and staying at least partially invested in stocks.

9. Ignore Inflation. When a household’s income, combined with half of their annual Social Security benefits, exceeds a certain threshold, a portion of their Social Security benefits are subject to federal
income taxes. The thresholds are not indexed. Over time, inflation pushes more and more retirees into the income range where they must add 50 cents of benefits to their taxable income for every
dollar their income exceeds the threshold. This means their marginal tax rate will be 50 percent higher!

10. Stay in Debt. Entering retirement debt-free is essential to being able to maintain a comfortable standard of living.

The NCPA is a nonprofit, nonpartisan organization established in 1983. Its aim is to examine public policies in areas that have a significant impact on the lives of all Americans — retirement, health care, education, taxes, the economy, the environment — and to propose innovative, market-driven solutions. The NCPA seeks to unleash the power of ideas for positive change by identifying, encouraging and aggressively marketing the best scholarly research.

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“Investor Education for Main Street America”