Investing in an Uncertain Economy For Dummies (For Dummies (Business & Personal Finance)) PDF
Preview Investing in an Uncertain Economy For Dummies (For Dummies (Business & Personal Finance))
Investing in an Uncertain Economy FOR ‰ DUMmIES by Sheryl Garrett and Garrett Planning Network 01_401163-ffirs.indd i 9/3/08 8:43:32 PM 01_401163-ffirs.indd iv 9/3/08 8:43:33 PM Investing in an Uncertain Economy FOR ‰ DUMmIES by Sheryl Garrett and Garrett Planning Network 01_401163-ffirs.indd i 9/3/08 8:43:32 PM ® Investing in an Uncertain Economy For Dummies Published by Wiley Publishing, Inc. 111 River St. Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2008 by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400, fax 978-646-8600. Requests to the Publisher for permission should be addressed to the Legal Department, Wiley Publishing, Inc., 10475 Crosspoint Blvd., Indianapolis, IN 46256, 317-572-3447, fax 317-572-4355, or online at http:// www.wiley.com/go/permissions. Trademarks: Wiley, the Wiley Publishing logo, For Dummies, the Dummies Man logo, A Reference for the Rest of Us!, The Dummies Way, Dummies Daily, The Fun and Easy Way, Dummies.com, Making Everything Easier, and related trade dress are trademarks or registered trademarks of John Wiley & Sons, Inc. and/ or its aff liates in the United States and other countries, and may not be used without written permission. All other trademarks are the property of their respective owners. Wiley Publishing, Inc., is not associated with any product or vendor mentioned in this book. 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Library of Congress Control Number: 2008935819 ISBN: 978-0-470-40116-3 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 01_401163-ffirs.indd i 9/3/08 8:43:33 PM About the Author Sheryl Garrett, CFP, founder of The Garrett Planning Network, Inc., has been dubbed “The All-American Planner,” possibly because of her zealous mission to “help make competent, objective f nancial advice accessible to all people.” Sheryl’s fresh approach as a f nancial advisor working with clients on an hourly, as-needed, fee-only basis has evolved into an international network of like-minded f nancial advisors, the Garrett Planning Network. This book is a collaborative effort brought to you by more than 70 profes- sional f nancial advisors who are members of the Garrett Planning Network (www.garrettplanningnetwork.com). Sheryl has also been honored to work with the House Subcommittee on Financial Services regarding predatory lending regulation, f nancial literacy, and Social Security reform. She also works as a consultant and expert witness in lawsuits against f nancial advisors who rendered questionable or inappropriate f nancial advice. She has authored, coauthored, or served as a technical editor on more than a dozen books and several magazine columns. These books include Garrett’s Guide to Financial Planning (National Underwriter), Just Give Me the Answer$ (Dearborn Trade), Money Without Matrimony (Dearborn Trade), Personal Finance Workbook For Dummies (Wiley), and A Family’s Guide to the Military For Dummies (Wiley). As a vocal advocate for f nancial education, Sheryl has frequently been interviewed on CNNfn, Bloomberg, ABC World News Now, and Fox-TV; NPR’s All Things Considered and Marketplace; and in Business Week, Newsweek, Time, Forbes, Kiplinger Personal Finance, Money, Smart Money, MarketWatch, U.S. News & World Report, Glamour, Parade, Better Homes and Gardens, the New York Times, USA Today, and the Wall Street Journal. For four years straight, Sheryl was recognized by Investment Advisor magazine as “One of the Top 25 Most Inf uential People in Financial Planning.” The National Association of Personal Financial Advisors (NAPFA) honored Garrett with the prestigious Robert J. Underwood Distinguished Service Award for her contributions to the development of the f nancial planning profession. 01_401163-ffirs.indd i 9/3/08 8:43:33 PM 01_401163-ffirs.indd iv 9/3/08 8:43:33 PM Dedication On behalf of the members of the Garrett Planning Network, I dedicate this book to you, the reader. Our goal is to help answer your questions and empower you to make smarter f nancial decisions so that your most cher- ished life goals become reality. Author’s Acknowledgments The passion and devotion of my colleagues in the Garrett Planning Network made this book possible. We all share the mission to help make competent, objective f nancial advice accessible to all people. This book is an extension of that mission. Thank you to Jeff Alderfer, David Anderson, Diane Blackwelder, Kevin Brosious, Barbara Camaglia, Kay Conheady, Peggy and Chad Creveling, Helga Cuthbert, Debbra Dillon, Paul Dolce, Jake Engle, Christine Falvello, Cynthia Freedman, Eileen Freiburger, Robert Friedland, Deidra Fulton, Gwen Gepfert, Garry Good, Angela Grillo, Kathy Hankard, Katherine Holden, Will Humphrey, Ben Jennings, Kim Jones, Jean Keener, Derek Kennedy, Michael Knight, Cheryl Krueger, Derek Lenington, Charles Levin, Jennifer Luzzatto, Roland Mariano, Warren McIntyre, Herb Montgomery, Thomas Nowak, Robert Oliver, Kevin OíReilly, Michael Oswalt, Abigail Pons, Dylan Ross, Brooke Salvini, Martha Schilling, Corry Sheff er, Brian R. Smith, Bruce Sneed, Janice Swenor, James Taylor, Denisa Tova, Gigi Turbow Marx, Neil Vannoy, John Vyge, Liane Warcup, and Richard Weimert. Without your insight and contributions, this book would not have been possible. My collaborative and support team, including Shawnda Hubbard, Jamie Breeden, Thomas Arconti, John Belluardo, Rick DeChaineau, William Keffer, Buz Livingston, David McPherson, Kevin Sale, Louise Schroeder, and Michael Terry, were indispensible. Thank you all for your endless energy and stead- fast devotion to this project. I’d be remiss not to acknowledge the army of folks involved in this project at Wiley Publishing. Thank you for taking on this challenge and for having faith that we could deliver. 01_401163-ffirs.indd v 9/3/08 8:43:33 PM Publisher’s Acknowledgments Weíre proud of this book; please send us your comments through our Dummies online registration form located at www.dummies.com/register/. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Composition Services Media Development Project Coordinator: Katherine Key Senior Project Editors: Tim Gallan, Layout and Graphics: Christine Williams Christina Guthrie Proofreaders: Laura Albert, Joni Heredia Acquisitions Editor: Mike Baker Indexer: Broccoli Information Management Senior Copy Editors: Sarah Faulkner, Danielle Voirol Special Help: Elizabeth Rea Assistant Editor: Erin Calligan Mooney Technical Editor: Joe Nierman Editorial Managers: Christine Meloy Beck, Michelle Hacker Editorial Assistants: Joe Niesen, Jennette ElNaggar, David Lutton Cover Photos: © Brand X Pictures Cartoons: Rich Tennant (www.the5thwave.com) Publishing and Editorial for Consumer Dummies Diane Graves Steele, Vice President and Publisher, Consumer Dummies Kristin Ferguson-Wagstaffe, Product Development Director, Consumer Dummies Ensley Eikenburg, Associate Publisher, Travel Kelly Regan, Editorial Director, Travel Publishing for Technology Dummies Andy Cummings, Vice President and Publisher, Dummies Technology/General User Composition Services Gerry Fahey, Vice President of Production Services Debbie Stailey, Director of Composition Services 01_401163-ffirs.indd vi 9/3/08 8:43:33 PM Contents at a Glance Introduction ................................................................ 1 Part I: Laying a Solid Foundation ................................. 5 Strategy 1: Keep Your Feet on the Ground ..................................................................... 7 Strategy 2: Realize That This Has Happened Before (And Will Happen Again) ....... 11 Strategy 3: Plan for Life’s Uncertainties ........................................................................ 15 Strategy 4: Protect Your Ability to Earn Income.......................................................... 18 Strategy 5: Assess Your Medical Insurance .................................................................. 22 Strategy 6: Assess Your Disability Insurance ............................................................... 26 Strategy 7: Assess Your Long-Term Care Insurance ................................................... 30 Strategy 8: Assess Your Life Insurance ......................................................................... 34 Strategy 9: Take Stock of Your Current Financial Picture .......................................... 39 Strategy 10: Save .............................................................................................................. 44 Strategy 11: Manage Your Debt ...................................................................................... 47 Strategy 12: Improve Your Credit Score ....................................................................... 51 Strategy 13: Set and Prioritize Financial Goals............................................................. 56 Strategy 14: Don’t Let Your Money Beliefs Sabotage Your Goals .............................. 60 Strategy 15: Avoid Common Mistakes in a Down Market ........................................... 64 Strategy 16: Use Non-Investment Options to Improve Your Finances ...................... 68 Part II: Using Investment Vehicles and Accounts throughout the Economic Cycle ................................... 73 Strategy 17: Include Cash Reserves: Savings, CDs, and Money Market Accounts ....................................................................................... 75 Strategy 18: Government Bonds: Should You Loan Uncle Sam Your Money? ......... 79 Strategy 19: Decide Whether Fixed Annuities Are Right for You ............................... 83 Strategy 20: Simplify with Target-Date Funds .............................................................. 87 Strategy 21: Invest in Mutual Funds .............................................................................. 90 Strategy 22: Hedge Your Bets with Variable Annuities ............................................... 95 Strategy 23: Invest in Exchange-Traded Funds (ETFs).............................................. 100 Strategy 24: Diversify with Real Estate Investment Trusts ....................................... 104 Strategy 25: Consider a Separately Managed Account ............................................. 107 Strategy 26: Invest in Individual Stocks ...................................................................... 112 Strategy 27: Invest in Individual Bonds ....................................................................... 116 Strategy 28: Hedge with Options.................................................................................. 121 02_401163-ftoc.indd vi 9/3/08 8:44:27 PM Strategy 29: Invest in Commodities ............................................................................. 125 Strategy 30: Consider Short-Selling ............................................................................. 129 Strategy 31: Use Caution When Buying on Margin .................................................... 133 Strategy 32: Get the Most Out of Your Taxable Accounts ........................................ 136 Strategy 33: Invest in Individual Retirement Accounts (IRAs) ................................. 139 Strategy 34: Make the Most of Your Employer Retirement Accounts ..................... 144 Strategy 35: Choose a Self-Employment Retirement Account .................................. 149 Part III: Demystifying Risk: Accumulating and Protecting Wealth ............................................. 153 Strategy 36: Understand Investment Risks ................................................................. 155 Strategy 37: Sort Through an Investment’s Return ................................................... 159 Strategy 38: Assess Your Ability to Absorb Losses ................................................... 163 Strategy 39: Create a Portfolio You Can Grow and Consume .................................. 166 Strategy 40: Allocate Your Assets to Minimize Risk .................................................. 170 Strategy 41: Rebalance Your Asset Allocation ........................................................... 173 Strategy 42: Diversify Your Stock Portfolio by Size ................................................... 178 Strategy 43: Diversify Your Stock Portfolio by Valuation ......................................... 182 Strategy 44: Diversify Your Stock Portfolio by Country ........................................... 186 Strategy 45: Diversify Your Portfolio by Industry...................................................... 189 Strategy 46: Diversify Your Bond Portfolio ................................................................ 192 Strategy 47: Diversify Your Portfolio with Alternative Vehicles .............................. 197 Strategy 48: Employ a Conservative Portfolio ............................................................ 201 Strategy 49 Employ a Moderate Portfolio ................................................................... 206 Strategy 50: Employ an Aggressive Portfolio ............................................................. 211 Part IV: Investing for Accumulators........................... 217 Strategy 51: Save for Emergencies ............................................................................... 219 Strategy 52: Provide for Large Expenses .................................................................... 223 Strategy 53: Develop a Plan to Provide for Children ................................................. 228 Strategy 54: Save for Retirement Regardless of the Shape of the Economy .......... 232 Strategy 55: Determine How Much Money Is Enough for the Rest of Your Life .... 235 Strategy 56: Strategies for Beginning Investors ......................................................... 239 Strategy 57: Investments for Beginning Investors ..................................................... 243 Strategy 58: Strategies for Intermediate Investors .................................................... 247 Strategy 59: Investments for Intermediate-Stage Investors ...................................... 251 Strategy 60: Take Advantage of Retirement Plan Catch-Up Provisions .................. 256 02_401163-ftoc.indd vi 9/3/08 8:44:27 PM
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