FINANCIAL NEWS YOU CAN USE: Capital accumulation and appreciation (03/19/06)

FINANCIAL NEWS YOU CAN USE

Capital accumulation and appreciation

by Walter Prochorenko

In our last article we touched on the complexities of setting up financial goals and objectives, and ultimately implementing these goals. However, by following the 10 simple rules which we saw in that article, we can ensure that we will at least have the tools to achieve such goals.

When we start out in a quest for financial independence or achieving a goal, we must first accumulate capital and ensure that it has a chance to appreciate and grow. This is one of the hardest tasks on our agenda. When stocks and bonds or real estate values are rising, just about anyone can look like a financial genius. However, it is when we see the "adjustments," the "corrections" or the so-called "dips" in the market, that we really can separate the wheat from the chaff.

Good financial professionals will find opportunities in any type of market. We know that bond prices go up when yields go down and that prices of bonds will drop as yields and interest rates go up. We have also seen that uncertainty can have detrimental effects on the stock markets. But these are the opportunities that good fund and bond managers can use to bolster the value of their holdings.

Common wisdom, therefore, dictates that good fund families, good fund managers, and proper diversification and asset allocation will most likely assist us in our goals. But how, you may ask, can one find such products in the complex financial world that exists today? History is a good indicator, but as all fund advertisement disclaimer statements say: "past performance is no guarantee of future results." Neither are positive articles in the financial magazines. It is generally well-known that once an article is published, the news is already outdated and the opportunities have probably already passed.

This leaves two options. The first is to intensely study the investment vehicles into which one intends to invest, and the other is to rely on professional advice. Unfortunately, there are no shortcuts in the financial world and rumors heard from the "guy-who-knows-the-sister-of-the-investment-banker's-cousin-who-overheard-the-deal" will most likely result in a financial disaster. If an investor does not have the very extensive amount of time necessary to devote to his or her own financial planning and management, then the obvious solution is to find a professional who will assist the investor in this task.

Although real estate has been making headlines in the financial papers for many years now, it, too, is subject to the peaks and valleys of economic cycles. I vividly recall an investment banker on Wall Street telling me that dot-com companies were not subject to the normal economic cycle rules. This was exactly four months before the dot-com crash and, not surprisingly, his company now no longer exists. If real estate is used as an investment vehicle, rather than just a domicile, then it should be bound by the same rules as any other prudent investment strategy.

Tax-exempt and municipal bonds have always been a relatively safe and good investment vehicle, but not for everyone. Normally, it is people in high tax brackets that will benefit the most from these types of investments. I could never understand brokers who would push these on pensioners who could derive little or no benefit from such investments.

For families with children who are most likely destined for colleges, 529 and Coverdell Education Savings Accounts (Coverdell ESA) would definitely be of great benefit. Both allow for tax exemptions with certain preconditions, but both have some strict rules regarding investing possibilities and strategies. Many grandparents have also taken advantage of these types of accounts for their grandchildren's education needs.

Recently there has been a resurgence of interest in high-dividend-paying stocks and in mutual funds that are composed of such stocks. Generally such mutual funds consist of blue-chip companies that have a good record of paying dividends and, when coupled with the appreciation potential of the component stocks, they can make a safe and attractive investment.

According to the Department of Labor, Pension and Welfare Benefits Administration, "Private Pension Bulletin: Abstract of 1998," the total assets in IRA's, Keogh and other plans amounted to over $4 trillion and covered 70 million workers, and provided one-fifth of the income of the elderly. It is believed that these figures have grown significantly since 1998, when considering the problems faced by the Social Security Administration and the concerns that younger workers have with SSA's liquidity when they reach retirement age.

Thus, for peace of mind and for tax- deferred savings, existing and new private pension plans offer great advantages. The only question that remains, however, is how the funds within these plans should be invested. When we read about the disastrous results of pension plans managed by companies like Enron and WorldCom, we again need to consider diversification and asset allocation as primary criteria in our planning. The retirement plans of employees in those companies included a disproportionate amount of investment in the stocks of these companies which eventually bankrupted. This again shows us that proper investment strategies can provide some measures of portfolio safety.

In the next three articles we will deal with capital preservation, capital distribution and professional assistance. Future articles will also address specific issues within these areas.

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NOTE: We will welcome any articles dealing with financial, insurance, estate and tax planning, and similar issues from the many Ukrainian professionals in these fields. Since we are a community newspaper, we welcome and encourage the participation of our readers and members in a meaningful dialogue that will help all our brethren.

Dr. Walter Prochorenko, is an accomplished businessperson with extremely varied multi-national project experience in over 40 countries, including Ukraine. He completed his doctorate in international business administration, is a registered NASD and insurance professional in New York and New Jersey, and is a Chartered Wealth Manager.

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