Do you own stocks, and if you do, do you understand stocks?
Some people don’t even know they own stock! For instance, if you are a mutual fund owner, you might also own stocks. Since you may be a hidden stock owner, it’s important to understand how stocks work. Doug explains what a stock is, how to pick the right stock for your portfolio, and how “price earnings ratio” affects stock prices.
Jackson Grant Investment Advisors Chief Investment Officer, Julie Jason, joins the show to discuss how to ask the right questions before making an investment decision. After all, different people need different investments, so you should ask the questions that are appropriate for you. Learn why risk and goal setting are the cornerstones of investment decisions.
Don’t get fooled by “fool’s gold” dividends!
Doug explains dividends and why high dividends are often a trap. Learn how it’s easy to be fooled by high dividends. How can you determine if a high dividend is worth the risk?
To learn more about stocks visit http://www.profile-financial.com/videos.
To learn more about Julie Jason’s book go to juliejason.com.
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Interview With Julie Jason
Douglas Goldstein interviews Julie Jason, Chief Investment Officer at Jackson Grant Investment Advisors. They go into great detail about what should affect your investment decisions and whether your income should come from an annuity.
Douglas Goldstein: I'm very excited to be talking to the Chief Investment officer at Jackson Grant Investment Advisors in Stamford, Connecticut. Her name is Julie Jason, and she's also the author of the book, The AARP Retirement Survival Guide: How To Make Smart Decisions In Good And Bad Times. Julie, how do you know whether you are in good or bad times? Some people look at the stock market hitting new highs and think it's great, while other people say, "No, no, no, everything is terrible." How can you identify them?
How Do You Identify Good and Bad Times In The Market?
Julie Jason: I love that question. It doesn't matter because what you have to do as an investor is ignore everything that doesn't affect you or your objectives and your risk. If you're going to be starting out the day trying to figure out whether we are in good times or in bad times, that will affect your investment decisions, and it should not. Investment decisions need to be driven by two things: your risk level, that is, how much risk you can afford, and then what you're trying to accomplish.
I want to talk to you about risk for a minute. Risk is not something that people have an easy time assessing. If you remember the risk questionnaires that most people filled out, they really don't ask you the question you need to ask yourself and that is, how much money can you afford to lose?
Douglas Goldstein: I think that's a critical question. One of the things that I've discovered over the years is that a lot of people don't even think in terms of percent because they don't understand it. You could say to someone, “If you had a million dollars and you lost 10%, how much money would you have left?” For whatever reason, we can blame high school math or elementary school math, but they don't know the answer.
Julie Jason: Yes. It's interesting.
Douglas Goldstein: I'll often ask a client," Listen, let's say you put a million dollars into the market and next month, your statement is at $900,000, what will you do then?"
Julie Jason: Yes, that's a great way to put it. Of course, if you're talking about retirement and retirement security and whether markets are good or bad, then you have to put yourself in the position of the client. Is he retired already and living off his income or is he approaching retirement? The truth is that everybody is approaching retirement, even if they're 20 years old. It helps to think that way, by the way. If it's somebody who's already retired and living off a portfolio, risk has a very important context and must be understood.
Douglas Goldstein: I think you have to quantify risk as well. Let's talk about the guy who is retired and he says, "I finally made it and now I'm going to live off the interest from my investments." He takes his $400,000 and he goes to the bank and he says, "Okay, I'm going to put it on CDs and live on the interest,” and then he finds that he can hardly buy the Starbucks on the way home. He got the risk and he's not going to make enough money to pay the bills.
Julie Jason: Exactly, not to mention inflation and taxes. Of course, taxes won't be great on that income.
Douglas Goldstein: Thank God. At least you're going to be happy about something; a good positive spin.
Julie Jason: Taxes and inflation are two important things to understand. You would think that it would be pretty straightforward to sit down and think about how much I am spending today. How much will I need to spend in the future, considering inflation and taxes? Before we take on a client, what we like to do is make a cash-flow analysis that pinpoints today and then looks to the future. Of course, everything that we assume today changes, so we redo the cash-flow analysis once every year to bring them up-to-date.
Our goal is to make sure that even if there is a decline in the market, it doesn't affect that cash flow. In other words, if somebody wants to live off their dividends and interest, that is the ideal situation. If you think about it, market data is typically total return data. You have the dividend payment based as a stock, plus the change in price action on the individual stock.
Ideally, if someone can setup a portfolio so that it's just the income flow that supports them, then market volatility is less of a concern. You're paying your bills with income generation. That, of course, is the ideal portfolio structure, but in order to do that there has to be enough capital, and of course the capital has to grow, to offset inflation.
Douglas Goldstein: Or there just has to be enough capital so that you don't have to worry about that.
Julie Jason: Yes.
Living Off Your Investments Wisely
Douglas Goldstein: Julie, let's dive in a little bit more to something you are talking about, which is the possibility of living off your investments. Here’s one of the arguments that many people will make, who are real stock market fans, and there's lots of retrospective evidence to prove this. They'll say, "If you just put all of your money into the stock market," all of which is pretty radical, and you take off X% every year, X number of dollars every year, had you been doing this over whatever period you look at, you would have been fine and you would have stayed ahead of inflation. In fact, you would have probably built wealth.
As an advisor, I know that I would never say something like that, and I'm guessing you wouldn't either, but is there some logic to that?
Julie Jason: That’s a very complex question. The answer is no, there is no logic to that, and the reason is very simple. Let's take the internet bubble. The internet bubble burst and we suffered three years of stock market decline. If you were following, Warren Buffet said that in the event that he predeceased his wife, he would recommend that she put everything into an S&P index fund. Of course, he or she could do that because they would not suffer if the market went down, which it does from time to time. Of course, they wouldn't require that money to pay bills. Anyone who has the need to pay bills in retirement cannot follow that strategy.
Douglas Goldstein: Well, everyone's who’s retired still has to pay bills.
Julie Jason: Sorry, I didn't state that right. I meant pay bills from their portfolio. So, no, it is not a good strategy. There are studies done on what is the safe withdrawal and the number typically comes up as 4%, but the problem with that is that they'd have to be correctly invested in order for any number to work for any length of time.
Douglas Goldstein: Yes, I never understood that study also. Maybe you can explain to me a little better because to me it seems that every client is incredibly different.
Julie Jason: Exactly.
Douglas Goldstein: Some people have pensions, and some people have a rich mother-in-law who's giving them gifts. Others, still, have received an inheritance. It doesn’t make sense to me when someone decides to bet his future on the 4% role.
Julie Jason: It does not make sense to me either. It is not a number that anyone can rely on, as it really depends on age, horizon, where the money is coming from, how much money has to come from the portfolio versus how much money is coming from Social Security and pension, and et cetera. There are a lot of people who invest on their own, the “do it yourself” investors who need to run through numbers, through different scenarios, and they cannot rely on a 4% or 3% or any percent number. What is key is how you're investing.
Douglas Goldstein: Let's touch on something you also mentioned before, which was that if you have income, one of the arguments that an insurance salesman would make is, "Listen. Take enough of your money, plug it into an annuity so that you will get guaranteed lifetime income, and then you can do whatever you want with the rest.” They say that you should make sure your income is coming from something that is very regular, like an annuity. What's your feeling on that one?
Should Your Income Come From An Annuity?
Julie Jason: Again, that's a complex area for the following reasons. Number one, you have to look at how much an annuity costs and the benefit that it pays out. You also need to find out who the insurer is and what happens to your spouse if you should predecease. Does the annuity go to zero or is there a survivor benefit and the like?
It's really not as simple as it appears. The cost of annuities; life annuities, a classic plain vanilla annuity that is a pension substitute can be very costly, and if you think about demographics and interest rates, the older you are and the higher that interest rates are, the better the payout will be.
In our interest rate environment, you'd really have to look very closely to see whether it makes any sense. Again, it turns on that person's individual situation and I'll tell you one place that I think an annuity is a valuable addition, and that is if you have a spendthrift situation or a person who's just not comfortable making investment decisions. Take those two factors and if there is no existing pension, I'd like to see a payment like that come in, to cover the essential expenses in the household.
You should try and get an annuity that makes financial sense; at the right price, considering your age and the current interest rate environment. Here’s an example. If the utilities, food expenses, and living expenses are say $1,000 a month and Social Security is $500 a month, you'd want another $500 to come in from something like an annuity, because then you don't have to worry about running out of money. You can always cut back on discretionary expenses. Of course, you don't have an inflation rider typically on annuities and you would need one. If it's a pension substitute, most pensions don't have inflation riders on them either.
You have to have other assets that you're growing at the same time. It gives someone more of a secure future knowing that they will not run out of money if they can cover their essential expenses.
Douglas Goldstein: I think that's a great example of the idea of realizing that different investments are right for different people. Saying, "Oh, everyone should have annuities," is a mistake, but saying someone who may be suffering from this problem of being a spendthrift, or having some other issue which would make preserving capital a challenge, would be something to consider.
Julie Jason: In the AARP Survival Guide, I talk about that. That book is intended to be an all market manual.
Douglas Goldstein: Hence the title.
Julie Jason: Yes.It does go through how to do cash-flow analysis and how to actually figure out whether someone has enough money to live on for the rest of their life. It helps them figure out what they can do if they haven't saved enough. It's intended to give the reader an idea of whether there's room for improvement, and then to find room and what to do about it.
Douglas Goldstein: That's a great introduction to my final question which is, if people want to learn more about what you're doing and follow you a little bit more, where can they go?
Julie Jason: They can visit my website, which is juliejason.com.
Douglas Goldstein: JulieJason, thanks so much for taking the time.
Julie Jason: Thank you. This was fun.