Category Archives: life changing events

How to Hang Tough in a Tough Market

Posted on October 9, 2008 | 4 Comments

These are tough times to be an investor. The stock market’s long-term return of 11-13% fades in relevance as the value of your portfolio declines. Investors begin to doubt their decision to invest in this wild, volatile, crazy, anxiety-creating market. I’m not writing this article to say you shouldn’t feel that way. I’m writing to suggest you grasp the lessons an ugly market teaches us, and evaluate whether you have the correct plan for your portfolio.

Striking the Right Balance

The most important decision an investor makes is the allocation of their money between stocks, bonds, and cash. Some research has shown that 90% of your long-term return comes from this asset allocation decision. Many, maybe most, people jump right into buying stocks and mutual funds before they have crafted their stock/bond/cash strategy. They end up with too much in the stock market, making them susceptible to larger losses than they can tolerate.

The stock market over the long term has provided higher returns than bonds because investors demand a premium for accepting the higher risk in stocks.  Why do stocks pose more risk to investors? The brief answer is when you buy shares of a company, you become part-owner in the firm. There are no guarantees of dividends or that you will ever get your money back. If you buy a bond issued by the government or a corporation, you become a creditor. You have lent them money. They in turn will pay you interest over the life of the bond. Upon maturity you get your principal back. Regular payments and your money back. Not much risk in that. Oh, if a company you lent money to goes broke, you get paid before stockholders get a dime. Common stockholders get paid if there’s any money left after bond holders and preferred stock holders are satisfied.  It’s not unusual in bankruptcy cases for common stockholders to receive $0.   

Points to consider.

There are three major considerations when deciding on how much to invest in stocks. How comfortable you are with market ups and downs, called risk tolerance, how long your money needs to last, called time horizon, and the size of your financial base relative to your financial needs.

Risk tolerance. Investors familiar with the stock market have a better idea of how they’ll react if the market drops. If you have been in the market the past few weeks, you may have decided you want less risk than you have. This market is putting every investor through a risk tolerance test. But if you aren’t sure how much risk you will be comfortable with, you can take a smaller bite of the stock market than would be recommended based on your time horizon. You can always add to that position as you learn through experience.

Time horizon. Too often individuals consider the years up to retirement as their time horizon. Not so. You could be in retirement for 15-30 years. Let’s say you are 45 years old with plans to retire at age 65. You are healthy and expect to live to be 90. Your time horizon is 45 years. The goal is to accumulate enough funds by retirement, the pre-retirement years, that will last throughout retirement, the retirement years. Generally, it is recommended that about five years before retirement the investment in stocks is reduced and bonds and cash are increased. But your money needs to last a long time, and it’s the stock portion of the portfolio that provides growth.

Financial base. The larger the difference between your portfolio size now and where you want it to be at retirement, the larger the allocation to stocks. Stocks are the growth engine of a portfolio. Bonds and cash protect the downside risk and provide income.

Let’s say Madeline wants to have $750,000 in her 401k when she retires in 20 years. She has $50,000 today with plans to add $6,000 per year. To achieve her goal, Madeline needs to earn 11% annually. Stock market returns over the long term have averaged 12%. Therefore, Madeline would need to have a 90 – 100% allocation to stocks to achieve a 11% return.

If Madeline had $100,000 in her 401k, instead of $50,000, she could reduce her allocation to stocks because she only needs an 8% annual return to achieve her goal of $750,000.

Sample Portfolios

Here are some examples of portfolio allocations during different stages of life according to Richard A. Ferri, author of the book All About Asset Allocation.

Mid-life Allocation Range

  Aggressive Moderate Conservative
Equity + REIT  70% 55% 40%
Fixed Income 30% 45% 60%
Cash    0% 0% 0%

 Pre-retiree and Active Retiree Allocation Range

  Aggressive Moderate Conservative
Equity + REIT  60% 50% 35%
Fixed Income 38% 48% 63%
Cash    2% 2% 2%

REIT = Real Estate Investment Trust
Fixed Income = Bonds

Each investor has an allocation that is unique to his or her situation.  The above examples may or may not be appropriate for you. 

A risk of NOT investing a portion of your portfolio in the stock market is that you will outlive your money.

A risk of investing TOO MUCH in the stock market is you will not have time to recover large losses. In addition, fear may cause you to sell in a panic when stocks are at their lowest prices.

Now is the time for rational decisions. “This time is different” is the phrase that pops up each time the stock market takes a precipitous fall. It may or may not be true this time. What we do know is what has occurred in the past. History demonstrates that markets recover and eventually move up.

An exodus to cash will leave you with the daunting decision of when to re-enter the market.  Investors who run to the side-lines often wait too long to buy back in, missing some of the best days’ in the stock market. This is one of the reasons the average investor significantly underperforms the S&P 500. The other reason is that investors chase performance, buying last years’ winners. For most people the best action is no action for now.  You may want to consider making adjustments to your portfolio later, after the market had recovered.

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Posted in asset allocation, investments, life changing events, retirement, risk tolerance

3 Tips to Keep From Running Out of Money In Retirement.

Posted on June 6, 2008 | Leave a comment

Your vision is of a white sand beach, you’re in a lounge chair sipping an exotic drink, watching the waves slowly roll in as swimmers frolic in the aqua clear waters. Then you wake up.  You immediately remember you fell asleep struggling with feelings of euphoria and panic as you begin the next phase of your life called RETIREMENT. 

We all want to enjoy our retirement years with as much vigor and as little stress as we can muster. While I can’t help much with the vigor, a few financial tips on how to live in retirement may help to reduce the stress.

Tip #1: Invest wisely.   Allocate your investment portfolio across stocks, bonds, cash in proportions that reflect both your tolerance for risk and your financial position. For instance, you may have a very low tolerance for taking risk with your money. Based on that alone, you might be comfortable with a very small or no portion of your retirement money in the stock market. Now review your financial position. Based on your current spending habits, you plan to spend, or are currently spending, 8% of your portfolio annually. That mean in order to maintain the principle balance your portfolio needs to earn 8% + some inflation factor of let’s say 3% per year, or 11% annual rate of return. That won’t happen invested in cash and bonds.  Over the long term cash has returned about 3%, bonds 5%, and stocks 10%. In the short term, returns vary dramatically from year-to-year, putting stress on you and your finances during retirement. So what do you do? You might start by reducing your spending habits. But that’s not my point in Tip #1. Find the right balance in allocating your money between stocks, bonds, and cash so the volatility in your stock investments will be offset by the more conservative and stable investments in bonds and cash. Stocks add a long-term growth element to the portfolio which is needed to increase the probability your money will live has long as you do. The following are some sample retiree portfolio allocations to consider:

Preservation Portfolio: This is probably best for retirees who stay awake at night worrying about losing money. It’s more appropriate for people with a shorter time horizons–say less than 10 years. By “time horizon” I mean life expectancy.
15% Stock
60% Bond
25% Cash

Conservative Portfolio: If you expect to live at least 10 years and you don’t like taking a lot of risk.
30% Stock
55% Bond
15% Cash

Moderate Portfolio: Retirees who expect to live more than 10 years and have an appetite for some risk, may want to consider a larger allocation to stocks.

60% Stock
35% Bond
5% Cash

Aggressive Portfolio: Do you expect to live 20 years or more? Is your spending flexible enough that you could reduce expenses during down markets? Do you have another source of income, such as a pension, that you can rely upon if the markets are negative for two or more years? If so, you may be a candidate for the Aggressive Portfolio.
75% Stock
20% Bond
5% Cash

Even the most aggressive portfolio does not have 100% stock. Some retirees may have a level of wealth that no matter how they invest they will never run out of money, think Bill Gates. Most retirees should not be risking their entire nest egg in the stock market. You will also notice that the portfolio with the least risk includes some stock. That is to maintain some potential for growth. There is uncertainty in knowing how long we will live. Even a preservation portfolio may need to last longer than we initially thought. You want living longer to be considered a good thing.

Tip #2: Minimize your fixed costs.
Flexible spending during your retirement years will put you in control. If you have the control to reduce expenses and draw less from your portfolio when the stock market is doing poorly, then your dollars will last longer. Wait until the markets have plumped up your funds with good returns before buying those cruise tickets. For many, the mortgage is their largest monthly fixed cost. Focus on paying it off.  Or downsize to a smaller, less expensive house.  If there’s equity left over, invest it.  Pay off your credit card debt.   

Tip #3: Don’t retire….. recreate your life.
For many retirees working after retirement will not be a choice.  It will be necessary.  Living in retirement for maybe 20-40 years is a very long time.   If there’s a pretty good possibility you may outlive your finances, take a year or so to live the retirees dream, then create your next life phase.  This could be your opportunity to do something you are good at but couldn’t make enough money from it to support yourself and your family.  Now the financial need isn’t as great, so go for it.  Take Dick and Nancy.  Dick taught painting before he retired and Nancy worked in art museums.  In their 70s now, they live 6 months in Italy where Dick paints the landscape and sells his art work to tourists.  Nancy authors books on artists and writes travel guides of Italy that include Dick’s art work.  How about Steve, a man who can fix anything.  He has fun socializing a few hours each week at a hardware store where he helps make home and landscape projects less daunting for those with lesser experience.  The extra cash, social enjoyment, and mental activity keep him young so he can continue to enjoy four days a week at a lake home with family and friends.

Recreate a life that makes you happy! 

 

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Posted in investments, life changing events, retirement

Selling Your Business – Getting the Best Price for Your Largest Investment

Posted on April 22, 2008 | 2 Comments

When should you think about selling your business?  The best answer is, when you become the owner.  At the earliest stage, consider an exit strategy.  Selling is one way to exit your business.  Other exit strategies can be to take the business public in an initial public offering (IPO) or pass it on to family members with a succession plan. 

If you plan to sell your business, then understanding what creates value will help you focus on value-creating aspects of the company.   Buyers look at the history of a business as support for today’s value.  Wouldn’t you rather buy a business with revenue and profits trending upward?  That means timing of the sale will be important to you.  If your interest is waning, the industry is stagnating, competitors are multiplying, your health is declining, you may find sooner rather than later will bring in the best offer.  Managing the business with an eye to its sale, will allow you to pick the best time to sell.   

An experienced, serious buyer will spend considerable time on due-diligence.  That is the process of scrutinizing your markets & marketing strategy, financial operations, property & equipment, and business operations & personnel.  Your preparation will reduce a buyer’s concerns and increase their willingness to make an offer. 

Manage the following aspects for creating value.

Maintain excellent records.  Lowering the buyer’s risk will increase what they are willing to pay.  Help the buyer feel confident that what they see is what they’ll get.  Keep good documentation for inventory control, payroll, financial statements and other key business processes. 

Buyer’s thinking:  A buyer has to continue to run the business when you are gone.  Having up-to-date written processes means the transition will go smooth even if some employees leave after the sale. 

Have a clean balance sheet.  Write-off or negotiate payment of old accounts receivable items.   Take care of the accounts payable items that have been on the books because of disagreements.  Focus on paying down debt, cleaning up the inventory, and minimizing liabilities. 

Buyer’s thinking:  Old receivables show an unwillingness for customers to pay.  A buyer will think there are unsatisfied customers.  Then the question is raised as to the quality of the product and service, the level of customer service provided,  and the overall customer experience and attitude. 

Focus on profit.  The concept is simple… increase revenue, reduce expenses, increase profits.  At least it’s simply stated.  To get the highest dollar for your business will require you to manage the income statement.   Are there opportunities to increase sales that have been overlooked or put on hold because you’ve concentrated on serving the current customers?   Have you reviewed contracts on real estate, property insurance, employee benefits, and so on to see if you can get the same or better service for a lower price.  Does the company lease vehicles?  Can you cut your lease expense?  If your income statement reflects accelerated depreciation, which is used to reduce profits and lower the tax liability, a different method for income statement purposes may reduce this expense, increasing the bottom line.  These are some general ideas for you to consider.  

Buyer’s thinking:  A  trend of increasing revenue and profitability shows that current management and processes are performing well.  The buyer can focus on growth with the expectation the current profits will be maintained after the purchase.   

Be sure the facilities, machinery & equipment are in good general condition.  Curb appeal is important.  Present a clean, organized facility.  Have the furniture & fixtures, vehicles, machinery & equipment in good condition.  

Buyer’s thinking:  If the seller maintains the property and equipment, then there is reason to think other parts of the business are well managed.  The buyer may be using these assets to collateralize the loan to finance the purchase.  The better the condition of the assets the more value the banker will assign to them resulting in a larger loan.

Have the right personnel.  A good management team and employees with the right skills need to be in place. 

Buyer’s thinking:  Adequate personnel keeps business disruption to a minimum during and following the transition.  A buyer can be more confident that sales will be maintained and impact on cash flow will be minimal.

Get a valuation analysis: It’s difficult to value your own business.   The personal attachment after years of hard work and personal sacrifice tend to inflate the value to a seller.  An ouside expert can give you a range of value developed from sound valuation practice and experience.  

Getting the highest price for your business may take 3 to 7 years of preparation.   The payback comes when you get the best price possible for the firm.  And, knowing the business you have worked so hard to create will continue into the future serving your customers and providing jobs for your employees. 

 

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Posted in investments, life changing events, mergers and acquisitions, selling a business

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Selling Your Business – Showcase Your Value

Posted on April 21, 2008 | Leave a comment

Profitability is important in valuing your business.  But that’s not the only position of value to consider as you think about selling.

You may hear that if your company isn’t profitable you have nothing to sell.  Not always true.  In 1993 I sold a management training firm that I had started three years earlier.  The company was just building name recognition and had achieved marginal profitability when my husband’s multiple sclerosis forced him into early retirement at 44 years old.  We decided the best option for the family was for me to sell the business and take a corporate position that would provide more security (health insurance) with less risk for the family.

It was a traumatic time.  I gained weight as I ate my way through hours of ‘coming to grips’ with the decision.  The business was serving the needs of the business community.  Three years of hard work were starting to provide the payback I had worked so hard to achieve.  Now, I was thinking of closing the doors.  That was the advice of a CPA who said the firm wasn’t profitable enough to get an interested buyer.

At first I took that advice as gospel.  Then I started thinking about the companies we had been serving and thought someone must see the gains we had made over the three years, with companies returning to buy additional services.

I decided to build a history of the firm, showing profit and loss statements with a trend of increasing revenue.  Following that, I built a spreadsheet that listed each customer.   After each company I included the invoices, dates, and dollars spent with us to show repeat business from satisfied customers.

It’s interesting, as the owner I knew this was taking place but I had never compiled the data in this way before.  Now I had a positive financial trend with repeat customers to share with potential buyers.  It was starting to look like we had something to sell.

I didn’t stop there.  In the files we had kept notes from customers.  Some had written comments of appreciation on the surveys that were sent with each product or service. Some were unsolicted notes from individuals we had worked with who just wanted to say ‘thank you’ for helping them find the best training book, video, or speaker to fit their training need.

The final step was gathering marketing pieces we had developed, newsletters, magazine articles written about us, and training material we helped companies to create.  Contracts with trainers & suppliers were added to round out all of the important business documents.

A three-ring binder was put together, creating an impressive picture of what we had to offer a buyer.

At that point I started making phone calls to companies that might be interested in buying the firm.  Within six weeks I had three interested parties, one of which owned grocery stores.  They bought the firm.  A rather unusual buyer you are probably thinking.  They had two reasons.  They wanted to increase the employee training within their stores and owning the firm would make that more cost effective.  The other reason was that one of the owners wanted to create and sell her own workshops, something we outsourced to professional speakers and trainers.

The company I sold was called An Open Mind Company and I recommend you keep an open mind when you plan for the sale of your firm.

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An Intelligent Woman, the Story of the Woman Who Influenced this Investment Manager

Posted on April 2, 2008 | Leave a comment

She was feisty, quiet, spiritual, and loving.  She didnt’ believe in talking about others who were not present.  At one time she stood 5′ 2″ tall.  As a child she worked hard milking cows, collecting eggs from the chicken coop, mucking stalls, and then heading to the house to help her Mom with cleaning.  I know, because I read her diary.  Only because she let me read a page or two.  Each page talked about the chores, dawn ’til dusk.  Not in a bitter tone, but a conversational description of her life as a teenager growing up on the farm in a family of eight children, a Father that was a preacher, lumber man, and proprietor of a construction company.  You see they lived in a small rural town in Wisconsin.  It was a tough job feeding a family of ten. 

There was absolutely nothing spectacular about this lady.  She walked fast, whistled while she walked even when the air was so cold the snow squeaked under foot.  She brought six children into the world.  The last one, a girl, born at Mrs. Boltice’s house, the midwife.  Her husband wasn’t very good at bringing a regular paycheck into the house, so she had to cook, clean, shop, attend school functions, and make money, too.  She didn’t complain.  Each day, as she came back from cleaning someone’s house, she went to the desk, took out a black journal, wrote something down beflore she closed it and placed it back in its cubby hole.  Inquisitive as I was, nosey some might say, I opened up that journal to see what she was writing.  It didn’t look like much.  A list of things followed by a dollar amount.  Ironing: $1.50, Wash and fold clothes: $1.00, House clean: $3.00, and the list went on.

This intelligent woman, my Mother, tracked each nickel that came into and went out of our home.  She kept us fed, clothed, and warm.  She lived a simple life with no debt.  She provided my first lessons in money management.  Oh, how lucky I have been. 

I hope I can share some of what I’ve learned over the years, as her youngest child, as a student, teacher, investment manager, and friend.  Through book reviews, commentary, and stories I will teach you about investing.  But, let me share with you right up front…. writing to you is a new experience and likely a real reach for me.  So, if you will be patient, over time and with your feedback, I’ll get better.  Atleast, that’s my plan.

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Investment Management Coach Blog Launch

Posted on March 28, 2008 | 4 Comments

Hi, I’m Rita Janaky, an investment management coach located in Colorado Springs, Colorado. I work with intelligent women who want to take control of their financial futures. They are typically women who either earned it, inherited it or received it through divorce, and found themselves suddenly facing important investment decisions. I am not a financial planner – I am an investment manager.  And, I consult with people who are looking to buy a business or sell their current business. 

Why do I do this work? Because I enjoy helping women remove stress from their lives by showing them how to make financial decisions that are aligned with their values or beliefs and ultimately helps them meet their goals. Basically, I want them to feel comfortable with the information so they can make more informed choices.

I have been an advisor since 2001.  In February 2004, I started Golden Hills Financial Group, LLC, a Colorado registered investment advisory firm.  This is an independent fee-only advisory firm. 

Portfolios we create for clients can be moved without disrupting the portfolio because the securities we buy are not proprietary.  For instance, if an advisor represents a firm whose securities are sold only through their advisor network, when a client becomes dissatisfied or heirs want to use a different advisor, the assets must either be sold, creating potentially large cap gains tax liabilities or an advisor within that same network must be utilized.    If our clients or their heirs elect to move, their entire portfolio can be transferred to another advisor with no penalty.

We believe that the markets are generally quite efficient.  That means we rely on exchange-traded funds, index funds, and low cost mutual funds when building client portfolios.  These are low-cost, tax efficient securities that keep more of our clients money working for them.

I am a Licensed International Financial Analyst, hold an M.B.A. and a B.S. in Business Administration, emphasizing finance with a minor in economics.  I have taught finance and investments at 2 universities, for the American Association of Individual Investors (AAII) Colorado Chapters, as well as public seminars.  

The goal of this blog is to educate.    In particular, to educate women who want to become better investment managers or those women who want to learn more about ’how to sell their business’ or ‘how to buy a new business’.

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Posted in asset allocation, buying a business, fees, investments, life changing events, mergers and acquisitions, risk tolerance, selling a business

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