Thursday, September 10, 2009

How the Rich Save Today

We don’t always like to admit it, but for most of us, role models have at least some influence over our own personal decisions. Whether they are sports heroes, style icons, movie stars, or other noteworthy characters, they inspire our own creativity & vision of what we can be.

Wealthy individuals, for example, often serve as financial role models for the rest of us. We reason that, because they are rich, they must know something that we don’t, and we want in on the secret.

In an article by Lora Shinn, "How the Rich Save Today", the director of the Wharton Wealth Management Initiative at the Wharton School, Chris Geczy, says “The wealthy are revisiting their investment & savings strategies in light of the nation’s financial volatility. The mass affluent and the emerging affluent are consuming less & saving more because, like so many others, they were overextended in real estate and investments gone sour. They’re still scared of risk and are now more likely to invest in fixed-income vehicles.”

For clarification, the mass affluent have been characterized as those who save more than they spend and invest for their future. Interestingly, your neighbor in the trophy house with the twin BMW’s in the driveway may not have sufficient liquid financial assets to be considered a member of the mass affluent class. In fact, my own professional experience has shown again & again that the mass affluent are more likely to live in ordinary middle class homes and drive five-year old Toyotas. Remember, the mass affluent live below their means.

The Shinn article also reports that many wealthy people are thinking now about the safety of their liquid financial assets over investment rate-of-return. This is leading them to low-yielding, cash equivalent investments like CDs and money market funds. Making even a little bit of money is better than losing money, so the thinking goes.

Unfortunately, the wealthy have to worry about inflation (i.e., rising prices) eating into their savings, just like the rest of us. Nancy Rooney, Managing Director of Private Wealth Management at J. P. Morgan in New York says “If you’re set on cash, your #1 enemy is inflation.” Being overly conservative or under-investing, can be at least as costly as incurring an outright investment loss, if not more so. It’s just harder to discern because the effects of inflation are insidious and few people measure their investment returns on an inflation-adjusted basis.

Therefore, some measure of inflation protection should be built into every portfolio. Common stocks, or equities, have been the traditional inflation hedge for most investors. They are, of course, generally more volatile than fixed-income securities. Other possible inflation hedges are commodities, real estate, and Treasury Inflation-Protected Securities, commonly known as TIPS.

Lastly, Ms. Shinn points out that new proposals introduced by Congress and the Obama administration have the wealthy concerned about the tax efficiency of their investments. Many are turning to trusted advisors for advice on tax-exempt investments, such as municipal bonds. However, Mr. Geczy noted that, “Investing in products like municipal bonds requires a level of sophistication that may be beyond many casual investors.” Ms. Rooney agrees, stating, “It’s an inefficient marketplace. It may be best to…find a qualified advisor to help you select a bond.”

All the experts agree that wealthy investors must be diligent in their qualification of a financial advisor and then monitor their activity continually after the hiring decision is made.

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Tuesday, September 1, 2009

Cincinnati Business Courier Interview on the Economy & the Stock Market

I sat down recently with Steve Watkins, a reporter for the Cincinnati Business Courier, for an interview about the economy & the stock market. Here’s a preview:

“The possibility for a positive end to 2009 is bright despite the chance of a near-term pull-back,” said Tim Meyer of Meyer Capital Management. “The recession,… is ending. We’re seeing gradual improvement in investor sentiment and consumer confidence.” Meyer had been snapping up stocks in beaten down sectors such as financials, real estate investment trusts and emerging markets. All posted gains of 25-plus percent in the second quarter.”

Read the full interview here: