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Episode #2121
Investment Strategies
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Brown: So you are nearing retirement or just graduating from college and you feel the need to invest your money in mutual funds and stocks. Where do you begin? We'll give you tips on who to ask, what to do, and give you a glimpse of what the future can bring from your investments next on Black Issues Forum.
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Brown: Hello, everyone and welcome to Black Issues Forum. I'm Natalie Bullock Brown. When it comes to investing many people assume that it's just for the wealthy or that if you are near retirement age, it's too late. Some young people may even believe that they have time to wait before investing. The money they make from entry level and post-graduate jobs. Well, today's show will lay to rest some myths about investing as well as help you to start an investment portfolio of your own no matter your age or station in life. And here to help us define some terms and start the ball rolling are our guests. First up is Patrick Lyons, an investor and author of the book Map Your Financial Future: Starting on the Right Path in your Teens and Twenties. We also have with us Dwayne Davis, founder and president of the now defunct Coalition of Black Investors or COBI. Mr. Davis is also a banker at a major financial institution in Winston-Salem. Welcome to Black Issues Forum.
I am going to start off with Patrick. Give us a picture of your background in investing and what led you to write your book.
Lyons: Well, I've been in the investment industry for 11 years. I work for an investment advisory firm here in Durham. And I wrote the book because I was hearing a lot of younger people filing for bankruptcy and it made me think about my financial problems coming out of high school and college and so I just thought I would write about kind of the roadmap that I used to get out of those issues and try to get people to focus on budgeting and saving for the future.
Brown: Dwayne, I know that you work as a banker but also within that role, you deal with investments. Tell us a little bit about COBI and what you do currently.
Davis: I'm a financial advisor, an investment advisor. COBI, the Coalition of Black Investors was started really almost as a brainchild of my fraternity brothers and I. We graduated from Morehouse and we started an investment club. And over the years we saved money together and we had to come to grips with, you know, different views about investing and having those conversations and it really just made me realize that we needed to educate black folk about saving and investing and talking to each other about it. So we formed COBI.
Brown: Okay, Patrick, and I am going to ask Dwayne to address this as well, but one of the things that maybe our viewers are contending with is the myth that perhaps investing is not for them. So can you give us, I guess, a profile of the average investor. But for black folks, what do they need to know in order to get into the game of investing and what are the benefits?
Lyons: Well, some of the myths-I mean I think a lot of the older people kind of feel like the stock market is going to crash. And when they think about the stock market crash of the 1900s and they just feel more comfortable putting their money in a savings account or something that is drawing very little interest because they view it as being a safe investment. There are so many resources available now with the internet that make it so much easier for the average investor to get involved. I mean, you can analyze your own companies. You don't have to hire a stock broker to do your research for you. And there are just a lot of ways where-I mean, I think people also need to understand that you don't have to have a lot of money to get started either. I think that's another myth is that you need to have $10-20 thousand but a lot of mutual funds companies will allow you to get started with as low as $50 a month if you do it on a monthly basis.
Brown: Dwayne, let me ask you the reality as far as how safe the stock market it, for our viewers so that they know that they won't necessarily lose their shirt if they invest. What is the climate now?
Davis: Well, I'd answer it two ways. I think that the safety in stocks is with time. The risk in stocks is if you try to go in today, which unfortunately a lot of folks want to do-get rich quick-you are trying to make money within three months or six months. But if you take the long view, it's extremely safe. You are looking at 10-12% returns on average for long periods of time. And it doesn't take a lot. I was giving a talk one time and my mother was in the audience. A dollar a day, from birth to age 65 is roughly $30 a month. So if you start them when a child's born and they pick it up themselves, at age 65 invested in the market that person would have $1,956,000. And in our community obviously a lot of folks will spend $30 a month on tennis shoes, lotteries and everything else. It doesn't take a lot to end up with a lot.
Brown: See, that's interesting what Dwayne just told us because you would never think that you could amass that much money, Patrick, by the time you're 65 if you are only investing $30 a month. So what are some of the barriers to people in general, black people in particular, really getting that as Dwayne said, over the long haul, investing can really be beneficial.
Lyons: Well, I think we have to understand that there are times when the stock market goes down, but historically the market goes up a lot more than it goes down. I think it is probably an issue of education. I guess a lot of us may not really know about the resources available that-about the stock market as far as education. And I talk in the book about the fact that a 16 year old, if they want to become a millionaire by the time they are 65 all they would have to put aside would be somewhere in the area of $60 a month. And I know when I was that age, I wasted $60 a month on so many things that I don't even know where they are now. So it just doesn't take a lot. But it's just an educational issue.
Brown: So, Dwayne, if you take the $60 a month, do you invest that in mutual funds or do you invest that in stocks?
Lyons: Yeah, that is a stock mutual fund.
Brown: But do you-okay, I will say it this way, do you invest it in individual stocks or in a mutual fund?
Lyons: For most folks I would suggest doing that in a mutual fund and the story goes that my mother was in the audience and she had been saving a dollar a day since my kids were born. She was putting it in a savings account. And the difference, I ran the numbers one time, it was hundreds of thousands. You end up with a few hundred thousand dollars in a savings account compared to $1.9 million investing. So the key is to invest it.
Davis: And the problem with that strategy of putting it in a savings account si you may not outpace the rate of inflation because inflation is going up on average 3% a year and maybe you're getting 3% off your savings account but in the grand scheme of things you're not making any money because inflation is eating upi your returns so that is why you need to have stocks and bonds and other types of investments.
Brown: How can you use inflation to your advantage, Patrick, when you are investing? Is there a way to kind of make it work for you?
Lyons: Yes, there are a few ways. One is, I mean, if you want to invest in bonds there are treasury inflation protected securities which are-historically bonds don't outpace the rate of inflation but the federal government recently introduced these securities maybe about four years ago where they will pay you your itnerst rate which you would normally make on your bond plus whatever the rate of inflation is based upon what the consumer price index is. So that is one way. You can also invest in commodities because historically when you have inflation commodities are rising so you can invest in things like gold, silver, oil, or you can buy stocks that make those products which are ways of outpacing the rate of inflation. Or you can also invest in real estate.
Brown: Dwayne, do you have anything to add?
Davis: Well, I was just going to say, that has been a traditional area for black folks. Like one of the places that we have seen that we will invest in has been real estate. And the last few years that has been very good. I know the number of real estate investors, black real estate investors over the last few years have done very well.
Brown: When we talk about real estate investment, Dwayne, are we talking about commercial real estate? Are we talking about residential real estate? What is really the best way to invest in that?
Davis: I don't know that I would say that any is best. It goes back to the temperament of the individual and where you want to have the expertise, where you have the time. There are also real estate investment trusts which are like mutual funds that would be good for folks who don't have the time, they just want to put the money somewhere and let professionals do it. Other folks I know have done it with commercial property, with residential property, with beach property, that they were willing to put the time and energy into to do the homework. And that's the key to any investment you make. Another area I like is black art. When you do it you got to understand and commit the time.
Brown: Right. I want to get to some statistics that we have. According to a survey of households earnings, 50,000 or more conducted by Ariel and Schwab, black investing had begin to rise between 1998 to the year 2002 from 57% to 74% which is really great, right? Can you talk about why this briefly Dwayne, and then Patrick, why we saw that rise?
Davis: Well, I hope some of it. Ariel and Schwab were major partners with COBI. And that was that period when we were really going around the country giving a lot of focus to saving and investing. So I want to hope that we had a little something to do with it.
Brown: And that it was education.
Davis: That is was education. A big piece of it was that the market was booming. And so it is like everything else, unfortunately we all know that we should buy low and sell high, the reality for most individuals is that they buy high and sell low. They wait until it is excitement and everybody's talking about it. The returns have already taken place. And then they go, "Oh, I want to do that!" Then when it goes down, they go, "Oh, this wasn't a good idea," and they get out.
Brown: And they sell. So again, Patrick, the emphasis is on long term, right? I mean, you should not panic if you decide you're going to start investing, when you see those dips and those peaks, stay still.
Lyons: Yes, and if you feel comfortable with your investments. I mean, if you have done your homework on your investments, those opportunities, those are chances to buy more of those stocks or mutual funds that you own because if you are in it for the long haul, if you like that $60 you should like it even more at $50 and you should like it at $40. But that is not always the mentality of investors.
Davis: I would add, too, I think that one thing, you know, like 401Ks are a great place to invest because it forces you to be constantly investing. So you are going to keep putting money in through the ups and downs. And you also have to know the purpose for investing. The purpose for cash, for money markets and CDs is for short terms needs and emergencies. The purpose for long term investing is to beat inflation. It's to be there 20 years from now when it's time to when to retire. Because there is the old thing, you need $250,000 for every thousand dollars of monthly income in retirement.
Brown: Wow. So okay-
Davis: Something that makes you go, "Hmm."
Brown: Exactly. Well, this is something that I kind of alluded to in the tease which is that older people, maybe 50 years and older, may feel like, "It's too late for me. If I need that much money to retire and I haven't begun to invest, there is no way I'm going to catch up." What would you say to someone like that?
Davis: It's never too late. I think the old Nike, Just do it." I mean, kids, you've got to get started because you are going to get there anyway. And you are either going to get there with an extra $25,000 or an extra $50,000. And the other thing is that it forces you to go ahead and start to drop your spending. It helps you both ways. If I start to lower my spending now and save, then I win both ways. I'm spending less when I retire and I save more money. So just do it. I don't care whether you are 50 or 55, whatever. Get started. It will make a huge difference.
Lyons: And you just need to, people just need to remember, it doesn't matter how much. I mean, just do something. If it's $10 a month, that makes a big difference because we just can't be dependent on things like Social Security because benefits are being cut. They are making you wait a lot longer before you can start drawing Social Security so you have to find some type of way of providing for yourself and by investing for the future that is one way of doing it.
Brown: Okay, well, I am going to stick with you, Patrick, for a moment. In your book you give several formulas for strategizing on how to invest. For example, you have a formula for asset allocation. Explain that a little bit. And I think we have a graphic to go along with that.
Lyons: Well, asset allocation is basically the principle of spreading your eggs among different baskets. You don't want to put everything in one basket. Because like we saw from the period from 2000 to 2002, the stock market went down but there were some asset classes such as commodities and real estate that did well and also bonds went up as well. So as far as asset allocation I recommend, you know, the easiest way to do it is take you age and that is how much you should put in bonds. So basically what that means is the younger you are, the less you are going to have in bonds. You're still going to have exposure but as you get older you are going to want to have a greater percentage of your portfolio in bonds because that provides a stable source of income. And so for example, I guess the example we had talked about was a 45 year old would want to have 45% of their portfolio invested in bonds and as they get older, 60 years old it is going to be 60%. You still want to have exposure to the other areas. For example, you want ot have 10% I recommend in real estate which can be real estate investment trusts which is one easy way for investors to get involved with real estate. Ten percent in commodities, because that is something that is going to help outpace the rate of inflation. And then that remaining 35% would be invested in stocks. And since this is somewhat of an older, I mean, a middle-aged person, I would recommend having a bigger percentage of those stocks in larger companies which are more stable. But you also want to have international exposure because people don't realize that there are so many growth opportunities outside the US and you can invest in an Asian mutual fund or a European economy which are growing a lot faster than ours. And then you can finish it off with some mid-sized companies which are going to give you a little more growth than the larger companies but is something that will help your portfolio in the long run.
Brown: To demystify what Patrick just said, I mean the average person is not going to understand commodities, real estate, but may want to get involved in all that he has recommended. So where should they go? Like who should they go to after they stop watching this show in order to begin the process?
Lyons: Yeah, and I would add to that that you probably want somewhere between three months and a year's worth of your expenses in cash because that is what will allow you to go through the ups and downs.
Brown: And when you say in cash, are we talking about a money market?
Lyons: Money market, savings, certificates of deposit that are maybe three to six months, maybe a year in length. Because that is the money that when things get bad, you don't have to go to your investments, you go to your cash. It's there and it doesn't go up and down in value. You can get to it at any time.
Brown: And there's no penalty for taking it out.
Lyons: There is no penalty-penalties with CDs or certificates of deposits but not with the money market or savings account. Right. So it's there and ready for you. IN terms of where do you go, if you don't want to do it yourself, then I think you go to a financial advisor and one of the best ways to do that is to talk to folks that are in a similar situation as you and find out who they are working with and how that experience has worked for them. Get a referral. I think that is a good way to approach it.
Brown: Is there a profile for who, what type of person should go to a financial advisor versus who should or who could maybe take it on on their own, online or however else.
Davis: I don't think there is a profile. I mean, I think you are going to get folks that are young, old, educated, I mean, there isn't a profile except to say, if you are interested in it. If you are the kind of person that enjoys reading the Wall Street Journal, Investors Business Daily, Black Enterprise, Fortune, if you enjoy that then you are the type that could potentially do it yourself. If you are the type that wants to do other things like go on vacations and have fun and do other things, then you want a professional to do it for you. Maybe the person that does your own taxes would be the person that might do their own investments. The person that goes to someone and says, "Here is a box." And they dump it on the table, you are probably not going to do it yourself.
Brown: Well, Patrick, let's see, that's awful, old age, setting in. What I wanted to know is, if you decide that you are going to begin to invest and you are going to work with a financial advisor. How much trust should you put into that person to do right by you, to do all of the research that needs to go into making decisions on investments. I mean, what sort of relationship do you have to establish with a financial advisor.
Lyons: Well, I would recommend first interviewing any financial planner before you hire them and ask them questions. One question that is very important is how do you invest your own money? I would also ask how they are compensated because some financial advisors are compensated to push their own products. So if you want an independent financial advisor it is probably best to do that as opposed to going with somebody with a major firm because that planner may be compensated based upon the number of products they sell. So I would just recommend, you know, before you even hire somebody and to keep constant contact with them. I mean, talk to him or her at least once a quarter but if not, once a month and at the very beginning just to see how they are investing your money and whether you feel comfortable with that strategy.
Brown: Right. And, Dwayne, I remember when we were in the green room we were talking a little bit about how much attention a financial advisor might pay to your particular account depending on how much money you have to invest. Talk a little bit about that.
Davis: Yeah, I think the reality of it is if you are going to brokers, you are either going to someone that is fee only or they are just going to charge you a flat fee to give you advise. Well, the issue when you are younger, that fee is usually going to pretty high. Thousands of dollars. So you can't afford that. And then you got folks that are commission only. Well, if they are commission only and you come in with a thousand dollars then they are not going to give you much time. Especially if they are seasoned in the business. So you are probably going to have to go with someone, if you are younger with smaller dollars, you are probably have to go with someone who is fairly new in the business. And it's just like any other relationship, that can be okay because then you all are growing together. You don't need the expertise of a 50 year old financial advisor when you are 22 and just starting. You can start with that younger advisor and grow with them. Because that is what it is about. I've got folks that I have worked with for 10, 15 years now and we have grown together and the trust is like any relationship grows with time and as you help through difficult periods.
Brown: Right. Patrick, anything to add to that?
Lyons: No.
Brown: Okay. Well, something that I-another thing that I think we need to address is regarding insurance and annuities because I think a lot of black people feel like they are doing, they are investing when they purchase insurance or even annuities. Patrick, talk about some of the pitfalls to allowing insurance and annuities to be the only investment products that you deal with.
Lyons: Well, one of the problems with some people is that they are buying variable annuities and with a variable annuity you get a tax benefit so once you withdraw the money your withdrawals will be tax-free but what people are doing is they are buying these annuities and putting them in IRA accounts which are also tax deferred vehicles as well. So it's like you are not getting any more benefit by putting that annuity in that IRA account. It would be a lot cheaper to just open and IRA account where you don't have any fees. And there are a lot of companies that offer no-fee IRAs. Another pitfall is that there are so many layers of fees on annuities. In some cases there may be four layers of fees.
Brown: What do you mean by layers of fees?
Lyons: You pay one fee for it might be called mortality fee which may be anywhere from 1-2%. You may pay a management fee for the investments in the account. You may pay a sales commission charge and then you may also be subject to a surrender charge if you decide to cash that annuity out early. And if you were to do that, I mean, sometimes the fees are 6-8% of what your investment is. So you're kind of getting behind the curve in the very beginning as opposed to opening a no-fee IRA account and putting it in index funds where the fees are less than 1%. So you could definitely save a lot by doing that.
Brown: And with insurance, Dwayne, I know we were talking about if in the black community we tend to be approached by insurance agents more than we are approached by financial advisors. Talk about that.
Davis: Well, I think there is compensation issues meaning financial advisors that are in the business and have been in the business are trying to gather hundreds of thousands, millions of dollars per month. And the number of folks in our community that have the ability to help an advisor to do that is fairly small. Versus an insurance agent hiking $100 a month insurance premium can be a very good deal for someone to write. So I think the key, insurance is critical for everybody. That is one of the base things that you need. You don't want to be over-insured. And that is the main point. So I would give the number five times your gross, sort of a good starting place. And one time your gross for each child is the amount of insurance that you might want to have. So if I was making $25,000 then I would say maybe I need about $125,000 in insurance. It's just a place to sort of start from to figure out where do you go from there more or less.
Brown: We are going to talk about insurance in another program but just do it and do your homework, right?
Lyons: Correct.
Brown: All right. Well, once again the title of Patrick's book is Map Your Financial Future: Starting the Right Path in Your Teens and Twenties with useful information for teens and adults as well. Our thanks to Patrick Lyons and Dwayne Davis for sharing their knowledge and expertise with us today. And if you would like to learn more about the work of our guests or more about how to become an investor, please visit the Black Issues Forum website at www.unctv.org/bif. We'd also like to hear your feedback and suggestions. So send us an email or you can call the BIFline at 919-549-7167. Be sure to meet us back here each Sunday afternoon at 4:30. For Black Issues Forum, I am Natalie Bullock-Brown reminding you to be encouraged no matter what. Have a good one.
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