The New Financial Literacy

As the economy changed during the past year, so has the language

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As an investor, you must speak the language CNBC pundits spout hourly. More importantly is to understand what your wealth advisers and financial planners are saying.

“Some of the hot issues that you’re hearing about today include sustainable withdrawal rates,” says Bill Baldwin, an attorney, president of Boston-based Pillar Financial Advisors, and national chair of the 2,000-member National Association of Personal Financial Advisors. “How much can you withdraw from your portfolio annually for personal spending? That’s a tough question to answer during volatile markets. One has to balance that issue against the need to invest because of living longer.” He points to a 4 to 4.5 percent annual withdrawal rate as the industry standard for safety.  

Exchange-traded funds have gained popularity as a vehicle for index investing. Buy them in any asset class ranging from broad to narrow. They are easy to sell and buy, so they work for portfolio rebalancing. However, James Casey, president and CEO of Palm Springs-based Integrated Wealth Management, cautions, “ETFs are in vogue right now. But just because it’s an ETF doesn’t mean it’s a good one.”

A recent study by Transamerica Center for Retirement suggests there is a significant gender gap in financial literacy: “Women did not start saving for retirement until age 40 or later. And while 34 percent said their retirement savings are invested in a relatively equal mix of stocks and bonds, an additional 31 percent were not aware of how their savings are invested.” That kind of financial illiteracy — no matter the gender — comes at a costly price.

Casey points to a key issue in today’s world of investing: transparency. Bernard Madoff shocked us with the enormous losses that occurred due to lack of transparency. Don’t be a victim. “We need transparency. Ignorance is not bliss when it comes to your money. Ask hard-hitting questions about fees, the security of the underlying custodian, and who the underlying company is supported by,” Casey says. “More important than ever is who is on the board.” 

Brian Shea, regional manager for Wells Fargo’s Wealth Management Group, agrees with Casey on the importance of transparency. “It’s a simple concept that comes down to do you really know what your money is invested in?” Even if you’re just buying mutual funds, then determine what the fund owns, what it is buying, and who’s behind these investments.”

New products include Treasury inflation-protected securities, also known as TIPS. According to TreasuryDirect®, “TIPS are securities whose principal is tied to the Consumer Price Index. With inflation, the principal increases. With deflation, it decreases. When the security matures, the U.S. Treasury pays the original or adjusted principal, whichever is greater.”

A new question asked by wealth advisers is, “What’s your number?” Shea explains: “That means what amount of liquid assets do you need and want to have available to you. It goes right back to depth of the financial crisis.” Shea cites foreign currency buying as a vehicle for forward-thinking investors.  

In the halcyon days of Wall Street, many investors were happy to let advisers and brokers handle it all. That’s no longer a strategic way to do business. “One investing concept people need to pay attention to today is managing return in a low-interest-rate environment,” says Dave Wilson, vice president and managing director of Northern Trust’s Rancho Mirage office. “Understanding the difference between yield to call, yield to maturity, and current yield is key today.”

It’s a new world. The best thing you can do is to educate yourself. Of course, one adage holds true: “Caveat emptor,” advises Haddon Libby, chief financial officer of El Paseo Bank.