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Article Archives: 01/12/2005

Profiting in 2005

This time last year I predicted that the stock market would go up around 8% and that the return on bonds would be lower than people had come to expect over the last 20 years. Those following my advice averaged 8-10% on their money last year. So what is your plan for 2005?

But wait! I was wrong! Instead of going up 8% the S&P 500 index went up 8.99%. I was also expecting bonds to earn 3-4%. The intermediate term treasury index only increased 2.02%. I recommended investors decrease the amount of money they have in bonds and increase the portion in stocks. I also suggested using Real Estate Investment Trusts (REITs) as a replacement for some of the money in the portfolio previously allocated to bonds.

For all of 2004, small company stocks were up 17%, the Nasdaq 9%, REITs 32%, and the large international index increased 17%. If you took my advice and had a well diversified portfolio you should have averaged 8%. My conservative clients averaged 6-8% with some earning 10-15%.

Enough about the past, how should you invest for 2005? Exactly the way I recommended in 2004. I expect the stock market to return around 8-10% in 2005, albeit with some bumps along the way. Many people have been talking about a bubble in the real estate market. I disagree and believe REITs will continue to do well.

I anticipate that the Federal Reserve will continue to raise short-term interest rates in 2005. I don’t expect long-term interest rates to dramatically increase. Since current rates are below the inflation rate, this rise should not seriously affect the economy.

There’s been a lot of talk about the size of our deficit and its effect on foreign investors financing our debt. I believe President Bush will successfully get a budget passed that will assure the world that he is serious about reducing the deficit.

Over the last year, commodity prices such as oil, copper and natural gas increased dramatically. I expect commodity prices to continue to remain at these levels and possible even go higher as a result of the Asian and world economy’s continued growth. Oil will generally remain above $40 a barrel with occasional spikes similar to what we’ve seen recently. I don’t expect these higher prices to put a significant drain on the U.S. economy.

This overall scenario means that it will be difficult for those investors who are trying to earn 6-8% investing in bonds. It’s simply not going to happen. For the next several years, even conservative bond-type investors will need to look to real estate and equities to average 6-8% per year.

Of course, real estate and stock market-based investments will fluctuate more than bonds. Many of the retirees that I talk with are greatly concerned and compare the market’s ups and downs to riding a roller coaster (and you won’t see many seniors lining up to ride the coasters these days). The thought of losing the money they depend on to maintain their standard of living makes them queasy enough—especially after many of them lost a lot of money in the stock market between 2000 and 2002!

That’s why it is vital that you work with an advisor who uses non-traditional money management methods designed to limit potential volatility. Unfortunately, most advisors follow the traditional ‘Buy and Hold’ methods of investing which basically say you should be willing to sit by and do nothing while you lose 30-40% of your money! I strongly caution against that method—it just doesn’t make sense.

There are ways to invest in equities with the comfort of knowing that your lifestyle isn’t at risk because of market fluctuation. Unfortunately, products like Equity-Indexed Annuities (EIAs) were developed by the insurance industry in an attempt to meet this need, but they force you to give up control and access to your money. You shouldn’t buy any investment that requires you to pay penalties as high as 22% to get at YOUR money. And don’t be lured by the ‘bonus’ they may pay. There’s no such thing as free money. You’re the one who could end up paying in the long run.

If you’d like free, clear, unbiased advice send your questions to jeff@guardingyourwealth.com.

Mr. Voudrie is a Certified Financial Planner™ Professional, nationally syndicated newspaper columnist and President of Legacy Planning Group, Inc., a Private Wealth Management Firm in Johnson City, TN. He can be reached toll-free at 1-877-827-1463.

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