Lessons From the
Strategies for Closing
the Confidence Gap
for Small Business
Five Years Later
Lessons From the
Five years after the near-collapse of the U.S. financial system, many investors remain
confused about what they should take away from that troubling time.
Some are padding savings accounts to provide
a cushion against fickle markets and liquidity
to fund future financial needs. Others, buoyed
by impressive gains in the stock market in
the past year, have erased the pain of loss and
are seeking out higher risk investments in
an attempt to maximize portfolio growth.
Yet a new Gallup poll shows that individuals
are more worried about experiencing another
financial meltdown during their retirement
years than they are about running out of
money or working in retirement.1
Certainly the financial crisis underscored some
lasting lessons that investors can use to more
safely navigate the investment landscape
whatever the future holds.
Avoid panic-driven moves. Many investors
could not control the urge to sell into a rapidly
declining market back in 2009. Unfortunately,
panic-driven moves such as this typically result
in the investor locking in losses.
Panic selling also exposes the investor to the
risk of missing the market's best-performing
days. For example, missing just the five
top-performing days of the 20 years ended
December 31, 2012, would have cost you more
than $16,000 based on an original investment
of $10,000 in the S&P 500. Missing the top
20 days would have reduced your average annual
return for the period from 8.22% to 2.09%.2
You never know when the market is going to
shoot up, so staying invested and not giving
in to emotions can really make a difference.
Be flexible about retirement withdrawals.
Another investing takeaway from the financial
crisis may have been the fact that big portfolio
losses just before retirement or in the early
years of retirement—when options to recover
or adjust are more limited—could potentially
derail your plans for lifelong financial security.
Consider the following hypothetical
example: If a new retiree's portfolio worth
$250,000 incurred successive annual declines
of 12% and 7%, its value would be reduced
to $204,600, and it would require a gain of
nearly 23% the following year to restore its
value to $250,000.3 When a retiree's need for
annual withdrawals is added to poor performance, the result can be a much earlier depletion
of assets than would have occurred if portfolio returns
had increased steadily.
What can you do to hedge against an ill-timed portfolio
decline? For starters, if you are retired (or close to retirement
age), take a conservative approach to withdrawing funds
from your retirement portfolio—and be prepared to adjust
your annual withdrawal rate as circumstances warrant.
Current thinking suggests that annual withdrawal rates
above 5% of your portfolio's value could increase the
likelihood that you will outlive your assets. Further, if the
financial markets turn choppy, being prepared to lower
your withdrawal rate to avoid potential long-term effects
to your retirement portfolio may be wise. One of the
easiest ways to adjust your withdrawal rate is to refrain
from adding a cost-of-living increase to your withdrawal
amount in a given year.
Of course, every situation is different and depends on such
variables as your age at retirement, your life expectancy,
the size of your nest egg and, as mentioned, annual market
conditions. The best way to target a withdrawal rate is to
meet one-on-one with a qualified financial advisor and
review your personal situation.
Keep a long-term perspective. This mantra is at the heart
of any successful investment strategy, but it may be all too
easy to lose sight of long-term goals when a perfect storm
of events such as we saw during the financial crisis occurs.
Yet history bears witness to the value of adhering to a
long-term outlook. For instance, historical market data
indicates that for all the one-year periods since 1926,
returns have varied from as low as -67% to as high as 160%.
For all ten-year periods, returns have not been below -4%
or higher than 20%. And, for all periods of 15 years or
longer, returns have all been positive.4
The lesson here is: Don't get caught up in day-to-day or even
week-to-week variations—in either direction. Instead, focus
on whether your long-term performance objectives, i.e., your
average returns over time, are meeting your goals.
1Source: The Wall Street Journal, "What We Learned
From the Financial Crisis," September 13, 2013.
2Source: Standard & Poor's. For the 20-year period
ended December 31, 2012. Stocks are represented by
the S&P 500, an unmanaged index that is generally
considered representative of the U.S. stock market.
Investing in stocks involves risks, including loss of
principal. It is not possible to invest directly in an index.
Past performance is not a guarantee of future results.
3Example is hypothetical and for illustrative purposes only.
4Source: Standard & Poor's. For all indicated holding periods between
January 1, 1926, and December 31, 2012. Stocks are represented by
the total returns of the S&P 500, an unmanaged index that is generally
considered representative of the U.S. stock market. Investing in stocks
involves risks, including loss of principal. It is not possible to invest
directly in an index. Past performance is not a guarantee of future results.
Women and Money
Strategies for Closing the Confidence Gap
One of the byproducts of the financial crisis is the impact that
it has had on women's financial role within their households.
More women are primary breadwinners than ever before, yet
they continue to lack confidence in financial decision making.
Recent research into the financial attitudes, goals and concerns
of women of all ages, income levels and across multiple ethnic
groups revealed that 53% are the primary earners in their
household and 25% earn more than their spouses or partners.
Earning status varies significantly by race: About a third of Asian
American and African American women are primary earners,
compared with just 19% of white women.1
While women's level of financial responsibility has risen, their
confidence in financial decision making has not. Just 20% of
female breadwinners feels "very well prepared" to make wise
financial decisions, and only one in ten believe they are very
knowledgeable about financial products and services.
Confidence Gap Grows Deeper
Although women are relatively secure in their ability to achieve
some financial goals, such as buying a home or reducing debt,
their confidence level about one of the most important financial
goals—attaining retirement security—has been dropping
steadily for the past five years.
Advice Is Key to Building Confidence
Although just one in three women reported using the
services of a financial advisor, those who do have a higher income level, more
accumulated savings and investments—a median of approximately $63,000
compared with just $10,000 for women without a financial advisor—and a greater
willingness to take on investment risk for the potential of reward. Notably, women who
use advisors also feel more confident about being ahead or on
track with their retirement savings goals and their ability to
maintain their standard of living in retirement.
While women are increasingly "in the driver's seat" of their
financial lives, they still face significant challenges when it
comes to feeling secure in their knowledge of financial matters.
What can you do to increase your financial confidence?
- Seek education about the investment vehicles that can help you
reach your goals. Contact local professional/trade associations,
women's groups, community colleges and adult education
centers in your area for information on investment or personal
finance seminars taking place.
- Work with an investment professional. An advisor is an
excellent source of information and guidance to sort
through the many choices available.
- Obtain information about the retirement benefits that are
available through your employer and actively participate in
any plans offered.
1Source: Prudential Financial, Inc., "Financial Experiences & Behaviors Among
Women," 2012-2013 Prudential Research Study. http://www.prudential.com/media/managed/Pru_Women_Study.pdf
Are You Covered?
for Small Business
If you are a small-business owner, you are keenly aware of
what it costs you in time, money and "sweat equity" to get the
business off the ground and to keep it running. But you may
not have spent much time thinking about what would happen
if an unexpected event, such as a natural disaster, an injured
employee or the death of a business partner threatened the
future of your company—and your own financial well-being.
Business insurance offers protection from
a number of financial risks, but deciding
which types and how much you need is
not as straightforward an exercise as you
Here is a rundown of some common types
of insurance you may want—or be required—to purchase.
- Property insurance: Business property
insurance typically covers damage to business
equipment, inventory and physical buildings
in the event of fire, theft or other unfortunate
circumstances. If you borrow money to buy
real estate or equipment, many lenders will
require you to carry property insurance.
- Key employee insurance: This is a life
insurance policy the company purchases
on the person or people who are crucial
to its ongoing success. For very small
businesses and start-ups, key employees
may be limited to the owner of the
business. For larger businesses, the term
key employee may also include others
who are responsible for running critical,
day-to-day business operations. Key
employee insurance is frequently required
by banks and other creditors as a way to
protect their investment, especially for
any start-up businesses they fund.
- Workers' compensation insurance: In most
states and in most industries businesses
with employees are required to carry
"workers' comp" insurance, which covers
medical costs and disability payments if an
employee is injured on the job.
- Liability insurance: Most businesses,
regardless of size or industry, need liability
coverage. General liability insurance
insulates you from claims brought against
your business by individuals who suffer—or allege they suffer—bodily injury or
property damage as a result of your business.
For a small-business owner, particularly
a sole proprietor of a business, it may be
wise to err on the side of overprotection
when it comes to liability coverage.
A Package Deal
Instead of shopping for individual insurance
policies, a more convenient and potentially
affordable option is to purchase a business
owner's policy (BOP), which typically bundles
property and liability insurance—often with
a pick-and-choose menu of extras.
Because insurance is such a competitive
industry, it is wise to shop around and
talk to other business owners to get a better
idea of what might be appropriate for your
needs. As part of your research, be sure to
contact your state's office of insurance.
State governments regulate the insurance
industry and provide services to consumers
and small-business owners.
How Much Is Enough?
Consider the following in evaluating
how much coverage is enough for
The value of your business. Consider
what you paid for real estate,
equipment and other property, as
well as how much it would cost to
replace it all in today's dollars. Then
plan on insuring any property that
is essential to the business for full
replacement value. Next, factor in
other assets and investments, your
current and projected financial
situation and other nontangibles to
arrive at a figure that approximates
what the total business is worth.
Your form of ownership. If your
business is a sole proprietorship,
consider opting for higher coverage
limits—especially liability coverage—
to help safeguard against personal
The National Association of Insurance
1Insurance policies contain exclusions, limitations,
reductions of benefits and terms for keeping them
in force. Your financial professional can provide you
with costs and complete details.
Filing taxes is one of those unavoidable spring chores.
Use this list to get a jump-start on your 2013 tax return.
Check all tax reporting forms, including W2s, 1099s and 1098s
(mortgage interest forms), for accuracy. Make sure to review your
state and federal withholdings. If you find a problem, call the phone
number listed on the form and request a corrected copy.
If you expect to receive a refund, file early. According to the IRS,
the average individual tax refund last year was almost $3,000.
On the other hand, if you owe Uncle Sam money, consider waiting
until the April 16 deadline to keep your money working for you as
long as possible.
Remember to get a written acknowledgment from charities for all
charitable contributions of $250 or more you made in 2013.
Don't overlook your IRA! You have until April 15, 2014, to make
your 2013 contribution of up to $5,500, with an extra $1,000
if you are over the age of 50. Also, if you qualify, be sure to take
advantage of the tax deduction associated with a traditional IRA
contribution. Generally, your eligibility is determined by your
income level, marital status and coverage by an employer-sponsored
retirement plan. Check with your tax preparer
(or visit the IRS website) for specific details.
Review cancelled checks and credit card statements from early
2014 for overlooked opportunities. Deductible expenses you may
have incurred and/or charitable contributions made in the last
few days of 2013 may not have shown up until your January or
February 2014 bank and/or credit card statements were issued.
Finally, as you file away your forms and schedules at the end of
the tax season, take some time to review your overall financial
picture and make adjustments where needed.
This information is not intended to be a substitute for specific
individualized tax advice. We suggest that you discuss your specific
tax issues with a qualified tax advisor.
The opinions voiced in this newsletter are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested in directly.