Budgeting a Plan : Individuals Seek Low-Cost Help in Designing an Investment Map
When Kevin and Robin Hopps had their second child, they realized they needed to start investing. Their expenses were under control and they were able to set aside a bit of money each month for their kids’ education and their own retirement. The problem was that they didn’t know how to invest it.
The Studio City residents went to a financial planning company, which told them they should buy a variety of products the company managed. They consulted others, with similar results. Finally, they decided to buy a financial plan from an independent consultant. It cost $1.
“I understand you have the best $1 financial plan on the market,” Hopps wrote to Jonathan Pond, a Boston-based financial author, when requesting Pond’s “four-step” plan.
What Hopps discovered is the latest in a series of inexpensive--or free--financial products designed to help individuals help themselves design an investment plan.
Promoters of these products say they’re necessary for two basic reasons: With interest rates in the basement, it’s clear that few will be able to reach their financial goals by investing in certificates of deposit. Millions of Americans have flocked to brokers and mutual fund managers as a result. Yet many of these investors are unsophisticated and in desperate need of advice, professionals say.
But, thanks to a series of financial scandals in recent years, many people don’t trust commission-based financial advisers. At the same time, they can’t afford fee-only planners, who charge as much as $1,000 to draw up a comprehensive financial plan.
Indeed, a recent survey by the Institute of Certified Financial Planners in Denver found that three out of 10 individuals who need financial advice won’t seek out a professional--of any type. Only 12% of those surveyed would talk to a financial planner.
“Those statistics are not a source of pride for me,” groans Richard B. Wagner, president of the ICFP. (Notably, financial planners were the second-most likely professionals to be sought out--following only bankers--by people with financial questions. But more people said they “didn’t know” (15%) or wouldn’t consult anyone (14%). Some 3% of those surveyed would ask a family friend before a professional.
“The problem is, we cost money. And people haven’t figured out that when you get something you’ve got to pay for it,” Wagner says. However, he acknowledged that consumers also realize they’re frequently too ignorant about finances to “be their own bodyguards” and fend off the charlatans.
Still, numerous professionals, ranging from mutual fund companies to authors, are trying to ensure that these millions of investors have somewhere to go.
Fidelity Investments and Dreyfus Corp. both offer free investor questionnaires that should help you determine how to invest. Numerous new investment books have been brought to market, and booksellers say those books are being briskly snatched off the shelves.
And now Pond, a financial author and “Today Show” contributor, has jumped into the fray with his $1 investment strategy.
Like many of the others, Pond’s plan has its shortcomings.
It’s not detailed. It’s not comprehensive. It’s not personalized nor particularly insightful. And, though the plan doesn’t make this clear, it is only meant to be applied to part of your investment portfolio--your retirement account and the additional cash you have to invest. Your home and your life and disability insurance are not “investments in the traditional sense,” he maintains. In other words, consider those separately.
Still, if you recognize these limitations, the plan has a simple appeal. It’s easy, cheap and was designed by somebody who has nothing--other than books--to sell.
It also recommends about 80 low-cost, strong-performing mutual funds and gives their specialties, investment minimums and toll-free phone numbers. All you have to do is follow the formula and make the phone calls.
Pond says he devised the plan to make a point: “It is not difficult to invest wisely and well, even with a small amount of money,” he says. All you need to do is create a reasonable plan and stick to it. According to him, that takes just four steps.
Step 1: Put all your money into just two things: stocks and bonds. And don’t bother with individual selections; invest through mutual funds. (Remember, he’s talking about just the cash part of your investments.)
Step 2: Decide how much to put in which type of investment. How? Use your age as the percentage figure to invest in bonds and put the rest in stocks--unless you’re under 30 or over 70, in which case you should still keep 30% in bonds and 30% in stocks, respectively.
Steps 3 and 4 are picking mutual funds to invest in and periodically “rebalancing” your portfolio.
Of course, some people are critical of such simplistic formulas.
“He’s trying to give you a magic formula that works for everyone,” says William J. Ruckstuhl, associate professor of finance at the American College in Bryn Mawr, Pa. “Financial plans are like shoes. No one size fits all.”
Still, says Ruckstuhl, “It’s probably worth a buck.”
Those who want a copy of Pond’s plan should send $1 and a self-addressed, stamped, business-size envelope to: Four Steps, P.O. Box 350, Watertown, Mass. 02272.
