Financial advisor recommends steady path

By Sam Harvey
Staff Reporter

	Coastal Point • SAM HARVEY Rick Solloway and Linda Mecham, from Edward Jones.

But whether you’re trying to shed a few pounds or save a few pennies, you might need more than mere resolve. Some kind of plan would probably help.

Rick Solloway, an investment representative with Edward Jones, offered a few suggestions, just in time for folks looking to turn over a new leaf in 2006.

Solloway frequently teaches classes on this topic, in partnership with the Delaware Money School, and will actually cover some of these same topics in January and February at the South Coastal Library in Bethany Beach.

If Solloway picks up a few clients, so be it. “But the best thing that could ever come out of the classes is people get better educated,” he emphasized.

As far as people coming in to the Bethany-area Edward Jones office, he said there seems to be a lot of interest in protecting principal. The stock market’s been on the up and up for a few years now, but some took losses in the last downturn (1999 to 2002).

But there are ways to invest in highly stable certificates of deposit (CDs) or government bonds — and then risk only the interest from those investments in other financial “vehicles,” Solloway explained.

He outlined a 10-year “conveyor belt” scenario (also called laddering), using $100,000 in principal to keep the math simple. In this example, the hypothetical Mr. Smith invests $10,000 in one-year CDs or bonds, $10,000 in two-year CDs or bonds…out to 10-year CDs or bonds.

The bond market’s a little funny right now, but just looking at CDs, interest rates typically get better and better the longer the term. So, estimate 4.5 percent for the one-year CD and 6.5 percent for the 10-year, for a 5.5 percent average, Solloway suggested.

So, the $100,000 principal earns an average $5,500 a year in interest, and it’s all Federal Deposit Insurance Corporation (FDIC) insured, he continued. And then Mr. Smith might feel a little better about placing the $5,500 in something with a little more risk.

Solloway said investors should consider between 6 and 8 percent interest rates “a very realistic goal.”

It all depends on how fast people wanted their money to grow, versus how much risk they feel comfortable with. And, as Solloway pointed out, this was as much an issue for Mr. Smith, with his hefty chunk of principal, as it was for someone contributing to an employer’s 401(k), for instance.

Accounts like 401(k)s are all different, and employees contributing to them often have opportunities to weigh in on just what they want under the hood, Solloway pointed out — and even more input when it comes to IRAs.

“What’s powering the vehicle?” he asked. “Is it CDs? Government bonds? Corporate bonds? Mutual funds? Individual stocks?”

Mutual funds typically deliver between 6 and 8 percent interest; stocks might return 10 or 12 percent — but the higher the return, the higher the risk, he said.

There are typically fewer options with the 401(k)s, he added — they are mostly mutual fund-driven. Solloway recommended investment in both a 401(k) and traditional or Roth IRAs.

He explained the differences between traditional, tax-advantaged or tax-deferred IRAs and Roth IRAs. But either way, he said, IRAs are better than annuities.

He characterized annuities as “life insurance meets mutual fund,” expressing distaste that financial advisors could legally guarantee protection from loss.

This was technically true, he said, but only for the beneficiary of an investor who died before the term was up. And annuities are expensive, he said – costing investors about 3 percent a year to hold.

“They pay people in my seat a lot of money,” he admitted. “If I sell a $50,000 annuity, I put $5,000 in my pocket.”

“If you want insurance, buy life insurance,” he added. But not whole life — according to Solloway, it makes a lot more sense to take out term life and invest the rest in IRAs.

Per Internal Revenue Service (IRS) regulations, people have to start taking money out of those accounts at around age 70, Solloway pointed out, and there are tax issues to be aware of. But he suggested there is typically some overreaction in this area.

“Most people don’t pay as much in taxes as they think they’re paying,” he pointed out.

So, resolve to stop hiding your money under the mattress this year and start putting it to work for you instead. And to learn more about the Delaware Money School classes (free, but seating is limited), contact Solloway at (302) 537-0600.