What financial issues are on people's minds these days? To find out, we asked Roy Diehl, a financial advisor with the Ayco Company L.P. Thousands of subscribers to our TMF Money Advisor service may have already made Roy's acquaintance (TMF Money Advisor subscribers get four hours of toll-free access to Ayco financial advsiors like Roy). He often responds to phone calls and tackles every sort of financial question subscribers pose.
We recently chatted with Roy about down markets, diversification, debt, and driving tanks.
Q: Tell us a little about your background. What you did before your days at Ayco?
A: I started my higher education in engineering, moved into foreign languages, and after an all-expenses-paid adventure in California and Germany (courtesy of the U.S. Army), I left the regular Army for law school and joined the National Guard as a tank crew member, and eventually got my commission as a judge advocate. I went into practice in labor and employment law (with a union for a couple of years and with a management organization for a few more). And then I came to Ayco.
Q: OK, tough guy. Leaving the tank-driving stuff aside for the moment, do you have a general philosophy about how folks should manage their finances?
A: I do have a philosophy on financial planning -- and I'm happy to say that it's one that Ayco and I share -- which is to help people make decisions and take action to improve their financial well-being. Hoping to get rich quick in the markets is like hoping to make a fortune as a professional athlete -- some hit it big in the majors; a few more make do in the minors; but far more nurse their aches and pains without ever making a penny!
If you want to gain financial security and a measure of affluence, work smart, work hard, then save and invest smart with your eye on the long haul. Keep your debt load low, too, and you should come out OK.
Here, I appreciate the fact that we only give the best advice we can. There are no competing agendas because our service does not have anything to sell. In fact, our reputation depends on our objectivity.
Q: What are the most common questions you're asked by TMF Money Advisor subscribers?
A: We get a wide range of questions from TMF Money Advisor callers. Some have oodles of money and want to learn how to manage it themselves. Others have oodles of debt and need some help deciding exactly what they should do to get out of that situation.
Many call with a specific question, such as what to do with a nice chunk of change they just got from an inheritance, what the tax implications are of selling a stock at a loss, how they can manage debt/cash flow, or should they buy or lease a car. To be responsible as well as responsive, we try to go a bit beyond just giving a "quick 'n' easy" answer to the question -- not only to make sure the caller is getting a correct answer to the question, but also to provide good overall advice to act on.
Caller: I just want to know what the taxes would be for taking money out of my 401(k) plan.
Me: Income taxes and 10% penalty -- but why do you need the money?
Caller: For a down payment on a house.
Me: Well, you might be able to borrow the money from the 401(k) instead of withdrawing it.
Caller: Oh, I hadn't thought of that!
Me: Do you have other money outside the 401(k)?
Caller: Well, some CDs.
Me: How much is in the CDs?
Caller: About $100,000.
Me: And how much will the house cost?
Caller: Oh, about $100,000.
Me: Why not use money from the CDs for the down payment?
Caller: I didn't think I could do that before the CDs mature!
We then went into a bit more on how CDs work; on interest rates; how to keep emergency money safe, available, and still a bit productive; and so on. The caller just needed more background information on financial issues.
Some callers are just a little sheepish, afraid their question may sound foolish (with a small "f"). Not to worry! Wherever you're going, you have to start from where you're at!
Q: Has the guidance that you and your team at Ayco give been adjusted at all for the times we're in now? Is our current economic situation reflected in the kinds of questions you're getting?
A: With the aim to improve the financial well-being of our client, the advice we give has always been designed to deal with the likelihood (not merely the possibility) that nasty market cycles like what we're going through now will occur from time to time. It may not be possible to predict exactly when, exactly how long, or exactly how bad, but the odds of going an indefinite period without a bear market are infinitesimally small. You have to plan for it.
Our general direction for asset allocation is developed by our Investment Planning Group, which uses a running 50-year history of market data as its base (for domestic stocks, that is; foreign stock databases only go back to 1970). Our direction is to start from a person's tolerance for "risk," which is another way of saying how much uncertainty they can accept in their investments' actual returns, one year to the next. We then build a mix of assets, using the historical data, tempered by our own judgment within that range of uncertainty.
The real challenge currently is not so much in building a model portfolio, but in dealing with the aftermath of bad market-timing calls that clients have made. A simple fact is that an investment style that may have made a person lots of money in the '90s could well have taken it all away -- and then some -- in the last year or two.
So what to do now if you weren't already reasonably diversified? Dump a lot of stocks that have plummeted in value -- even though they may still turn out to be really good long-term investments? What about the person whose retirement assets have been hammered? Or simply whose confidence in stocks has withered away? That's really where we're earning our keep, helping them understand the role of the stock markets and bond markets in their long-term financial picture.
Other frequent topic areas include refinancing debt when interest rates are low, and alternatives in buying a car -- lease versus buy versus 0% interest.
Q: What area of finance do you find that people neglect the most?
A: Maintaining liquidity. More than a few folks have built up wonderful wealth in retirement accounts or investment portfolios, but have to whip out their credit cards to pay for vacations, car repairs, even college tuition -- and then pay off the balances over a long period of time. Just keeping enough cash around to avoid bouncing checks often does not cut it!
It's always a wonderful thing to live below your means, but even then there are liable to be moments where you just can't keep this month's expenses within this month's means. So you need to have some cash set aside -- as cash -- to deal with those occasions without going into debt.
Particularly with the markets of the past two years fresh in the collective consciousness, folks are accepting the fact that investments (be they stocks or bonds) go down as well as up. In order to avoid the nasty potential of needing to sell an investment when it's down (and when you really think it's still good for the long term), you need to have enough cash in the wings to deal with the bills as they come.
As a general matter, I always suggest looking at what you may need to take from the kitty in the next two or three years and keep that in such boring things as CDs, even passbook savings. You may not make a lot from this money, but that's not the point -- you're trying to preserve what you have and have it available when you need it.
Q: And now for the shameless plug portion of our interview: Thousands of TMF Money Advisor subscribers have taken the opportunity to talk one-on-one on the phone with an Ayco advisor. For those who haven't yet, why should they consider calling?
A: Many callers start out saying that they're not sure what to expect from the call. But most people have issues at least on the back burner of their mind, and through our questions we can bring these to the front burner. Should I refinance my house? Is it good that I'm putting money in my 401(k) after tax instead of before? Is there some risk in using my state's college savings plan? How do bonds really work? What will getting married do to my taxes?
When we talk, these questions often lead to other issues -- maybe they're not saving enough for retirement or they're paying too much to finance their car loan. For many other callers, it's more a matter of fine-tuning the plan they've already put together. We may offer a little different perspective on how to mix investments, or give them a better feel for the effects of arcane provisions of the tax code. There's rarely any risk in consulting with someone else who knows a subject well.
Finally, it can be a bit of fun -- I've swapped war stories with more than one old soldier, and with more than one parent with little kids at home!
Q: In what circumstances should someone seek the counsel of a professional in making money decisions -- even beyond talking to you and Ayco?
A: For investors that have the time, there is seldom a real need to hire a professional to take care of their investments. Other circumstances, however, really do call for some outside help. Let's say you have a lot of money and little time to manage it yourself. Or you have complex tax matters (such as administering an estate), divorce and related disasters, business taxes and accounting -- when the stakes are high and the numbers are not simple, you really need to make sure the job is done right.
But we still come back to the basic idea that if you have the time and the interest, with a little help you can do most things for yourself -- even taxes. It's often just a matter of getting steered to the right resource and maybe getting a little clarification that can make the difference!
Q: What's the most Foolish (with a capital "F") thing you've ever done in your life?
A: I guess the most "Foolish" thing I ever did was to get my commission as a JAG in the Army National Guard.
With that, we ended our interview with Roy Diehl with a salute, the secret handshake, and a promise to build up our liquid assets.
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This article originally ran in January 2002, but was updated on January 16, 2003.