Photo Illustrations by Pete McArthur
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Getting Scrambled By Stocks?
By Diane Harris, March-April 2003
In rocky times, these alternative investments will make your money last as long as you do
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You've heard it before—heck, you've heard it from us before—but it's so critical we're going to say it again: When it comes to saving for retirement, diversification pays. You must spread your long-term savings among several different kinds of financial assets, so that at least one or two are always making money. Not convinced? Think about the profound and painful slump in stock prices over the past three years and the damage it has done to your nest egg. That should help you see how important this strategy is for investors over 50.
"This is not the time of your life to be financially adventuresome, but it's not the time to run for cover in all so-called safe investments either," says Dee Lee, co-author of The Complete Idiot's Guide to Retiring Early.
There are some smart investment opportunities that bridge that gap. And those who have taken advantage of them in recent years have been amply rewarded—by avoiding the horrific losses that have decimated so many nest eggs built mainly around stocks.
Consider former paint plant manager Jim Wood, who retired in 1998, fortified by 401(k) and IRA savings totaling a combined six figures. Early in his retirement—working with the broker who had handled his portfolio for a decade—Wood used a small chunk of his savings to trade stocks. Though the market was at its peak, Wood wasn't totally satisfied with his results. He began educating himself about investing, and eventually abandoned his broker. By mid-2000, he had learned enough to decide he needed to begin shifting money into various alternative investments, including real estate funds, inflation-protected securities, fixed-income funds, and even old-fashioned Series EE savings bonds. "I stopped trying to hit home runs and focused on just staying in the game," says Wood, 69, who lives with his wife, Jane, 62, a retired nurse, in Terre Haute, Indiana. Three years later, with the S&P 500 down 40 percent from its peak, the Woods have lost less than 4 percent of their savings. "We've had to tighten our belts a bit, but we're not panicked," Wood says. "We figure our money should still last us the next 30 years."
So where can you, like Jim and Jane Wood, find investments that promise positive returns and a degree of safety and stability amid economic turmoil? Here, according to financial advisers, are four outstanding choices:
Location, Location, Location
Real estate has been one of the few bright lights on the investment stage recently. But double-digit value hikes in many areas of the country have fueled concern that the real estate market will be the next financial bubble to burst. At the same time, owning property solely as an investment has always had serious drawbacks. Real estate is labor intensive, expensive to maintain, and, if you need cash, not necessarily easy to sell fast. That's why, rather than buying real estate directly, more and more investors are instead opting for shares in real estate investment trusts (REITs), which own collections of property, or in the mutual funds that invest in these trusts.
As Mari Adam, a certified financial planner in Boca Raton, Florida, puts it, "REITs give you most of the financial benefits of owning real estate without anyone calling you at three o'clock in the morning to fix the toilet."
Mirroring the real estate market's gains, REIT shares (which trade on the stock exchange like other public companies) have had a stellar run since the stock market began to tank. As a group, the trusts rose 14 percent annually over the three-year period that ended October 1, 2002. The average stock lost 13 percent of its value in that time. History says that long-term REIT returns in the 8-10 percent range are likely.
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