Things to look for in '07

January 07, 2007|By Humberto Cruz | Humberto Cruz,Tribune Media services

Forgive me if I dismiss as mere entertainment - and not too entertaining at that - the endless parade of investment outlook forecasts that compete for attention every new year.

Rather than try to predict the unpredictable, such as where stocks or interest rates are headed, I'll play it safe and give you my annual list of things sure to happen in 2007:

Not long into the new year - perhaps just after the first two weeks - millions of Americans will have broken their resolutions to get their finances in order.

One big reason, aside from any lack of real resolve, is that many of these resolutions are too vague and open-ended, such as, "I am going to save more in 2007." Or they are unrealistic, such as, "I know I haven't saved much up to now, but I am going to make up for it and start saving 20 percent of my income."

For any resolution to have a chance, it has to be realistic and measurable, and have a deadline. Here is an example: Starting now, I am going to reduce eating out to help me save an extra $100 a month, so by the end of the year I will have an extra $1,200 to add to my retirement funds.

Market commentators and self-proclaimed pundits will scrutinize every word uttered by Federal Reserve Chairman Ben S. Bernanke and pore over every statement made by the Federal Open Market Committee, vainly looking for nuances and clues, real or imagined, to divine the direction of interest rates. The future of our economy and markets will seem to hang on whatever happens at each Fed policy committee meeting - until the next one comes along.

Unsophisticated investors who may not be able to explain the difference between a stock and a bond will nevertheless be talked into buying increasingly complex and esoteric products that promise the proverbial free lunch - the possibility of gains without the risk of loss.

While I want to avoid stereotyping, it's fair to say that many of these investments - going by names such as structured products, principal-protected securities, equity-linked notes and hybrid securities - are too complex for Main Street investors, and sometimes even investment professionals, to evaluate properly.

"This complexity and opaqueness allow structured products to survive in the marketplace despite their marked inferiority to traditional portfolios of stocks and bonds," said a paper by chartered financial analysts Craig McCann and Dengpan Luo of Securities Litigation and Consulting Group in Fairfax, Va.

My assessment: Although some of these products may be appropriate for some investors under the right circumstances, others suffer from high costs, limited upside potential and low liquidity, and benefit mostly the people who pocket a commission for selling them.

At least once a week an insurance company or some other financial company will release a study showing baby boomers worry that they will run out of money in retirement (which is true).

Then the company will claim a new product it has developed, usually some sort of lifetime-income annuity, is the solution to the problem.

While this proliferation of choices offers increasing opportunities to consumers, the risk for wrong decisions also grows, given the complexity of many of these products.

Particularly during the winter in areas with high concentration of snowbird retirees, mailboxes will be filled with "special invitations" to "wealth preservation" and "educational" seminars - with a free meal thrown in - where attendees will receive "hundreds, even thousands of dollars'" worth of information that supposedly will save them a bundle in taxes and eliminate market risk from their portfolios.

Educational seminars do exist. But securities regulators warn that "seminars" can be disguised sales pitches for high-commission products such as equity-indexed and other types of annuities with extended surrender charges that may not be appropriate for everyone, and particularly not for older buyers.

Although you may not always hear about them, there are and there will continue to be smart consumers and disciplined investors who can turn away from sales pitches and self-styled gurus.

These smart folks will continue to focus on the basics - spending less than they make, saving systematically and investing in low-cost and widely diversified portfolios, while keeping things simple. Over the long haul, these people will come out ahead.

Humberto Cruz writes for Tribune Media Services.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.