| Sargent & Lundy Savings Investment Plan |
| LOSING TRACK OF THE BIG PICTURE |
The following excerpts are from an article in the Tuesday, March 10, 1998 "Wall Street Journal". The opinions of the author, Jonathan Clements, may or may not reflect those of the SIP Committee. One step forward, two steps back. This particular dance is all too common among investors. They think they are making a smart financial move, but they don't consider all the ramifications. Below are 10 problems that can arise from making investment decisions in isolation and ignoring the big picture: * If you buy the biggest house possible, you will find it tougher to pay for your kids' college. If you send your children to ritzy private schools, it will be more difficult to retire early. For most people, "these goals are mutually exclusive," says Kenneth Klegon, a financial planner in Lansing, Mich. "You can't have the whole pie. You need to set realistic goals." * Investors often parcel out their dollars, without comparing the likely return from different investments. Homeowners, for instance, sometimes make extra payments to pay off their mortgage more quickly, even as they continue to carry much more costly credit-card debt. Similarly, investors will fund a tax-deductible individual retirement account, while ignoring their employer's 401(k) plan, which offers not only a tax deduction but also a matching company contribution. * Anxious about college costs, many parents sensibly save as much as possible. But because they invest in their kid's name, they end up hurting their chances of receiving college-financial aid. * "People will change jobs for a higher salary," says Dallas financial planner John Gay. "But they ignore the benefits," which may be far less attractive at their new employer. In addition, it may take time for their new company's retirement plan and health benefits to kick in. * "Clients will want to buy a large house, largely because of the tax advantages," Mr. Gay says. "But they don't realize all the other expenses that come along with that," including higher home- insurance costs, heftier real-estate taxes and bigger home- maintenance bills. * In pursuit of market-beating returns, many investors single- mindedly search for the best investments. "They look at one mutual fund or one stock at a time, rather than looking at the whole portfolio," says Pittsburgh financial planner Jonathan Kuhn. Result? Investors can end up with an unbalanced portfolio that includes too much money in a single market sector or the wrong mix of stocks and more conservative investments. * A lot of employees load up on company stock because they receive stock options, they can buy shares at a discount or they can purchase stock through the company retirement plan. "The danger is, if the company gets into financial difficulty, you not only lose a lot of your net worth, but you could also lose your job," Mr. Kuhn says. "If you have more than 20% of your total portfolio in your company's stock, you ought to consider diversifying into other investments." * If you have a fund or a stock that's been disappointing, the temptation is to dump it and move on. But, says John Cammack, a financial planner with Baltimore's T. Rowe Price Associates, you shouldn't make any trades in your taxable account "without thinking about the tax consequences." Because of the capital-gains taxes that may be owed on the lackluster investment, you might find you are better off staying put. And if you do decide to sell, it could be worth waiting a little longer, so that you qualify for the low capital-gains rate on investments held more than 18 months. * Parents will buy life insurance, to provide for their children in the event of their death, without considering estate taxes. If you buy life insurance on your own life, the proceeds are subject to estate taxes. But if the policy is owned by, say, an irrevocable life-insurance trust, the insurance proceeds are tax-free. * Whenever they buy a house or an investment, many couples instinctively purchase the assets jointly with right of survivorship. That means the assets go directly to the surviving spouse upon the death of the first spouse. That might seem attractive, because you can leave an unlimited amount to your spouse without triggering estate taxes. But if you do that, you waste your $625,000 unified credit, which is the amount you can leave tax-free to other heirs. "As a couples' assets approach $1 million, we look at retitling assets, so that they own assets individually," Mr. Kuhn says. These individually owned assets are often then used to fund a bypass trust. On the death of the first spouse, up to $625,000 goes into the trust, with the assets earmarked for, say, the kids, but with the money still available to the surviving spouse. This uses the first spouse's unified credit, thus ensuring that less estate tax is owed on the death of the second spouse. |
This page updated on 3/10/98