Riding The Wave

Ten smart things Washingtonians can do now with their money.

By: Kimberly Palmer

Illustration by Michael Morgenstern.
With the stock market slowly recovering, many Washingtonians are getting back into the game. But the recent financial crisis hasn’t been forgotten—financial advisers say the recent downturn is shaping investors’ choices.

“They’re a little more cautious,” says Alexandra Armstrong of the DC financial-planning firm Armstrong, Fleming & Moore.

We asked advisers what their savviest clients are doing now with their money. Here are ten suggested moves.1. Get Back Into the Market

While the volatility of the past year led some investors to sit on spare funds, many are deciding it’s time to put them on the table.

“We are seeing a lot of cash coming into the market from real-estate sales and inheritances that took place over the last 18 months,” says Eric Hess, senior adviser at Alpha Financial Advisors in McLean.

That’s a good idea, says Hess, because he anticipates continued growth: “We’re encouraging people more strongly than ever to invest idle cash. We have seen the turn in the market.”

That doesn’t mean he suggests putting all of it into stocks. Hess recommends sticking with a traditionally diversified split, which for his clients typically means 60 percent in stocks and 40 percent in bonds. That way, he says, if the market has a bad week or quarter, investors aren’t overexposed.

Other advisers, still wary of potential dips ahead, urge clients to tread carefully.

“We’re not in smooth economic territory,” says Armstrong, pointing to the high unemployment rate and federal deficit. Her clients are maintaining higher-than-normal cash reserves; Armstrong generally recommends having one year’s worth of expenses.

2. Know Where Your Money Is

Gone are the days when investors would trust an adviser to manage their money without understanding where it’s going and why.

“We’ve noticed an increase in folks who have called us looking for a second opinion,” says Mary A. Malgoire, president of the Family Firm in Bethesda. “They say, ‘My brokerage account went down 40 percent—is that what happened with you guys?’ People are shopping around.”

Advisers also say that clients, perhaps wary of another Madoff scandal, are asking better questions and avoiding strategies that sound too complicated.

Top questions to ask a financial adviser include these: How does your fee structure work? What are the risks associated with the strategy you’re recommending? How have your clients done during the downturn?

Speaking with longtime clients or getting adviser recommendations from friends are also smart strategies. 3. Seek Safety—and Returns

Low interest rates mean that the usual conservative spots for investors—including money-market funds, certificates of deposit, and savings accounts—are paying such low yields that they often fail to keep up with inflation. That’s causing safety-seeking investors to turn to annuities, high-yield bond funds, and dividend-paying stocks to keep their money relatively safe while earning decent returns.

Armstrong says some of her clients, many of whom are retirees, are buying annuities with guaranteed payouts. “People like the fact that they’ll get the money,” she says. She still recommends devoting a significant portion of a portfolio—around two-thirds—to stocks but selecting more or less conservative ones based on a client’s stage of life.

“As you age, buy dividend-paying stocks,” she says. “Or invest in funds that are paying decent yields. Some funds increase dividends over time. Because people are living longer, you want your money to last as long as you do.”

Funds that focus on dividend-paying stocks typically include the word “dividend” in their name, such as the Fidelity Dividend Growth Fund and Vanguard Dividend Appreciation Index Fund.

4. Guard Against Inflation


TIPS, or Treasury Inflation-Protected Securities, go up and down with inflation, which makes them a useful tool for investors who want to protect themselves against the risk of rising prices. Like bonds, TIPS pay interest at regular intervals. Yields on ten-year TIPS have recently hovered between 1.2 and 1.5 percent, making them more appealing than many money-market funds and savings accounts.

5. Buy Gold

At first glance, gold can seem like a dud of an investment: Its value tends to be cyclical, going up when the dollar goes down, so the recent run-up in the value of gold seems to suggest it will soon be headed south.

But some advisers point out that because the value of gold tends to go up with inflation—which some economists anticipate will rise—the metal is still a good buy.

Rita Cheng, an adviser with Ameriprise Financial in Bethesda, generally recommends that clients invest 2 to 7 percent of their portfolios in gold, precious metals, and commodities. She says that the percentage varies by situation; more-conservative investors may need a higher percentage to protect themselves more from inflation, while investors with more in stocks may need less. Investing through an exchange-traded fund that tracks gold prices, such as iShares COMEX Gold Trust or SPDR Gold Shares, is an easy way for investors to gain exposure to gold without sacrificing liquidity.

6. Invest More Overseas

You can protect yourself from a declining dollar and slowed US economy by investing more in international stocks. Armstrong urges clients who can take some risks to put about 5 percent of their portfolios into emerging markets such as Brazil, India, and China.

“That’s where the real growth will be,” she says. “If you want to hedge against inflation, everybody should have a piece of it.”

According to a recent analysis by Fidelity Investments, putting 30 percent of stock portfolios into international equities best protects investors from the risks of global fluctuations while maximizing returns.

Instead of choosing specific countries, some experts recommend investing in global funds with stakes in multiple countries, such as Fidelity’s Worldwide Fund and its International Discovery Fund.

Armstrong says investors can also increase their exposure to the global market by investing in major American companies that do a lot of business overseas, such as Caterpillar and Coca-Cola.

“Multinational companies get a lot of their profits from abroad,” she says—meaning that strong consumer demand in a country like China will have a positive impact on business.

7. Take Advantage of Free Help

While many top advisers require a potential client to have a portfolio of $1 million or more, investors who don’t meet that minimum can still benefit from a firm’s advice. Just visit its Web site.

Rockefeller Trust Companies, for example, which manages money for wealthy individuals, shares its general strategies in quarterly outlook reports posted on its site. The most recent report discusses countering a weak dollar with investments in global equities.

Major brokerage houses such as Fidelity, Vanguard, and Merrill Lynch also post analyses online. “People like doing that kind of research,” says Susan Freed of Freed Advisors in Chevy Chase. “You can tap into their general investment advice—their view on the economy, what type of bonds they like. It won’t say exactly what they’re buying and selling, but it’s a good indication of their views and strategies.”

Investors who meet a firm’s minimum portfolio and who are willing to pay for advice are more likely to do so these days, according to Freed. “A lot more people are considering hiring someone to help them manage their money,” she says, because the financial crisis has underscored how volatile and risky investing can be.

8. Expect Full Service

Most high-net-worth investors don’t want to have to arrange separate meetings with their tax accountant, estate planner, and financial adviser and then sort through any conflicting recommendations. Instead, they prefer to meet with all of them at once.

Barry Glassman, president of McLean-based Glassman Wealth Services, says he increasingly arranges such get-togethers, which he dubs “wealth-adviser summits,” at least once a year for clients. While the super-wealthy—those with investable assets of more than $50 million—have long coordinated similar exchanges, Glassman says it’s become more common among clients with portfolios of $2 million or more.

9. Invest to Minimize Taxes

People in high tax brackets often invest in some tax-exempt options that allow them to keep more of their money.

Earnings from municipal bonds, for example, which state and local governments use to raise funds, are usually exempt from taxes. Tax-exempt bond funds expose investors to a range of municipal bonds. Rita Cheng recommends them to clients because the yield is usually slightly higher than other alternatives for cash, such as savings accounts, and it’s a relatively safe investment, although risk levels vary.

“If you can get 2 to 3 percent tax-free, you feel a little bit better about your capital,” she says.

Vanguard’s high-yield tax-exempt bond fund currently yields 4.14 percent.

10. Give Assets to Your Kids

In addition to annual limits on gifts, investors can give away a total of $1 million tax-free over their lifetime. Alban Salaman, chair of Holland & Knight’s private-wealth-services group for the Mid-Atlantic region, says it’s a good time for high-net-worth individuals to give away some of their wealth. Because assets have lost some of their value, people can give more away tax-free under the gift limits.

“Why not give some of the lower-value assets to your children now? It lets your daughter get the appreciation,” he says, while allowing an investor to avoid paying significant estate taxes on the gains that occur after the gift is transferred.