Billy Ying sweeps the floor around the Knight Capital trading post on the floor of the New York Stock Exchange after the close of trading Friday, Aug. 3, 2012. Knight Capital's stock soared after the battered trading firm received a financial lifeline and clients said they expect to resume routing trades through the system.
Richard Drew, Associated Press - Ap
A financial plan for the truly fed up
- Article by: RON LIEBER
- New York Times
- August 11, 2012 - 8:52 PM
The deck is stacked. The game is rigged. The system is unmanageable.
With each passing scandal, it gets a little bit harder to ignore this refrain from individuals who have had it with traditional financial services companies. Perhaps it's because the unfortunate events seem to be happening with increasing frequency.
This month, the funky trading programs at Knight Capital sent many stock prices scattering. While most individual investors were not hurt, the company, a major player in stock trading, is reeling.
The breakdown at Knight comes on the heels of -- well, take your pick. The trading debacle at JPMorgan? The LIBOR-fixing scandal? The Facebook initial public offering? The customer restitution that Capital One is paying for what the Consumer Financial Protection Bureau said was deceptive credit card marketing?
It's enough to give credence to the people who want nothing to do with the profit-making players of the American financial system.
I've heard from some of them of late, and they areen't fringe characters living in fantasyland. They know they need to continue to save 15 percent or more of their income and invest it in something that earns a reasonable rate of return if they're going to have any hope of retiring. But they don't want to own stocks or do business with traditional financial players to achieve their goals.
Are they crazy even to try? This week, I took up the challenge of creating a financial plan for people like this -- including the beginnings of a model investment portfolio -- to see if such a goal is even remotely possible.
Storing your money: It all starts with your day-to-day cash flow, so for a checking account, the opt-outers will want to do business with a credit union.
As for investments (and we'll get to the specifics in a moment), store them in a brokerage firm at Vanguard, USAA or TIAA-CREF, all of which are member-owned or use profits to pay dividends to customers and lower their fees.
If your employer matches any money that you save for retirement, don't turn that down out of spite for the for-profit firm that may be administering the 401(k). Save enough to get that match.
Bonds: Just because you're trying to avoid investing with, or in, for-profit entities doesn't mean you ought to sit out the bond market. Consider municipal bonds, which help pay for roads and schools and other local or regional projects. "You're basically investing in your community," said Doug Wheat, a financial planner with Family Wealth Management in Holyoke, Mass. "Which is one of the main tenets of being a socially responsible investor."
Vanguard's Long-Term Tax-Exempt Fund has averaged a 6.23 percent annual return over its 35 years of existence. That's no guarantee of long-term future performance in a world where interest rates may rise and cities are going bankrupt, but at least you can sell it if you need the money or wish to reallocate your portfolio for whatever reason.
Then there's a curious mutual fund offering called the CRA Qualified Investment Fund. (It trades under the symbol CRATX.) CRA stands for Community Reinvestment Act, and the bonds this fund holds help banks (who buy their own shares of the CRA Qualified fund) fulfill the requirements that the act lays out.
The banks can meet the rules in part by investing a certain amount of money in affordable housing and community services for low- or moderate-income individuals, small businesses and distressed or underserved areas.
Banks use this fund to help stay on the right side of the rules, and since 2007, individual investors have been able to as well. The annualized performance (including returns from the years before individual investors could play along) has been 5.16 percent.
Real estate: Owning property and renting it to farmers, businesses or individuals can be a fine long-term strategy, though timing is everything, as we learned in the middle of the last decade.
But there is plenty about real estate that is nothing like owning stocks, starting with the time it takes to research a purchase. "It's like being a vegan," said Michelle Maton, a financial planner with Aequus Wealth Management Resources in Chicago. "You have to educate yourself if you're going to make that choice." After all, there is no Morningstar for buildings that are up for sale.
There are a few other things that make real estate at least as risky as owning stocks, even if you may feel better about the underlying asset. It's not particularly liquid, so you'd better be sure you won't need to sell quickly. The time it will take you to manage the property counts for something. Then, there are the usual tenant nonpayment and vacancy risks, plus the possibility of permanent economic decline in your region.
There is one upside: If you buy in middle age, you may pay off the mortgage just as your other savings are running out 10 or 15 years after retirement. At that point, the rental income becomes sort of an annuity.
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