Factor job into investment decisions
Investment planning involves a self-assessment of your goals, time horizon and risk tolerance. But financial planners say career choice should also be factored into the equation.
To maximize your income security, your investment plan needs to be in sync with your occupational outlook. If your employment position is shaky, “that dictates a more conservative asset allocation,” says Paula Nangle, a CFP with The Marshall Financial Group, based in Doylestown, Pa.
Yet, Mark Heller, vice president of investments at UBS Financial Services in New Orleans, says, “People who are in risky professions are also big risk takers,” while those in stable jobs may be more risk-averse investors.
Take the tenured university professor, for example. “When you think of the tweed coat and the patches on the jacket, this is typically not a high-risk person, even though … he could afford to take more risk (as an investor),” Heller says.
Here’s how your employment situation should guide your saving and investing strategy.
Consider the arc of your career
School teachers and university professors with tenure enjoy the kind of job longevity that gives them leeway to put more of their money in riskier investments — up to a point. Pete D’Arruda, president of Capital Financial Advisory Group in Cary, N.C., advised many teachers earlier in his career, earning the nickname “Coach Pete” among his clients.
“They’ve got a long time horizon,” says D’Arruda, who hosts the nationally broadcast radio program, “Coach Pete’s Financial Safari.”
“The problem with many teachers is that they are not getting paid enough to really take too much risk with their money,” he says.
These days, many of D’Arruda’s clients are athletes who earn high salaries during the relatively short span of their pro careers. For these and other clients who are making fast money now but are likely to peak soon, he says the best tactic is “building some money in a place where they can’t lose it.”
Prepare for the worst-case scenario
If you have a high layoff risk, beef up your emergency fund.
“A solid financial plan should call for between three (months’) and six months’ of cash reserves — six months if you’re in a shaky position, three months if you’re in a pretty confident position,” Heller says. “Then what you do with your investments after that shouldn’t matter as much.”
But Nangle says many financial advisers recommend raising that minimum to a year’s worth, though she acknowledges that, in today’s economy, many workers struggle to build up even a six-month reserve.
“I think you’re seeing planners recommending a larger emergency fund depending on the types of risks that the client is facing,” Nangle says.
Save extra if a strike is likely
“Communications companies, car companies and even professional athletes seem to be going on strike these days,” says Sarah Place, president and CEO of Place Trade Financial in Raleigh, N.C.
Place advises members of unions that strike regularly to be cautious investors — and proactive about having enough cash on hand to survive a work stoppage.
“My brother-in-law works at a major communications company where they go on strike fairly often,” she says. “So these people basically need to have a strike fund in addition to an emergency fund. If not, if they are on strike and then are in an emergency, they are going to be in a lot of trouble.”
Apply industry know-how with caution
If you decide to invest in company stocks in the industry you work in, pay attention to workplace clues about the industry’s health.
“You know when hiring is happening, what the morale is inside the company,” D’Arruda says. “Back in the boardroom, before they come out and give a smiling face to the press, you’ve seen what the real attitude is.”
But don’t get overconfident of your insider’s knowledge. Place says she’s seen many professionals do this.
“They think that they know the markets and will make a ton of money,” Place says. “But, unfortunately, a lot of them haven’t done their homework. They don’t diversify as well as they should, so they end up losing a lot of money.”
Don’t over-weight portfolio with company stock
Investors who watched employees of Enron and Bear Stearns lose their retirement savings as their respective firms collapsed learned a lesson. According to the Employee Benefit Research Institute, 401(k) participants continue to diversify away from their company stock, a trend that began in 1999. Under regulations that recently went into effect, most 401(k) plans must permit plan participants to sell company stock and reinvest the assets at least on a quarterly basis, though many plans allow more frequent trades.
“When your livelihood and your investments are with the same company or industry, you could end up putting your financial future at risk,” Place says. “If the industry starts to decline, your job might be on the line, so you could lose your investments and your job at the same time.”
Place says putting the bulk of your money in your company’s stock is bad investment planning and almost always turns out badly.
“I have one client that I can think of in my career that is heavily invested in his own company’s stock that hasn’t blown up his account,” she says. “All the rest of them have had something happen, like the dot-com bubble or something else. At least that client also had a lot invested in other things.”