ST. LOUIS, Mo. -- As a junior at St. Louis University, Jeff Duncan interviewed an investment banker at A.G. Edwards for a class paper.
The project hooked him on managing financial assets. Over the years he worked at various financial institutions, helping to support financial planners, advisers and insurance agents.
"I learned from them how important a position they played in advising clients in creating and transferring wealth and how to perform these functions in a tax-efficient manner," Duncan said.
Eventually, he realized that if he could share the information he had gathered, individual investors could build their wealth and, as he puts it, "better the lives of the people they care about."
In 2005, he founded Duncan Financial Management, which now has two offices near St. Louis. The firm manages a portfolio of more than $25 million for clients who include engineers, doctors, communications workers, police officers, firefighters, teachers and employees of AT&T, Laclede Gas and Anheuser-Busch.
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QUESTION: How should people plan for their financial futures in light of the recession?
ANSWER: The Dow Jones industrial average is hanging around 10,000, a point first reached in 1999. Most investors didn't plan for a stock market that was going to trade flat for 11 years. Investors planning for retirement should plan for the worst and hope for the best. I've experienced time and again that individuals plan for the best and hope for the best.
This mentality developed during the 1980s and '90s, when investors were told to diversify and buy during stock market dips. This "traditional investing" is no longer a valid retirement plan.
Most 401(k)s, IRAs and other retirement investments make money only when markets and the economy expand. Investors need to be able to make money when markets are up, down or sideways.
Q: What are the necessary investment tools?
A: One tool is guaranteed. Investors know that governments, insurance companies and banks guarantee principal, earnings and terms. But what investors don't like today is the low returns.
Another tool is a hybrid. This investment tool has the principal guaranteed and in some cases income guaranteed with the possibility of higher growth potential than the first tool. Banks and insurance companies offer these tools, which have a stated term, possible early withdrawal penalties and possible growth limits.
The third tool is the "risk and potential growth" tool. Mutual funds, exchange-traded funds, brokerages and insurance companies offer these tools. Principal and earnings are not guaranteed. Also, the term is undetermined with that factor left to the investor. This tool carries the risk of market-like losses and the chance of market-like gains.
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Consumers want great service, low price and high quality but can pick only two of the three. With investments, the choices are safety, growth potential and liquidity but, once again, only two traits are available. Investors should consider safety first, then growth. Many individuals overemphasize liquidity, dampening their opportunity for growth.
Q: Does effective retirement planning hinge on tax considerations?
A: The federal government's huge budget deficit and debt burden will likely result in higher taxes. As a result, IRAs, 401(k)s and other deferred compensation plans are the biggest tax bombs to individuals.
Recently, investors have been converting their IRAs to Roth IRAs. By paying investment taxes now, individuals can enjoy future tax-free growth. But many individuals who convert their IRAs to Roths don't understand the complexities the IRS imposes on these conversions. Investors should consult a CPA or investment adviser who specializes in this area.
Another key to tax planning is determining the amount of money individuals need to take from their accounts before retirement. Recent studies have shown that withdrawal-rate recommendations are declining from just a few years ago.
Q: What if smart investing conflicts with someone's impulse to be reckless or overly cautious with personal finances?
A: One of an investment adviser's toughest duties is understanding clients' greed and fear. I admire Warren Buffet's philosophy: Buy when everyone is selling and sell when everyone is buying. Unfortunately, most investors do the opposite.
When people invest, they buy investments they think will make them bunches of money. What they fail to plan for is the decision to sell. Smart investors devise an exit strategy before they buy the investment. That protects them from making emotional decisions when markets are turbulent.
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Q: What will happen to Americans' retirement plans if other countries -- China, mainly -- decide that owning U.S. Treasury bonds is no longer wise?
A: Interest rates would go up for everyone. If interest rates rise, the value of existing bonds would fall. I have found only a third of the investing population understands the inverse relationship between interest rates and bond prices. Think of a teeter-totter. When interest rates go up, bond prices go down; when interest rates go down, bond prices rise.
I believe China will maintain its current holdings so that they can hold their value. China wants to keep its economy expanding and recognizes us as a valuable importer.
