By
Michael Coffey, Kevin Cornwell, David Heitmiller & Vicki
Robin
2001
 In
response to many inquiries about whether Step Nine as described
in Your Money Or Your Life is
still valid -- given the current status of the Dow, the diminishing
supply of Treasury Bonds, the advent of Socially Responsible
Investing, you-name-it -- a team from the Your Money Or
Your Life Speakers' Bureau (folks who have followed the
Nine Steps in Your Money Or Your Life for six months
or more) reviewed our original recommendations.
Here
is their report.
Keep
in mind that the prime directive of Step Nine is to become
knowledgeable and sophisticated about long term interest bearing
investments.
Study
• Choose • Caveat Emptor
INTRODUCTION
When
people think about Your Money Or Your Life they often
conjure up two things: keeping track of every penny and investing
in US Treasury bonds. It would be a pity if the liberating
message of establishing a transformed relationship were misinterpreted
as a deadening practice of penny pinching or an excessively
prudent investment strategy. Our effort here is to clarify
and expand our investment philosophy and the opportunities
that lie ahead for people on the road to Financial Independence.
Underneath
all investing is a profound and ancient human need for security.
This need is manifest in two opposing forces in all our psyches:
greed and fear. Your Money Or Your Life helps people
encounter and balance these forces by helping people understand
what 'enough' means for them. Fear says: go slow, be sure.
Greed says: get ahead, take advantage. Enough says: I am secure
in having my needs met and can go out and play! This is certainly
one of the revolutionary messages of the book. It flies in
the face of the mania for more, the competitive consumption
game the whole world is being pushed into playing.
Staying
steady with your non-economic goals is tough amidst a myriad
signals to increase your holdings for increase sake. This
is important to bear in mind as we revisit Step 9.
Your
Money Or Your Life distinguishes between two types of
"investing." There is investing/speculating as a
supplement to (or replacement of) paid employment for the
purpose of increasing wealth. This may be aimed at increased
consumption, paying the bills, retirement or leaving money
to the heirs. The other type of "investing" assumes
you have accumulated a sufficient nest egg and want to rely
on it for income production while you turn your attention
to something other than making more money. It's investing
to have a paycheck for the rest of one's life, no matter what
you do with your time. The extremely conservative recommendations
in Step 9 are based on the latter assumption. We assume
that once you reach "enough", you will want to invest
more time in living the life you've saved for, rather than
spending life energy attending to your investments. We
assume that only the sophisticated and the risk-tolerant will
see the first type of investing as a primary means of capital
accumulation. If we seemed to strongly favor "sweat of
the brow" income as the primary way to FI, it's because
this program is for everyone, not just the lucky few who pick
well enough to have the stunning Wall Street successes that
so many folks seem to envy. For every winner, we've met a
loser - and the FI program tries to be a reliable strategy
that is foolproof and fail-proof.
However,
experience has shown us, and changing times demand,
that we revisit our investment recommendations.
Why?
1.
The availability of Treasury bills, notes and
bonds is changing. Treasury securities used to
be like Niagara Falls - always powerful, always there.
From never-changing, they are now changing with unsettling
frequency. As of early 2001, some short-term U.S. bonds
(52-week Treasury bills) are no longer being issued. 30-year
Treasury bonds appear to be going away and there was a
time earlier this year when the U.S. government was buying
back bonds before they fully matured. More on this later.
2.
The availability of low-risk socially responsible
investment vehicles is increasing. There are
a number of socially responsible investments available,
and the performance of these stocks/funds/investments
has generally been in line with similar low-risk non-socially
directed (growth type) funds. Furthermore, an increasing
number of people are finding that investing in socially
responsible investment vehicles allows them to merge their
quest for FI with their humanitarian or environmental
values.
3.
Many people who follow the 9-step program want
information on how to maximize the income from their savings
during the long haul to FI. Since being financially
independent is not a pressing short-term goal, investing
for safety rather than wealth accumulation seems to ignore
some of the more conservative opportunities the stock
market offers. This field is outside our expertise,
but we want to offer some thoughts and resources for those
who choose to follow this path.
4.
The nine criteria for investing in Step 9 are
not all equally important to all people; by considering
them one at a time, other options emerge.
The
following discussion attempts to put these points in perspective.
The Chart of Step 9's criteria for investing will open and
deepen your thinking about how you want to invest your own
hard-earned money.
The
Times They are a Changin' (Background)
Chapter 9 provides information on investing in U.S. Treasury
bonds for a predictable, safe income stream. The beauty of
the book's process is its simplicity and predictability. That
system has worked for many years including the 9 years since
the book was first printed. It should be noted that at this
writing, Treasury bonds are still being issued and the process
described in the book still works.
In 1999 the U.S. Government began running an annual surplus
(as opposed to a deficit) and its long-term borrowing needs
diminished.* [see UFE, United for a Fair Economy http://ufe.org].
There is still a monumental Federal debt (it might be useful
to think of the debt as a mortgage - even if you are making
more money than you have bills due, you may be solvent and
still have a mortgage payment), which must be financed on
an ongoing basis. At present, the public debt still stands
at about $5.6 trillion and is only marginally lower than it
was at the end of either of the past two fiscal years.
So far, one outcome of this surplus is that 1-year (52-week)
Treasury bills were discontinued early in 2001. Also as a
result of the U.S. government's reduced financial need, the
30-year Treasury bonds originally recommended in Your
Money Or Your Life face the possibility of no longer
being issued. At best, this means the availability may be
significantly reduced. At worst, some 30-year bonds are actually
being redeemed early and the debt retired, which leaves the
investor with cash and seeking other investments.
Although the supply may be dwindling, it is still true that
the purchase of Treasury bonds involves a bidding process
through which the small investor is guaranteed a bond, provided
they submit a "noncompetitive" bid. This simply
means you'll accept the interest rate the government offers.
This is important because at the present time there are more
bidders than there are bonds available for sale. You can learn
more about Treasury bonds, including how to buy them online,
by going to the website: http://www.publicdebt.treas.gov.
If, however, the public debt is eventually eliminated, 30-year
Treasury bonds would, most likely go away. There are a number
of alternatives. First among these alternatives is that you
can still buy 30 year T-Bonds on the secondary market.
They would presumably still be in circulation and you could
have guaranteed payments, if you wish. The process for doing
this is presented in the original Your Money Or Your Life
text.
U.S. Government Agency Bonds
Even without Treasury bonds, the nine basic criteria outlined
in Your Money Or Your Life are still generally attainable
using the Government-sponsored "Agency bonds" described
in the book. Agency bonds are purchased from a broker. It
should be noted that each of these agency bonds has drawbacks
that should be understood before investing. For instance,
unlike Treasuries, individual agency bonds may not be exempt
from state and local taxes. They must be sold by a broker
and so incur a commission. Many are callable (the issuer may
pay them back before the maturity date). Some pay back bits
of principal along with interest, which makes it easy to inadvertently
spend the principal. Some have minimum investments of $25,000
or more. They are often less liquid should you need to sell
some. A list of questions to ask when buying agency or T-Bonds
from a broker is included in the Addendum.
Shades of Gray
The investing criteria in Your Money Or Your Life
are based on certain assumptions, prominent among which is
the ultimate safety and predictability of Treasury bonds as
the vehicle for growing the nest egg. The original text clearly
indicates that only one investment fits all the criteria perfectly.
Indeed, once FI is achieved, the original process can provide
the safety of a paycheck for life. T-bonds are ultimately
the most safe and predictable way. But they are not the only
way. There may be practically as many discrete ways to achieve
FI as there are people who have done the steps. It is often
a question of shades of gray.
The base assumption regarding the safety and predictability
of T-bonds doesn't take into account that some people on the
way to FI may want to grow their nest egg differently and
are willing to take additional risk or explore other options.
Some of the basic Your Money Or Your Life criteria
are not as relevant during the period when the nest egg is
growing. For instance, some investments (such as Zero-coupon,
E-Series and I-Series bonds) don't pay cash until they mature;
instead, they're bought at a deep discount from face value
and mature at face value. But if the nest egg is still being
grown that may not be important. Also, as previously mentioned,
some investors may want to be more deliberate about where
their money goes and choose investments with a social or environmental
screen.
A comparison to some other possible investments is in order.
Following is a table comparing and contrasting the original
nine basic criteria for investing your capital from Your
Money Or Your Life with a cross section of investments
(listed in approximately descending order of correlation to
Treasury bonds). Though far from being exhaustive, this can
provide a useful place to start in evaluating the appropriateness
of various investments for you. Of course, one can hold a
variety of investments in a diversified portfolio, and does
not need to go all one way or the other. Please note that
this table is only a tool and you need to make your own decisions
about whether or not certain criteria are important to you.
"Shades
of Gray" Comparison Table:
Basic
Criteria for Investing Your Capital
U.S. Gov't & Agency Bonds I-Series Bonds CD's Corporate
Bonds Bond Mutual Funds Money Market Funds Stock Mutual Funds
Stocks
1) Capital Produces Income Yes Yes Yes Yes Yes Yes
Maybe1 Maybe1
2) Capital Absolutely Safe Yes Yes Yes4 No No Yes No
No
3) Totally Liquid Yes Yes Yes2 Generally Yes Yes Yes
Generally
4) No Fees @ Investment Yes Yes Yes No No3 No3 No3
No3
5) Income Absolutely Safe Yes Yes Yes4 No No Yes No
No
6) Income Can't Fluctuate Yes No5 No7 Varies8 No No
No No
7) Income Payable in Cash Yes No6 Varies6 Varies9 Yes
Yes Yes Yes1
8) No Fees on Income Yes Yes Yes Yes Yes Yes Yes Yes
Yes1
9) No Further Involvement Yes11 Yes11 Yes11 Yes10 Yes12
Yes12 Yes12 No
Notes:
1
-- Depending on the types of stocks chosen -- some pay dividends
and some don't.
2 -- Will likely forfeit some earnings if withdrawn before
maturity.
3 -- Even "No-Load" funds and most Index funds have
management fees.
4 -- Typically the principal and earned interest is only insured
up to a maximum of $100,000.
5 -- Interest rates fluctuate every six months, but is adjusted
for inflation.
6 -- Interest is typically paid at maturity of instrument,
but some longer-term CD's pay interest periodically like bonds.
7 -- CD's have a guaranteed interest rate until maturity,
but are normally issued only up to 5 years.
8 -- Some bonds are callable.
9 -- "Zero-coupon" bonds pay no interest till maturity.
10 -- Corporate bonds have a risk of default. Lower quality
bonds should be monitored.
11 -- Until maturity, after which a new investment must be
made.
12 -- Will fluctuate with markets and should be monitored.
Sophisticated
investors will find exceptions to the Yes's and No's indicated
above. It is beyond the scope of this sample to deal with
all the possible details. Caveat emptor.
Series
I Bonds (Inflation Indexed)
Series
I Bonds are a new type of bond sold like traditional U.S.
Savings Bonds. I-Bond interest is added to the bond monthly
and paid when the bond is cashed. Series I Bonds are sold
at face value -- you pay $50 for a $50 bond -- and they grow
in value with inflation-indexed earnings for up to 30 years.
The
earnings rate of a Series I Bond is a combination of two separate
rates: a fixed rate of return and a variable semiannual inflation
rate. The fixed rate remains the same throughout the life
of the Series I Bond, while the semiannual inflation rate
can vary every 6 months. Similar to Treasury bonds, they are
exempt from state and local taxes. The single biggest difference
is there is no income stream until the bonds are sold. Most
of the above information was taken from the following website:
http://www.publicdebt.treas.gov/sav/sbifaq.htm.
Certificates
of Deposit (CD's)
CD's
normally keep your money for a specified period of time and
pay interest and principal back at the end of the term. Typically,
you forfeit some or all of the interest if you withdraw the
money before the due date (maturity). Certificates of Deposit
come in a variety of forms now, including ones that pay interest
every 6 months like a bond. These can be "laddered"
(staggered, so they mature at progressively more distant points
in time when you may need the money) several years into the
future. While you can make a CD ladder with CD's from any
bank, many people are looking to buy CDs from community development
banks and credit unions as a way of integrating their financial
plans with their values. CD's from these institutions are
competitive with rates offered by conventional banks, but
they help create affordable housing, fund social services
and other vital community development programs. (More on values
integrated investing below.) The principal on each CD, either
from a conventional banking institution or from a community
development bank or credit union, is normally insured up to
$100,000. Be on the lookout for "callable" CD's,
which are brokered and do not act like normal CD's.
Low-Risk,
Socially Responsible Investments
For individuals willing to accept increased risk, investing
in individual corporate bonds, stocks and mutual funds are
a way to do this. Socially responsible investing integrates
an investor's needs with social and environmental concerns,
while still offering rates of return that are competitive
with conventional investment vehicles.
Socially responsible investment possibilities run the gamut
from mutual funds that offer social and environmental screens
to community loan funds that support community development
initiatives here and abroad.
For more information about socially responsible investing
products and services, you can visit the website of the Social
Investment Forum http://www.socialinvest.org,
which offers comprehensive contacts, resources and information
on social responsible investing and is a good source of information
about trends in socially responsible investing, and how these
vehicles compare to the conventional market. There are also
CD's available from banks committed to restorative values,
such as Shore Bank in Chicago and Self-Help Credit Union in
North Carolina. Also see http://www.greenmoney.com.
If you aren't sure if this slightly more involved investment
strategy is right for you, Co-op America publishes
the Financial Planning Handbook for Responsible Investors,
designed to help you understand how socially responsible investing
fits into your overall financial picture.
There are a dizzying number of possible investments, which
makes it beyond the scope of this article to do more than
increase your awareness of the range of alternatives out there.
A checklist of things to consider when making an investment
is included in the Addendum.
None of these references are intended as endorsements, but
rather as examples of thinking beyond Treasury bonds. Further,
there are thousands of mainstream mutual funds, individual
public companies, and ample information sources available
on-line for researching any investments that may be of interest.
Again, caveat emptor; remember what happened in the stock
market the week after September 11.
Closure
Rather than seeing the prescribed Your Money Or Your Life
method being viewed as an "On-Off" switch, there
is a wide spectrum of strategies for getting to FI. As time
goes on, there are more opportunities than ever, especially
for the individual, to grow a nest egg. Find the road to FI
that's right for you.
ADDENDUM
Questions to ask when buying agency bonds or T-Bonds
from a broker.
-
Must these agency bonds be purchased from a broker?
-
How much commission, or spread, is charged on this bond?
(Same question for buying and selling)
-
Is this agency bond exempt from state and local taxes?
-
Is this bond callable (paid back by the issuer before the
full maturity)?
-
Does this bond pay back principal along with interest?
-
Are there minimum investments (some bonds have minimums
of $25,000 or more)?
-
How liquid are these bonds (can they easily be sold if you
want the cash), and at what price?
Checklist
of Things to Consider When Making an Investment
- Is
this investment in line with my tolerance for risk?
-
Is this investment in line with my values?
-
What are the federal, state and local tax implications of
this investment for me? (Is it tax efficient for my income
bracket or situation?)
-
How easily can I liquidate (sell out of) all or part of
this investment?
-
What sales charges/penalties (if any) will I incur in getting
into or out of this investment?
-
Does this provide the current/future income I need?
-
Does this provide overall diversification for my investments?
RESOURCES
General
Investment Knowledge
Government
and Government Agency Bonds
Socially
Responsible Investing & Mutual Funds
Books
& Newsletters
Annette Thau, The Bond Book. Salem, MA: Probus Publishing
Co., 2001
Amy
L. Domini, Socially Responsible Investing: Making A Difference
& Making Money. Dearborn, 2001. The latest book from
a socially responsible investing pioneer.
Peter Camejo; Foreword by Ralph Nader; Introduction by Robert
AG Monks; with many contributing authors, The SRI Advantage:
Why Socially Responsible Investing Has Outperformed Financially.
New Society Publishers, 2002.
Hal Brill, Jack Brill, Cliff Feigenbaum, Investing With
Your Values: Making Money & Making A Difference.
New Society Publishers, 2000. This book covers the world of
socially responsible investing, including screens, mutual
funds, community investing and shareholder activism.
Jay Goldinger, Keys to Investing in Government Securities
(Barron's Business Keys). New York: Barron's Educational Services,
Inc., 1995
John C. Bogle, Bogle On Mutual Funds. Burr Ridge,
IL: Irwin Professional Publishing, 1994. The Chairman of the
Vanguard group of investment companies, one of the largest
companies of its kind in the world. Bogle provides sage advice,
wisdom and warnings about various mutual fund investments
in this readable book.
Dale C. Maley, Index Mutual Funds (How to simplify your
life and beat the pro's). Watkinsville, GA: 1999. A very
readable, simple primer on investing in mutual funds.
Peter Lynch, One Up On Wall Street. New York: Simon
and Schuster, 1989. An outstanding introduction to prospective
investors that provides the confidence to do it yourself from
one of the greatest investment managers of our time.
Beardstown Ladies, The Beardstown Ladies Investment Book.
The charming, educational and amusing step-by-step book of
how a group of mature women formed an investment club, slowly
educated themselves about investments and eventually accumulated
a portfolio of stocks whose performance rivaled brokers on
Wall Street.
The Greenmoney Journal, socially and environmentally
responsible investing, business and consumer resources, a
bimionthly publication. (P.O. Box 67, Santa Fe, NM 87504.)
ACKNOWLEDGEMENTS
The authors of this article would like to thank the following
people for their input and editorial assistance:
About The Authors
-
Michael J Coffey is a life coach living in Seattle and a
member of Your Money Or Your Life Speakers' Bureau.
He began producing Reasonably Simple while participating
in a voluntary discussion group.
-
Kevin Cornwell is a member of Your Money Or Your Life
Speakers' Bureau.
- David
Heitmiller is co-author of the book Getting A Life,
a member of Your Money Or Your Life Speakers' Bureau.
-
Vicki Robin is the co-author of the bestselling book, Your
Money Or Your Life. She is also the president of The
New Road Map Foundation.
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