Departments: Money
What Can I Count On?
It's Your Life, Insure It!

Q: What kind of investment returns should I expect?

A: Most people expect too much. It's not difficult to see why. For the four years from the beginning of 1995 through the end of 1998, the U.S. stock market, as measured by the Standard & Poor's Index of 500 stocks, returned an average of 30 percent a year! Last year that dropped to 21 percent.

Those are astounding numbers. To put that in perspective, consider that the historical average return on stocks is 10 to 11 percent a year, bonds around 6 percent, and cash 3 or 4 percent.

Most professionals argue that we are due for a "regression to the mean," by which they mean some negative years to pull down those lofty returns of the 1990s. Others say that things have changed, that technology has improved productivity and we will all profit from it, and that the baby boomer scramble to save for retirement will buoy the market for a good long time.

We don't know which group is right. And we can't afford to be paralyzed worrying about it. The important thing is to make regular investments.

Setting goals does require that you think about a reasonable investment return. One thing you might find helpful is the Rule of 72. This rule allows you to find out how many years it will take your money to double at various earnings rates. Divide 72 by the return you expect to get and the answer tells you how long it will take you to double your money.

So, for instance, if you could earn an average of 15 percent a year, your money would double in 4.8 years. If you expect to double your money in a year, you need a little better than a 75 percent return. Pretty tough to do. (You can also turn it around and divide 72 by the number of years in which you want to double your money to see what return you'd need to accomplish that.)

Most investment pros I talk with assume it takes seven years to double your money as a sort of rule of thumb. That assumes a 10 percent return, which is a reasonable expectation. So if you are 14 years from retirement, this rule says you might expect two doubles.

Q: Is life insurance a good investment?

A: I think it's a mistake to think of life insurance as an "investment." If you have dependents who count on your income, life insurance coverage is an absolute necessity. For young couples and young families, the most economical way to buy that coverage is with straight term insurance, which means you pay a premium and you get coverage for a specified term.

When people start talking about investments in the same breath as "life insurance," they typically mean some type of cash value or whole life policy that combines straight insurance protection with an investment account that may be invested, for example, in mutual funds.

The problem with this investment-type insurance is that too much of it is sold for the wrong reasons. What I've seen time after time over the 25 years I've been writing about personal finance is that life insurance is improperly sold as an investment for retirement or an investment for college.

Life insurance is life insurance. An investment-type policy might be a good investment for your beneficiaries. Or it might not. But it is never the best investment for college savings or for retirement. It helps to remember that it is insurance. First and foremost, it is insurance.

Q: My 13-year-old daughter is interested in stocks.How can she learn more?

A: There is so much good educational material available online at sites like www.morningstar.com,. www.vanguard.com, and www.moneycentral.com, where I write a weekly column.

I would encourage her to pick some stocks and set up a portfolio at a free site like www.morningstar.com or www.moneycentral.com. We call this a "watch portfolio" because she doesn't actually own the stocks but is just watching them. That will allow her to observe how the stocks react to various news events and earnings reports. At Money Central, for instance, the investor is flagged when there is any news about a stock in his portfolio.

Online newsgroups can be a good place to pick up information, too. If your daughter introduces herself as a teenager who wants to learn about stocks, I suspect many regulars will be eager to help.

Finally, I would encourage her to put some money in a couple of stocks. A small amount of money to start. A couple of Web sites come to mind where investors can buy stocks for just a few dollars with no investment minimum: www.buyandhold.com and www.sharebuilder.com.

--Mary Rowland

Rowland is an author and contributor to financial planning magazines.

Thrifty Educator

This month's tips come from NEA members Mary Baker, a Waterbury, Connecticut, second grade teacher, and Patricia Butchko, a first grade teacher from Scottsdale, Arizona.

Baker: "I recently received a plant holder as a personal gift. But instead of using it at home, I brought it to school and turned it into a handy place to store student school supplies. The stand has different size pot holders that accommodate most of the students' supplies. One holds glue bottles, glue sticks, and scissors. The lower tier holds pencils, tracing plates, crayons, and markers."

Butchko: "I use material to cover my bulletin boards. Every month, when we teach a certain unit, I change the material. For example, when I teach about insects, I put up material with a lady bug pattern. For Halloween, I put up material with scarecrows on it. For Christmas, it's angels, for Valentine's Day, red hearts. I save the material from year to year, and some of the material--especially the cloth with letters and numbers on it--I keep up year round. Using the material keeps me from having to change the artwork every month."

If you have a favorite money-saving tip that you apply in your workplace, send your idea along to neatoday@nea.org.

Heads Up from NEA Member Benefits

Calculators Online
If you're puzzled about how much home you can afford to buy, try the "Financing Calculator" pages on the NEA Member Benefits Web site. The calculation will take only a few seconds, after some personal financial data is entered from your computer keyboard, and it's all done in the privacy of your own home without waiting in line to talk to a bank officer.

The home loan affordability page is one of many financial calculators on the NEA Member Benefits Web site (www.neamb.com).

To select one of the calculators, click "Life Planning" on the home page. You'll have a choice of financial tools at your fingertips, including information on refinancing, renting vs. buying, and loan consolidations.

You can also compare loan offerings from different financial institutions by using one of the calculators.

Check the Rates
The "Savings, Deposit and Investment Programs" page on this same Web site offers you immediate, around-the-clock access to the current rates on the NEA-Sponsored GoldCertificate CD and the NEA FDIC-Insured Money Market.

The latest yields on certificates of deposit and money market funds offered by NEA Member Benefits are updated each Monday.

The rates have frequently beaten or matched some of the best yields in the nation.

You can download an application form from the NEA MB Web site to enroll in either of the two savings programs.

To open an account or get current rates, call 800/205-8647, ext. 3231.