MAKE YOURSELF A MILLIONAIRE This page intentionally left blank. MAKE YOURSELF A MILLIONAIRE How to Sleep Well and Stay Sane on the Road to Wealth Charles C. Zhang with Lynn L. Chen-Zhang McGraw-Hill New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2003 by Charles C. Zhang and Lynn L. Chen-Zhang. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-142559-4 The material in this eBook also appears in the print version of this title: 0-07-140982-3 All trademarks are trademarks of their respective owners. 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DOI: 10.1036/0071425594 To our children, our all-time best-performing portfolio, Mitchell and Alex. DISCLAIMER While the information in this book is believed to be accurate, distribution of this material should not be considered an endorsement of any particular investment strategy, product, or service described herein. This information is being provided only as a general source of information and is not intended for use as a primary basis for investment decisions, nor should it be construed as advice designed to meet the particular needs of an individ- ual investor. Please seek the advice of your personal accountant, attorney, or tax and financial advisors regarding your particular financial concerns. In addition, please note the following: ■ Mutual funds are offered by prospectus only. For more information about individual mutual funds, including fees and expenses, ask your financial advisor or product provider for a prospectus. Read the prospectus carefully before you invest or send money. ■ Loans and withdrawals from an insurance contract may generate income tax liability, reduce available cash value, and reduce the death benefit. Negative performance in the underlying subaccounts of variable insurance products may impact the death benefit. Refer to your individual contract for applicable provisions. Guarantees issued by insurance companies are based on the claims paying ability of the issuing insurance company. ■ Stocks of small or midsized companies are generally subject to greater price fluctuations than large-cap stocks. ■ International investing involves some risks not present with U.S. investments, such as currency fluctuations and other economic and political factors. ■ Interest received from investments in Municipal Bond Funds may be subject to Alternate Minimum tax (AMT). ■ Variable Annuities and Insurance Products are subject to fees and expenses that may impact performance. ■ Most annuities have a tax-deferred feature. So do certain retirement plans under the Internal Revenue Code. As a result, when you use an annuity to fund a retirement plan that is tax deferred, your annuity will not provide any necessary or additional tax deferral for you retirement plan. ■ Options are not suitable for all investors. Ask your financial advisor for an options risk disclosure booklet and read it carefully before investing in options. CONTENTS Acknowledgments ix 1 The First Step 1 2 An Investor’s Best Friend—Asset Allocation 21 3 Guerrilla Warfare:You Versus Your Portfolio 37 4 I Own That Company! 51 5 The Shopping Mall of Investments 71 6 Help! I’m Running out of Money! 93 7 The Steady Staples of a Well-Balanced Portfolio: Bonds, Cash, and REITS 107 8 When Good Investing Goes Bad 133 9 Harvard, Yale, or Your Local Community College: What Can You Afford? 153 10 Make April 15th Your Favorite Day 169 11 Guarding Against the Financial Pitfalls of Death 197 vii For more information about this title, click here. Copyright 2003 by Charles G. Zhang and Lynn L. Chen-Zhang. Click Here for Terms of Use. viii CONTENTS 12 Financial Suits of Armor 217 13 Why You Shouldn’t Count on the Government’s Help for Your Retirement 245 14 Where Do You Want Your Money to Take You Today? 279 15 You Can’t Take It with You 315 Glossary of Financial Terms 335 Index 341 Copyright 2003 by Charles G. Zhang and Lynn L. Chen-Zhang. Click Here for Terms of Use. ACKNOWLEDGMENTS W e owe a debt of gratitude to many people for this book. But our deepest gratitude goes to Jennifer Eritano, our assistant and friend, who devoted her time and talent to make this book possible. Without her, this book would have never been completed! A big thank you goes to our editor, Steve Isaacs of McGraw- Hill, for his guidance and patience, and to Sally Glover for her great editing work. Our undying gratitude also goes to the leaders and staff at American Express, especially Ken Chenault, Jim Cracchiolo, Brian Heath, Mark Regnier, Rhonda Schwartz, Guinero Floro, Paula Swanson, and our compliance and legal department, for their invaluable support and suggestions. We would like to thank our wonderful assistants, Kerrie Peterson, Tricia Watkins, and James Walsh, for their dedication through all of this. Their unfailing loy- alty is appreciated from the bottoms of our hearts. Our families and friends have been very supportive through this process. To our par- ents, we give them our deepest appreciation. Copyright 2003 by Charles G. Zhang and Lynn L. Chen-Zhang. Click Here for Terms of Use. [...]... direction ESTABLISHING A FINANCIAL PLAN Smart investors know that they must know where they are currently, what they want to accomplish, and they know that they need to have a game plan A financial plan is just that: a financial road map A 14 CHAPTER 1 sound plan should cover a broad range of topics that relate to your present security, as well as to your future well-being It should include an analysis of... well as address any other key estate planning concerns IS A FINANCIAL PLAN REALLY WORTH IT? People neglect financial planning for a number of reasons Feeling that they have insufficient assets or income is one reason Another is that 18 CHAPTER 1 people feel that their finances are already taken care of, or are in good shape While that may be true, everyone can benefit from hiring a financial advisor and... more than Portfolio A Diversification does not guarantee a profit These values are hypothetical and do not indicate any type of future results The value and return on most investments will vary (American Express Funds literature.) assume that you’ll make a profit or insure against a loss, it may help temper any loss you may sustain INFLATION AND TAXES—HIDDEN DANGERS The asset allocation approach also... there are the tax breaks that aren’t tax breaks and are actually illegal Financial planning can help identify the impact that taxes will have on you in the future While we can’t predict tax increases or decreases, we will have a good idea of how to minimize the taxes you pay, both now and in the future There are a number of different tax-exempt and tax-deferred investments you can buy that will help... large? It’s important for you to know what will be available to your heirs when your estate is settled Additionally, you want to make sure that estate transfer costs and estate taxes are as low as possible Estate planning is a highly specialized area that your financial plan will cover Your advisor will help you plan to ensure that there is enough estate liquidity to meet estate settlement costs, as... your face and a glint in your eye, because you can become as wealthy as you want to be By having a more positive outlook, you may see a change in them, too THE FINANCIAL PLANNING PROCESS Personal financial planning is the process through which you, along with your advisor, determine how to meet your financial goals Financial planning distinguishes financial planners and advisors from other professional... know that you will have money coming in because you purchased disability insurance for yourself? Death is an eventuality that we all must face If you want to leave as much of your estate to your heirs as possible, it’s necessary to plan This way, you will have an idea of what will go to your heirs and what will go to the government in estate taxes Failure to plan may cause your heirs to fall behind and... rather than applying a cafeteria plan to each client At some point in time, everyone will need the help and expertise that only a financial advisor can provide They offer a well-balanced approach to your finances Let’s face it, you may be too emotionally involved with your money to manage it properly You have worked hard for you money and don’t want to lose it A financial advisor is the third party to... factors may affect your investment Both inflation and taxes can wreak havoc on your investment accounts and may inhibit your ability to make more money No proper financial plan should fail to take these things into consideration For example, if you have a 10-percent return on your overall portfolio in a given year, your actual return may be 4 to 5 percent less because of federal, state, and local taxes... consider an example of someone who keeps a fair amount of money in a cash position Each time she receives recommendations, she says that she would like to think about it before acting She then calls and says she has picked out a few funds on her own As a financial advisor, I pick mutual funds based upon past performance over 10 or more years I look at track records, fund managers, and the makeup of . MAKE YOURSELF A MILLIONAIRE This page intentionally left blank. MAKE YOURSELF A MILLIONAIRE How to Sleep Well and Stay Sane on the Road to Wealth Charles. the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw- Hill eBooks are available at special quantity