This week, Moneywise continues a new monthly series on financial planning and investing advice. We want to make managing finances much more applicable to personal circumstances by using real stories from real people. The first financial planning story features one of our readers who has written to me seeking help and has agreed to allow a discussion of the composite situation. If readers would like to participate in future financial planning composite cases, contact me confidentially via e-mail. The next Financial Plan Analysis is scheduled for July 12, 2014.

The Moneywise financial plan for our composite client, who asked for help in investing the family’s only savings. He specifically stated that the investment has to provide a high rate of return to make it worthwhile.

The case:

• widower, aged 56

• two children: a daughter in a doctoral programme on a partial scholarship, the other, a son two years away from college, currently in private school, also on a partial scholarship

• modest home, no mortgage

• a second-hand car, owned outright

• part-time job — compensation about $3,000 a month, hours fluctuate on flex-schedule, limited medical insurance coverage

• widower annuity — $1,000 per month

• Savings account — certificate of deposit. $200,000

The planning situation. Our reader tells us: “Regrettably, my wife passed away about 18 months ago, after 30 years of marriage leaving our family grieving her absence, while trying to manage a household of three with just one wage income going forward.

“Fortunately, we had a moderate insurance policy on her life that was enough to liquidate our remaining mortgage.

“Recently, my working hours were also reduced to part-time. Given the slowdown in the local economy, my employer and business has been struggling to remain solvent.

“The only thing I am able to focus on right now and my only goal at this time is to ensure that my children complete their education so that their financial future is assured.

“I provide all funding in excess of our oldest child’s doctoral scholarship, and I am responsible for the remaining costs of private school.

“My son will attend Bermuda College, in two years, then head overseas for his final three years. I need to invest the savings in a way that will generate the highest return.

Can you help?”

We asked lots of questions about his personal financial situation last week, many of which we do not have answers.

I am, as the composite qualified financial planner, very concerned about a number of “gaps” in his personal financial situation. Licensed professional advisers (CFP, PFS, CPA, CA, CFA, CHFC, et cetera) have a fiduciary duty to put the client’s interest first, meaning that the client’s financial position must be in harmony with his/her goals before an investment recommendation can be made, or a suitable investment product can be sold. We see gaps: possibly not enough of a savings cushion given the tentative viability of his part-time job in a depressed economy, not enough or no health insurance, high physical and emotional stress levels due to coping with such a terrible loss — his wife and best friend, commitment to finalising the education of his children, and little to nothing set aside for his retirement. Later the composite client did mention that he “might” receive an inheritance from his mother. Might inherit is never used as an investing or planning guarantee. I have seen parent(s) live until age 104 before what little was left went to heirs who then squabbled mightily over the scraps.

Practicality has to take over, eventually. A bereft widow or widower ultimately finds that while they grieve terribly, they also are forced by the circumstances of a spouse’s death to become a monetary realist.

Ironically, too, no amount of sadness at missing a dear spouse’s presence can overcome the sudden drop in the family budget caused by the deceased spouse’s financial contribution to the family. At some point, life is back to measurement of rent and education costs to be paid, household expenses, insurance, food and focused work attendance.

In the investment world, typically, a high rate of return equals high risk of loss. How does one measure what that statement means?

All investments have some risk. Even when an annuity, for instance, is advertised as a guaranteed return, the insurance company now holding the customer’s cash to provide that guaranteed return needs to be scrutinised in detail: for liquidity, balance sheet strength, strong management, conservative investment philosophies, credit risk and compliance protocol ratings, and a stable jurisdictional environment, among many criteria. The investments could be close to guaranteed, but the company may not be. Let’s leave annuities for another time.

We will ignore all the investment media/salesman buzzwords, such as ‘know your investment tolerance’, ‘choose your asset allocation,’ ‘decide on your goals,’ for this section of the investment planning process.

If a high rate of return is risky, what is that percentage? Who sets the ‘safe’ rate of return, meaning, ‘low risk investments equals low rate of return?’

The short answer is capital markets do. But, the more understandable answer for any investing environment is that the sovereign countries’ government debt (as an investment) is generally viewed as the safest. Countries with the most stable governments, conservative fiscal policies, enforced legal systems, successful tax bases, the strongest currencies, and strongest economies informally set the ‘safe investment rate’ by the rate of return on that government’s bonds are offered and sold in capital markets.

Why will that rate dominate? Because of the perceived safety of investing in the government of a strong economy and the expectation that the bond principal will be repaid in full. No default.

Hence to term, ‘flight to safety’, meaning that in volatile unpredictable financial crises investors sell riskier investments and flee to purchase sovereign debt backed by safe haven countries. Safe also means low interest rates. Safe means no defaults on bond interest and principal. The annual interest rate — at June 19, 2014, according to Bloomberg, offered on 10-year Treasury bonds by United States — the world’s primary reserve currency — is 2.62 percent, by the Republic of Germany- the strongest economy in the European Union — 1.32%; and by the United Kingdom — considered the largest financial centre in the world — 2.73% and the sixth largest economy by Gross Domestic Product, reflect the price of that safety.

Our client investor wants a high rate of return. In general, that means any rate above the rate of current sovereign debt. So if the UST-bonds coupon rate is 2.62 percent, higher rates of return, whether in stocks or bonds, mean higher risk. How easy is that to figure out?

But what about another market risk, that is, the risk of losing your investments. What constitutes a more risky security investment?

Let’s refer to our stable low risk low return on US ten-year bonds relative to the country of Brazil, a fitting comparison during the World Soccer Cup tournament.

Bond Investments. Brazil government bonds yield a generous, but not great 4.17 percent this week. The Brazil government has defaulted six times (1961,1964, 1983, 1986-87, 1990 Wikipedia) on repayment of principal to investors. Ah, but the rate of interest is so good, once a client told me. Is this higher return worth the high risk?

Stock investment values tend to reflect the strength of the company and environment, as well. A large multinational corporation stock may have an average annual total return (dividend and capital appreciation) over ten years of say six to eight percent, while the share value will tend to fluctuate less in tough market conditions. An emerging economy up-and coming corporation may grow twice, possible three times that or more, while being much more volatile in adverse market conditions. Will this return be worth the risk? And what if our client invests at the top of the market — at current conditions?

First thought. Why don’t we translate these projected total rates of return into dollar terms?

$200,000 invested at

03% = $6,000 per year

06% = $12,000 per year

10% = $20,000 per year

15% = $30,000 per year

Gee, by investing the entire amount as stipulated above into securities, a possible $30,000 per year in extra income (and appreciation) would go a long way to helping with education funding. But, what happens when markets are in a turmoil?

Second thought lesson. Risk of loss could be the amount of the rate of return or even greater. Investors tend to succumb to emotional panic in volatile markets deciding ‘to sell out’ while the getting is good.

How much will our Moneywise client have left after a severe market correction? If he sells, his only cash assets could lose as much as half or even more. If he does not sell, and the share value remains low, can he handle that additional stress? He has no cash cushion. What if he needs an immediate cash infusion to keep the household functioning?

This is a very basic look at where and what kind of investing decisions our client has to make. Many questions cannot be answered completely without a very detailed in-depth look at our client’s complete financial profile.

I think you know what my answer to him is going to be, but I am not going to tell you today.

Why don’t you tell me what you think our composite client needs to do?

Next: part three — The final section. Moneywise summarises the steps the composite client should consider taking on a go-forward basis.

Disclosures: Please read the disclosures relative to this composite planning as stated on June 14, 2014 Moneywise article: A Parent Left Alone — Moneywise Family Financial Plan.

Martha Harris Myron CPA CFP JSM Masters of Law: International Tax and Financial Services, Summa Cum Laude

Appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland

President: The Pondstraddler* Life™ Consultancy providing international financial planning for the challenging lifestyles of multinational individuals and their families residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle. Specific focus for residents of Bermuda, the premier international finance centre. www.marthamyron.com Contact: martha@pondstraddler.com

* Pondstraddler. A person with one foot on each shore whose heart resides in both countries*