Going It Alone on Health Insurance

Question of the week:I just started a new job and my new employer doesn't offer health insurance. I'll only be covered by my old employer' plan for a few more months. I've always been in employer plans before--where should I turn?
--Healthy But Worried in D.C.

Dear Healthy,

Whatever you do, don't become one of the 43.6 million Americans (or 15 percent of the population, according to the U.S. Census) who are without health insurance altogether. With medical costs as high as they are today, even a small injury or brief illness could have a catastrophic effect on your finances. According to a Harvard University study, an inability to pay medical bills is one of the leading reasons people declare bankruptcy.

Certainly if you are soon to be without health insurance, you have every reason to be anxious. And if the comments we recently heard in the Armchair Millionaire community are any indication, even people who still have health insurance are plenty worried. Here are a couple of examples:

"My husband is a cancer survivor at age 24 and so he has to work for a big company that has health coverage for everyone. Now, there is no way we could afford private health insurance for him on our own because of his history. As is, we can barely afford the out-of-pocket expenses." --Meg H. in Idaho

"I have health insurance provided by my employer which costs me $150 month for me and my children. It's a pretty good plan, no real complaints. However, my out-of-pocket cost has gone up every year over the past four years and it's going up again next year. When I think about being able to handle a temporary period of unemployment, I feel pretty confident that I can handle it for six months or so, but what I fear is not having health insurance coverage for me and my children." --Mattchiavo

The good news is that there are still plenty of choices in private health insurance plans for individuals. And although there's been talk in Washington lately of offering tax assistance to individuals who buy their own health insurance, for now you're going to have to foot the bill on your own. My guide will point you in the right direction for getting your own policy.

The Armchair Millionaire Guide to Obtaining Individual Health Insurance

• Cast a broad net. Leverage the Internet to help you compare lots of different plans quickly. eHealthInsurance.com and insweb.com are two places to start. If you'd rather deal with a human being, go to an insurance broker who represents several different companies, not an agent who sells for just one company.
• Decide if you'll pay now or pay later. Policies with the lowest premiums have the highest deductibles and co-pays, and may not offer coverage for anything beyond the basics, like prescriptions or mental health care. Higher premiums will get you better coverage. Either way, you'll pay--it's just a matter of when.
• Get coverage that fits. Before you buy a policy, check carefully to see which providers (doctors and hospitals) and services (for example, cancer screening or well-baby care) that it covers, and that you're happy with those options. If you end up going to a doctor who is not part of your plan, you'll probably pay extra.
• If you have a medical issue, be prepared to improvise. Unlike when you are covered by a group policy from your employer, individuals applying for their own insurance must provide a detailed medical history. If you've had a medical problem in your past, the policy may specifically refuse to cover that problem, or you may be declined coverage altogether. If that's the case, find out if you live in one of the 29 states that offer "high-risk pools," or coverage for residents who can't otherwise get insurance. You can find a list at www.cobrahealth.com.

THE BOTTOM LINE: Once you're on your own with health insurance you should be prepared to pay more for your health care--in addition to your insurance premium--than you ever did under your employer's group plan. However, health insurance is simply essential that you simply can't be without.

Portfolio Design 101

Question of the week:I'm just starting to save for retirement and am doing a lot of research to find the best possible mutual funds. What are your recommendations? --G.B.

Dear G.B.,

Your enthusiasm is commendable, but you're really putting the cart before the horse here. Choosing your mutual funds before you've designed your portfolio is like building a house and shopping for the wallpaper before you even have the blueprints.

The important question is actually not which mutual funds you should buy, but what kind of portfolio you want to build. Once you know that, it will be easy to choose the right funds.

You see, contrary to popular wisdom, most of your investment returns over the long run actually have little to do with your individual investment choices. Instead, academic studies tell us that most investment returns are largely determined by your asset allocation--the different types of investments and the proportion of each investment type in your portfolio.

In other words, a portfolio consisting of 100 percent stocks will perform very differently from a portfolio made up of 80 percent bonds and 20 percent cash. This makes your asset allocation much more important to your long-term investing success than the specific funds you choose.

We recently asked members of the Armchair Millionaire community about how they build their portfolios, and heard several detailed descriptions. Here's one:

"My portfolio is in stocks, heavily weighted toward small caps. My Roth IRA is entirely in small caps, while my brokerage account is mixed … and my 401(k) is 20 percent large cap value, 20 percent large cap growth, 30 percent small caps, 20 percent international and 10 percent employer stock." --Doug

While Doug has obviously done a lot of thinking about his portfolio design, your own does not need to be so complicated, particularly since you're just getting started. My guide will give you a basic overview of using asset allocation to build the best possible portfolio for your needs.

The Armchair Millionaire Guide to Designing a Great Portfolio

• Step 1. Choose your asset classes. An asset class is a set of investments that share the same broad risk and return characteristics. The three we think of most commonly are stocks, bonds (also called fixed income) and cash (which includes money you keep in CDs, a money market account, or in U.S. Treasury bills). Most people who are investing for a goal that is many years away--such as for retirement--will generally want to invest primarily in stocks because they offer the best returns over time. For shorter-term goals, you can mix in bonds and cash, which generally give you a lower return, but also less risk.
• Step 2. Choose your sub-asset classes. Sub-asset classes are groups within each asset class that share a narrower set of risk and return characteristics. The most important sub-asset classes within the stocks asset class include U.S. large cap stocks, U.S. small cap stocks and international stocks. It's important to diversify across all three of these sub-asset classes in order to get the highest returns while minimizing your risk. The allocation I've chosen for my own portfolio is one-third for each of the three.
• Step 3. Choose your funds. Now you're ready to pick the mutual funds that will fit into the asset allocation that you've chosen. I highly recommend using index funds, which track the stocks of sub-asset classes. An S&P 500 index fund, for example, is composed of U.S. large cap stocks. A Russell 2000 fund is composed of U.S. small cap stocks. Because you always know which sub-asset classes index funds invest in, they make it very easy to stick with your chosen asset allocation.
• Step 4. Put it into action. Once you know the funds you want to buy, the rest is easy. Simply contact a broker or consult with a financial advisor to open an account and purchase the funds. Or, you can usually buy your funds directly from the fund company.

THE BOTTOM LINE: Wall Street would love us to think that the key to investing success is simply buying the latest hot mutual fund. But what it really takes is using asset allocation to design a portfolio that makes sense for you, and then buying--and holding--the mutual funds that are right for that portfolio.

Should Men and Women Invest Differently?

Question of the week:My husband and I have an ongoing disagreement about whether men and women should invest differently. I say they do; he says they don't. Who do you agree with? --Happily Married in Boston

Dear Boston,

I'm definitely not taking sides on this one. Lucky for me, I get to say that you're both right--sort of.

I believe that the rules of good investing are gender-neutral. At the same time, I recognize that real-world circumstances (most notably, on average they live longer than men and earn less) often mean that women have to be even more diligent in following those rules to achieve the same results as men. So women should invest the same, only better.

We asked members of the Armchair Millionaire community for their thoughts on this thorny topic. Folks were generally in agreement that while there shouldn't be any difference between the sexes when it comes to investing, it does make sense to take into account the different needs of women:

Less means more. "Women have less money and have to make it stretch further. I think that the same rules of good investing apply to everyone. It's just that women have less margin for error." --Chris in California

Less aggressive approach. "Men and women should not invest differently. I would give the same investing advice to both my son and daughter. However, my daughter needs to recognize her natural tendency will be to be less aggressive in her investing, but because she will most likely live longer, she needs to be at least as aggressive as my son with her investments." --Mattchiavo

My guide highlights the unique challenges that many women face and how to overcome them.

The Armchair Millionaire Guide to Overcoming Women's Financial Challenges

• Secure your retirement. Women on average still earn about only about 75 percent of what men earn, and spend many more years outside of the work force, primarily to care for children or parents. This adds up to significantly less retirement savings for women. The solution? Be super-diligent in maximizing every opportunity to stash away retirement funds. This means your employer's 401(k), your own IRA and a taxable investment account.
• Get adequate life insurance. The average age of widowhood in the U.S. is just 56. And widows on average widow experience a 38 percent drop in their household income. The solution? If you're dependent on a husband's or partner's earnings, make sure you really have enough life insurance to meet your needs.
• Get adequate long-term care insurance. Women on average live seven years longer than men and are more likely to need long-term nursing home care. The solution? Prepare yourself for this possibility by obtaining adequate long-term care insurance.
• Empower yourself. Studies show that women tend to be less confident, more conservative investors. The solution? If you haven't already, let go of the old stale myth that a man will be there to take care of your finances. Empower yourself with education. Bookstores are chock-full of publications that will teach you how to ensure your financial future, and the Internet is packed with resources, as well. (My favorite sites for women include www.wfn.com and www.womenandco.com.) If you want help from a real person, attend an investing seminar--there are plenty available, many of them designed especially for women.

THE BOTTOM LINE: It's true that most women encounter certain financial obstacles that most men don't. But those obstacles are certainly not insurmountable. With an educated, common sense approach, both men and women can achieve the financial security they deserve.

Cashing in on Collectables

Question of the week:I just found a stock certificate from 1970 for one share of Ringling Bros. and Barnum & Bailey Circus. It's very pretty--a colorful piece of paper with pictures of animals and the like. How can I find out how much it is worth today? --Caitlin C. Dear Caitlin, Despite what you might think from watching the Antiques Roadshow, making serious money on items you might find in the attic is actually quite rare. While many collectables--everything from coins and stamps to comic books and baseball cards--do increase in value over time, actually profiting from these items on a consistent basis takes deep know-how about your genre. When we asked the Armchair Millionaire community about their views on investing in collectables, we heard two comments that went right to the heart of what makes it so challenging to make money at it: Value is in the eye of the beholder. "The values of collectables are purely subjective. There is the prospect of great profit only if you can find the right buyer who is emotionally involved in the product." --Erik The usual rules don't apply. "Illiquid assets such as collectables are a game in which the rules are considerably less standardized than the securities markets." --Doug If you're just dabbling with collectables, the first place to turn for information will likely be the Internet. In the case of your old stock certificate, you want information on scripophily--the hobby of collecting old stock and bond certificates. You can visit www.scripophily.com to get an idea of the value of your stock certificate. But if you really want to try to make money buying and selling collectables, you'll need to get much more serious. My guide will get you started with the basics. The Armchair Millionaire Guide to Investing in Collectables Risk. Collectables are among the riskiest of all investments. While they can go up in value, they can also drop. If you buy at the peak of a collectable's popularity (remember Beanie Babies?), it will probably end up being worth less than you paid for it. Lack of liquidity. Unlike more traditional investing--where you can always sell your stocks or mutual fund shares--there are no guarantees that you'll ever be able to find a buyer for your collectable willing to pay your price. If you don't, you'll never be able to get your money out of the investment. Pricing. Prices for collectables are determined by a number of factors, including rarity, condition, age, historical importance and perhaps most critically, current fads. However, at the end of the day, the only thing that determines the price of an item is what another person will actually pay for it. Research. Just like regular investing, you shouldn't buy until you've done your research. Books, price guides, antique dealers, antique shows, the Internet and other collectors can all be important sources of information. Emotion. Unlike the stock market, investing in collectables is about more than simply buying low and selling high. The most successful collectors are truly passionate about the items they collect. At the same time, you have to keep your emotions in check--if you fall in love with a particular item, it's very easy to pay too much for it. THE BOTTOM LINE: Your chances of Grandpa's antique fishing lure funding your retirement years are slim. While investing in collectables might be fun, it's likely to be highly profitable only if you're an expert and you use the same discipline to make those investments as you would any other. PS: There's a great example of a Ringling Bros. stock certificate (1969) for sale for $295 at Scripophily.com. No clowning around!

Putting Your Finances on Auto Pilot

Question of the week:My employer is encouraging everyone to start receiving their paychecks through direct deposit. Call me old-fashioned, but I really like getting that check in my hands, and I'm not sure I trust the direct deposit technology. What do you think? --Geri G. Dear Geri, It's time to join the 21st century. A survey by the American Payroll Association found that more than half--56 percent--of all workers in the U.S. receive their pay through direct deposit. I strongly suspect that once you join their ranks, you'll never want to go back to paper checks again. For starters, you needn't worry about the technology. Banking statistics tell us that the chance of having a problem with a check is 20 times greater than with direct deposit. And the advantages of direct deposit are numerous: You'll get the money in your account sooner, won't have to ever worry about a check being lost or stolen, and won't have the hassle of waiting in line at the bank. Because it saves banks money, many offer free or low-cost checking when you have your pay directly deposited with them. And most employers will allow you to have your pay split up and deposited into more than one account, making it easy to set up a savings system. But perhaps the most compelling thing about direct deposit is how much it can help you begin to gain firm control over your financial life by automating your savings and spending. Members of the Armchair Millionaire community recently told us how this works for them: One check, many baskets. "My paycheck is deposited automatically and then divided into several areas. A fixed amount is deposited into several mutual funds for paying myself first and the rest goes to bills, my emergency account and for spending. All my spending is based on a preset, fixed amount, which ensures that my expenses are within the preset limit. Any excess is goes to my charity account." --Jonathan Like clockwork. "I have my paycheck deposited in my credit union checking account, but before I get my check, I have the maximum contribution withdrawn for my 401(k) account. Then every payday I pay off my credit card balances. I always put some money into my money market account, and try to maintain the equivalent of six months' take home pay in this account. As the money accumulates there, I move it to my Internet savings account to get higher interest without risking principal." --Elizabeth M. As you can see, directly depositing your paycheck is just a first step in a chain of events that will ensure your financial security. My guide will show you how to automate the rest of your financial life. The Armchair Millionaire Checklist for Putting Your Finances on Autopilot Direct deposit all your payments. Your paycheck is not the only payment that can be directly deposited. You can also have dividend and interest payments, annuities, pension payments, government benefit payments and tax refunds all made by direct deposit. Pay bills by automatic funds transfer. Chances are that every single company that bills you regularly--such as your utility, insurance and mortgage companies--allows you to have those bills paid by automatic withdrawals from your checking account. You'll never have to worry about paying bills on time again. Invest automatically. Having a portion of your take-home pay (I recommend 10 percent) automatically withdrawn from your checking account and deposited into an investment account once a month is the smartest, least painful way to save there is. That money will be gone before you have a chance to spend it and, by investing regularly, you'll take advantage of dollar cost averaging. Build an automatic portfolio. Tracking and regularly re-balancing a portfolio is not everyone's idea of fun. If you don't want to be bothered with it, choose mutual funds that will take care of the chore for you. Lifestyle funds maintain a specific mix of investments right for your age and risk tolerance, and thus are designed to be the only fund your need to hold in your portfolio. And index funds that cover the entire market are also available. THE BOTTOM LINE: You'll never become financially secure if you don't control your cash. One of the best ways to do this is to have the that paycheck sent straight to your checking account, and then doling out that cash automatically according to your needs and long-term goals.