We’re big fans of making the most of things. But it takes a little perspective to learn how to prioritize our goals. What are our very next needs? What are the wishes that can wait?
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We can do it all… but not all at once. How you might prioritize all the most important financial goals on the path ahead. What are the next needs versus the wishes that can wait?
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What a year! The events of 2020 have reached into every facet of our lives. Many careers have been changed or upended.
People working happily at advanced ages have told us they are leery of workplace exposures, so many are on leave or have retired. Others have been displaced from jobs they would have preferred to keep. And some are helping descendants cope with “distance learning” or a loss of childcare options instead of working at jobs.
One friend retired just before the pandemic, planning an ambitious travel schedule. That isn’t happening. And another, who had planned to retire, now works from home: they figure they might as well keep working, since they cannot travel or engage in activities they had planned for retirement.
No matter what 2020 has thrown at you, the basics of retirement planning have not changed. It is a five-step process. We need to figure out…
There are nuances to each step—options to analyze, lifestyle decision to make. Retirement planning works out best when it is a process over time. We have noticed that people learn more about their objectives and their finances as time goes on, and things change. So your retirement plan adapts and changes over time, too.
If the pandemic has shaken things up for you as it has for others—or if it has just gotten to be that time—call or email us when you are ready to work on your plans and planning. Clients, if changes need to be incorporated in your plans, let’s keep talking.
We’re glad to help.
The dramatic and unexpected events of 2020 have tested our adaptability and resourcefulness like no other. There are patterns in those who are navigating these times successfully.
1. Realize there are usually lessons in history to guide us; maintain perspective.
2. Avoid hasty decisions that could have negative long term consequences.
3. Look for the opportunity in the challenge, not vice versa.
By taking time to think about the context, understand our own situation, and get accurate information about whatever the new reality is, we usually can make better decisions.
In personal finance, tapping high interest credit cards to maintain spending in the face of income reductions may be necessary for some items. But any outlays that can be avoided, or are discretionary, should be deferred, not financed. The average credit card interest rate remains in double-digit territory, a huge drain.
In your investments, long term holdings should not be disrupted by short term considerations. When the situation changes in ways that everyone knows, the new circumstances are likely to be priced into the market already. So there may not be an edge in taking action. If you do not need the funds in hand for pressing purposes, you might leave them be.
The stress of the situation may be alleviated by working on things within your control. Practicing healthier habits with regard to exercise, nutrition, sleep, and alcohol can also reduce stress, while giving you a sense of conrol.
Finally, contact with other people is a necessity for social beings such as humans. It may be especially useful as you talk things out or need someone to bounce ideas off of. We would be happy to visit with you by phone or email, Zoom video or in person – about whatever is on your mind. Email us or call.
One of the keys to successfully weathering the downturns in the market, large and small, is having sufficient cash to do what you need to do in your real life. That helps avoid selling long term investments at bad times.
A few weeks back we went through investment advisory accounts to check cash balances for ongoing monthly distributions and make sure we had cash positions to last several months. And in our reviews with you, we inquire about upcoming cash needs.
As our lives unfold, our situations may change. For example, we talked with a pair of young adults a few weeks back, a brother and sister, who each are completing advanced degrees. In infancy, they received a gift of shares of stock from their great-grandfather, an old friend of mine.
Their holdings grew over the years. Each one called to talk about the strategy for paying off student loan balances later this year with the value of the accounts. When it became evident that the holding period was down to months, we advised the sale of sufficient stock to clear their balances, at once. Money that you plan on spending in the short term should not be invested for the long term.
The moral of the story is to communicate with us about exceptional cash needs that develop. If together we manage your liquidity to avoid untimely sales of long term investments, you and we will both be better off.
Clients, if you would like to talk about this or anything else, please email or call.
We talked about human capital, the traits, characteristics and skills you possess which others value. This is the source of your earning power. When you spend less than you earn, you develop savings. Our topic today is how to manage those sums.
Think of having three buckets. The first one you have is short term. This is where you go to find money to deal with emergencies. You also use the short-term bucket to save for annual expenses like real estate taxes or insurance premiums. This bucket must be stable and liquid, to provide money when you need it. Returns are secondary.
On the other end, you have a long-term bucket. If you ever hope to retire instead of going to work every day, or accumulate wealth for other long-term goals, you need one of these. Unlike the first bucket, this one may endure more volatility in the hopes of garnering higher returns over a long time horizon. You should plan on not tapping this bucket except for those long term goals, short of an emergency which can be met no other way.
Naturally, the third bucket is in between. You may have goals for things that happen in a few years, on an intermediate time horizon. It might be for a major purchase like a boat or camper, to meet educational expenses for a child who is a few years away from college, a down payment on a home you intend to buy at some point in the future.
Not surprisingly, the third bucket may balance stability and higher returns with a middle of the road approach. This is in between the strategies of the short-term bucket and the long-term bucket.
There are other aspects of investing that we will explore in future letters. But the idea of three buckets is a helpful way to understand the functional purposes of investing. You will need to know something about the basic kinds of investments, styles of investing, some tax considerations, and the options available in retirement accounts.
Clients, if you would like to talk about this or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Our Fundamental Rule #3 of Investing: own the orchard for the fruit crop. What do we mean?
If the fruit crop is enough to live on, you would not have to care what the neighbor would pay for the orchard – it’s not for sale! Whether the latest bid was higher or lower than the day before makes no difference.
You can think of your long term portfolio the same way. If it produces the cash flow you need, fluctuating values don’t always affect your real life – you buy groceries with the income, not with the statement value. The down years may have no impact on your life or lifestyle. All we need to know is where to find the cash you need, when you need it, to do the things you want and need to do.
This is what we mean when we say “own the orchard for the fruit crop.” It’s important, because enduring volatility is an inherent part of investing for total return.
There are two key points of caution. This approach presumes you keep the faith that downturns in the market end someday, that the economy recovers from whatever ails it—and you do not sell out at low points. Also, it assumes that your short term lump sum cash needs are covered by savings that do not fluctuate.
Clients, this understanding is key to our work. Please call or email us if you would like to talk about it, or anything else.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
If you believe that living with ups and downs is an integral feature of long term investing, some aspects of customary investment practices seem rather curious.
The idea that volatility is risk is the root of the trouble, in our view. We believe volatility is simply the normal ups and downs, not a good measure of risk. A widely followed concept, Modern Portfolio Theory or MPT, adopts the approach that volatility is literally, mathematically, risk.
This approach attempts to work out “risk tolerance,” by which they mean willingness to endure volatility. If one is averse to volatility, then portfolios are designed with volatility reduction in mind.
Unfortunately, volatility reduction may result in performance reduction. But investments which do not fluctuate are not truly investments. Your bank account does not fluctuate, but it is not an investment.
We think beginning the conversation with an attempt to tease out willingness to endure volatility is a lot like a doctor working with a child to determine tolerance for icky-tasting medicine before making a prescription.
Our strategy is to impart what we believe about investing. We work with people to understand what part of their wealth might be invested for the long term, and whether they are comfortable with ups and downs on that fraction of it.
This necessarily involves learning about near and intermediate cash needs and income requirements, as well as talking about what it takes to live with the ups and downs. We invest a lot of time and energy into providing context and perspective so people might be better able to invest effectively. This process begins at the very beginning of our discussions with potential clients.
Clients, if you would like to talk about this or anything else, please email us or call.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
We recently were consulted by folks who are just a few years from retirement. Mr. and Mrs. C had a chance to make a major purchase that they had long considered and would really enjoy. Some people want a camper or a boat, others a cabin…you get the picture. They wanted our help to figure out if it would fit with the rest of their plans and planning.
The process we used to help them is the same framework we use to help people understand how retirement will work for them, financially speaking. Perhaps it will be of interest to you.
There are four kinds of numbers that figure in.
Fortunately, Mr. & Mrs. C have expected retirement income sources that should sustain their lifestyle in retirement. Once that was determined, we could move on to sorting out the best way to handle the purchase they planned.
There are tax considerations to withdrawing retirement plan dollars, cash flow considerations from taking on debt, and opportunity costs to cashing in investments. We framed the costs and benefits of each alternative so they could figure out what they wanted to do. If you would like to talk about your situation, please call or email us to set a time for discussion.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
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