In my last post, I talked about the need for prudence in the current market environment. It is a message that has been well received by most people that I talk to. But the discussion often turns to “Well, what does that mean?”Prudence as an over riding philosophy sounds great, but how do we put that into practice? One way to address this is the Barbell Approach. In investing, the Barbell Approach is a strategy with two components. On one side is a very aggressive and potentially volatile investment with high expected returns. On the other side is a conservative cash-like investment with lower return expectations. This helps smooth out the overall volatility of your strategy. It also potentially gives you dry powder to invest when volatility turns down.
During the second half of 2017, I spent a lot of time with clients walking through annual market reviews. I would like to share some of the insights that have come out of those meetings. There are two broad areas of focus: investment implications and personal finance implications (or, as I like to think of it, regular old life implications).
The secret at the heart of financial planning is one they don’t teach you in the classroom. The secret is that the financial planner’s main job is to help clients develop reasonable expectations about their money, their lifestyle and their future standard of living. This can be tough emotional work.
Many people pay a lot of attention to the little things in their financial lives and lose sight of the bigger, more important ones. For example, I hear people talking about cutting out their favorite coffee drink to save money. This is not a bad idea, and savings, wherever you find them, are helpful. But often these same people are making large financial mistakes that they don’t realize are costing them hundreds of dollars a month.
I recommend focusing on the big financial issues: income, housing expenses, car expenses and other major costs in your life. Get the big things right, and the other puzzle pieces are much easier to fit together.
The idea of talking with a financial advisor makes many people feel the same way they feel about a trip to the dentist: not thrilled. After all, financial planning requires that we think through and talk about how to deal with scary or unpleasant circumstances.
But good financial planning isn’t just about downside protection. It’s also about planning so people can do the exciting and meaningful things that make life wonderful.
In financial theory, risk is equated with volatility. Often this is described mathematically as standard deviation, a measure of how much variation there is in the data. Although the math that illustrates this concept is relatively straightforward, it is not helpful in understanding risk in terms of investor behavior.
When I work with clients, I discuss risk in a much different way. I use simple illustrations to show clients what might happen to their portfolio in a downturn.
To make it even easier to grasp, I talk about real dollars, not percentages. People tend to be comfortable talking about percentages when their portfolio rises, but not when it falls. “We made 5% this quarter,” they’ll say. But when investors see declines in their portfolios they think in dollars: “We lost $50,000 last year.”
Today's note is a little more industry oriented than normal. Still, I thought you would be interested because it touches on my philosophies regarding Financial Planning:
Recently I got into a Twitter conversation (yes, I tweet. You can follow me at the bottom of the note) regarding an article claiming that most millennials shouldn’t be bothered with financial planning. One advisor responded that most people under the age of 50 don’t even need financial advice. Just “save as much as you can in your 401(k) and Roth,” this advisor wrote.
I completely disagree. This line of thinking is a peeve of mine. In fact, it’s more than a peeve — I set up my firm specifically to help these types of clients and work with them over the entire course of their financial lives.
Americans are enamored with debt. We can’t stop ourselves from buying things even if we don’t have the money to pay for them.
This is bad for obvious reasons. Paying off debt crowds out other spending, so that you don’t really get to spend your money on what you want anymore — you spend your money on what you used to want. In essence, you are trading an immediate purchase for an ongoing payment stream, reducing your financial flexibility. Almost every terrible financial situation I have seen has been a result of overindulgence in debt.
This time last week, I added an item to my to-do list: Start writing my next client note. The topic was going to be “Sideways Markets Can Be Difficult to Deal With, Too,” or something to that effect. What a difference a week makes!
Let’s talk about austerity. No, not the austerity proposed in Greece (although I’m probably the only one not writing about Greece). Rather, I’m talking about personal austerity. I frequently recommend that families develop an austerity budget. Let’s describe what this is and how it might help you.
Note: The contents of this site are general in nature and not intended as specific investment advice. All investments are subject to risk; including loss of investment value. If you have any question regarding investments or concepts in these pages, please consult with an investment professional.