By Michael Gold, CFP®, MBA Founder and CEO, Wealth Advisor
The current state of affairs has made this a scary time for a lot of us, especially if your retirement accounts have taken a hit. Although we don’t know exactly when economic instability or down markets will occur, we can do everything in our power to make sure we are prepared for when they happen. Since we are in the thick of the onslaught of negative economic data right now, here are three things to focus on and take advantage of now:
1. Maintain Your Income AND Control Expenses
This may seem like an odd point to make about protecting your wealth, but the truth is your income is your greatest wealth-building tool. The ability to maintain and increase your income allows you to have more margin in your life to save towards an emergency fund and prevent the need to sell assets or take on debt to meet your basic needs. If you are in the decumulation phase, meaning you are no longer dependent upon earned income and you are taking distributions from your portfolio, consider the following: tapping into your reserve fund (we recommend two years’ worth of living expenses in reserve) and/or using the fixed income portion from the portfolio to help maintain your cash-flow to meet expenses. This strategy can be effective when you enter a Bear Market (Asset Class declines by 20 percent from the recent peak). Additionally, be sure to know what income you have that is not tied to your portfolio such as social security payments, pension and/or annuities with a fixed income stream.
If you are still in the accumulation phase and experience a job loss or pay reduction, contact your providers regarding your mortgages, student loans, etc. and explore forbearance options.
This is also a perfect time to consolidate or refinance debt. List all your debts and the annual interest rates associated with each category – mortgages, credit cards, student loans, personal loans, business loans, etc. Next, investigate creative ways to refinance your high interest loans with lower interest. If done correctly this can provide an immediate boost to cash-flow and perhaps less financial stress.
Lastly, if you do find yourself out of work or furloughed, what other job opportunities can you take advantage of that are in your control? How can you get creative about maintaining your income? Having a stable income and a sufficient level of savings, gives you the luxury of making decisions out of strategy and preference, not desperation.
2. Identify Your True Risk Tolerance
There is nothing like realizing where you stand on something until you are put to the test. Whether you wanted this or not, your actual risk tolerance is being tested right now! From my experience, when the markets are on the rise I see that many people are more cavalier about adding additional risk. It’s when the music stops and people feel like they don’t have a chair left, that those same people who were just comfortable taking on additional risk all of the sudden become risk averse. When the markets are up, many are lulled into a false sense of security and take on too much risk. This can lead to financial decisions that are no longer aligned with meeting their financial goals. The best way to truly protect your wealth is to only invest as follows:
- Identify your goals and let your goals be the driving force behind everything you do financially. If you desire to have an income you don’t outlive, a legacy for your heirs, send your children to college, buy a home or whatever it is you set out for, that’s where you start.
- Develop a plan to achieve these goals – know how much you should contribute to or take a distribution from. Be sure to factor in inflation, taxes and cost.
- Design a portfolio strategy to achieve your goals that reflects your overall risk tolerance so when the corrections and bear markets come, as they always do, you can manage them in stride.
What is risk? Risk is the chance of permanent loss of capital. In my nearly two decades advising investors and studying the history of the capital markets, it has never been clear to me how anyone would think permanent loss would happen (and we must consider that one reason a permanent decline is so hard for me to imagine, is that it has never actually happened). However, stocks have declined sharply on many occasions and I would expect they will do so over and over again.
I think about this example: Since the end of WW2, the stock market has experienced a rough average of a 30 percent drop every five or six years (this is an average, some were not as bad and some much worse like the financial crisis of ‘08/’09 which was down ~57 percent). Additionally, as the chart below shows, for the past 40 years the S&P 500 experienced an intra-year correction resulting in an average 14 percent decline. What is interesting is that although these corrections occurred every single year, most years rebounded and closed out the year with positive results. What are the takeaways? It seems like something spooks the market every year and these highs and lows are actually a very common aspect of investing. Corrections in the markets are so common that in my professional opinion, forecasting the next correction is in some ways the equivalent of forecasting that it will snow in Alaska this year.
Risk is really all about how we feel. It’s our emotions around the fear of missing out on gains and the fear of loss. Investing is more about our emotions than math, although the latter is still very important. Volatility in the markets is a constant. If an investor struggles to endure a fourteen percent temporary correction each year with an average decline of roughly a third every five or six years, they should not be an equity investor. It is extremely important to speak with an advisor you trust about how you are feeling (especially with a pandemic going on) and come up with a strategy that is goal based, plan driven and a portfolio that works with your risk tolerance.
3. Don’t Pull Out Your Investments
I completely understand it is tempting to want to pull out money when it looks like your investments have tanked, but when you do this, you are locking in the low value of your accounts instead of letting them rebound before you withdraw. The only time you are guaranteeing that you lose money when markets are down is when you withdraw money from your investment accounts at that time. If you have a goal based financial plan, with two years of cash-flow in reserves, this volatility should already be factored in and accounted for in your financial plan. If not, this is the perfect time to overhaul your financial plan to get back on track.
Many times during recessions and bear markets I hear investors and market prognosticators say things like, “Since the current economic data is terrible, consumer confidence is down, unemployment is at all-time highs and the outlook on the world seems grim, nobody is going to spend money the way they used to. If consumers don’t spend money then companies can’t make money and if that happens the markets likely won’t recover”. Nothing could be further from the truth. Remember, the market is not looking at today’s data, but it is always looking at tomorrow. The market cares much more about where it will be in the future than where the economy is today. I talk a lot about historical perspective and historically, bull markets tend to emerge when investors are feeling the worst about their outlook for the future. Remember how you felt about the market in the end of 2008 and beginning of 2009? Investor sentiment about the future outlook was terrible and the rest is history.
We Are Here To Help Preserve and Safeguard Your Wealth
When so much is out of your control, take advantage of what you do have control over by putting yourself in a better position moving forward. Every week Gold Family Wealth, LLC is committed to providing you with insights, perspective and advanced planning strategies. With all the moving parts and complexities of personal financial planning, our mission is to help connect the dots and ease the overwhelming nature of your financial life.
Reach out to us at [email protected] or (800) 303-2533 to schedule a complimentary consultation and start taking control of your finances. Additionally, who do you know that would benefit from this content and/or a relationship like the one you have with us? Please feel free to forward this content along to them or reach out on how best to make an introduction.
Michael Gold is the Founder and CEO, Wealth Advisor of Gold Family Wealth, an independent wealth management boutique, and is named one of the Top 100 People in Finance. Michael has 20 years of experience in the financial industry and has a bachelor’s degree in business and economics from the State University of New York College at Oneonta, an MBA from NYU Stern School of Business, specializing in Quantitative Finance and Leadership, and his CERTIFIED FINANCIAL PLANNER™ (CFP®) credential. He serves business owners and entrepreneurs by stress-testing their financial plan to identify red flags and missed opportunities. Michael strategically outsources professionals from various fields, such as tax, insurance, retirement and trust, and estate law to collaborate on potential solutions to help position his clients to pursue their desired goals.
Michael currently lives in Westport, CT. When he’s not working, you can find him spending time with his wife, Giselle, their three children, Sebastian, Aria, and Pierce, and their dog, Charly. To learn more about Michael, connect with him on LinkedIn.
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