North Korea and Your Investment Strategy

Should investors sell due to the tensions with North Korea? The short answer is, “Probably not.”

The longer answer has to do with the broader global and military context surrounding the recent well-publicized shouting match between North Korean dictator Kim Jong Un and President Donald Trump. While the latest headlines can make people nervous–and while we should certainly not blithely disregard the serious consequences of a miscalculation on either side–many experts do not believe that the fierce rhetoric of the two leaders indicates an imminent nuclear conflagration.

First, according to the Washington Post and other sources, the US military does not appear to be taking any of the preparatory steps that would normally precede a decisive military incursion. No US Navy carrier groups are being ordered to positions near North Korea, for example. Further, the US State Department has taken no measures to evacuate personnel from South Korea, which would almost certainly be on the “first targets” list for any strike ordered by Pyongyang. So, while the tough talk between the two heads of state may be unsettling and probably not conducive to productive discussions between the nations, it does not seem that it is time to head for the bomb shelters just yet.

Meanwhile, the US financial markets continue to bump against new highs. The economy continues its steady–if not spectacular–growth, and most companies continue to report earnings at least somewhat higher than they had forecast.

“But,” someone might say, “isn’t that all the more reason to pull back out of the market? Shouldn’t we take some profits and wait to see how things play out between Washington and Pyongyang?”

Here again, the best answer is “probably not.” Trying to time the market has been proven, by study after study, to be the very best way to miss important upside swings in value. Is it possible that hostile rhetoric or perceived threats could cause some panic selling? Yes, but many analysts would regard these as buying opportunities. There have been many serious world events that have pulled the markets down–9/11 being perhaps the most serious recent example. But even in that case, those who stayed in the market through the subsequent steep drop and slow recovery still achieved strong gains.

If you are feeling particularly vulnerable due to equity exposure in the current climate, by all means, speak to your financial advisor. Depending on your situation, it is possible that some portfolio rebalancing and restructuring could be helpful. But selling due only to ominous headlines is not a financial strategy; it is an emotional response to a perceived threat–in this case, one that has not yet materialized. Such emotionally driven decisions hardly ever bode well for your long-term financial well being.

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Five Retirement Savings Habits

When it comes to saving for retirement, sooner is always better. But even if you’re already well into your career, it’s not too late to form some useful habits. Let’s take a look at five very important habits everyone should consider to get on the road to a more financially secure retirement.

  1. Have a Spending Plan, and Stick to It: Remember that line your middle school teachers and parents used to pull? “Failing to plan is planning to fail.” Well, as annoying as it is to admit, it’s really true! Many people resist forming a spending plan because they perceive it as restrictive. However, the opposite is really true; when you have a plan, you gain a sense of freedom. You don’t have to agonize over a purchase decision, because, as long as you stick with the plan, you have the freedom of knowing it’s okay. Another benefit of having a plan is that it is excellent training for living in retirement, when most of us will be operating on a smaller budget. The discipline of budgeting teaches us to know the limits of our resources and allocate accordingly.
  2. Utilize Employer Matching: Many companies will match their employees’ contributions to certain types of savings and retirement plans. If you are fortunate enough to work for one of these companies, you should seriously consider contributing up to the maximum your employer will match. Think of it as doubling your money–immediately. And over the years between now and retirement, the compounding effect on that “free” money can add significantly to your retirement bottom line.
  3. Rollovers Are Your Friend(s): This is especially important to remember in the era of frequent job changes. Very few who have entered the workforce in the last ten years or so can realistically expect to work for the same firm for their entire career. We change jobs more frequently, which also means that many people forget all about the 401(k) they had at their previous place of employment. The result is either small accounts scattered all over the place–which makes it much more difficult to assess your assets and investment options–or simply cashing in the plan when you leave the company, which reduces the amount you’ll have in your retirement fund when you really need it. Instead, utilize rollovers to consolidate your accounts and retain the power of compounding on a tax-free basis.
  4. Know Your Options: There is no one-size-fits-all retirement strategy. Depending on your age, time until retirement, asset mix, and other variables, you may have a number of viable choices for both the timing and the funding of your retirement. The more you know, the better your decision.
  5. Start Now: This is the most important hint: no plan will help you until you start using it. The central, crucial factor in retirement planning is time. The earlier you start, the better your chances of enjoying a comfortable retirement lifestyle.

If you have a young person in your life, encourage them to implement these five habits now. They will be thanking you when they retire.

And if you have questions on these five habits or other wealth management topics, contact your financial advisor to discuss them with him or her.

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Discussion with Apollo Lupescu, PhD

Recently our clients had the privilege of hearing Apollo Lupescu, PhD, Vice President of Dimensional Fund Advisors. Dr. Lupescu, who taught finance at the University of California, Santa Barbara, prior to joining Dimensional in 2004, leads efforts to communicate to financial advisors and individual investors the academic and theoretical foundations that undergird the investment philosophies and practices of Dimensional Fund Advisors.

Apollo Lupescu is gifted with the ability to make complex financial principles understandable without oversimplification. For more than an hour at a dinner hosted for clients and friends of Bernhardt Wealth Management, Apollo fielded questions and explained important concepts about the financial markets. A few highlights from his presentation follow.

Interestingly, Apollo opened his remarks on a very similar theme to that with which he began on his last visit here: US presidential politics. On the previous occasion, the election of Donald Trump had not yet occurred, and many in the audience were very interested in Apollo’s take on the likely effects in the financial markets of various election outcomes. As he did on his first visit, Apollo shared with his most recent listeners his firm conviction that investors should not focus on the effect that a particular president may or may not have on the financial markets. Emphasizing that the financial markets in the aggregate, and specific companies in particular, are valued based on the fundamentals of earnings, profits, and competitive practices projected well into the future, Apollo posed the question, “Which do you think is more relevant for the companies: President Trump’s policies, or the products they develop and the execution with which they bring the products to market?” Apollo made the related point that during one of the most pro-business presidencies in recent history–that of George W. Bush–the stock market returned an annual average of -2 percent (i.e., a negative two percent annually) during the eight years of his administration. Conversely, during the administration of Barack Obama, often viewed as hostile to business, the markets returned an annual average of 15 percent. The moral? Who is in the Oval Office does not matter nearly as much to the financial markets as many investors believe. Rather, a long-term perspective on the value of the thousands of companies that make up the markets is much more important.

Continuing on another theme he sounded at his previous presentation, Apollo discussed the importance of adequate diversification as the best protection against the volatility and unpredictable nature of the financial markets. Pointing out that predicting the price movement of any particular stock is very difficult, he surprised his listeners with two pieces of information: 1) the U.S. stock with the highest performance in 2016 was not, as many might expect, a tech stock like Apple or Tesla, but US Steel, which was up 300 percent; 2) the country with the highest-performing stock market last year was Brazil, up 70 percent, despite the country’s well-publicized woes, both financial and otherwise. Apollo’s takeaway was that while short-term performance of any particular stock or sector is usually difficult to predict, investors should instead be looking at the long-term trends and should cast their nets as widely as possible in order to increase their chances of success.

Further illustrating the importance of diversification, Apollo shared the historical returns of various market segments. “If my grandparents had invested one dollar in the S&P 500 index in 1926, when my dad was born, what do you think it would be worth today?” The answer was just over $6,000–despite wars, the Great Depression, and the financial meltdown of 2008 and the Great Recession that followed it. But then, Apollo asked for the audience’s guess as to what that same dollar would be worth today if, instead of being invested in the largest companies in America, which make up the S&P 500, it was invested in a basket of smaller-capitalization stocks. In this scenario, he said, the dollar grew to $27,000, during the same period. “The very first thing you should look at as an investor is whether you are only buying large companies or also buying small companies. The greater the perceived uncertainty, the greater the potential return.” He also explained the concept of valuation of companies on the basis of their ratio of stock price to earnings per share. “The ones that have a lower price compared to their earnings are called ‘value companies,’ and they tend to provide a higher return over the long term than companies with stock prices that are high in relation to their earnings.” Apollo pointed out that on the same historic basis shown above, a dollar invested in smaller companies with high value ratios grew to $78,000.

Apollo shared an analogy that he used in order to explain the concept of sector-based investing to his mother-in-law. “I was swimming in the ocean in Florida, and I realized I was above a school of fish. If I tried to focus on one particular fish and predict which way it would go, it was very difficult. But after a while, I began to see a pattern in the movements of the school as a whole.” Researching large amounts of data covering large sectors of the markets–large vs. small capitalization, value companies vs. growth companies, U.S. stocks vs. foreign stocks, and other differentiators–analysts like those at Dimensional Fund Advisors are able to determine larger patterns with much more precision. “I cannot tell you how each stock will move, any more than I can tell you which way a single fish will swim. But when I look at the sector as a whole, I have a much better understanding of what to expect.”

Bernhardt Wealth Management is deeply grateful for the research- and evidence-based insights of Dr. Apollo Lupescu. As part of our fiduciary approach to helping our clients manage their assets for retirement, education of children and grandchildren, and other important life needs, we are strongly committed to providing our clients with the very best financial thinking we can find. Dr. Apollo Lupescu’s perspective, and especially his simple, common-sense way of sharing it, helps us meet that important educational goal for those we serve.

Of course, we invite our clients to contact us at anytime to discuss investments, their accounts, or any wealth management matter.

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Saving for Retirement

Many Americans are taking advantage of the Roth IRA, with its $5,500 annual contribution limit ($6,500 for those 50 or older), to sock away money for retirement and enjoy nontaxable growth on the invested funds. While Roth IRAs, unlike traditional IRAs, do not afford taxpayers a deduction from taxable income for the contribution. However, unlike traditional IRAs, on which withdrawals at age 59 ½ are taxed as ordinary income, Roth IRAs allow tax-free withdrawals, which can be deferred as long as the owner wants (another difference from traditional IRAs, which require withdrawals to begin by age 70 ½).

But suppose you’ve already made your maximum contribution to your Roth IRA for the year. First of all, congratulations on having the foresight to fund your retirement account to the highest level possible! But what if you want or need to save more? Are there vehicles you can use that offer tax advantages, either now, during the accumulation period, or when the funds are withdrawn in retirement?

The answer is yes; there are a number of plans and tax-deferment savings methods that many investors are eligible for. If you’ve already reached the annual limit for your contribution to your Roth IRA, consider some of the following options that may be available to you:

  • 401(k), 403(b), or 457 plans: Your employer may offer a 401(k) plan, which is a defined contribution plan that allows you to contribute on a payroll deduction, using either pre-tax or after-tax income, depending on the specific options in the plan. A 403(b) plan works in a similar way but is only available to employees of qualified, nontaxable institutions like public school systems, universities, and some religious organizations. Both 401(k) and 403(b) plans usually allow the individual employee to select the investments within the individual account, typically from a list of available options provided by the plan. You can contribute as much as $18,000 to a 401(k) or a 403(b) in 2017 (or $24,000 for those 50 or older). A 457 plan, which is a deferred compensation plan available to governmental and certain other employers, allows contribution of pre-tax income, which can grow on a tax-free basis until money is taken from the plan, when it is taxed as ordinary income.
  • SIMPLE IRA or SEP IRA for self-employed individuals: If you have self-employment income or a small business, you may be able to contribute up to $12,500 annually ($15,500 if you are 50 or older) to a SIMPLE (Savings Investment Match Plan for Employees) IRA. Once again, contributions to SIMPLE IRAs are deducted from taxable income, the plan grows tax-free until retirement, and withdrawals are taxed as ordinary income. The SEP (Simplified Employee Pension plan) IRA also grows tax-free until retirement and is taxed as ordinary income but the contribution cannot exceed the lesser of 25% of the employee’s compensation or $54,000.
  • Defined benefit plan: These plans are more complicated to set up and administer, but for a self-employed individual with high income who is nearing retirement, a defined benefit plan can allow you to contribute and defer taxes on up to $210,000 per year.

Of course, the most important retirement savings plan is the one you have! Even if you aren’t contributing the maximum each year, you can still make significant strides toward a financially comfortable retirement by making systematic contributions each year, and by carefully choosing your investment options. A qualified and experienced financial advisor can help you sort out the options that are best for you.

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Emerging Markets: What You Should Know

With the US stock market hanging around all-time highs, and with the nagging prospect of at least slightly higher interest rates, many investors are wondering how much more upside can be expected from domestic stocks. Others are eyeing overseas markets–particularly those in rapidly developing parts of the world–and considering whether the pastures might be greener on the other side of the ocean.

While we generally urge investors to take a long-term view of investments in any market, whether domestic or foreign, it might be worthwhile to think about the special characteristics of investing in emerging markets–places like Malaysia, Thailand, the Czech Republic, Turkey, Hungary, and, to a lesser extent, China and South Korea. What are the rewards of investing in places like these, where growth patterns are associated with relatively new, rapidly expanding economies? And what are the dangers?

First of all, many analysts see tremendous upside potential in emerging world economies and the markets associated with them. The MSCI Emerging Markets Index is up 25 percent over the last twelve months or so, compared with an increase of 15 percent for the S&P 500 during the same period. (Note: The MSCI Emerging Markets Index has also underperformed the S&P 500 over stretches of time in the recent past.) Further, in recent times, emerging markets have seen relatively low volatility, which has been attractive to a number of large investors. Many analysts believe that overall valuations are not stretched nearly as thin for companies in the emerging markets as they are for more mature companies in the United States. And these characteristics carry over into more than just stock investments; many of the emerging market countries are also sources of good yields on bonds and other interest-bearing investments, as companies experiencing rapid growth bid up the cost for the borrowed funds they need to fuel their expansion.

But what about the risks? Certainly, any investment in an emerging market–or any foreign security, for that matter–is subject to at least one risk that is not present in domestic investing: currency risk. In other words, when a security is purchased in US dollars, its value can fluctuate, not only according to the underlying value of the company, but also according to the value of its home currency in relation to the US dollar. And there are other risks, as well. Transaction costs for buying and selling foreign securities can be quite high, so investors should thoroughly discuss and understand these before making any commitment. Liquidity is also a consideration, since trading in foreign investments are subject to the limitations of the specific markets. Political, financial, or even military turmoil in a foreign country can sometimes obstruct the markets for their securities, and thus hamper an investor who wants to buy or sell.

For any investment you are considering, of course, it is always best to have a careful discussion with a financial advisor who is familiar with your situation, your risk tolerance, and your overall portfolio. Emerging market investments can be an important part of your overall financial strategy–as long as you know all the facts.

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The Stock Market or Real Estate?

Almost everyone knows the three most important factors for investing in real estate: location, location, and location. Certainly, over the last several years, we have seen wildly different changes in the value of both residential and commercial real estate, with much of the variance determined by the geographic region and how that particular region was affected by various economic trends, whether the housing bubble and the collapse of mortgage-backed securities, or the downturn in manufacturing that decimated the value of much commercial property in the Northeast and upper Midwest.

But it is also true that many of the largest fortunes in this country have been amassed in the real estate industry–witness the current occupant of the White House. So, is real estate really all that risky? After all, as the other saying goes, they aren’t making any more land. Especially compared to the notorious ups and downs of the stock market, wouldn’t it be a good idea to have some of your investment portfolio in real estate?

The answer, as is often the case with such questions, is, “It depends.” From the beginning of 1999 to the end of 2004, US real estate prices, as valued by the Office of Federal Housing Enterprise Oversight, increased more than 56 percent. During that same period, the S&P 500 lost about six percent of its value.

But if you look at a longer time horizon, stocks have significantly outperformed real estate. From the beginning of 1980 to the end of 2004, for example, home sale prices increased 247 percent. Not bad, right? But during that same period, the S&P increased in value by more than 1,000 percent. Looking at a more recent period, US residential real estate returned 21 percent from 2010 to 2015; during that same period the S&P 500 returned 75 percent. Going all the way back to 1975 and continuing through the end of 2015, US residential real estate achieved an aggregate return of 595 percent, compared with a 2,352 percent increase in the value of the S&P 500.

Of course, there are reasons to own real estate other than the return on investment. Home ownership has a value to most of us that far exceeds the strictly financial considerations. For those who earn their livings from the land, owning farm or ranch property is a way of insuring continued independence and some measure of control over the means of production. And if an individual has deep familiarity with the business and economic cycles in a given community, that knowledge can often be leveraged to create returns on investment much higher than national averages might indicate.

So, it often makes good sense to have some portion of your assets invested in real estate. For example, we typically invest a portion of each client’s portfolio in real estate investments because it is dissimilar to stocks and its performance is not highly correlated with the stock market. You may want to talk to your financial advisor to review your complete portfolio and help you assess the appropriateness of your current asset mix, whether that includes stocks, bonds, real estate, or other assets.

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401(k) Plan Basics

If you work for a company that sponsors a retirement plan, you should certainly take full advantage of this excellent opportunity to save for retirement on a tax-advantaged basis. But many people are hazy on the details of how various types of plans work. Some even use the terms “pension plan” and “401(k) plan” as if the two were synonymous. While both types of plans are offered and sponsored by employers, there are actually a number of important differences between the two.

Most true pension plans are financed by the employer and are of the “defined benefit” type: that is, the plan guarantees a certain specified pension to be payable for the remainder of the qualified employee’s life, based on age at retirement, number of years of service with the company, amount of earnings, and other variables. Many pension plans are paid 100 percent by the employer, but some may allow contributions by the employee, as well. Typically, the investments in the pension plan are controlled by the employer.

By contrast, 401(k) plans–and the similar 403(b) plan available to employees of tax-exempt organizations like public schools, religious organizations, and some hospital cooperatives–are of the “defined contribution” type. In such plans, the employee and the employer both may make contributions, and those contributions are defined as to the amounts that either employer or employee may make in a given year (in 2017, the contribution limit is $18,000 for individuals under 50 years of age; those over 50 can put in an additional $6,000 due to the IRS “catch-up” provision). The investment of the funds in the 401(k) plan is controlled by the individual who owns the plan.

Since their beginnings in the mid-1980s, these types of plans have become the overwhelming choice of most employers, mainly because they are much less expensive to maintain and administer. They also take away from the employer the risk of guaranteeing future income levels for retiring employees. Instead, it is up to the employee to make sure that sufficient funds are being set aside in the plan to insure adequate income upon retirement.

Advantages to both employer and employee include the ability to reduce taxable income by the amount contributed to the plan, up to the annual limit. Additionally, funds in such plans accumulate on a tax-advantaged basis. Withdrawals from the plan upon qualified retirement age are taxable as ordinary income in the year they are made. Early withdrawals, however, are subject to a penalty, in addition to being treated as ordinary income.

With much higher contribution limits than either the traditional or Roth IRA, 401(k) plans can provide a very useful vehicle for accumulating funds for retirement. Employers who offer 401(k) plans can provide to their employees information about enrollment, investment options, and other plan features and administrative requirements. You may also wish to consult your financial planner or other investment advisor for more personalized perspectives and recommendations.

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An Open Letter to Our Clients

Recently, Bernhardt Wealth Management (BWM) had a unique opportunity. We took part in one of the largest surveys of clients ever conducted by the financial advising industry. One of our strategic relationships, Dimensional Fund Advisors, surveyed almost 19,000 individual investors nationwide. The purpose of this study was to provide benchmarks to help us better understand our clients’ needs and what our clients most desire in their relationship with us.

The survey gave us an opportunity to not only obtain insight into our clients and their perceptions of our work with them, but also to be able to compare our results with thousands of other investors all over the country. This was incredibly valuable to us at BWM. Just as we need to know as much as we can about each individual client’s goals, needs, concerns, and preferences in order to provide the best possible advice and financial planning, it is also vital for us to see how our clients’ perceptions stack up against those of other investors. This “report card” from our clients then enables us to refine our services, our communications, and everything else we do on behalf of those we serve.

So, if you were one of the many clients who completed the survey, we give you our most sincere thanks. You have paid us the supreme compliment of really telling us what you think. In this letter, we’d like to share a few highlights of the survey results, along with our reflections on what these results might suggest for future initiatives and strategies at BWM.

Would You Recommend Bernhardt Wealth Management to Your Friends?

One overwhelming piece of information revealed by the survey is that 99 percent of our clients who responded affirmed that they would recommend BWM to their friends, family members, or colleagues. We are both delighted and humbled by this response.

In comparison, a 2016 study conducted by PricewaterhouseCoopers LLP, comprising more than 1,000 high net worth individuals in Europe, North America, and Asia, found that only 39 percent of persons with investable assets of $1 million or more were likely to recommend their advisor to others. So, when our clients indicate at a nearly 100 percent rate that they would refer us and our services to their friends, we feel deeply grateful for such a level of confidence.

Such a result deepens our commitment to continue to “do things right” for our clients. We know that confidence must be earned and that it must also be maintained. Rather than sit back on our laurels, we at BWM take this survey result as both a validation of what we have done and a challenge for what we need to continue to do with every client, every day.

What Is Most Important in Your Advisor Relationship?

Given the high level of confidence indicated by our clients, the next logical question to consider is what our clients consider most important in their relationship with us. Whatever that is, we want to make sure that we continue to deliver on it and focus all possible efforts on improving our value in the indicated areas. So, we were very interested to see that the largest response of our clients to the statement “Choose the attribute you consider most important in your advisor relationship” was “investment returns;” 35 percent of our clients gave this response, compared with 32 percent of the total respondents. The next-largest response was “client service experience,” chosen by 32 percent of our clients, and 31 percent of the total group. The third most popular response was “experience with clients like me,” at 26 percent for our clients, at an equal rate with respondents nationwide. Responses to other priorities–“fees and expenses,” “range of services,” “team size,” and “advisor age”–were all in the single digits.


The strong message here is that if BWM wishes to continue to enjoy the confidence of our clients, we need to continue to focus on the basics: prudently allocating our clients’ assets, and providing excellent service that is tailored to individual clients’ situations.

How Do You Measure the Value We Provide?

The final point we will consider in this letter is by what criteria our clients measure the value BWM brings to the advising relationship. In response to the question, “How do you primarily measure the value received from your advisor?” a strong plurality of our clients–40 percent–responded, “sense of security; peace of mind.” This compares with the overall rate of 35 percent of respondents who made the same selection. The second highest response from our clients was “progress toward my goals” (22 percent), and the third highest was “investment returns” (16 percent).

We interpret these results to indicate that one of the principal benefits we provide to our clients is the security that comes with knowing we are mindful of each investor’s objectives and needs. In other words, we believe that our principal value is in the quality of our relationships with our clients. If we are doing our job well–listening carefully to our clients; communicating clearly; fully explaining the options, opportunities, risks, and rewards; and above all, putting our clients’ best interest first–we believe that the result is a feeling of security on the part of our clients, realizing that we are working diligently on their behalf at all times. That feeling of security and confidence is our ultimate goal. We desire, above all, that our clients rest easy, safe in the knowledge that we are watching out for them.

In future communications, we will explore some additional information from the survey and some technology and reporting enhancements you will see. But for now, we want to close this letter with one more word of sincere thanks, not only to our clients who participated in the survey, but to all those who continue to place their trust in Bernhardt Wealth Management. We take that trust very seriously, and we come to work every day with the chief goal of continuing to earn it.

Thank you!

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Three Steps to a More Secure Retirement

Financial planners often hear the question: “Am I putting enough aside for retirement?” It isn’t surprising, especially as people reach “a certain age,” that they start wondering about this, especially since “not being a burden to my children in my old age” is close to the top of many prospective retirees’ worry lists.

Of course, each person is different: we all have different goals, different standards, and different resources. But here are three ideas to increase retirement savings that can help almost everyone toward success, no matter the variables of the individual situation.

  1. Set a goal to save 15 percent of income. Saving 15 percent of your pre-tax income for retirement is a broad recommendation, but one that could be very helpful to many people. It is reachable for many people and, while not so much that it should deeply impact your current lifestyle, it can really build up if pursued with focus over a number of years. This is also a helpful goal for those with a company 401(k) plan who may be thinking that just meeting their employer’s matching level is enough. That’s certainly a good practice, but that may not be enough to build a sufficient nest egg for retirement. For those making more than $120,000 per year, for example, the annual 401(k) contribution limit of $18,000 won’t make this goal. These individuals may wish to consider opening a Roth IRA in order boost their retirement savings on a tax-favored basis.
  2. Invest intelligently. This is where a trusted, qualified investment advisor can really be helpful to many. The mistake that many people make is in failing to adequately diversify their holdings to protect against as many risks as possible. Too often, investors focus on market risk–the day-to-day value of their investments–and forget about other, more long-term risks, such as inflation. Failing to take inflation into account sharply increases the likelihood that your retirement investments will not grow fast enough to keep pace with ongoing inflation; you could reach retirement with a pool of funds that has lagged the growth rate needed to maintain your future spending power. A qualified advisor can help you determine your risk profile and can provide assistance with helping you to deploy your assets strategically and intelligently.
  3. Do the math–ahead of time. If you have questions in your mind about whether your retirement savings will be adequate, perhaps you should also ask: “Have I ever calculated how much money I’m likely to need when I retire?” Especially for younger individuals, simply having a target number can be a tremendous motivator toward improved saving habits. Here again, a qualified advisor can provide you with proven benchmarks for retirement savings that take into account your age, income, intended retirement age, and other individual variables. There are also a number of online retirement income calculators (google “retirement income calculator”) that you can use to help you get started with a general idea.

These three, common-sense suggestions are certainly not complicated, but they can help you set a course for a more secure, well-funded retirement.

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Stress-Test Your Financial Plan

Many of us are familiar with the somewhat dreaded routine: climbing onto the treadmill at a clinic or our cardiologist’s office, having electrodes taped to our chests, and then undergoing a series of graduated exertions designed to measure our cardiovascular system’s ability to perform at greater and greater levels of effort. We don’t typically enjoy these outings, but the results are very important for maintaining our health and well-being. We need to know how our hearts perform under stress.

Similarly, engineers can testify to the importance of sensitivity and stress testing for materials and systems. Would you want to drive across a mile-long bridge, for example, if you didn’t know that the materials used to build that bridge had been tested and certified for their ability to hold up, not only in “normal” conditions, but also in bad weather, or under unusually heavy traffic loads, or when there was an especially strong tide?

Your financial plan can also be stress-tested. It can be very important, in fact, to have some idea of how your financial strategies and assumptions will perform under various scenarios–before you actually experience the scenarios!

Most financial plans have four important “pressure points”:

  1. Spending and saving
  2. Inflation
  3. Life expectancy
  4. Portfolio returns including portfolio volatility

For each of these factors, there are some matters that are in our control, and some that are not. With spending, for example, we can exert a fair amount of control over the percentage of our portfolio we spend during a year. We have less control, however, over certain types of expenses that may crop up during our life span–medical emergencies, for example. Fortunately, spending is the factor that most directly affects a financial plan, and also the one over which we have the most control. Inflation and life expectancy, however, are subject to very little individual control. Even Warren Buffett can’t control the worldwide trends in the cost of goods and services, and unless you were able to choose your parents, you have certain “built-in” life expectancy risks over which you can exert very little influence. Portfolio returns are the factor we most often focus on, and by exercising appropriate diversification as to asset classes and other investment characteristics, we can mitigate–though we certainly can’t control–the risks associated with the portfolio.

An informed and experienced investment advisor can assist you with “stress-testing” your financial plan by inputting various factors into a simulation that permits you to observe how your plan would perform in certain hypothetical scenarios. For example, let’s say you wanted to see how your plan would hold up if you increased your spending rate from an annual 5 percent of your portfolio to 6 percent. The simulation will show you the rate at which your assets would be depleted by the increase, allowing you to determine whether or for how long such an increase in spending could be sustained. Or, you might wish to see how your plan would hold up under various higher or lower inflation scenarios; a simulation can allow you to “stress-test” your plan for this possibility.

As the old saying goes, “Forewarned is forearmed.” Stress-testing your financial plan can help to fortify you against the unpleasant surprises that sometimes come our way. And contact us if this is a matter you would like to discuss further.

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