The major U.S. stock averages achieved record levels in the first few months after the election of Donald Trump. Predictably, those gains spurred the inevitable warnings that we are in a “bubble” and a huge crash is sure to follow.
The internet, and probably your email inbox, are full of dire warnings predicting a big crash. I’m not smart enough to predict that, and neither are most of the pundits. The fact is, trying to time the market is a sucker’s bet. A better option is to make your financial plans in a manner that attempts to protect your nest egg in good times and bad.
With the major stock indexes reaching record highs early in the Trump presidency, the consensus was that this occurred because of his proposed tax reductions, calls for major increases in infrastructure and repatriation of capital that U.S. corporations have parked overseas to avoid higher U.S. taxation. But, even with a Republican House and Senate, the President was unable to achieve repeal and replacement of the Affordable Care Act, an action he and nearly every Republican pledged in their campaigns. It remains to be seen whether that setback will slow momentum in achieving the other goals.
I built my practice on the premise that we can’t predict the future, but we can fashion our investment portfolio strategies to help protect us from down markets, and we can use insurance to help protect our nest eggs from other bad things we can’t predict.
We developed a model for investing and retirement called Lifestyle Driven Investing™. Within that system, a key element is building your “House of Security.” The details can get complicated, but the basis is simple. We divide your retirement goals into four categories:
• NEEDS – necessities of life such as food, shelter, clothing, insurance (life, long-term care, disability, etc.)
• WANTS – extras such as travel, hobbies, entertainment, club memberships.
• LIKES – vacation home, boat, camper, major family vacation.
• WISHES – charitable giving, gifts to heirs and other legacy items.
The illustration is simple, but that’s part of its beauty. To build a house, you start with a solid foundation. That explains why Needs is at the bottom. That is your foundation.
Until the foundation of your basic Needs is built, you can’t start dealing with the Wants. The exercise requires you to build your foundation, then add on (upward) as you find the cash to pursue the next level. Click here or on the image to find an interactive version on our firm’s website. It’s yours to use.
If you go through the exercise, you will probably fit into one of these three groups:
1. You have enough money and have lived within or below your means. Ask yourself the question: In a perfect world, what would your preferred lifestyle look like? You have the resources to incorporate all four categories into your lifestyle.
2. Your resources are not as substantial and you must compromise. You will need to work harder to determine what is truly a Need and what is a Want, and then determine if you have the means to fund Likes and Wishes.
3. You are not entirely realistic about your financial resources and the lifestyle that your assets will support. You must face the truth and work to determine what is possible.
Protection from the unexpected is high on my list of priorities and I emphasize it with my clients. My father died when I was young, leaving the family with nothing. A few years later, an auto-motorcycle accident threatened me and my family with financial ruin because we lacked the resources to defend ourselves. We figured out a means to defend ourselves, but from that point on I knew that having money gave me options, and I made it a mission to make sure I had it.
In my world, life insurance, long-term care insurance and disability insurance are generally necessities.
What are Your Wants and Needs?
Differentiating between Needs and Wants can be subjective. Food is obviously a Need, but eating out could be considered a Want. Simple and less expensive vacations might be considered a Need in your world, with more extravagant trips placed in the Want category. Another gray area might be paying for a child’s college education. Some would consider it a Need, while others would move it “upstairs” into the Want category.
Dividing the expenses into different categories is important because it helps determine how to invest your nest egg.
It is fundamental to pay for Needs with what I call Lifestyle investments. These must produce an income, either now or when you need it in the future. The income must have at least one of these two characteristics: it must be predictable or guaranteed. It would be ideal to have your Lifestyle investment dollars in some sort of legal entity that provides a level of protection in the event of a lawsuit.
I intentionally make this investment category strict for the obvious reason that it funds your basic needs. This is no place to take big risks. As you move “upstairs” to fund the other categories, I look at investment recommendations that emphasize some growth and inherently expose you to more risk.
While Lifestyle Driven Investing™ is simple, it is also very powerful. I know this because I saw it work during the crash of 2008. Many other advisors had to call their clients and tell them they would have to reduce their lifestyle and expenses significantly due to the reduction in their portfolio values.
I would always want markets to be predictable, but I also know that’s not reality. I encourage you to visit the website and take advantage of our House of Security.
Phone or email and we will arrange a consultation.
Erin Botsford – Botsford Financial Group