May, 2021 | Live a Life By Design

Managing Risk In Your Portfolio

Posted on May 27, 2021May 27, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Risk is one of the most difficult investment variables for individuals to control. All aspects of life have a risk component. A friend of mine attempted to prove his strategy for removing all risk was valid. He simply stated that he could bury his money in his backyard. When I reminded him, that thieves may discover his hiding spot, he may forget where he hid the money or environmental changes, such as a flood, may prohibit him from accessing his funds, he quickly withdrew his comment about safety.

When you invest your money in an investment account, the custodian bank will provide you coverage using membership in SIPC or the Securities Investor Protection Corporation. This type of insurance protects you in case of a bank failure in a similar process as FDIC, or Federal Deposit Insurance Corporation. Limits are higher for securities investors at $500,000 per investor and accounts insured under FDIC are limited to $250,000 per account. These coverages are only available if the custodian bank is insolvent.

Another form of risk is market risk. The probability of losing value in the markets may be reduced by implementing a systematic approach to investing. For example, a portfolio’s inherent risk will rise when the total investment positions within a portfolio consists of more equities than bonds or cash. However, based on the current economy of the United States, bond yields are below inflation. Simply put, your bond investments, particularly those that are rated investment grade or better, provide interest yields that will not sustain the purchasing power of your dollar. Gasoline, food and other necessary staples of life are rising faster in cost than bonds can create income.

To mitigate risk in your portfolio it is critical that you understand the purpose of diversifying your positions. Do not allow current market conditions to impact your allocation of investments within your portfolio. This action will lead to greater risk in your retirement assets than you may be willing to accept.

Investment advisers utilize two methods of rebalancing portfolios to maintain an acceptable level of risk: 1) percentage and 2) time. When a certain asset class of a portfolio increases in value, the remaining asset classes lose the same percentage of their weighting. Remember, your portfolio is a pie chart. You can only have one hundred percent of the pie at any given time. If your equity positions increase in value by 10%, then remaining positions of the portfolio will have been reduced by 10%. The best means of reducing this increased risk level is to sell the equity positions back to their original percentage in the portfolio. This action is known as rebalancing based on asset allocation.

The second method of rebalancing is based on time. For example, rebalancing the portfolio based on set periods of time passing. Continuing with the previous facts presented about percentage of asset allocation rebalancing, the growth of the portfolio would cause you to rebalance to your original allocation every quarter, semiannually or annually. Again, you would sell the positions that are growing and buy the positions that have performed less. Keep in mind that you are controlling risk in the portfolio not simply maximizing return of the portfolio.

Investing is a long-term process. To create a portfolio that will meet your long-term needs such as retirement, you will need to consistently invest in a balanced portfolio that accepts the level of risk you wish to tolerate. Remember, nothing ventured, nothing gained. By consistently rebalancing your portfolio, whether using the percentage of asset allocation method or the time method, you may control the inherent risk within your investments at a level you feel is acceptable.

Managing your future is difficult. Seek out a CERTIFIED FINANCIAL PLANNER™ professional to guide you in establishing, monitoring and rebalancing your retirement portfolio to gain a higher probability of reaching your long-term goals. You may qualify for a complimentary stress test for your portfolio. To live the type of life you desire, without excessive risk, may just be the plan you need for success. See you on the jogging trail!

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Small Mistakes, Big Consequences

Posted on May 21, 2021May 21, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

As humans, we make mistakes all the time. Some mistakes may relate to your career choice. Other mistakes may relate to the location of your home. However, some of us make, seemingly, small mistakes and don’t realize the impact the outcomes will bring to our lives.

Small mistake #1: Failing to save for retirement early in your career. When a person is 23 years of age, the future seems so distant. Their entire career is just launching from the starting gates of their recent college graduation and time is their friend. Fast forward twenty-five years and the person is looking at their future with a different lens. Kids, mortgage, car payments, and other living expenses caused by the choices made many years earlier has redirected their otherwise retirement savings to current expenses of life.

The obvious outcome is one that none of us wishes to realize – working until we are much older than we would prefer. By initiating your future savings at the beginning of your career, time and compounding of money will help you realize your financial goals later in life. Start with your employer’s plan and contribute at least the amount the company will match. For example, if your employer matches 5% of your salary then you should seek a goal of contributing 5% of your salary. The math is easy on this one. You will have doubled your contribution amount annually with the employer’s matching contribution. Let’s assume the markets treated you favorable and the investment in your employer’s plan grew by 8% for the year. Now, you can experience growth far beyond your 5% initial deferral from your salary.

Small mistake #2: Failing to live within your means. A philosophy practiced in our retirement planning business is one of “pay yourself first” for our clients. You want to do things differently in your life than most of your friends – save first, spend second. What this means is that you will treat your retirement contributions as a priority before incurring and spending your earnings on current pleasures of life. Too often we experience clients that meet with us that have all the toys of the day but lack any liquid savings or future investments.

Maximize your probability for retirement success by implementing a budget and focus on “paying yourself first”. By taking a more realistic approach to your future, you will continue to enjoy life and enjoy it more abundantly when you retire. Of course, prudent investment selection and monitoring are critical during the accumulation phase of life. You may wish to seek the guidance of a Certified Financial Planner practitioner to initiate your plan and provide you annual feedback on your progress.

Small mistake #3: Allowing your credit card balance to remain unpaid after one month. This is something that too many of us fall victim to early in life and it is a difficult problem to solve if left unattended. Based on a survey performed by Nerdwallet in January, 2021, the average balance carried on a credit card is $7,149 and the U.S. household will pay interest charges of $1,155 on average for 2021. Further, the survey discovered 63% of the responses indicated that they feel their household finances have worsened from that of the previous year.

The best method of controlling the interest accruing on credit card balances is to remember the card is for emergency purposes only. Do not use a credit card for a purchase that can’t be paid in full with your current savings or income. To be obvious, the use of a credit card is a means to live outside your current means.

To resolve this mistake, use a debit card that immediately withdraws the funds from your bank account. Another method of solving the credit card debt issue is to ask your credit card issuer to draft the full payment each month from your checking account. This is a critical step since you must be certain the funds are available for the payment each month.

Lastly, place your credit card in a small plastic bowl of water. Place the bowl in the freezer and leave it there for about 3 days. Remove the bowl and note the credit card is safely stored in a block of ice that requires thought and effort to free the card. I know this sounds silly, but it is effective for those people who are impulse buyers with their credit cards.

Don’t wait to improve your life by eliminating or resolving these three little mistakes from your life. Seek out a CERTIFIED FINANCIAL PLANNER™ professional to guide you in managing your cash flow to maximize your future savings. What have you got to lose? Worry, anxiety, stress, etc. See you on the golf course!

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The Millennial Perspective: Financial Literacy

Posted on May 13, 2021May 13, 2021 by Ashley Stieb

As I get older and the more I work in finance, I find that many younger clients around my age are in the dark on many practices and basics of money management, such as investing, creating a budget that works specifically for them, and saving money. This all boils down to a concern about the education we may or may not have received about financial literacy in our school days. This also brings up the concern for the generations that will follow us and the advice they are receiving around this subject.

Without this knowledge of how money works in the real world and how it should be managed can set a lot of people up for failure. There are plenty of programs available to purchase that will teach you different ways to pay off your debts and manage your money. However, those programs can be expensive and are often sought after when it is too late. Currently in the United States, only 17 states require financial literacy courses in their curriculums. While Oklahoma happens to be one the states that requires this course, depending on who may teach the course and what their background in finance may be, the information may not be conveyed in a manner that is thorough and engaging.

These are the kinds of courses that need to be taught by someone with experience in economics and finance with a curriculum that is designed to allow students to make their own choices based on real life situations. They need to be able to get a glimpse of what real money management and decisions are like, so that they can learn from the lessons and apply it later in life. For example, my senior year of high school, my school offered its first ever “Financial Literacy” course. The course was 16 weeks long, was considered an elective and was not required, and was taught by the World History teacher. He did not have any kind of professional financial background and the most I learned in that class was how to write a check and that 10% of what we make is ours to keep. We did not learn about the importance of saving money, we did not learn about the stock market or how to invest, we did not learn about retirement, and the list goes on. The thing is, I already knew how to write a check because that was still a fairly common practice at the time. Also, telling a room full of teenagers that 10% of what we make is ours to keep without any kind of real context or any kind of knowledge about building a budget that works for us is dangerous word play, especially in today’s economic state.

I cannot speak for every student in that class or in the classes that followed, but I can tell you that I definitely gained a confidence in that class and just knew that I had it all figured out. Well, I did not, and it is something that I have struggled with for all of my adult life. Who is to say that if I had a better, more qualified, teacher or if I had learned lessons that would really benefit me in the real world that my situation would have turned out differently? This is something we will never know, but it doesn’t negate the fact that these lessons are a cornerstone and should be handled as such. These are the types of lessons that should not come at a cost to anyone, especially at a point in life when the cost could break you. These lessons should also not be solely placed on the parents to teach. In a lot of cases the parents are also not professionals and while they might have some great advice, they may not be able to paint the bigger picture outside of their own personal experience.

Of course, the wise thing to do for those in my generation that did not receive the ideal financial education, is to seek the advice of a CERTIFIED FINANCIAL PLANNER™ who is also a fiduciary. A lot of times, these professionals will offer complimentary consultations to help you get on the right page to managing your money in a way that is designed for you and your specific needs. This can be far more beneficial that buying into a cookie cutter, for-profit program that may or may not work in the end.

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It’s About More Than Numbers

Posted on May 10, 2021May 10, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Too often we paint someone with a broad brush as to their contributions to the world solely based on the group in which they are a member. For example, medical doctors may specialize in a field that allows them to focus on a specific area of the human body. These physicians are capable of providing you general advice and medical care but may also provide you greater, more detailed, information pertaining to a particular illness such as kidney ailments or cancer of the brain.

Wealth advisors are individuals who may specialize in certain areas of financial matters that a particular segment of the population needs. For example, many wealth advisors focus on corporate executives and their unique compensation opportunities. Other advisors may focus more on the intricacies of Social Security Benefits and less about long-term market investments.

To be certain, your life is more complex than simply working with numbers to reach your lifetime goals and dreams. It is vital that you consider the qualitative factors in your life as much, if not more so, than you do the quantitative factors. My case in point is the life of a lady we will call “Jane”. By all outward appearances, Jane had all that was needed to sustain her the remainder of her life and leave a legacy for her children to expand their wealth. A couple of years after her husband’s passing, we asked Jane if we could meet to discuss the important matters in her life. She assumed we were talking about her accounts and showed up with her Financial Organizer we provided when initiating the relationship.

Immediately, we recognized that Jane had not understood what we wished to discuss with her. After explaining the importance of happiness in her life, we asked her a few simple questions to initiate this subject. “What is one thing that happened recently that made you smile and one thing that was difficult?” She looked up at me and began to create a big smile on her face. She exuberantly stated, “I had the best time recently volunteering as a cancer patient attendee!” I asked her, “What of that process made you so happy?” She responded in a way that made me realize she had found a new purpose in life. “When John was dying, I had no one that understood, truly understood, what I was going through at that time in my life. By helping these terminally ill individuals live a more fulfilling life and knowing that someone understands the palette of emotions they are experiencing, helped me heal and find happiness again.”

We continued to discuss this wonderful opportunity for Jane to serve and offered her some qualitative advice. “Why don’t you establish a self-help group or lead others in the process of caring for terminally ill individuals that provides dignity, understanding and compassion?” This new form of serving her fellow man gave Jane the emotional support she needed to truly live again after the loss of her husband.

As wealth advisors that specialize in retirement planning, we place a significant amount of importance on helping clients understand, and navigate, the maze of life after the loss of someone special. We are proud of our technical competence and expertise. More importantly, we are most humbled that our clients know that we are here as a resource for more than numbers.

As humans, we are all different in some way. However, we all need emotional support, in addition to financial advice, to truly live a rewarding life. It is not all about the numbers unless you are talking about the lives you touched in deep, emotional moments that helped them see life in a better way.

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Solutions to the Top Financial Concerns of Retirees

Posted on May 3, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Rising healthcare costs. Death of a spouse. Outliving investments. These three concerns are constantly confronted by retirees. Solutions to these challenges do exist.

Based on historical costs, it is likely that retirees will experience a 7 – 9% increase in healthcare costs in 2021 over what they paid in 2020. One of the best methods of controlling your out-of-pocket medical costs, it is critical that you understand what Medicare covers and consider a supplemental policy to provide you coverage for the amount of expense not covered by Medicare. It is not unheard of for a person to experience a bill for a hospital stay of only a few days in the amount of $10,000 that is not covered by insurance! Consider a supplement to your Medicare coverage to mitigate the excess expenses that may disrupt your financial plan for the future.

The premature loss of a spouse is not something any of us wishes to think about. However, it happens far too often, and the surviving spouse is stressed with burial costs as well as lower household income. Consider this scenario. A retired couple receives $5,000 per month of Social Security Benefits. One of the couple suddenly expires due to a heart attack. The surviving spouse needs $5,000 per month for the operation of their lifestyle and household functions. Resulting from the loss of her spouse, the widow receives only $2,500 per month of SSA Benefits for the remainder of her life (with some annual cost of living increases).

How can one prepare for this loss of income? First, if your spouse retires from the federal government or as a school teacher, consider the option to leave your survivor a portion, or all, of your retirement benefits. Yes, the election to choose survivor benefit options will pay a lesser current amount to the retiree but it will provide some assurance to your surviving spouse should you predecease you.

Another option to replacing income is to work with a CERTIFIED FINANCIAL PLANNER™ professional to create a financial plan that allows your investments to exceed long-term inflation impact. This approach will allow your investments to provide you funds that will retain purchasing power as the cost of goods rise. It will be impossible to control inflation, but it is possible to control your investment strategy to counter inflation’s effects on your family’s budget.

The overarching concern of most retirees is the potential that they may outlive their investments. One of the best methods of addressing this concern is to properly invest, project lifestyle expenses and plan for contingencies. None of us can accurately predict the future. However, with a few assumptions and proper planning, most families can protect their future by forming a valid plan and monitoring the plan’s performance each quarter to determine weaknesses or changes that should be addressed.

Life is too short to be worried about each day’s results of your portfolio or the possibility of a life-wrecking illness. It is far better to enjoy each day that you are given and spend time with your loved ones creating memories that generations will enjoy far beyond your earthly existence. My mentor, Jim Rohn, said it best, “Days are expensive. When you spend a day, you have one less day to spend. So, make sure you spend each one wisely.” Go ahead, live your life by your design!