What Is Your Net Worth?

As a result of the economic disruption of the past two years, many people are becoming confused and concerned as to the sufficiency of their financial wealth in maintaining their lifestyle. Fear has a means of causing one to doubt previously acceptable strategies and financial reserves as supportive of your future. By focusing on the factors, you can control, you will regain your confidence and build competence to achieve your future no matter the market conditions.

First, it is critical that you understand your current financial state. To do this it is necessary that you look earnestly at your overall finances in a manner that provides you the most information. One document that will help you capture this information in a succinct manner is a personal financial statement. This report is a snapshot of your assets (the items you own), your liabilities (the amounts you owe to others) and your net worth (an arithmetic function of assets minus liabilities). Let’s assume you own assets valued at $3,000,000 and have liabilities of $1,000,000. Your current net worth, in the most simplistic of terms, would be $2,000,000.

By understanding what you own and how much you owe others, you may now start the planning process for the future. You know the old saying, “It is hard to get to where you wish to go if you don’t where you are.” This document can be a very useful tool for an individual planning for her future. Exam the personal financial statement and notice those assets that may create income and those that simply grow in value. Perhaps on your financial statement there are assets that are idle and incur expenses without generating income to offset their maintenance.

Examining the liabilities, you may calculate several important ratios or factors that will help you achieve greater net worth. For example, if your indebtedness is secured by collateral, what is the value of the asset? Is it sufficient to allow the indebtedness to be liquidated by selling the asset? What is my weighted average cost of borrowing? These are important questions to consider when creating a financial plan.

Taxes are often overlooked on a personal financial statement. This is one liability that must be considered in the statement since it is prevalent in our country and will require assets to achieve the payment. Taxes are owed in many forms – estate, sales, income, property, etc. I am reminded of the poem authored and published by the Adam Smith Institute that reads in part, “Tax his cigars, tax his beers, if he cries then tax his tears. Tax all he has, then let him know, that you won’t be done til he has no dough. When he screams and hollers, then tax him some more, tax him til he’s good and sore.” A little levity is always good when talking about a portion of one’s lifetime income being sent to a taxing authority.

The final step is to analyze the change in your net worth. Are you growing in net worth or are you losing ground? It is critical to understand the net worth you possess so that you can work with this amount for purposes of funding your future lifestyle. Review your net worth over the past ten years and note the growth trend you experienced. Are you consistently increasing in net worth prior to retirement? If not, adjustments must be made in your assets that you purchase and the indebtedness you incur.

To fully understand the development and uses of a personal financial statement, seek the assistance of a CERTIFIED FINANCIAL PLANNER™ professional. To create a pathway to success, you must first establish your current point in time and net worth. You owe it to your family and yourself to be as capable as you can possibly be to direct your efforts to the future of your design. See you on the gridiron!

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The Most Critical Action for Success

The focus of my articles has been the creation of great value in the lives of the readers. Many of our articles focus on the financial and planning aspects of life. This one is a little different in the terms of investing in yourself.

Many of us would agree that it doesn’t matter where you start in life to determine if you’re successful. It is always the activities and decisions between birth and death that define success. In that regard, it is the proper environment of economic, social and familial contributions that provide a proper society to allow for your growth as a leading society in the world. 

Recently, we have developed as a nation that lacks the unity required to maintain our status as a world economic power (this article will disregard military implications and scenarios since it is not my expertise). Differing ideas and philosophies of social services and generational paradigms cause us to forget our reasons for founding this wonderful country. One of the basic premises of building a society that allows its citizens to thrive is the belief that all men are created equal. This unity in freedom is the foundation for our economic wealth in the United States of America.

As an entrepreneur, it is imperative that we develop a service or product that delivers great value to the marketplace. One of the means for which the marketplace grows in its own wealth is through the robust economy we develop. Think about some of the less developed countries on the globe. They lack simple public services such as drinking water in ample supply, food, shelter that is affordable and medical care that is designed to increase their happiness in life. We possess all the benefits of our society and a great financial economy through a stable a banking system that is liquid and allows for its customers to borrow with reasonable terms.

One of the phrases I have heard during my adult life is that “a rising tide raises all boats in the harbor”. To define this phrase in business terms, it is critical that some of our citizens generate capital through products and services to provide jobs for the mass of our fellow citizens. The disruption we experienced during the pandemic has been a challenge to return to “normal”. It is a challenge that we will overcome to create the greatest economy in the world once more.

First, we must not waste our natural resources but rather utilize them in an efficient and effective manner to generate the value we seek. In the current social environment, it is difficult for me to understand the elimination of any aspect of our energy production for the sake of another person’s idea of conservation of resources. For example, wind energy is a great augment to our current power grid of electricity. However, it is not sustainable as a primary source by itself.

Second, every member of our society is afforded opportunities to improve himself. Our country is known for the life improvements gained by valid immigrants who see the opportunities in the United States of America that aren’t available in their homeland. Having traveled our country extensively, I have been honored to meet many of these very successful people who are grateful for the opportunity of wealth that has been afforded them because of our country’s freedoms and rights.

To reach our potential as a country and an economy it is vital that we all recall those beliefs and traits we all share – freedom to live in the manner we desire without government mandate of religion, business and other aspects of life. The division facing our country can be healed if we the people will focus on the overall good that life brings when we all work together. I am strong proponent for the capitalistic system of our economy. For those who wish to achieve financial independence, you can do so in the United States of America. For those who wish to live a different lifestyle in a more modest means, that, too, is your choice and available.

Think about the great freedoms and rights we hold as citizens of the greatest country on the planet. Join minds, hearts and hands and let’s bring back the powerful traits of unity and freedom to all Americans. You will find that success awaits us when we are stronger together!

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New Tax Law, New Opportunities

One thing in life you can always count on is that tax laws will never be simple in language or applicability! President Biden signed the Inflation Reduction Act of 2022 into law on August 16, 2022. Immediately, much hoopla ensued from the Biden Administration touting its effectiveness and from opponents as to its contribution to inflation instead of reducing the negative economic impact. The law is more than 300 pages in length and contains some of the most difficult language for citizens to apply to their person financial situations. However, lets review a few of the provisions of the law that applies to individuals.

 A major funding measure of the bill is to increase, or some say replace, the number of IRS agents and revenue officers employed in the areas of audits and tax collections. It is not contained within the law but many of the lawmakers are parroting the intent was that individuals earning greater than $400,000 annually would be subject to increased scrutiny by IRS audits. Realistically, if your return were to report less than the aforementioned amount while containing information that is suspect, you may be selected for audit. The IRS uses an algorithm to select returns for audit and the variables of the selection formula are not disclosed to the public. Consequently, Treasury Secretary Janet Yellen has issued a directive that the IRS should implement new compliance programs in a manner as to not increase examinations of taxpayers earning less than $400,000.

The majority of the law’s provisions pertain to green energy in the form of tax credits. One of the major areas of green energy investment that may apply to a greater number of individuals is the credit for the purchase of clean vehicles (a.k.a., electric vehicles). To claim the maximum amount of the credit of $7,500, the taxpayer must meet vehicle manufacturing criteria as well as income limitations. For example, the automobile shall be produced by a specific qualified manufacturer (i.e., defined as one that primarily utilizes union labor), its final assembly is in North America and the components must be sourced to a U.S. manufacturer or any country with which the U.S. has a free trade agreement in effect. For purposes of annual income limitations, individuals earning more than $150,000, head of household filers earning more than $225,000 and married filing joint filers earning more than $300,000 would not be availed the credit. These criteria will make it difficult for many individuals to take advantage of the credit.

Additional limitations in the law impact the purchase price of the clean vehicle. If the manufacturer’s suggested retail price exceeds $80,000 for vans, sport utility vehicles, and pickup trucks as well $55,000 for any other types of vehicles, the buyer will not be allowed to claim the credit of $7,500 for federal tax purposes. If you were hoping for a Tesla Model 3, this credit will not help you purchase the car!

Homeowners may benefit from the law by installing qualified energy efficient windows, doors and HVAC systems as well as heat pumps. The limit is applied annually for the credit of $1,200.

Coincidentally, the limitation on state and local tax deductions for individuals was not addressed in the law. Individuals may deduct, as an itemized deduction, an amount of $10,000 of state and local taxes. In states, such as California and New York, where individuals are subject to higher income tax rates than many of the other states, taxpayers are feeling a pinch because of the nondeductible portion of their state and local income taxes. Time will tell if this area of taxation is addressed in the future.

Taxes are part of living in a civilized society. Many people show tremendous disdain for paying any taxes subjected to their income. However, our wonderful country and state would not function for the purposes of society without funding. It is critical that you comply with the complex tax laws of our nation and state. If you have a question as to the applicability of a tax law or simply wish to plan for the future to reduce your tax burden, it is imperative you visit a CERTIFIED FINANCIAL PLANNER™ professional. Real tax savings may be gained by managing your income and tax burden in the proper manner. Welcome to football season!! 

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Lifetime Decisions on Social Security Benefits

Perhaps one of the “Top 10” retirement questions we receive is when to elect social security benefits. The question is one that is complicated to answer due to the fact that many unknown variables exist within this question. Just a few considerations are: 1) How long will I live? 2) How can I maximize my benefits? 3) What is the best strategy to gain the most household benefits? 

Let’s tackle the first question since it is preeminent to the prediction of mortality. The answer to the question of “How long will I live?” requires greater analysis than a simple number presented as the target date. What age were your parents and grandparents at their deaths? Do you have any comorbidities or systemic health issues? What are your current cash flow needs? Are you married? Widowed? Do you have a dependent child that has been diagnosed special needs? All of these factors, and many more, give rise to a greater amount of analysis to properly estimate your date of filing for benefits.

According to the U.S. Centers for Disease Control, in a study published in 2019, men enjoy a life expectancy, at birth, of 75.1 years and women 80.5 years. Of course, these are averages and many of us will live to 100 years of age and beyond. Curiously, the projected ages for men and women declined in the past year by approximately 0.9 to 1.2 years. Was this due to the effects of the pandemic or is this a normal fluctuation of the population cycle? 

The most important election many of us will make that has a lifetime impact is the election to receive social security benefits. Much confusion exists around the timing of this election. We highly recommend that each client examine their needs, lifestyle and circumstances when determining the filing date for benefits. For example, if your lifetime savings is not projected to meet your cash flow needs due to the lower returns from the current market cycle, you may wish to analyze the lifetime loss of SSA benefits by electing earlier than your Full Retirement Age (FRA). It is not ideal to make lifetime decisions based on short-term needs. For an individual who is age 62 and would reach FRA at age 67, if benefits are elected at any time from age 62 to 66 years and 364 days (provided it is not leap year), his or her benefits will be reduced permanently by 30%. Depending on your lifetime earnings report, this may be a significant loss of benefit.

Lastly, the best strategy for your household is to determine the ages of each spouse and then review the earnings reports for each by obtaining them on www.ssa.gov . If the higher earned benefit spouse were to delay benefits until reaching age 70, instead of claiming at age 67, a 24% increase in monthly benefits would be availed to the surviving spouse upon the death of the higher earner. The bonus earned by the higher-earning spouse is material in the fact that many spouses may live to be 90 years of age or more which allows significant time for the collection of the bonus payments. Upon the death of the higher benefit spouse, the survivor would “step in the shoes” of the deceased and receive their benefit (while forgoing the survivor’s original earned benefit).

It is critical that you make the best decision for your family. A proper analysis of the hundreds of options of benefit elections is necessary to give you confidence in this lifetime decision. If you wish to plan appropriately for your SSA benefits, contact a CERTIFIED FINANCIAL PLANNERTM professional to assist you in this important lifetime decision.

Today is another 24-hour period for you to find gratitude and happiness. Spread your smiles to those around you and you will reap what you sow. I have a saying that may be appropriate – “If smiles were contagious, would you start a pandemic?” See you on the walking trail!

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The Elusive Measure of Time

One of the curious hobbies I enjoy is reading grave markers when attending a funeral or during a day of honoring our loved ones. My wife often remarks, “What fascinates you with grave markers?” I often smile and simply say, “time”. She looks at me with that look of confusion she gives me and walks back to the family and friends we met while visiting the cemetery.

The primary fascination for me is not simply the design and epitaphs engraved on the stones but rather the dates and the dash between birth and death. This simple mark represents, in some cases, only a few years. In other cases, it represents a century or more. In my journals, I often wax philosophically about time and its power.

Time is an element of life that is studied by physicists and cosmologists that continues to be a mystery to this day. There are many theories about the beginning of time and the passing of it. However, my focus on this powerful environmental phenomenon is the use of the tool. Yes, to me, time is a tool or power that can be wielded in great ways. Conversely, time can be squandered by those who don’t understand its power or their ability to control it.

What is important about time and why write about it in a financial column? When something as powerful as time is not recognized by many until its too late, it would behoove us to begin today with an acknowledgement of all the wonderful attributes and uses of this facet of life. First, time is the creator of all memories for humans. My father, a great storyteller of our family’s history, always starts a story with, “when I was younger…”. Hearing this opening sentence piques my mind and perks up my ears for another great tale of the Williams Family and potential joys and hardships of pioneer life. (As a side note, I am laughing while writing this column as thoughts about my father’s stories of his six mile walk to school which always included unusual terrain like “uphill both ways” and meteorological phenomena such as “in a foot of snow”.)

Second, time is a power that yields exponential benefits. When it comes to investing for your future, you have read many times in this column that time is the one factor we can’t control but can utilize to achieve greatness. A favorite song of mine as a teenager (this may reveal my age) was called, “Time in a Bottle,” by Jim Croce. The songwriter imagines what he would do if he could capture time and use it with his own discretion. Of course, he is dreaming and the song is pure fiction but the writer’s life ended abruptly at the young age of 30 when a single-engine plane in which he was a passenger hit a tree on take-off in 1973. Truly he did not control time or he would have wished for longevity.

One of the benefits of time is the growth of money. By starting to save as young in age as possible, one has the potential to accumulate a significant investment portfolio by retirement age. For example, if you initiate your lifetime savings plan by age 25 and save for the next forty-two years, you will have saved a considerable amount of funds, if invested properly, to retire at age 67. This is called compounding of your investment. What you invest today will, theoretically, earn interest that will then earn interest on itself which compounds or builds your savings at a greater pace as time passes.

Lastly, time is finite for humans. No one throughout history has lived since the beginning of time. Each of us will one day be remembered by the dash placed on our grave marker. This is not meant to be a depressing statement but rather one to empower and motivate you to live a life of abundance creating memories and assets. Your dash can be as powerful as the dash of presidents or celebrities such as Elvis Presley. The world is waiting, and was established, for you to contribute to society for the purpose you were born. 

Starting today, smile more, laugh more and serve more to create a story your ancestors will be proud to share of the life you lived with fullness. To help you plan for the future, contact a CERTIFIED FINANCIAL PLANNERTM professional. Your legacy and lifetime fulfillment are in your control. It is time you made a plan to utilize and harness the time in your dash to become a bigger, better and bolder you. See you on the walking trail!

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Thriving in Volatile Markets

Do you dread challenging markets?  Do you break out into a cold sweat when your investment statement arrives in the mail?  Many of us don’t understand the positives, yes, I said “positives”, of the opportunities that present themselves in volatile markets.  Retail investors exhibit several common traits.  First, they typically like to “buy high” and “sell low” based on fear and not sound research.  Second, their idea of diversification is to own several different accounts with a myriad of investment positions in each one.  This is not only a complicated method of living but fraught with issues such as investment overlap and possible sector concentration.

A better method of achieving your long-term investment goals is to develop a plan of investing that does not change with market cycles.  This type of approach will serve you well in the long-term since you are dollar-cost averaging by investing each month (or some predictable cycle).  In a market expansion, your constant investment amount will buy fewer shares or units of a particular investment.  However, in a declining market, such as the one being experienced in the United States at this time, your consistent investment amount will buy more shares of a particular investment due to the lowered buy price.

Dollar-cost averaging doesn’t guarantee success of your portfolio but it does utilize the natural market cycles to help you achieve a potential lower average cost in the shares/units you purchase over time.  For example, if you are investing $1,000 each month in your portfolio and the shares are $50.00 each, you may buy 20 shares during the month.  However, if the market is declining and shares are now $40.00 each, you may buy 25 shares during the period.  Over time you may experience a lower average cost of investment in each share.

In our previous example, assume the investment is a company that has a history of paying excellent dividends and has weathered many difficult business cycles.  The company’s management gives you confidence that it will, once again, keep the company moving in a positive trajectory despite the economic hardships.  By focusing on facts and not emotions, the probability that you will achieve your investment goals is much greater.  Remember the quote from the “Oracle of Omaha” Warren Buffett, “If you don’t feel comfortable owning a stock for 10 years, you shouldn’t own it for 10 minutes.”

I understand it is difficult and takes great courage to weather some of the more difficult economic cycles the United States has suffered.  However, remember that you will be using the totality of your investments for supporting your lifestyle in retirement and it took you many years to accumulate the funds.  One or two negative market cycles will give way to more positive cycles at some point.  The future isn’t hard to predict if you create it yourself. 

Establish your investment plan based on sound logic and economics.  Don’t attempt to time or “outsmart” the markets.  Many bankrupt individuals have attempted these approaches.  If you have questions on establishing an appropriate strategy for your lifetime accumulation of retirement funds, contact a CERTIFIED FINANCIAL PLANNERTM professional.  The best counter to emotional disruption during a negative market cycle is to think long-term and stay with the plan you developed. Now, go out and enjoy your day.  You got this!

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Defining Retirement Success

The word “success” scares a lot of people, confuses some and eludes most. This word is such a phenomenon that many of us can’t define it in terms that are relatable to others. Why is this so? I believe the word “success” has been given a bad reputation because many people associate the word with wealth or money.

Success is simply the level of happiness you attain in life. If this means you must possess great wealth to be happy, be careful for what you wish. Many of the wealthiest families I know have experienced significant familial hardships throughout the decades. Too many opportunities for negative aspects of life to become entrenched in your family are realized. Simply put, to seek a goal of having an abundance of wealth for wealth’s sake is not a proper goal. It is the person you become while attaining wealth that should be the goal – more charitable, more caring, more family supportive.

As retirement planning specialists, we are often asked, “How much money do I need to retire?” This question is valid and the answer is, “Enough to meet your family’s needs and acquire some of your wants.” When we state this response to our client the wheels start turning in their mind and their eyes become bigger. The follow-up response is, “How do I know what my needs and wants are for this purpose?”

Now we are at the point of the matter. Too often retirees compare their personal situation to generic plans or the specific plans of others with dissimilar facts. The most significant and impactful approach to retirement success is cash flow planning. By understanding your cash inflows and managing your cash expenditures on a monthly basis, you will gain confidence that your time in retirement will be enjoyed.

Let’s explore some critical errors to avoid in retirement. The first four to five years of retirement should be funded in a manner that you are not required to take significant distributions from your long-term funding sources such as Traditional IRAs or Roth IRAs. To leave these pools of money intact is critical in the later years of retirement when additional cash outflows are required for health maintenance and other lifestyle needs.

Another error in retirement is improper use of resources in elimination of debt. Ideally, we prefer our clients to be debt-free before initiating retirement. However, in some cases this is simply not feasible. To effectively create a means where your assets are creating sufficient income streams to address the monthly outlay for housing or automobiles, your asset allocation should consist of more income-generating assets such as bonds, real estate and value stocks. Project the return your portfolio may generate and compare the need for the payments you must tender each month. If your portfolio is generating a greater return than the interest charged on your indebtedness, you are on the right track. In this instance, your earnings on the investments will, over time, completely liquidate the indebtedness. 

If retiring in the current market cycle, additional challenges will need to be overcome in your investment strategy. Further, if possible, it would advisable to delay retirement if you’re concerned about the sufficiency of income from your existing sources to fund your lifestyle in retirement.

Deciding to retire is a huge life event. One shouldn’t make this decision without consideration for all aspects of life that require use of resources. If you are considering retirement within the next five years, it would benefit you to create a plan of action that will give you confidence and comfort that your life will continue on your terms. Contact a CERTIFIED FINANCIAL PLANNERTM professional to obtain a second opinion or construct a plan that meets your goals and desires. Remember, you retire for the first time only once. It is better to be confident than to be forced to correct course at a time in life you should be enjoying your time. Make it a great weekend!

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Opportunity or Tragedy?

The world has become a tenuous planet over the past couple of years. Many people have been impacted, some positively and many negatively. How do you think a person can become positively affected by such trauma and chaos in the world? First, the maintenance of attitude. 

Negative people only seek ratification of their advice by recruiting others to the depths they find themselves. The positive people will be a much smaller, yet growing, group of people. No matter the opportunity, someone will always find the negative or “how can I lose” option in the venture. This mindset has not created happy people but rather a group of cynical, and often, maligned population that is skeptical of all positive attributes of life.

A person’s attitude is influenced in many ways. It is better to feed your mind with positive stories of successful people than to focus on excessive newsfeeds of the tragedies of the world. I recommend a good book be the focus of your time rather than negative news on a daily basis. 

Another attitude influence is the friend circle you maintain. Personally, I spend ninety-nine percent of time around people that are successful, optimistic and charitable. There is always a success story shared among the group that inspires the rest of us to keep growing and making the world a better place for mankind. The most important asset we hold is our attitude. Assets and net worth are merely tools to accomplishing and maintaining a positive outlook in life by contributing the improvement of less fortunate people. When I see the reaction of families that are recipients of positive support, it motivates me to work harder in creating greater change in our community.

The stock market has recently reached bear market territory. That simply means the S&P 500 Index has fallen by 20% since January 1, 2022. Many of us look at our investment statements on the day after such market changes are posted and frown. Some of us look at this lower price in stocks as an opportunity to buy undervalued stocks that will pay dividends for decades to support our livelihood. Remember, the United States stock exchanges are auction markets. For every one that wishes to sell a stock, someone else must be willing to buy it. 

For example, if I were to sell XYZ stock and posted my intentions on the exchange at “market”, a buyer could purchase the stock at whatever its price at the moment of purchase was posted in the marketplace. However, if I were a potential purchaser, I may wish to calculate a target price for which I wish to purchase XYZ and order a stock buy at the price. This means if I want to purchase for $25 and the stock is currently at $26 in the market, my buy order will go unfilled until the stock hits the order price called a buy limit order.

Why I am telling you all of this about attitude and your finances? The real reason is that you have worked for more than 30 years accumulating sufficient assets for your lifetime needs. Don’t allow your fears to cause you to make an immediate decision on a lifetime investment because of short-term market activities. We, as a country, have been here before in the markets and we will improve, and most likely, set new market highs in the future. The bigger question is when.

The manner you have invested your lifetime savings is critical to your long-term success. If you have concerns about your portfolio’s allocation and capabilities to withstand significant market headwinds, consider contacting a CERTIFIED FINANCIAL PLANNERTM professional. The goal is lifetime income for a better night’s rest. Stay positive!

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Why Your Loan Interest Rate Is Going Up

If you have attempted to purchase a new car, new home or pay on your credit cards, you may notice the interest rates being charged you are higher than you experienced earlier this summer. Inflation has been a tremendous force on the budge of families in the United States in the past year. Currently, the year-over-year inflation rate is 8.5%. This number impacts most financial matters where lenders are involved.

The Federal Reserve Board is the responsible agency for establishing a monetary policy and to promote stability in the banking system of the United States. Based on the money supply in the country, as we are currently experiencing, demand for consumer goods and real estate are higher but the supply of these same goods is limited. This is the definition of inflation. Although you can’t see “inflation”, you experience it everyday when buying groceries, filling up the tank of your automobile, borrowing money on a home or requesting a credit card.

The rate controlled by the Federal Reserve is known as the discount rate. This is the rate of interest charged to banks to borrow from the Federal Reserve. If the rate of borrowing rises for your community banks, the rate of interest charged on loans to you by the bank might be higher than you previously experienced. Loan rates to consumers (you and I) are based on manner factors:  your credit score, your debt-to-income ratio, collateral offered for securing the loan and general payment history with the lender.

In the past several years, the Federal Reserve allowed the discount rate to remain near zero percent. This fueled an aggressive amount of lending and money supply to become more liberal for borrowers while rates charged the borrowers were exceptionally low. For example, to some of the most credit-worthy borrowers, automobile financing companies such as General Motors Acceptance Corporation would loan funds to buy automobiles with terms such as no interest for sixty months. Why would the lender extend such a loan to anyone? The reason is that the inventory of automobiles was increasing, and manufacturers (and the related dealers) needed to sell more inventory.

Credit card companies were maintaining extremely low interest rates during the past several years as well.  I am not a fan of credit cards as a means of borrowing unless the full payment of the card will be paid each month. Interest rates for unsecured, personal credit can be as high as 22% – 25% annually. 

When the Federal Reserve raises the discount rate, it impacts the prime rate (the rate of interest that banks loan its customers with good credit) by causing an increase approximately a few weeks after the Federal Reserve announcement. Shortly, after the prime rate increases, mortgage rates and other lending will increase commensurately. 

Unless it is necessary, purchases of large items on credit during a time of rising rates is not recommended.  For example, your home may be valued much higher today than it was two years ago. However, the home you would need to buy for your family, if you sold the primary residence, would cost you more for the same home than it would have two years earlier. It is the natural cycle of value and borrowing. 

As the money supply in the United States begins to tighten (less money in circulation), inflation will begin to lower. It is an economic certainty that the U.S. markets will expand and contract. This is the manner in which it has always performed.  The hardest questions to answer are: When will the economy expand (boom)? When will the economy contract (recession)? The person that knows the answers to these futuristic questions may sell you some ocean-front property in Arizona. 

Economics is a difficult subject for many of us. It is critical that risk be considered in all financial transactions, including loans. For additional information, and planning for your future, contact a CERTIFIED FINANCIAL PLANNERTM professional. Be careful, it’s a jungle out there!

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Why and When to Re-balance Your Portfolio

The world has become disruptive in the past couple of years. Rampant inflation in the economy and rising interest rates are causing many Americans to wonder if retirement is in their future.

​One rule I live by is “never make lifetime decisions based on short-term factors.”  Let us assume you are 60 years of age and wanting to retire at age 67. Your career is going well and your savings for retirement has been maximized for the past 30 years. Based on these simple facts, you surmise that retirement would be sustainable for the remainder of your life. Then the pandemic strikes! The economy contracts! You are now feeling less confident in your plans.

​A market correction is defined as a 10% or more decline in major market indexes. Based on that definition, the U.S. experiences a correction approximately every two years (consider recently the Covid Correction). There have been twenty-eight corrections in the S&P 500 since World War II.  The average market decline during this period was 14%. One of the most important key facts to remember is that the index recovered and returned to new all-time highs within a few months to a few years. 

Typically, emotional investors create their own problems by over-correcting their portfolios. Wayne Gretsky, the Hall of Fame Hockey Player, remarked to a sports reporter asking his secret to holding the title in the National Hockey League for the most points in a season, “I skate to where the puck is going to be, not where it has been.”  In a similar approach, you should not become so emotional during market corrections that you leave the market and realize losses when patience may return your investment positions to a greater value than when the negative market change occurred.

One method of removing the emotion from your investment portfolio management is to rebalance to maintain the appropriate risk balance you desire. There are two methods of rebalancing: time and threshold. Based on our research, either method will provide comparable results which is keeping your desired risk at a certain range or level.

Rebalancing using a time approach is simply setting a periodic date to rebalance your portfolio by selling the necessary asset classes to maintain the appropriate mix for your risk tolerance. For example, on the first business day of every fourth month you will rebalance your portfolio. Simple to remember and takes a little trading to sell and buy the various securities.

Alternatively, you can rebalance using the threshold method. When a portfolio is designed based on your time horizon, risk tolerance, and cash flow objectives, you may arrive at a portfolio with 50% in equities and 50% in fixed income investments. Over time the portfolio will experience changes based on market conditions. Should the equities allocation increase to 60%, the impact will be a reduction in fixed income investments to a 40% allocation. To maintain your proper risk level in the portfolio, you might wish to sell some of your equity investments and buy fixed income investments until you arrive at the desired 50/50 allocation.

During market turmoil, it is critical to your long-term success to manage risk. If you want a portfolio analysis of your retirement assets, contact a CERTIFIED FINANCIAL PLANNERTM professional. It is always better to know where you will land before jumping!

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