The One Constant is Change

Remember as a younger person when you first heard the phrase, “the only constant in life is change”? At the time you, perhaps, thought the person to be either a great philosopher or speaking gibberish. As I am approaching the inspirational age of 60 years young, the aforementioned statement of change has been proven true more times than I can recall. To provide additional truth to this historic statement, the IRS does its part by changing the laws governing your annual filing of income tax returns.

The standard deduction is the allowance of a certain amount to accommodate your lifestyle needs such as food, shelter, and clothing without the need to itemize these deductions on your individual income tax return. Each year the IRS considers the inflation rate in the United States to determine if adjustments should be made to the standard deduction amount for the various filing statuses. In recent years, the IRS simplified this process by combining the original standard deduction with the exemptions a filer could claim to reduce his taxable income. 

Due to the altitudinous inflation experienced in the United States in the past two years, most recent rate provided by the U.S. Bureau of Labor Statistics to be 8.2%, the IRS recently issued the increased standard deduction amounts for the 2023 tax year (i.e., your return you will file in 2024). For those filing jointly, the standard deduction has increased $1,800 over the 2022 amount to a deduction of $27,700. If you qualify as a single filer or choose to file as married but filing separate from your spouse, the standard deduction is $13,850 which is $900 higher than the previous allowed deduction. For those individuals who are single and maintain a household for a minor or special dependent, the head of household status allows a greater deduction than a single filer. Their amount for 2023 standard deduction will be $20,800 which is $1,400 higher than in 2022.

For taxpayers that owe little or nothing for a residence, contribute smaller amounts to charities and have medical coverage for major illnesses or infirmities, the standard deduction provides a benefit. Time is a considerable savings for filers who do not meet the standard deduction limit with their itemized deductions. To simplify the process of filing your individual return each year, consider the standard deduction amount allowed and perform a quick mathematical equation to confirm your potential deductions are more than your standard deduction.

The United States Tax Code provides seven tax rates, or brackets, for purposes of calculating your annual income tax liability. From a rate as low as 10% on taxable income of $11,000 or less to a maximum rate of 37% for filers with taxable income above $578,125 for single individuals and above $693,750 for married filing joint taxpayers. To add a little complexity to the process, the Congress assesses a surtax on certain filers to assist in the funding of the Medicare and Social Security programs. 

One of the easiest methods of completing your annual tax filing obligation is to start early. Employers are required to mail Forms W-2 to employees on or before January 31, 2023. Start now by gathering your potential itemized deduction receipts and as income documents are sent you, begin the process of completing your returns. It is recommended that you file electronically to facilitate the processing of your returns and, hopefully, the electronic deposit of a refund check to your bank account.

A quote attributed to one of the greatest planners of the last one hundred years, President Dwight D. Eisenhower, as the commanding general in WWII, “In preparing for battle I have always found that plans are useless, but planning is indispensable.” applies to tax “battles.”  The planning for targeted outcomes is critical to the realization of your goals.

Tax planning is necessary for you to prepare yourself for the best results possible in filing and paying your annual income taxes. If you need assistance achieving your retirement planning goals, one of which should be the lessened impact of taxation on your wealth, seek the assistance of a CERTIFIED FINANCIAL PLANNERprofessional to guide you through this important planning process. Go play in the Autumn breeze this weekend!

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Medicare Benefits Planning

One of the most critical benefits affecting American citizens is the Medicare Program.  For those individuals who qualify at age 65, this program provides health coverage for inpatient care (Part A), outpatient care (Part B), prescriptions (Part D) and other areas.  This article will focus on these three most common areas of care.

To qualify for Medicare benefits, you must have worked in a job that withheld Medicare contributions from your paycheck while working at least forty quarters (i.e., 10 years).  This is a very low bar to meet eligibility for such a comprehensive medical plan.  Of course, as with many federal laws, exceptions apply to the general guidelines.

The important concept of medical coverage through Medicare is that it functions similar to the private insurance you may have received while employed in your career.  For example, Medicare covers 80% of your covered qualified medical charges for inpatient care.  This means your hospital stay may be covered but you will be expected to pay the remaining 20% unless you purchase a Medicare Supplement Plan.

Supplement plans are relatively inexpensive and can be the difference between destroying your lifetime savings and the security your family needs.  There are many carriers of such plans and each state may differ as to the carriers available.  It is critical that you determine the appropriate Medicare Supplement Plan you desire that is contracted with your various medical providers.  Supplement plan consultants are often helpful to narrow the field of possible plans and to assist in the selection of a plan that meets your budget.

To enroll, or to change plans, you should be aware of the upcoming Open Enrollment Period.  For 2022, the period is October 15 through December 7.  It is critical that you review your current plan for potential savings as new plan changes and plan providers are introduced into the marketplace.  Often people will purchase a supplement plan and, like the infomercial, “set it and forget it”.  This is a big mistake that could cost you thousands of dollars.

Let’s review the outcomes of such a person who failed to obtain a supplement plan and suffered a significant health issue.  While in the Intensive Care Unit of a major hospital, the medical care she received was excellent.  She left the hospital after 10 days of care and felt so much better… until she started receiving the bills!  The total cost of the hospital stay was more than $120,000 for all the medical care provided her.  Without a supplemental plan, she was responsible for more than $24,000 of the total cost.

Medicare Part D is a complicated area of law.  It is vital that you seriously consider enrolling in this program when you are first eligible or you will be penalized for each month you delay enrollment.  This sounds rather harsh but the method of funding the program is through premiums assessed individuals who utilize the benefit.  Considering that most people may live a relatively healthy life until age 75, the ten-year period of qualification to election date may cause you to incur a significant penalty at a time when you may need your savings for other priorities.  

The cost of medical care continues to rise at an unprecedented pace in the United States.  We highly recommend those individuals enrolling for their Medicare Benefits to seriously consider purchasing a supplement plan.  Monthly premiums vary depending upon the level of care and the carrier issuing the policy.

If you are approaching your 65th birthday, it is critical that you file for your Medicare Benefits approximately 60 – 90 days prior to your birthday.  It will be a lot easier to blow the candles off your cake if you aren’t worrying about medical bills.  Seek the assistance of a CERTIFIED FINANCIAL PLANNER™ professional to guide you through this critical and difficult process. Make it a wonderful week!

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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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Staying Focused is the Key

Ask any all-star athlete the secret to their success and they will tell you – focus. This past weekend at The Masters in Augusta, Georgia, Tiger Woods initiated his triumphant return to professional golf. During his post-round interview after he finished the tournament, Woods used the word “focus” several times to describe to the interviewer what his secret was in returning to competitive golf after such a devastating automobile accident.

Life is similar to a sport, perhaps a marathon race. It is difficult for many of us to see the long-term impact of initiating and maintaining a savings plan from age 20 to age 67. As my dad often used the “stick and carrot” analogy, the younger investors can’t taste the carrot due to the overwhelming length of the stick. For those that can maintain the zeal for living a life prepared for unexpected instances that require substantial resources, success is often the outcome.

Younger people look at me with disbelief when I explain the power of compounding to them. To paint the picture in a manner that “shortens the stick and sweetens the carrot”, I ask them to look at their investment account every six months. One of the first statements they utter is “Wow! Look how much I saved and I didn’t miss the money.” Albert Einstein, the great physicist, was credited with a quote about compound interest: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

To create a system of focus pertaining to your finances, it is critical that you automate as much of the process as possible. For example, if you are participant in an employer-provided retirement plan, your investment funds will be automatically deferred from your paycheck and invested in the manner you direct your employer. This is a simple method of automating your savings and also receiving consistency in the process.

If you work in a company that does not provide an employer plan, you can accomplish the same automation with an ACH (automated clearing house) election. This process works very similarly to that of your employer election. By filing a form with your wealth advisor to transfer a certain amount of money at a fixed frequency, you will not be required to physically write a check, prepare an envelope or worry about finding a stamp to mail the deposit. Your life will be much simpler from an investment standpoint and you can worry about things such as fishing, golf or running.

If you wish to automate your savings for retirement, it is critical that you have a plan in place to accomplish your goals. See the advice and create a plan for your future by visiting a CERTIFIED FINANCIAL PLANNERTM professional. Take control of your future and you will enjoy less stress in life. See you on the pickleball court!

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Know Where You Will Land Before You Jump

What if you purchased an investment that the insurance salesman informed you would give you annual payments for your lifetime? What if you were 83 years of age? The reasons for the preceding questions are due to the factual case of a client that came to our office.

One of our retiree clients began asking questions about an insurance product that paid annual lifetime payments and earned an unusually high rate of return the first two years. Puzzled by the initiation of the conversation on this topic, I asked her why she was interested in this product. What transpired was a conversation that both shocked and irritated me.

The client’s mother is a widow and 83 years of age. She began to regale me with a story of her mother and a friend attending a free luncheon where they were introduced with a story about “guarantees” and “lifetime income”. Of course, with no understanding of what she was buying, her mother was informed by the salesperson, or she understood him to state the fact, that her money was insured.

We asked the daughter to bring her mother to our office to personally discuss the matter and confirm the facts of the purchased investment. After a few minutes of her mother describing the event and “nice young man” that spoke, she provided a copy of the contract for our review. Quickly I noticed the product came with a 12-year surrender period. Keep in mind, the lady was 83 at date of issue. 

Complicating matters was that she had placed all her liquid cash except for $50,000 in this investment. After our discussion, she was quite upset and acknowledged that she and her friend had made a mistake buying the long-term, illiquid product.

The story doesn’t end with our conversation. Due to the recent purchase of the product, we informed her that she was in her 20-day Free Look Period and that she could cancel the product purchase with proper notice given the insurance company. We assisted her in the cancellation process, and she thanked us for helping her understand the investment more comprehensively.

These types of incidents occur too frequently to the elderly in our communities. Without knowledge of the products in which money may be invested, the elderly are prime targets for unscrupulous salespeople.

I should point out that the person selling the long-term investment to the elderly lady had a proper insurance license and wasn’t a CERTIFIED FINANCIAL PLANNERTM professional. 

The lesson learned is that nothing in life is free. This has been borne out from my father’s teachings when I was a little boy. There is always someone paying the bill for the service or product you supposedly receive for free.

Want to know how the story ended? The elderly lady received her sizeable amount of investment back and was provided a plan for her future that addressed cash flow, estate, and tax matters to empower her to make good decisions. She has a reasonable amount of reserve for potential emergencies and no longer eats free meals offered her by strangers. So, as the storybook always reports, all lived happily ever after.

Investing requires understanding, education, and awareness about the strategies you employ for your future. Don’t invest your money in sophisticated strategies that are incomprehensible. Consistent investing over a period of time in a fully diversified portfolio that is easily monitored and rebalanced gives you greater comfort and confidence in your future. Seek out the advice of a CERTIFIED FINANCIAL PLANNERTM professional to help you understand your investment portfolio. One of my favorite quotes of Abraham Lincoln applies in this situation: “The best way to predict your future is to create it.”

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How Geopolitical Risks Affect the Markets

Today, we live in a global economy. Although appearing insulated to the disagreements between countries on the other side of the globe, U.S. markets are negatively impacted nonetheless. How could a political conflict between Taiwan and China create market disruption in the U.S.? This type of risk to markets is called Geopolitical Risk.

One of the most critical factors of any economy is the ability to maintain a steady flow of capital through the production and sale of goods and services to respective markets. When this flow becomes interrupted by governmental policy, military action or social interaction, markets become concerned that buyers and sellers of these goods can continue to make profits, hire employees, obtain raw materials, etc. Recently, political relations deteriorated between China and the United States. Differences in economic goals and outcomes, fair treatment of workers and use of natural resources, or the lack thereof, can impact the flow of goods and services in a significant manner.

Diversification of a portfolio requires far more than simply allocating your assets among different styles of investments such as large capitalization and small capitalization companies. To properly diversify your portfolio, it is critical you analyze the inherent risk in foreign markets including developed and emerging countries. An investor would be required to understand and accept greater risk involved with investing in an emerging market country where transparency and lack of efficient trading occurs more so than a sophisticated and developed efficient trading country.

Based on the World Economic Forum’s Global Risks Report 2020, economic confrontation between major powers is the most concerning risk for 2020. Most recently, the invasion of Ukraine by the Russian Federation presents significant attributes of market disruption. The markets for fertilizers and other natural resources located in Ukraine, in substantial quantities, have been disrupted in the past month. Fertilizer prices rose due to continued high demand and supplies were lowered by the political disruption caused by war.

The pandemic caused by Covid-19 continues to disrupt the free flow of goods from manufacturers in China and the Far East destined for the United States. How does the pandemic affect the flow of goods and materials? In China, a zero-tolerance policy exists in the manufacturing sector. This simply means that the discovery of one case of Covid-19 diagnosed in a worker requires the entire closure of the facility. Let’s assume a plant in China manufactures automobile replacement parts. Demand for these parts remains very high in the U.S. economy. By closing the plant for a period of a week (or for a month as done during the Chinese New Year) will generate less supply for consumers and greater demand for the parts. The result of this imbalance between demand and supply is inflation.

Investing requires an understanding of the functions of foreign and domestic markets, taxation of international imported goods and the impact of geopolitical risks. Most individuals feel ill equipped to make such investing decisions or where to research the matter. Seek out the advice of a CERTIFIED FINANCIAL PLANNERTM professional to help you analyze the risk in your portfolio and provide you opportunities and guidance to reach your lifetime goals. Matt Haig said it best, “Never underestimate the big importance of small things.”

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Prudent Steps to a Secure Future

Our world is experiencing disruption on a global basis. War in Ukraine, inflation at a 40 year high, gasoline prices reflect the 70s, and continued impact of a rampant virus. Have you had enough? Yes, me too. However, my father taught me that words are cheap and action is riches. This was his statement to, “quit griping and start working” to achieve better results.

The people of Ukraine are suffering in ways that U.S. citizens cannot relate. All of us can sleep tonight in a warm bed, eat a nice dinner and drink water that is potable. Medical care is available and jobs are plentiful. Why I am stating the obvious? To provide you some perspective. Life is good in the United States even in the midst of all this disruption.

When experiencing moments of potential recession, it is critical that you review your future plans to determine if small adjustments are needed. It is important that we understand the current economic environment will pass (no, I don’t know when) and life as we know it will return for us. The resilience of our republic continues to amaze me.

The following steps should be considered to provide your family a more secure future. First, review your cash flow spending and determine the priority of these items. Do you actually need a new laptop or is it a want? Is a new car needed or do you simply want one? Also, remember it is better policy to make sound financial decisions based on your current cash flow, savings and needs rather than surrendering to the fancy marketing of the gadgets that make us more comfortable.

Next, reduce debt balance to zero as quickly as possible. The purpose of this is to relieve the pressure on your family’s budget. Any credit card balances should be paid monthly to eliminate the potential cost of credit through high interest rates. Federal Reserve Chairman Jerome Powell is recommending, next week, a 0.25% increases in the discount rate to be implemented for purposes of slowing the rampant inflation rate in the U.S. Additional rate increases are anticipated through 2022.

Another step is to review your portfolio to determine your true risk inherent in the underlying positions you own. In the past 12 years, the U.S. markets have rewarded equity investors. In the current market contraction, it would be advisable to review your positions for possible gains to protect the overall balance in the account. I am not suggesting market timing. However, I am recommending that you determine a price you would wish to reach before selling your investment positions. For example, lets assume we buy AstroWorld common stock, a fictitious company, for $35.00 per share and set a price of $70.00 at which we would sell the position. One of the greatest investors in history was a man named Peter Lynch. As the manager of the Magellan Fund of Fidelity Investments, his fundamental approach to investing was to perform the same process on each position he bought in the fund. If it was a good approach for him and the fund he managed, perhaps it may be good for your family.

Lastly, keep calm during market correction periods. Panicking only increases the probability that you will make poor decisions that could harm your family’s future for many years. By thinking about your financial decisions with a cool head, the likelihood of taking advantage of market declines allows you to “buy low and sell high”. 

Of course, these steps will not ensure great returns or eliminate risk of loss. However, you will give your family and you the best chance to attain your retirement goals and security for the future.

One of the best methods of gaining confidence that your family’s finances are on the right track is to seek a complimentary “financial checkup” from a CERTIFIED FINANCIAL PLANNERTM professional. Your investments, like your body, may suffer if proper attention is not given. See you on the jogging trail!

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Buy or Sell?

Life has a way of keeping things interesting. After a long cycle of bull returns, the time for profit-taking has arrived. This is the process of capturing the gains in the investments that have performed well. I will explore some of the factors that are currently active in the economy, the markets and what you can do to maximize your family’s best interest.

The overall economy is improving in the United States. When I state that comment I sort of cringe thinking about the impact that is being felt by the families of our country. Inflation has reached a 40-year high at 7.5% according to tradingeconomics.com. Some of the factors leading to this excessive rate are labor shortages, soaring energy costs and supply chain disruptions. Based on a review of ktvz.com, March and April, 1980, inflation had risen to an unprecedented peace time level of 14.6%. Acknowledging that this rate is extremely high by today’s standards, the highest inflation factor in the United States was experienced in 1778 at 29.78% (Investopedia.com). 

Improvements in market controls, inventory production, delivery methods and banking policies contributed to maintaining a more reasonable inflation experience for many decades. It is not unusual for the people of the United States to be subjected to a 2% – 3% inflation rate in our overall economy. However, in our modern world where we rely on transportation and housing that must be heated and cooled with natural gas or electricity, an inflation rate above 4% begins to reflect on people’s lifestyles.

The unemployment rate is at historic lows for our country. This rate often touted by politicians to show their outstanding work on the economy is misunderstood by the mass of Americans. To properly understand the application of the rate to the economy, you must consider that underemployed and those individuals not actively looking for work are not considered in developing the rate. For those individuals seeking employment, there are currently more job opportunities than workers to fill them. This is a big plus for our economy. During times of high demand for skilled workers the hourly wage rises. It is simple economics – supply and demand. When demand for something (or someone) rises and the supply (people looking for work) is static or lower, the price for labor will be higher. 

Rising wages are good for workers until they realize the costs of goods rise along with them. Companies will increase prices on goods to cover the increased cost of labor while maintaining the profit margin necessary to continue operations.

Another factor affecting the economy is the supply chain disruption. Goods that are manufactured outside the United States must be imported for sale by businesses to the public. Recently, the shelves of some of the largest retailers have been limited or out of products demanded by the public for their functions in life. Don’t get me started about the “Toilet Paper Run of 2020”. There was plenty of the product for the current needs of people in our country. However, a rumor on social media stoking the fears of people caused a panic to buy greater quantities of toilet tissue. Some of the memes on social media were hilarious! At one point it appeared that toilet tissue would become the currency of choice due to the high value it held in the public’s mind.

All these factors create economic conditions of expansion or, more recently, contraction in the economy. People are subjected to many emotions in life. However, in my 34-year career, I have discovered two emotions that are most prominent when it comes to financial decisions about a person’s retirement and investment accounts – fear and greed. Memory fades quickly from the very positive returns of only a few months earlier when a market correction appears. People who have enjoyed almost 14 years of positive returns in their portfolios are suddenly stricken with the fact that markets can (and often do) go down.

Recently, I asked a client if she would sell her home if it went down in value. The look on her face was as if I had asked her to donate a kidney! Her response was “that is a long-term asset and has tremendous value to me”. I then asked the simple question, “Your retirement account is your lifetime asset. Why do you want to sell it when it is down?” She simply stated, “You are right.” The stock market is the only investment I am aware that people buy when its high and sell when its low. This is the opposite to increasing your overall lifetime return and cash flow.

Buy or sell? Each person must deal with their fear or greed. By remaining calm when others are frantic and scared, you will be rewarded with greater opportunity for growth over a lifetime. Make certain your risk tolerance is properly reflected in a diversified portfolio and your cash reserves will accommodate 90 – 120 days of living expenses. This correction will pass.

Your lifetime of financial security for your family is no laughing matter. To alleviate the stress from worrying about your finances, seek out a CERTIFIED FINANCIAL PLANNERTM professional to help you build confidence in your future so you can laugh all the way to retirement and beyond.

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The Millennial Perspective: Planning Ahead

Disruption can arise at any moment and oftentimes there is nothing we can do to avoid it from happening. There has been a lot of disruption in the last two years and it has left countless people jobless, on unemployment, or sent home for a few weeks to recover from COVID-19. With the most recent COVID-19 spike I have heard stories of several people who feel that they cannot miss work because of the money they would lose despite being ill. It now seems that more and more people are finding themselves between a rock and a hard place, money or the safety of others. I am certain that the majority would prefer the latter. However, having a plan in place can make the decision easier.

Looking back at the start of the pandemic, employers were afforded the ability via tax credits to pay for an absence due to COVID-19. This allowed employees to stay home without having to worry about missing out on wages while even those who lost their jobs were able to draw unemployment at a higher rate than usual. With most businesses no longer offering “COVID pay,” employees have felt obligated to make the tough decision between going to work and being extra careful around others. This can easily become a liability for the company because of safety protocols and spiraling COVID quarantines which can force companies to temporarily close their doors because of staffing issues or to ensure the quelling of outbreaks. Thus, leaving all the employees to miss out on wages while forcing the company to miss out on profits.

Many who are sick are not able to know that they have COVID-19 because some may have simply thought it was the common cold or just allergies. Regardless of the cause of their symptoms, no one should be put in the position of having to determine if their symptoms are due to a relatively benign issue such as allergies or a contagious disease without being able to consult a medical professional or have diagnostic testing performed, especially now when the stakes are seemingly high. It is therefore important to have a plan for when life happens. Building a plan to save for a rainy day can be very intimidating for some. Working with a CERTIFIED FINANCIAL PLANNER® (CFP®) can help make the task feel less daunting. A CFP® can often help you build a budget that is customized to your needs and can help you set aside money without stretching your account too thin.

Building these savings will not happen overnight. Some people may have to decrease their debts before they can save. Paying down debt with higher interest rates (avalanche method) or smaller balances (snowball method) is always a good place to start. By lowering the amount you have to pay each month you free up funds that can be set aside to start saving or even pay off more debt. Some people may prefer to pay all of their debts off before saving, but this doesn’t help out much when disruption arises and may indeed decrease their available cash for emergencies

My dad (the smartest man I know) frequently uses the phrase, “Hope for the best, but plan for the worst.” That philosophy has really stuck with me these last two years with all the disruptions we have had in our day to day lives. It doesn’t sound very optimistic to always plan for the worst, but you never know what kind of disruption life will throw at you. It is never a bad idea to be prepared. No one has ever wished they were less prepared for when an emergency arises. No one ever wishes that they had planned and managed their finances without proper considerations. A CFP® has been trained specifically to look at each person as an individual and set them along the right path to plan for these disruptions while still living a lifestyle that is enjoyable.

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Three Steps to Reduce Risk In Your Portfolio

Wouldn’t the world be a better place if you could predictably earn 8% returns on your portfolio every year and only invest in certificates of deposit? Of course! One problem with this thinking is that you wouldn’t live in the United States of America and the dollar would be worthless.

You face some type of risk every day of your life. While driving your car through town, you may experience an automobile accident. This is the risk of driving a vehicle. You think about staying home and raking leaves. A sudden gust of wind causes a tree limb to fall on your roof causing significant damage to your home. This is environmental risk.

We all seek the best outcomes but many of us do not wish to experience the associated risks involved in the process. The universe works within a risk/reward paradigm. When more risk is accepted, we expect a higher reward. By investing in certificates of deposit, you believe you are undertaking a risk-free investment. Alas, you may expose yourself to interest rate risk, inflation risk, default risk (highly improbable, but a risk nonetheless) and liquidity risk. That sounds like a great deal of risk for an FDIC-insured investment.

Diversify Your Portfolio

The best approach to life is to manage risk, not attempt to alleviate it. The first method of mitigating risk is to fully diversify your portfolio. Diversification does not remove the risk factors but may lower them to a more acceptable level by investing in many different types of investments that are noncorrelated. Simply put, don’t put all of your monetary eggs in one basket.

Inexperienced investors make mistakes that may cost them significant money and time. 

Two emotions generally guide individuals in their investment approach – fear and greed. One of the best methods of taking advantage of the stock market, an auction market in which one entity is selling the shares and another is buying them, is the focus on the emotions of other investors in the market. The famous investor, Warren Buffett, is cited as originating a quote that is used as the premise to maximizing your opportunities in the stock market – “Be fearful when others are greedy. Be greedy when others are fearful.”

Understand the Investments You Are Buying

The second method of reducing risk in your portfolio is to understand the investments you are buying. Significant hype typically precedes Initial Public Offerings (IPO) as the underwriter is attempting to create a market for a stock. Without a historic picture of the company’s capabilities to generate a profit and pay a dividend, beyond its operations as a private company, the investor is buying based solely on prospective anticipated performance (i.e., hope). Many of the companies going public provide novel products and services not yet proven in the marketplace. For example, many IPOs will list for a price that reflects much higher value than the performance of the company may sustain. After the hype of the issue, realism sets in and the price may fall to a level that is a fraction of the issue price.

When to Rebalance Your Portfolio

Lastly, consider rebalancing your portfolio to its original target allocation when the variance is 5% – 10% above the intended percentage. For example, when your portfolio experiences growth in one asset class, the allocation for the original investments will change. Stocks have performed reasonably well in 2021 and bonds have provided lower yields. After the year has faded, you look at your portfolio and realize your 60/40 portfolio is now 75/25! Good news is that you have a larger portfolio value but inherently gained more risk. By rebalancing the portfolio consistently and timely, you will maintain better control of the risk in the portfolio.

Many investors may receive a benefit from seeking the assistance of a Certified Financial PlannerTM professional to analyze their portfolio. By implementing a few consistent steps in managing your retirement assets, you may increase your probabilities to achieve your ultimate goals. 

See you on the jogging trail!

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