Risk | Live a Life By Design

Life Isn’t “Set it and Forget it”

Posted on February 27, 2023February 27, 2023 by Jimmy J. Williams, CPA/PFS, CFP®

“It’s the end of the world as we know it,” as the pop singer bellows out the first line of the chorus of a top song for their band. What a profound statement when we think of the chaos of the past few years and the impact economic factors have made on your net worth. For many Millennials and Gen-Z individuals it may appear as if their world has ceased to exist as they are accustomed to in their short lives. We have been here before and we will return to this state of the economy again.

One constant in U.S. economy is the fact that it will continue to cycle. The four phases of our economy have been recognized by financial experts for decades and with quite predictable accuracy – expansion, peak, contraction, and trough. Difficulty lies in defining which one of the phases we currently find our country.

Economists analyze several factors to determine the current phase of our economy. Gross Domestic Product, employment, interest rates and consumer spending are a few of the factors followed to determine trendlines within the four phases of the economy. Gross Domestic Product (better known as “GDP”) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. GDP can be computed on a nominal basis or a real basis. When accounting for GDP on a real basis, the consideration of inflation plays a significant role in the computation.

In the United States, our real GDP rate is typically between 2% – 4% on an annual basis. To compare this with other countries, consider China who reports a real GDP rate of 8.1% for 2021 according to www.data.worldbank.org. As the country’s GDP rate goes up the production for labor, exports and other areas of the United States is performing at efficient levels. If other factors considered are increased over a previous period, the country may be in expansion or reaching its peak economically.

It is important to understand the cycle of our economy and use this information to your benefit. The New York Stock Exchange, the American Stock Exchange and London Stock Exchange are auction markets. It functions by a process that someone must sell a stock for someone to buy a stock. This is known as the secondary market.

Another of the statistics focused on by investors is the labor participation rate. The United States is currently experiencing one of the best unemployment rates in modern history due to the recall of millions of workers back to the workforce after the federal government shut down the businesses employing them. If the unemployment rate rises, this will be a leading indicator to possible negative economic conditions occurring.

There is not one magic number for purposes of determining the type of economy experienced in the United States. To study these factors and guide your investment philosophy requires discipline and patience. Many investors have been unable to fight the emotional battle of watching their savings plunge and staying the long-term course determined to be the most probable path to success. As wealth advisors, our goal is to provide understanding and education to our clients so they can make intelligent decisions. Emotions play no role in the process but can be intrusive to sound judgment.

Life changes on a daily basis. It is critical that you construct your affairs in a manner that allows for the disruptive periods of time to pass without substantial change to your long-term plans. To attempt to time the markets would, in my opinion, give greater risk to reaching your long-term savings goals than to simply design a fully-diversified portfolio to weather the storm. By consistently maintaining your acceptable level of risk in the portfolio through periodic rebalancing, your probabilities for reaching your goals are much higher.

If you’re concerned about the economic conditions or have questions pertaining to your investments providing for your future in the manner you desire, consider a complimentary consultation with a Certified Financial Planner™ professional. When you have a vision for your future that helps you see your goals accomplished, it is much easier to live through the economic challenges of life. See you on the jogging trail!

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Prudent Steps to a Secure Future

Posted on March 11, 2022March 11, 2022 by Jimmy J. Williams, CPA/PFS, CFP®

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 PLANNER^TM professional. Your investments, like your body, may suffer if proper attention is not given. See you on the jogging trail!

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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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Difference Between Economy and Markets

Posted on January 22, 2021January 22, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

What is the driver of our economy in the United States? Is it labor? Not entirely because our nation is suffering one of its highest unemployment rates in recent history based on a report by the U.S. Bureau of Labor Statistics dated January 8, 2021, and the world keeps spinning. The current United Stated unemployment rate of 6.7% is not the actual number that concerns me. When you understand the factors that compute the unemployment rate in our country, you must also consider those individuals who have simply dropped out the job market and resigned themselves to remaining unemployable. The true number of unemployed and underemployed individuals in the United States, the quoted unemployment rate would easily double.

Is our economy built on industries? Yes. The five most productive industries in the United States, for 2019, are healthcare, technology, construction, retail and durable goods. Each month the Bureau of Economic Analysis, an official agency of the United States Department of Commerce, reports on the various components of the economy both domestic and internationally. Due to the lack of business operations in the second quarter of 2020, caused by the impact of COVID-19, the gross domestic production in our country fell by more than 31.4% but rebounded sharply when businesses reopened and employees went back to work in the third quarter of 2020.

If the economy has been so volatile, why have the markets been so robust? The answer is not a simple one but allow me to offer a response. Based on a report in Barron’s published on January 2, 2021, the Standard & Poor’s 500 Index (S&P 500) returned 18.4% for the calendar year 2020. This index is representative of the overall economic condition of the United States. Consider the fate of smaller, less capitalized companies primarily based in our country. The return of the Nasdaq Composite for 2020, based on the same Barron’s report, was 45%. Smaller companies have the ability to adapt to economic conditions but may not have the funding necessary to survive economic downturns.

One word of caution when considering any investment is to think long-term. In the past couple of weeks, I have received requests from individuals for the “hottest” stock or “one that is priced low and guaranteed to rise in value in a short time”. The answer I provided each of these individuals is to think long-term, diversify to lower risk and consider your current needs. One of the individuals commented that he “didn’t have much time until he wants to retire” and intimated that he would have to earn excellent returns over the next two years to meet his goals. I am not one to trample on others’ goals but I can assure you that one should not expect the markets to behave in a predictable manner for the short-term to payoff big investments.

The most probable method of reaching your goal for investing is to start early, invest consistently in good and bad markets and stay focused on the long-term. It will reward you to discount the suggestions of those that promise “no risk” and “excellent returns” when the real world of investing contains no such attributes. All investments have risk. One of the safest investments you can make is to place cash in a savings account. However, that investment has significant purchasing power risk. Your money’s ability to buy goods and services in the next ten years will be impaired due to the impact of inflation. Think about it in an economic sense, your money is earning less than 1% and inflation is greater than 2%. Not a good outcome for your future.

To provide yourself peace of mind, it is critical you stress test your portfolio by measuring performance during market cycles that are not at the peak. If I had a crystal ball, I could inform you of market movements and the world would be swimming in butterflies and unicorns. That is not reality. What is real is financial advice given you in a fiduciary manner that addresses your needs, goals and risks. Wouldn’t you sleep better if you knew you could weather a financial storm? Seek out a Certified Financial Planner™ professional for a complimentary consultation and analysis. Sleep well, my friends.

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What is Risk?

Posted on October 2, 2020October 2, 2020 by Jimmy J. Williams, CPA/PFS, CFP®

So many people that I meet seek a panacea for their retirement assets. It is one of those facts of life that if anything yields a return, it also inherently contains risk. Let’s explore what risks are applicable in our everyday lives.

Market risk is most common among individuals that meet with us. People will look for a “happy median” and mitigate as much risk as possible while retaining enough risk to allow their investments to earn a targeted rate of annual return. How do you mitigate risk in the market? You have heard this word many times in this column but it is worthy to mention it again – diversification.

The distorted belief of market risk is that it is the overall risk of the market. However, we should look at the various types of risk contained in this general category of risk. For example, market risk can be further defined as currency risk, equity risk or interest rate risk depending on the type of investment you are considering. Should you wish to invest in a security that is issued from a foreign company, you may be subject to potential risks in the difference between the U.S. Dollar and the currency of the domicile country of the target investment. Again, there are measures to mitigate this risk. When we use the term “mitigate” you must understand that it does not mean the risk is eliminated, merely lessened or mollified.

Interest rate risk should be heeded when purchasing debt or bond instruments. Remember, the interest rate of a bond has a direct impact on the value of the holding. For example, bond market prices drop when interest rates rise and vice-versa. The longer the bond term to maturity will also be a consideration when looking at risk exposure.

Equity risk is the presence of risk when you invest in stocks or equity instrument shares and the value of the shares may decrease. This is the most prevalent of risks to investors. Every session the markets are open, and trading is occurring, is a day that equity risk is present.

Concentration risk may be a new term for many people. This type of risk is explained within its name – concentration. Executives of publicly-traded companies are given shares of the company stock for incentives of compensation. Presumably the executives’ efforts to create profit, increase market share, etc. will cause the stock share price to increase which, in turn, will give the executives greater earnings from the ultimate sale of the stock. Risk is inherent in this type of compensation when the executive is ready to retire and their portfolio consists of the employer’s stock for more than half of the total value of their account. Tax ramifications and other considerations should be analyzed to determine the least costly method of diversifying the portfolio to reduce concentration risk.

Liquidity risk is a significant issue when holding shares or bonds that you can’t sell for a profit when you wish to sell. You may be required to sell your positions for a loss to meet a cash flow need of your family.

One of my favorite quotes by Will Rogers, which seems very appropriate in an article on investment risks, is “I’m not so much interested in the return ON my money as I am the return OF my money.” Oklahoma’s Favorite Son was always reliable for a good turn of the word.

The types of risk listed above do not fully explain all risks an individual may encounter. However, with the acceptance of a certain level of risk, mitigating the presence of risk by utilizing diversification and other measures, you may feel more comfortable and confident about your future. One method of determining the current level of risk in your portfolio is to request a complimentary analysis or “stress test” from a Certified Financial Planner™ professional. I recommend that you consider a balance between risk and return not simply the elimination of all risk. By eliminating all risk, you may not achieve your goal of exceeding inflation with your investments. See you on the golf course!

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How Do You Define Risk?

Posted on April 29, 2019April 26, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

Danger! Danger! Red flashing lights! Sirens breaking through the still night awakening you from a deep sleep! These are simple, yet effective, methods of alerting you to risks that arise in life. Don’t you wish investment risk were that simple to alert you when you are about to face an inanimate action that has the power to destroy your life savings?

We accept certain risks in life everyday. Once you leave the safety of your bed, you may be subject to risk. Let’s focus on one type of risk – financial risk. You can control the level of risk in your financial life by taking prudent steps to minimize risk when possible. For example, if you are 80 years of age, it may be too risky to invest in a new tech startup with 50% of your retirement portfolio. If you were 24 years of age, this may be viewed more as an opportunity.

As specialists in retirement planning, we believe it is critical to properly measure and mitigate risk when possible. Many of our clients come to us with portfolios that are highly illiquid or invested in a manner that is not in their best interest. When we ask questions pertaining to their acceptable level of risk, the client will generally be moderate or conservative in their approach to investing their hard-earned money.

However, after a careful analytical analysis of their portfolio we inform them of their current investment risk level and their eyes pop open like they are watching a scene from a horror movie. To mitigate the risk, we believe several factors must be considered in their portfolio design:

Consider liquidity needs
Research suitable and appropriate types of investment positions
Determine the tax-effect of the proposed investments
Properly diversify the portfolio to control the level of risk acceptable by the client.

Simply investing the portfolio in its initial allocation does not resolve the client’s risk issues. Proper monitoring of the performance and appropriate rebalancing of the asset allocation to its original target are critical to maintaining the client’s risk level in the portfolio. The financial planning required for an advisor to fully understand the client’s long- and short-term needs and goals entails significant education, experience and knowledge of the economy.

Certified Financial Planner practitioners are professionals that maintain one of the highest credentials as a witness to their competency and ethics. Don’t risk your lifetime savings to risk. What you don’t know could truly ruin your future. Ask for a second opinion regarding your retirement portfolio. Better to find out early if there is a problem in your future.

Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee or future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loass, including total loss of principal