This short video from our friends at Dimensional Fund Advisors is worth a couple minutes of your time…view Tuning Out the Noise here. It highlights one of the ways that we, as advisers, aspire to bring value to our clients lives. It is also a friendly reminder to focus on what matters, and ignore the rest.
If you were a member of the popular press, you’d probably be happy with 2018’s first quarter performance. At last – some volatility fueling news1 in early February, with plenty of enticing “largest,” “fastest,” and “worst” market superlatives to savor after a long, languid lull.
As usual, there are plenty of potential culprits to point to among current events: global trade wars heating up, the arrival of quantitative tightening (rising interest rates), troubles in tech-land over data privacy concerns, ongoing Brexit talks, and some interesting events over in the Koreas. At quarter-end, one hopeful journalist asked, “Is the Bear Market Here Yet?”2 Another observed: “[T]he number of [Dow Jones Industrial Average] sessions with a 1% move so far in 2018 are more than double 2017’s tally, and it isn’t even April.”3
Has the coverage left you wondering about your investments? Most markets have been steaming ahead so well for so long, even a modest misstep may have you questioning whether you should “do something,” in case the ride gets rougher still.
If we’ve done our job of preparing clients and their portfolio for market jitters, clients may might be able to cite back to us why they’ve already done all they can do to manage the volatility, and why it’s ultimately expected to be good news for evidence-based investors anyway. Remember, if there were never any real market risk, you couldn’t expect extra returns for your risk tolerance.
That said, you may have forgotten – or never experienced – how awful the last round of extreme volatility felt during the Great Recession. Insights from behavioral finance tell us that our brain’s ingrained biases cause us to gloss over those painful times, and panic all over again when they recur, long before our rational resolve has time to kick in.
If you noticed the news, but you’re okay with where you’re at, that’s great. If the volatility is bothering you, talk to a CFP® professional or other qualified financial professional; it may help ease your angst. If you continue to struggle with whether you made the right decisions during quieter markets, plan a rational shift to better reflect your real risk tolerances and cash-flow requirements. Not only is your peace of mind at least as important as the dollars in your account, you could end up worse off if you’ve taken on more risk than you can bear in pursuit of higher expected returns.
As Wall Street Journal columnist Jason Zweig said during the February dip: “A happy few investors … may have long-term thinking built into them by nature. The rest of us have to cultivate it by nurture.” We couldn’t agree more, and we consider it our duty and privilege to advise you accordingly, through every market hiccup.
If there is a universal investment ideal, it is this: Every investor wants to buy low and sell high. What if we told you there is a disciplined process for doing just that, and staying on track toward your personal goals while you’re at it? Guess what? There is. It’s called strategic rebalancing.
Imagine it’s the first day of your investment experience. As you create your new portfolio, it’s best if you do so according to a personalized plan that prescribes how much weight you want to give to each asset class. So much to stocks, so much to bonds … and so on. Assigning these weights is called asset allocation.
Then time passes. As the markets shift around, your investments stray from their original allocations. That means you’re no longer invested according to plan, even if you’ve done nothing at all; you’re now taking on higher or lower market risks and expected rewards than you originally intended. Unless your plans have changed, your portfolio needs some attention.
This is what rebalancing is for: to shift your assets back to their intended, long-term allocations. In fact, this is part of the best practices suggested in my recent blog post for the New Year.
To illustrate, imagine you (or your advisor) has planned for your portfolio to be exposed to the stock and bond markets in a 50/50 mix. If stocks outperform bonds, you end up with too many stocks relative to bonds, until you’re no longer at your intended, balanced blend. To rebalance your portfolio, you can sell some of the now-overweight stocks, and use the proceeds to buy bonds that have become underrepresented, until you’re back at or near your desired mix. Another strategy is to use any new money you are adding to your portfolio anyway, to buy more of whatever is underweight at the time.
Either way, did you catch what just happened? Not only are you keeping your portfolio on track toward your goals, but you’re buying low (underweight holdings) and selling high (overweight holdings). Better yet, the trades are not a matter of random guesswork or emotional reactions. The feat is accomplished according to your carefully crafted, customized plan.
We’ve now shared a simple rebalancing illustration. In reality, rebalancing is more complicated, because asset allocation is completed on several levels. First, we suggest balancing your stocks versus bonds, reflecting your need to take on market risk in exchange for expected returns. Then we typically divide these assets among stock and bond subcategories, again according to your unique financial goals. For example, you can assign percentages of your stocks to small- vs. large-company and value vs. growth firms, and further divide these among international, U.S., and/or emerging markets.
One reason for these relatively precise allocations is to maximize your exposure to the right amount of expected market premiums for your personal goals, while minimizing the market risks involved by diversifying those risks around the globe and across sources of returns that don’t always move in tandem with one another. We, and the fund managers we typically turn to for building our portfolios are guided by these tenets of evidence-based investing.
Rebalancing using evidence-based investment strategies is integral to helping you succeed as an investor. But like any power tool, it should be used with care and understanding.
It’s scary to do in real time. Everyone understands the logic of buying low and selling high. But when it’s time to rebalance, your emotions make it easier said than done. To illustrate, consider these real-life scenarios.
Costs must be considered. Besides combatting your emotions, there are practical concerns. If trading were free, you could rebalance your portfolio daily with precision. In reality, trading incurs fees and potential tax liabilities. To achieve a reasonable middle ground, it’s best to have guidelines for when and how to cost-effectively rebalance. If you’d like to know more, we’re happy to discuss the guidelines we employ for our own rebalancing strategies.
Strategic rebalancing using evidence-based investment strategies makes a great deal of sense once you understand the basics. It offers objective guidelines and a clear process to help you remain on course toward your personal goals in rocky markets. It ensures you are buying low and selling high along the way. What’s not to like about that?
At the same time, rebalancing your globally diversified portfolio requires informed management, to ensure it’s being integrated consistently and cost effectively. An objective advisor also can help prevent your emotions from interfering with your reason as you implement a rebalancing plan. Helping clients periodically employ efficient portfolio rebalancing is another way that PLC Wealth Management seeks to add value to the investment experience.
Have you caught cryptocurrency fever, or are you at least wondering what it’s all about? Odds are, you hadn’t even heard the term until recently. Now, it seems as if everybody and their cousin are getting in on it.
Psychologists have assigned a term to the angst you might be feeling in the heat of the moment. It’s called “FoMO” or Fear of Missing Out. Education is the best first step toward facing FoMO and making informed financial choices that are right for you. So before you make any leaps, let’s take a closer look.
What is cryptocurrency?
Crytpocurrency is essentially a kind of money – or currency. Thanks to electronic security – or encryption – it exists in a presumably secure, sound and limited supply. Pair the “encryption” with the “currency,” and you’ve got a new kind of digital asset, or electronic exchange.
Well, sort of new. Cryptocurrency was introduced in 2009, supposedly by a fellow named Satoshi Nakamoto. His Wikipedia entry suggests he may not actually be who he says he is, but minor mysteries aside, he (or possibly “they”) is credited with designing and implementing
bitcoin as the first and most familiar cryptocurrency. Ethereum is currently its second-closest competitor, with plenty of others vying for space as well (more than 1,300 as of early December 2017), and plenty more likely to come.
Unlike a dollar bill or your pocket change, cryptocurrency exists strictly as computer code. You can’t touch it or feel it. You can’t flip it, heads or tails. But increasingly, holders are receiving, saving and spending their cryptocurrency in ways that emulate the things you can do with “regular” money.
How does cryptocurrency differ from “regular” money?
In comparing cryptocurrency to regulated fiat currency – or most countries’ legal tender – there are a few observations of note.
First, since neither fiat nor cryptocurrency are still directly connected to the value of an underlying commodity like gold or silver, both must have another way to maintain their spending power in the face of inflation.
For legal tender, most countries’ central banks keep their currency’s spending power relatively stable. For cryptocurrency, there is no central bank, or any other centralized repository or regulator. Its stability is essentially backed by the strength of its underlying ledger, or blockchain, where balances and transactions are verified and then publicly reported.
The notion of limited supply factors in as well. Obviously, if everyone had an endless supply of money, it would cease to have any value to anyone. That’s why central banks (such as the U.S. Federal Reserve, the Bank of Canada, and the Bank of England) are in charge of stabilizing the value of their nation’s legal tender, regularly seeking to limit supply without strangling demand.
While cryptocurrency fans offer explanations for how its supply and demand will be managed, it’s not yet known how effective the processes will be in sustaining this delicate balance, especially when exuberance- or panic-driven runs might outpace otherwise orderly procedures. (If you’re technically inclined and you’d like to take a deep dive into how the financial technology operates, here’s one source to start with.)
Why would anyone want to use cryptocurrency instead of legal tender?
For anyone who may not be a big fan of government oversight, the processes are essentially driven “by and for the people” as direct peer-to-peer exchanges with no central authorities in charge. At least in theory, this is supposed to allow the currency to flow more freely, with less regulation, restriction, taxation, fee extraction, limitations and similar machinations. Moreover, cryptocurrency transactions are anonymous.
If the world were filled with only good, honest people, cryptocurrency and its related technologies could represent a better, more “boundary-less” system for more freely doing business with one another, with fewer of the hassles associated with international commerce.
Unfortunately, in real life, this sort of unchecked exchange can also be used for all sorts of mischief – like dodging taxes, laundering money or funding terrorism, to name a few.
In short, cryptocurrency, blockchain technology, and/or their next-generations could evolve into universal tools with far wider application. Indeed, such explorations already are under way. In December 2017, Vanguard announced collaborative efforts to harness blockchain technology for improved index data sharing.
That said, many equally promising prospects have ended up discarded in the dustbin of interesting ideas that might have been. Time will tell which of the many possibilities that might happen actually do.
Even if I don’t plan to use cryptocurrency, should I hold some as an investment?
If you do jump in at this time, know you are more likely speculating than investing.
Bubble or not, consider these two points. First, there are a lot of risks inherent to the cryptocurrency craze. Second, cryptocurrency simply doesn’t fit into our principles of evidence-based investing … at least not yet.
Let’s take a look at the risks.
Regulatory Risks – First, there’s the very real possibility that governments may decide to pile mountains of regulatory road blocks in front of this currently free-wheeling freight train. Some countries have already banned cryptocurrency. Others may require extra reporting or onerous taxes. These and other regulations could severely impact the liquidity and value of your coinage.
Security Risks – There’s also the ever-present threat of being pickpocketed by cyberthieves. It’s already happened several times, with millions of dollars of value swiped into thin air. Granted, the same thing can happen to your legal tender, but there is typically far more government protection and insurance coverage in place for your regulated accounts.
Technological Risks – As we touched on above, a system that was working pretty well in its development days has been facing some serious scaling challenges. As demand races ahead of supply, the human, technical and electric capital required to keep everything humming along is under stress. One recent post estimated that if bitcoin technology alone continues to grow apace, by February 2020, it will suck away more electricity than the entire world uses today.
That’s a lot of potential buzzkill for your happily-ever-after bitcoin holdings, and one reason you might want to think twice before you pile your life’s savings into them.
Then again, every investment carries some risk. If there were no risk, there’d be no expected return. That’s why we also need to address what evidence-based investing looks like. It begins with how investors (versus speculators) evaluate the markets.
What’s a bitcoin worth? A dollar? $100? $100,000? The answer to that has been one of the most volatile bouncing balls the market has seen since tulip mania in the 1600s.
In his ETF.com column “Bitcoin & Its Risks,” financial author Larry Swedroe summarizes how market valuations occur. “With stocks,” he says, “we can look at valuation metrics, like earnings yield. With bonds, we can use the current yield-to-maturity. And with assets like reinsurance or lending … we have historical evidence to make the appropriate estimates.”
You can’t do any of these things with cryptocurrency. Swedroe explains: “There simply is no tangible relationship between any economic or financial parameters and bitcoin prices.” Instead, there are several ways buying cryptocurrency differs from investing:
Cryptocurrency simply doesn’t yet synch well with these parameters. It does have a price, but it can’t be effectively valued for planning purposes, especially amidst the extreme price swings we’re seeing of late.
What if I decide to buy some cryptocurrency anyway?
We get it. Even if it’s far more of a speculative than investment endeavor, you may still decide to give cryptocurrency a go, for fun or potential profit. If you do, here are some tips to consider:
Last but not least, good luck. Whether you win or lose a little or a lot with cryptocurrency – or you choose to only watch it from afar for now – we remain available to assist with your total wealth, come what may.
Happy New Year! Now that 2017 is a wrap, one of the best presents you can bestow on yourself and your loved ones is the gift of proper preparation for rest of the year. Want to get a jump-start on it? Here are 10 financial best practices to energize your wealth management efforts.
Next Steps in the New Year
We get it. Life never stops. The holiday season can be a busy time that often spills right into the new year. Don’t despair if you can’t get to all ten of these tidbits at once. Take on one each month, and you’ll still have a couple of months to spare before we’re ringing in 2019.
Better yet, don’t go it alone. Let us know if we can help you turn your financial planning jump-start into a mighty wealth management leap. It begins with an exploratory conversation.
What makes you happy? As we wish you and yours a Happy Thanksgiving, we’d like to take a moment to reflect on this timeless question.
You probably already realize that piles of possessions by themselves aren’t enough. But it may be less clear what does generate enduring happiness and how we, as your trusted advisor, might be one of your core alliances for discovering it.
First, let’s define what we’re talking about. We are fond of this description by “The Happiness Advantage” author, popular TED Talk presenter, and Harvard researcher Shawn Achor:
“Happiness … isn’t just about feeling good,
it’s about the joy we feel while striving after our potential.”
Such a simple statement, but it’s packed with profound insights. To take this even further, I believe that we get closer to our potential when we focus more on others rather than our own well being. That is, being generous towards others plays a big part in achieving sustained contentment and joy. It is quite the paradox (that we get the most when we give the most), but it has been believed through the ages and proven more recently in the research.
Happiness isn’t about indulging in fleeting pleasures.
In fact, it’s closer to the opposite of that. If you can only be happy once you’ve “scored,” you are limiting your joy to isolated incidents instead of weaving it into the fabric of your life.
You can still be happy, even when life isn’t all puppies and rainbows.
Distinguishing enduring happiness from occasional pleasures frees us to enjoy even our most challenging experiences, and to savor them as among our fondest memories. It’s why we may willingly burn the midnight oil on a project of deep interest. Pay a personal trainer to push us harder than we’ve ever gone before. Volunteer our hearts and minds to others in need. Give birth.
Everyone has different sources of happiness, but the joy it can spread is universal.
In a world that sometimes seems increasingly polarized, a greater appreciation for happiness might just bring us closer together. As Achor comments: “Joy makes us want to invest more deeply in the people around us. … It makes us want to learn more about our communities. It makes us want to be able to find ways of being able to make this a better external world for all of us.”
By coming together to focus on what sustains us – an optimistic outlook, value-driven action, meaningful relationships – therein we can find greater happiness. That’s what the evidence suggests, anyway.
Again, we wish you a most Happy Thanksgiving!
If you’ve taken our past advice about ignoring the onslaught of breaking market news, you probably didn’t read Russell Investments’ recent “2017 Global Market Outlook Q4 Update.”
I’m not prone to pore over these relatively unremarkable analyses ourselves, but I do read a lot of ‘industry speak’ as part of our due diligence. More times than not, it for purely entertainment purposes to see what the tea leaves say on that particular day. This is how I came across this intriguing statement in Russell Investments’ wrap-up:
“Our main message for the close of 2017 isn’t much different from our opening one: we maintain our ‘buy the dips and sell the rallies’ mantra.”
Great idea, but a little weak on practical application. It’s akin to suggesting that lottery players can score big … as long as they consistently pick the winning numbers!
Immediately following Russell Investments’ mantra, you’ll find this disclosure:
“These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.”
In all seriousness, I feel these sorts of reports speak inadvertent volumes about the evidence-based mantra to which we adhere. If you are not familiar with this term evidence-based investing, be on the lookout as I will be writing more about this soon. It is a main tenant to the way we view and implement investment strategies. By depending on practical evidence instead of fanciful forecasts, our views are rarely subject to change – especially not in hurried reaction to current market conditions.
Instead, we continue to believe the best way to manage your personal wealth is to:
This is our mantra, and so it shall remain – regardless of the date at the top of the page.
I initially wrote about my take on the Equifax Security Breach about a month ago. In that time since, the news continues to come out about just how pervasive this hack was (and maybe continues to be). We were already on high alert for instances of identity theft. But the source, scope, and what seems like a justified feeling of betrayal associated with this particular breach have ushered in a new era of cybersecurity. There was before the Equifax security breach; now there’s after.
What does “after” look like, and how can we help you navigate it? Unfortunately, there is no one-size-fits-all regimen, but here are some of the most frequently cited actions we’ve seen, along with our commentary on them. Some of these were mentioned in my first post (repetition never hurts) but I have added some new thoughts as well.
What should you do right now?
Information fatigue is the enemy of action
We’ve seen other tips and pointers besides these, some of which may be advisable as well. To avoid informational overload, here are three guiding lights:
So, how can we help you moving forward? If you’d like to consult with us as you think through some of the points we’ve touched on above, we welcome the conversation. We also ask you to be responsive when we reach out to you with security-related questions or suggestions. For example, earlier this year, we produced a quick-reference and more detailed overview, “Avoiding Financial Scams and Identity Theft Slams,” filled with perennial information and best practices. We’d be delighted to share those materials with you so just ask.
As this wise educator observed in reflecting on the Equifax breach, “Security isn’t a product. It’s a process.” Just as sensible investing involves taking appropriate near-term steps in the context of an ongoing, personalized plan, so too do we find it increasingly imperative to respond to this and future cyberattacks with upfront planning, well-reasoned action and continued best practices. Let us know how else we can assist with that!
Financial monitoring…this is part of financial planning that gets often overlooked. Like a crack in the foundation of a house, it is hard to see unless you are looking for it, but it can have catastrophic consequences if left unattended. As you may have heard, Equifax (which is one of the 3 main credit reporting agencies) admitted to a historic data breach which occurred earlier this year. If you haven’t heard the details, you need to read about it here. This explanation and suggested action steps from the Federal Trade Commission is excellent. Supposedly 143 million people had their personal information potentially comprised. I say ‘potentially’ because Equifax has not disclosed the exact details of the breach, so we really don’t know the extent of what occurred. I find it pretty disappointing that the breach occurred earlier this year, they knew about it several weeks, if not months ago, and yet we are just now hearing about it. That said, I wanted to take the opportunity to highlight a few different points.
First, do not get lax about these data breaches. Just because they seem to happen all the time, and the numbers of people affected seem so large that it is hard to fathom as real, do not take a laissez faire approach, thinking it will never happen to you. This is exactly the attitude these criminals look to exploit. And make no mistake about it…the days of the disgruntled teenager hacking away in his parents basement is long past. Most of these hacks and the subsequent identity thefts are undertaken by world wide organized crime rings.
Next, check your credit report. Note, this is different than requesting your credit score. By government mandate, everyone is allowed one free credit report every year. You can go through the process here. It only takes a few minutes. If you are married, do this separately for both spouses. This will give you a detailed listing of all credit accounts that are open, or were previously opened, in your name. I suggest that you download and review this every year. I have done this fairly consistently, and have found error accounts, or accounts that I thought were closed out but were actually still open. Closing a credit account (like an old Gap card that you never use or the credit card you opened that one time to get a free plane ticket) may drop your credit score temporarily, but I think it is worth the short term hit so as not to have accounts open that you never use or check. These dormant credit accounts can also be great opportunities for criminals to hack and use.
Finally, you can be your own best protection against identity theft by just being aware and diligent. I suggest you read through the FTC’s post (link above) and review your annual credit report. But don’t stop there…these institutional hacks open the door for more and more identity theft, the fastest growing crime in the world. At PLC Wealth, we have several procedures in place to do our part to make sure our clients money is protected and secure. Additionally, TD Ameritrade has even more built-in procedures to ensure money does not move to anyone other than the account owner. But we can not protect your bank accounts or credit accounts, which seem to be where much of this white collar crime occurs. It starts with personal information being stolen, then moves to the criminals (usually through computer programs) trying to probe to see where they can get in. If you think your bank account has been compromised, let the bank know immediately. They will change your account number and give you new bank cards. If you see a strange transaction on a credit card, let the credit card company know right away. It’s likely that you won’t be held responsible for that charge, and they will send you new cards immediately, sometimes overnight.
The main point of all of this is that you need to be diligent. With 143 million people exposed as part of this latest breach, it is likely that some of your personal information was part of it. I checked Equifax’s alert site and found that both my and my wife’s information was part of the breach. That being said, I will most likely not take part in the free credit monitoring service that Equifax is offering, primarily because the service will automatically start billing at their normal monitoring rate after the first year, unless you proactively cancel. That just seems like a slick way to get more people paying for their services rather than being a true pro bono offering. I will, however, be watching transactions diligently and checking my own credit report for anything that looks off…and I think you should too.
Money is a great servant but a bad master. Francis Bacon
Joshua E. Self, CLU, ChFC, CFP®
June 9th, 2017
How many of us plan, save, and invest for the future, anticipating that one day we’ll get to a point of enjoying our wealth? And all along the way, we find our personal lives, family lives, and financial lives becoming increasingly complicated, taking more of our time, not less?
How often have we heard of or been directly affected ourselves, by the unexpected and untimely illness, disability, or death of those we know and love? It is a fact of life: No one makes it out alive. On the other hand, if both a husband and wife live to be sixty-five years old, 50% of the time, one individual from that couple will live 30 more years! Without knowing the future, how do we live our lives to the fullest today, while still being good to our future selves?
We’ll tackle these challenges in three parts. First, be good to today’s you and to future you. Second, give serious consideration to lowering your financial goals – or at least pause to ponder the motivation for the money goals you have set for yourself. Third, get help to manage your growing wealth and your shrinking time.
We often sense tension between preparing for an uncertain future and enjoying today. On the one hand, when you get right down to it, today is really the only time we have. On the other hand, we know that we desire to care for those we love and for ourselves in the future. How do we resolve this tension?
The answer to that question is a good-news-bad-news story. First the bad news: We can’t resolve this tension. Now the good news: There are some really important things we can do to live well with this tension.
First of all, as you consider where to spend your time and money, consider those things that only you can do. Only you can call your mom. Only you can be a husband or wife to your spouse. Only you can be a father or mother to your children, or a good friend, or a good neighbor to the people in your life. Only you can run your business or do your job just the way you do it. Never trade away the things that only you can do.
There are things that other people can do for you, and if you can afford it, you should consider trading dollars for time so you can invest back in the opportunities that are unique to you. The perennial favorite outsourced task for dusty husbands everywhere (or at least in the southeast) is lawn care, but you can expand your thinking from here. Your assistant (virtual or otherwise) can help you with your e-mail and calendar. Amazon can help you with your shopping. A Roomba can help keep your floors clean while you sleep.
Next, care for your health. It costs very little money (in some cases it saves money) to exercise and eat the right amount of healthy food. Caring for your personal health is one of the highest return-on-investment activities you can do. And it’s one of the best things you can do for your future quality of life.
Shred your excuses in this area. Can’t work out because you don’t want to join a club or gym? Running, cycling, pushups, sit-ups, and stretching are free in America. Can’t get exercise during the workday because you don’t want to sweat at work? Walk or do the stairs – just get up and move. Track your steps and challenge yourself to hit the 10,000 mark Monday through Friday. Can’t eat “healthy food” at a restaurant? Order the side salad and a cup of soup; substitute water for sweet tea; eat only half of the cheeseburger and box the rest for tomorrow! There’s always a way to hit your goal if you want it enough.
Flip the script in your mind from “I can’t” to “How can I?” And here’s more great news – none of these things we’ve just discussed costs very much money at all. It’s a triple-win strategy: Better life now, better life later, and more wealth for future you.
But what about things that do cost money in the present, and so will, by arithmetic, reduce your future wealth? Many times we’re not as clueless on this topic as we pretend we are. We have lived our lives up to this point and can reflect on our past expenditures and ask ourselves whether they delivered the enjoyment we expected for the money we spent. And, if we’ll meter our consumption over time, we can probably afford everything we want anyway.
For example, if you have a family goal to take a particular trip with your children or grandchildren while they’re school-aged, there are only certain years when you can get this done. By contrast, your kitchen remodel, unless you are no longer able to prepare food in your kitchen due to a fire or flood, can be deferred until the kids are older. Under this scenario, you can enjoy the trip now, look forward to your kitchen remodel later, and get both done over time.
Try this thought experiment: For any expenditure at a particular time, project yourself into the future and look back on what you spent. Are you delighted, indifferent, or disappointed with the decision? If you’re delighted, and if you have the money, go for it. If you’re indifferent, wait until your thoughts become clear. If you’re annoyed with yourself that you parted with your dollars, just say No.
Toddlers are famous for asking “Why?” As a parent, I’ll agree they take this question to extremes, but as adults we can become complacent and ask this question too seldom. For example, if you’ve set a net worth goal of $5M (or $2M or $10M), take a moment and ask, “Why?” Is it because it sounds good to you? Is it because you’ve used some analysis and determined this is the amount you need to replace your current income? Have you considered that it is actually your spending (plus inflation), not your income that you need to replace in retirement? Does this fact suggest anything to you?
Remember, for everything you get, you give up something else. Every hour you work in your job or business is an hour not spent on something else. Every dollar you invest for tomorrow is not spent on something today.
Imagine a couple celebrating their wedding anniversary at a special spot. The tab for two is almost $500. However, they are prepared for this, and the dining experience was a deliberate decision (in fact, a family member had given them a gift certificate!). Here’s more about that fabulous meal: The couple was at the restaurant for four hours and consumed enough calories to last at least one full day, along with an entire bottle of wine. The children stayed home with a sitter (more money!). It was a lovely and truly memorable evening.
But would you want to spend four hours at a restaurant even once a month, let alone several times each week? If you ate like that very often, you’d soon be overweight. A glass of wine is nice, and more is nice on a special occasion, but that level of alcohol consumption on a regular basis doesn’t help your future self. And, as crazy as they are, you probably enjoy sharing supper with your children.
In a lengthy podcast (now lost from his archives), Joshua Sheats did a terrific job telling the story of why lowering your financial goals can be a big help for your life, both now and in the future. Whether I accepted all the assumptions or not, I listen carefully as he read about the different budgets based on different levels of wealth, and asked myself whether a higher level of consumption in the future is actually what I want.
Next, as I alluded above, it is not actually your current income that you need to replace in the future. It is your inflation-adjusted spending that must be replaced by your investments.
Two insights leap from this fact: First, you must know what your spending is in order to know what you need to replace. This implies some form of budgeting or tracking of your expenditures. Second, you’re in the driver’s seat on how much you spend in every category of your budget. If you want to be financially independent sooner, reducing your expenses is the way to go. Henry David Thoreau told us “that man is richest whose pleasures are cheapest.”
How much will ‘future you’ be able to utilize from the assets that you have accumulated? This can only be prudently answered in the context of your total financial plan. There are a number of ‘rules of thumb’ you could use, but these are not able to consider all of the nuances and variants of your financial plan, so talk to your financial planner about this. Some food for thought to help you prepare for the conversation can be found here and here.
You may not consider yourself wealthy, but the fact that you are reading this article means that you are probably in the top quartile of income earners or asset gatherers…you have wealth or the ability to create it. Just because you don’t live ostentatiously doesn’t mean that you are not wealthy.
The wealthy, and those who will become wealthy, have a team of advisers. Roughly speaking these advisers can be broken into two groups. The first group contains those with unique knowledge of you and of life in general – your spouse, adult children, parents, closest friends, and perhaps a mastermind or industry group of which you’re a part. The second group of advisers has specialized domain expertise and includes estate and corporate attorneys, CPAs, and CFP’s.
According to Tom Stanley, whose research on millionaires is unsurpassed, the truly wealthy have a low propensity to spend on high-status items like cars, clothes, and watches, but are willing to part with their carefully husbanded dollars to get the right advice on their taxes, contracts, and financial plan. The number one ranked activity shared by decamillionaires, engaged in by 85% of survey respondents within the past year? Consulting with tax experts! (The Millionaire Mind, page 374).
As you accumulate wealth and your financial life becomes more complex, keeping good relationships with both your informal and formal team of advisers will help you make wise decisions and maintain and grow what you’ve worked so hard to build. “In an abundance of counselors there is safety.” Proverbs 11:14.
As you grow in your life and your wealth, there is a genuine risk of missing the forest for the trees. You are accumulating wealth at least in part in the hope of enjoying it in the future. It is critically important that you take the steps today not only to grow your wealth for the future, but to celebrate and enjoy the journey from here to financial independence.
Along the way, embrace the tension of caring for both today’s you and the future you. Ask why you’re aiming for your particular financial goals (and take a good look at expenses – are they delivering for you the way you want?). Finally, get the help you need in every area of your life, including your financial life, to make the best decisions you can. Death and taxes are the only guarantees. But there are many, many things we can do to stack the odds of a joyful life now, and financial independence in the future, in our favor.
