“Stop trying to predict the direction of the stock market, the economy, interest rates or elections”
Uncertainty and risk tolerance. This concept of just what a person can “stomach” is huge when it comes to properly allocating how your hard earned assets are to be positioned. Most of our clients, and the public in general, as they move into retirement, aren’t keen on losing money. So, for these folks, it’s important to control volatility.
Typically, in a first meeting with clients, we do our best to have a valuable conversation as to just what their concerns are. What their goals are for their money in retirement, how they feel about risk and what kind of lifestyle they have envisioned for themselves. We’ve learned much about them and now it’s our turn to go to work and design a Comprehensive Financial Plan.
In the second meeting we do our best to try and explain exactly how we can position their assets to provide them with a comfortable retirement but we sometimes see that there can be a disconnect. Because of this we instead talk about the client’s “fiscal house” and have divided up these money placements into what might be termed Principal Protected “Foundation Funds” or safe money and then we talk about the “walls” of their fiscal house or Inflation fighting funds that carry some degree of risk. We need to have a portion of the client’s funds working to combat “purchasing power risk”.
Safe money is money you cannot afford to lose. Money that cannot go down in value. These funds are generally used to produce an income stream you cannot outlive… like a personal pension, which forms the bedrock or foundation of your financial plan. We use safe money to take care of living expenses, like rent or a mortgage payment, food and transportation… another Advisor I know calls these, “pay-checks”. Financial instruments that fall into this category are CD’s, Money Markets, certain types of Annuities, and Government Guaranteed Securities.
Wall Money or those financial instruments that carry risk, is money you can now afford to place with a calculated degree of risk because we have identified and measured your tolerance to risk and you have an appropriate amount of safe money set aside as your safety net. Riskier monies really need a longer time-horizon to truly be effective. With risk comes a greater degree of growth potential and since we don’t know exactly how this money will perform, we exercise more caution with our riskier assets the older we get. We look for these funds to generate the “play-checks” of life. In rebalancing, we shift more from the riskier assets to the safe money foundation as we age and approach retirement.
Time… the more of it you have the more should be in the riskier or “wall” section of your fiscal house. You need to let the system work for you. You ask… how much should I have in each area? Here is a place to start… let’s look at the “rule of one hundred”. Take the number one hundred and subtract your age from it. The resulting number suggests the maximum amount of risk exposure you might want to have in your portfolio. Example: for a person age sixty-five, the equation is: 100 – 65 = 35%. This is the maximum percentage that should be subject to the risk of the market. The rest should be in principal protected “foundation funds”. Before we ever launch a plan we have a heart-to-heart talk with clients about emotions and market timing. We believe that good coaching helps to dispel unwarranted fears and by far, the most common fear is that of the unknown. Understanding the mechanics at work within your portfolio, replaces your fear with knowledge that enables you to make good decisions and avoid bad ones. We want you to Retire With Confidence.