Risk is in the air these days and it has most people re-thinking their investment mix. Not surprisingly, those who are closer to their retirement age–or already retired–are the most focused on risk. Those in their fifties, sixties, and seventies want to make sure their nest egg doesn’t fall apart at exactly the wrong time in their lives.
Political and economic uncertainty is gradually replacing the bliss of steadily rising markets we saw in 2017. Suddenly we are seeing 500 point swings in the markets, which is never a good sign.
That being said, most of us still want to have a fishing pole in the water, growing a part of our money, while keeping our feet firmly on the ground with safe assets. All of us as investors want our money working for us at all times, with a balanced approach to risk and reward.
Therefore it is normal and natural to seek an optimal balance between risk and return as you decide where and how to allocate money.
In seeking less risk, investors can get themselves in trouble by running to investments they PERCEIVE will be safer than others, but in reality are not safer. This happens, for example, with mutual funds and Morningstar ratings. Morningstar ratings do not protect anyone from the risk of the market falling. You can lose half your money in a five star fund during a market crash–and many people have.
The most important thing you can do to avoid retirement-killing losses is to keep the right amount of money sequestered AWAY– and protected FROM– market declines. The older you get, a corresponding amount of your money should be invested in safe money places, which have no exposure to direct market declines.
Yes, you still want to grow your money for the future, but you want to weather oncoming storms. And, we could be heading for a doozy of a storm if things turn the wrong way. You want your fiscal house to be the one that is still standing after a hurricane.
In other words, your important money for retirement should be kept out of harm’s way, yet still doing hard work to advance your plan.
This can be done with a simple bucket plan where you separate income capital from growth capital.
Trying to keep your money safe with mutual funds in the face of a market crash is not prudent. There is no structure or foundation in a mutual fund. ALL of your money is at risk 24/7. As you move to and through retirement, you need an increasing allocation to assets WITH a foundation, guaranteed against loss, but which can deliver the goods on competitive income.
In the real world, most people simply don’t believe they are lucky enough to win the big strike and make a killing with a small investment. In the real world, study after study has shown that investors are more concerned about experiencing a potential loss than getting an unexpectedly good return.
Therefore, the majority of investors, it has been found, are willing to sacrifice some of their EXPECTED return in exchange for safety and certainty. Allocating a growing percentage of your savings to safe, secure income producing assets makes a lot of financial sense.
Will Rogers said it best: he was more interested in a return OF his money than ON his money. When the market gets shaky and you are in or near retirement, your emotions can swing wildly. We all know that is when we are at our worst when it comes to decision-making. Managing by crisis is a sure way to see your money dwindle.
What I have found in my practices is that reasonable people–who have worked and sacrificed for the money they have– are motivated NOT by pie-in-the-sky, but by the prospect of sound growth, easy liquidity, and rock solid income. Sure, they’d love to make a killing on their investments, but they know that where-ever a killing can be made, the risk is high, and the “killing” can go the other direction.
Because we all desire more certainty, and better financial outcomes, we don’t invest every penny we have in any one asset or idea. Some of our money goes toward insurance, where we really don’t expect to “make” money, but to keep from losing it. We buy insurance on the most important aspects of our lives. That’s why we buy homeowners insurance, car insurance, and health insurance. Insurance isn’t an investment in the market, it is an investment in peace of mind.
Properly selected annuities for example, or a form of income and principal insurance, combined with an investment component. That is why they are so popular in this shaky financial environment. Annuities provide protection from all financial storms. But we can’t allocate all of our money there.
So, how do you put a plan together to weather any financial storm?
To Find Clarity In Your Financial Plan With Smarter Bucket Planning.
Take these simple steps:
-Separate your income capital from your growth capital
-Allocate your retirement savings into carefully measured pre-determined buckets.
-Allocate a healthy amount of funds to pure liquid assets in bucket 1
-Use the highest paying secure assets for your income in bucket 2
-Use high quality dividends, reinvested to mathematically accumulate more shares of profitable companies in bucket 3
-Acquire sufficient insurance for non-negotiable outcomes in bucket 4
-Stop trying to time markets.
-Stop worrying about running out of money & income.
The IQ Wealth Planning Philosophy can be summed up like this:
Insure your income, insure your outcomes, invest the rest with purpose.®
For help with putting together a Smart Financial Bucketing Plan, you can reach me here:
Steve Jurich is a financial advisor in Scottsdale, Arizona. His radio program “MASTERING MONEY” can be heard monday through friday from 8am to 9am on Money Radio, AM 1510. Podcasts are available on your app store and on i Tunes. Simply type in Mastering Money