Published by Scott Danek
This year has been one of those years when it seems like almost daily you hear about the ‘stocks at an all-time high’. While this kind of year is usually more ‘fun’ for investors, it should lead to three important financial planning considerations.
Do you have any idea just how much risk is embedded in your portfolio right now?
If instead of ‘stocks at an all-time high’ you turn on the TV and learn of stocks being down 20%, do you have any idea what to expect your overall portfolio to go down as well?
Failing to identify the risk embedded in your portfolio could cause you to lose more money than you’re comfortable or more importantly what you can afford to lose. This is especially critical if you’re in or within 5-10 years of retirement or actually in retirement. Many failed to understand this in 2006 and 2007 and were forced to either come out of retirement or not retire when they had planned when ‘stocks at an all-time high’ fell precipitously at that time.
Do you have your money ‘bucketed’?
This means do you have certain money/accounts/funds that aren’t likely to go down either much or at all the next time ‘stocks at an all-time high’ experience large losses? Dollar-cost-averaging (buying variable priced assets with a fixed contribution) is what you likely did when you were accumulating your investments, especially in your retirement accounts at work. Unfortunately, dollar-cost-averaging is also brutally efficient in reverse, meaning when you’re selling/distributing regularly and that account experiences a steep and especially prolonged decline in value.
Absent this understanding, and the proactive advice you need during the critical distribution phase of life, the next large sell-off in the market could cause you to invade principal and significantly increase the chances of running out of money in retirement. As idyllic as bouncing your last check on your last breath sounds, you don’t want that to be in your 60’s or 70’s when you realize you HAVE to go back to work. . .
Have you identified what your required rate of return, or Family Index Number, is?
This is the rate of return that over the course of your remaining years/decades your portfolio needs to earn on an average, annual, net basis to keep your lifestyle and cash flow where you want it to be. The reason this is important with ‘stocks at an all-time high’ is because it can help with determining if taking and keeping more risk embedded in your portfolio is necessary. All things equal, the higher the Family Index Number the more risk probably should be embedded in your portfolio in an attempt to generate a higher average required rate of return. If you’d like to learn more about the Family Index Number, download our free guide.
Interestingly, the higher the risk the greater the swings in value will be in your portfolio and therefore the more important the ‘bucketing’ strategy is. This illustrates how understanding one or two of these concepts within your portfolio still could lead you to be at risk at a time with ‘stocks at an all-time high’.
As you can see there are a number of very important considerations when we’
This year has been one of those years when it seems like almost daily you hear about the ‘stocks at an all-time high’. While this kind of year is usually more ‘fun’ for investors, it should lead to three important financial planning considerations.
re at or near a period with ‘stocks at an all-time high’. Fortunately, the proper planning and guidance is available, so if you’d like to explore your portfolio and planning as related to these concepts please let us know.
An excellent way to start the conversation is by completing the Risk Survey which should only take a few minutes. Just be sure to complete the ‘Get Started’ information at the end so we can contact you to discuss your results.