I am going to tell you something right now that will not surprise anyone reading this: We are going through incredibly uncertain times. We are in the middle of the most unpredictable economy we have experienced since the Great Depression. Over the past 12 years we’ve been through some pretty scary stuff from the dot com bust, terrorist attacks, a housing crunch, a Euro-zone collapse, and a downgrade to the United States’ credit. I will be the first to admit that I am not telling you anything you don’t already know. With that said, I would like to ask this question: What have you done to guard yourself from the next financial storm? Whether it’s the unrest in the Middle East, hyperinflation, a double dip recession, the bond bubble, another rating downgrade, etc.; Do I need to go on?
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In the world of investing there are two types of investors: the informed and the uninformed. Take a guess at who is in a better position to weather the next peril that lies ahead. This is accomplished by a very basic planning technique we implement when building our clients’ Financial Houses.
I would assume that many readers of this article have, at some point, built their own physical house—not with your own two hands but with the assistance of a professional. I have received mixed reactions about the process itself. Some find it a trying and tedious process while others find the experience to be exhilarating and new. Regardless, the underlying common denominator to a successful build is having a proper plan in place before any ground breaking occurs.
Unfortunately, I find that many people have built a very basic but glorified teepee. All roof with no foundation to sit on and no walls to tie the two together. In our working years it is necessary and natural to assume more risk in our portfolios. To better understand this, let me breakdown the three essential structural elements of a properly built Financial House.
Common sense tells us that the necessary starting point when building a house, physical or metaphorical, is the foundation. For retirees, the foundation is undeniably the most important part of the Financial House. We absolutely cannot start building out the walls or roof without a proper foundation. The foundation is meant to provide stability, strength, protection, and most importantly a base on which to assemble the more visible (exposed) portions of your house. Foundational assets portray these same qualities. We know that no matter what financial perils lay ahead, the assets you have positioned in your foundation will still be there. Think back to the first pictures and video taken by the Red Cross helicopters after Japan was struck by the tsunami. When the waters receded, what was the only visible indicator of civilization? That’s right. We were able to make out the areas where people once inhabited because of the foundations of houses that were left behind. The key here is, when faced with the perfect storm, you do not want your entire portfolio exposed to the elements capable of tearing down the house you worked so long and hard to build. Another component to keep in mind is the varying levels of foundation. Some houses sit on a cement slab (basic) while others enjoy the benefits of a crawl space or even a basement (functional). When building your foundation, you want to consider making it as functional as possible. This will allow you to maintain the structural integrity and protection of your assets while at the same time permitting upside potential.
Wall assets are going to be stable in nature and are designed to provide a pedestal to secure the roof. Walls are where we incorporate income-producing, inflation-protected, real assets. I’m sure you would agree both income production and inflation protection are essential when planning for retirement. Historically, advisors have used bonds to build out the walls of their clients’ financial houses. In today’s interest rate environment, bonds are like Chinese drywall. If you recall, back in 2001 the US started importing drywall from China that was later found to contain harmful chemicals leaving homeowners sick. Do not build your walls with Chinese drywall! Alternatives we consider still kick off a regular monthly dividend capable of reinvestment or withdrawal as income. The key difference here is the underlying assets have the ability to rise in value when inflation inevitably comes down the pipe as opposed to being washed away. We can hear the train coming. Do not wait until it’s too late to get off the tracks.
Roof assets are going to be the riskiest positions/investments you own. Stocks, mutual funds, and variable annuities are all examples of assets we would classify as roof-based. Consider each position as a shingle. One thing we know about roofs is the fact that they take the brunt of the beating every time we experience a financial hailstorm, tsunami, or tornado. On the flip side, you can experience significant gains in a positive market. With this said, it is necessary to take a certain amount of risk inside your portfolio but you have to make sure it is smart and calculated. The thing to keep in mind here is, just as you would with your physical house, you occasionally have to replace a couple shingles and sometimes an entire new roof is needed. At our office we utilize the services of a money manager with the ability to position assets in or out of your roof on a daily basis. This allows us to advise on a proactive basis instead of reacting to our volatile markets, which, as we all know, is too late. Anytime you consider a money manager, always consider fees, expenses, and exactly how your money is being invested in order to intelligently decide which “roofer” you employ. The news hasn’t always been positive in years past. This is what we have come to know and love about the investing world we live in. This is a very important time to have a proper financial plan in place. Make sure your Financial House is structured in a manner to truly provide the protection you need to weather the next storm. The clouds are ominous. The winds are gusting. The radar is red. Your financial security is in your hands. Let this be the siren to jump-start your efforts in building your Storm-Proof Financial House.
Andrew Greer focuses on retirement planning at Hobart Financial Group in Charlotte, North Carolina. He is a licensed insurance agent and a registered representative with Global Financial Investment Services, LLC. Andrew is series 65 and series 7 licensed allowing him to work with clients in the area of portfolio management and retirement planning. To reach Andrew, contact him at (704) 553-0123 or firstname.lastname@example.org
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