In these days of market volatility and high emotions, I’d like to contribute a little financial wisdom to the discussion. To wit:
Buy low and sell high.
Amazing how many people do exactly the opposite. Say we’ve spent quite a bit of time ascertaining your risk tolerance. We go through the Riskalyze software exercise, and you score into an allocation that should, over the next 6 months, produce returns in the range of -8% to +16%. You agree that an 8% drop wouldn’t bother you. You could still sleep at night, knowing that markets are cyclical, and the long term trend is always up. We subsequently invest you appropriately. Yet, during a market correction, you call all worried about China and the price of oil and Puerto Rican bonds and the Brazilian recession, and instruct me to sell you out.
What happened here? Either you replied untruthfully to the questions the software program uses, or you let emotions cloud your judgment. Studies show that as much as 90% of portfolio returns can be explained by investor behavior. Resisting the temptation to sell low – when markets are falling and you fear all sorts of awful things – takes discipline. Best to keep a cash position for times like these, when buying opportunities abound.
The only two sure things in life are death and taxes.
This from Benjamin Franklin. Our job here is to prepare you for both.
On the subject of taxes, it isn’t so much what you earn that matters, but what you get to keep, after Uncle Sam takes his haircut. Consider these small facts: buying something because a generous rebate is offered is a great way to turn after-tax dollars back into taxable. Yes, that $100 Chase gave you for opening a checking account is taxable income. Getting a big IRS refund is to have the federal government pay you back the amount you loaned it, at 0% interest. When considering the total costs of homeownership (mortgage, real estate taxes, insurance, maintenance), based on the current tax code (2017), even if you’re out of pocket more than a rent would cost you, you could still come out with an even cash flow due to increased tax savings.
On the subject of death, since you can’t take it with you, you can decide what should happen when you leave it behind. There is no right or wrong solution here – just preferences. But your preferences can be carried out with wisdom. If you leave your house to your three children you’ve just set up a fight between siblings. If you’ve promised the family silver to your son, since it has his initial, but haven’t put that fact in writing, that silver may end up being sold to satisfy estate obligations. The point is: the two sure things in life – death and taxes – are upon us all daily. With forethought and wisdom we should anticipate and plan for the inevitable.
The way you actually spend your time is your priority.
Here’s an example. If I’ve blocked out two hours on my calendar to answer email, but I end up using the time to complete a different project, it is self-evident, then, that the different project is my actual priority for those two hours. Good, bad, or indifferent, that’s the way it turned out to be.
What’s are the implications for financial planning? Say we’ve worked together on your budget. In order to save $500/month in an IRA, you’ll have to cut back on restaurant meals. That is my recommendation, and you agree to it. You realize the importance of saving. Yet when we subsequently meet, there has been no savings accomplished. What was your priority? Eating out. Good, bad, or indifferent, we live with our choices. In this case you the client sacrificed long term financial stability for short term pleasure.
I hope I’ve given you a little food for thought here. If you have any questions, by all means get in touch: [email protected]. Visit the CameronDowning website, where you’ll see all of our blog entries and be able to book an appointment to come see us.