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The Right Mindset for Growth

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There are simple rules to follow to prime your financial engine for more effective growth. Following these can be difficult for some, but these general rules all offer benefits. It is not enough to only prime your finances for growth though – you must also prepare and adapt your mindset and view of the world to weather the uncertainty of the market.

These are some common mental pitfalls that can torpedo your investment strategy and impede your financial wellness:

Nine Negative Investing Behaviors

  • Loss Aversion: We feel loss more deeply than the happiness that comes from gains. Avoiding loss can cause you to hold on too long to a failing investment, have unrealistic expectations of low-risk investment returns, and make poor stock selections based on these expectations. It hurts, but you have to know this: some volatility and loss is to be expected in any financial model.
  • Narrow Framing: When you make decisions without considering all possible implications. Narrow framing leads to market bubbles and bad investments based on hype and chasing growth that has already occurred. This can have impacts far beyond individual investors, as in the dot-com and housing bubbles of the 2000s.
  • Mental Accounting: Not tracking your finances on paper can lead to varying levels of due diligence and planning. Arbitrary categorization can work against your goals, like impulse-spending your tax refund or bonus.
  • Diversification: Diversification should be used as a whole across your portfolios, and be evaluated based on overall risk, rather than industry sector. Many investors chase risky profits across many industries and consider themselves “diversified.”
  • Herding: It’s easy to follow the crowd and this can play off our tendency toward confirmation bias. There’s comfort here, but remember how many people lost their shirts in following the crowd on recent bubble bursts.
  • Regret Aversion: We experience much more mental pain when we commit an error than when we miss on an opportunity due to inaction. This causes investors to sell too early to lock in on profits, missing out on larger gains later. Some may hold their positions too long, hoping for an upswing to erase their standing losses that grow each day.
  • Media Response: Don’t be too eager to buy into what talking heads are selling you – confirmation bias can be deceiving. Failing to examine potential negative impacts or researching alternative information sources can lead to narrow thinking and narrow investing that can net big losses.  
  • Overconfidence: Nobody can constantly beat the market. Even investing “gurus” take consistent losses in their financial models. If you don’t plan to roll with the punches and absorb volatility, your financial model will quickly be broken and you could wind up broke.
  • Anchoring: Our previous experiences inform our outlook, worldview, and plans for tackling the future. Even if they don’t apply. These informational anchors can hold you down if you fail to recognize them for what they are and move beyond this frame of reference.

These negative behaviors can cause you to abandon key points of your financial model and sound investment strategy. Remember, it’s all about time in the market, not timing the market. If you want to grow your wealth you need to face some intellectual discomfort to recognize and overcome these negative behavioral impulses in yourself.

Your Investment Policy Statement

A powerful way to overcome these negative tendencies in yourself is to draft a personal Investment Policy Statement. Much like a personal manifesto or a company’s mission statement, this is meant to help you unify behind a vision guiding your investment strategy toward your financial goals. Some areas to consider including are:

  • Purpose: What is your purpose and goal for your IPS?
  • Values: What values guide your life and decisions? How do you want your investment decisions to support these?
  • Objectives: What do you want to achieve through your investments? What timeline, risk tolerance, and performance objectives figure into those goals?
  • Duties: What role does everyone on your investment team play? What is your involvement? What expectations do you have for yourself and the rest of your team?
  • Portfolio selection: What investments (based on your previous statements) will comprise your portfolio? Laying out a complete picture here can be a powerful evaluative tool.
  • Performance: How do you select your investments and what standards must they meet in order to remain as a holding or purchase goal? Base these decisions on your statements and objective facts.
  • Costs: Any costs associated with managing your portfolio should be 100% transparent.
  • Review: How often will your portfolio and IPS be reviewed? We recommend at least annually. Make sure that as your life changes you update your strategies to fit your future needs.

With the right mindset and a clear investment policy guiding your financial model, you can hack your future and grow your wealth more effectively. These are real steps towards true financial freedom, of being able to rely on your own wealth for your future. Want to figure out the path forward together? Contact us to schedule a consultation.

The Rules of Financial Balancing

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Achieving financial balance is no easy feat, but it provides countless benefits to your life in personal finance and beyond. Following the rules of financial balancing helps reduce your reliance on your paycheck and removes the fear and uncertainty that comes with living in debt or living hand to mouth.

Follow these basic rules to help get your financial house in order and start moving towards true financial freedom:

Maximum Protection

As discussed in our series on protecting your wealth and risk management, it is not enough to only protect your current possessions and investments. You must protect your full economic value- including future earnings- to achieve maximum protection. You can find a more in depth guide to achieving this in our previous posts, but building this safety around your income, investments, property, and life will help to protect yourself and your loved ones in case of a terrible tragedy. It may seem daunting at first, but the diligence needed to protect yourself and future is as important as the rest of these rules.

Annual Savings

What percentage of your income are you saving? We recommend that you save and invest 15% of your income annually. This may seem like a large number, but it is essential to achieving your full economic potential. If something is standing in your way of completing this goal, you must figure out how to break down that barrier – without this amount of liquidity and cash reserves, you put your family and future at a greater risk of financial catastrophe or failure. If you’ve struggled with debts, you can recapture those losses with the right financial model after you’ve eliminated that dead weight from your financial life.

Short Term Liquidity

You should always have 3-6 months of cash reserves on hand – this means enough cash to cover ALL of your expenses for that span of time, in case of a job loss or emergency. It is also smart to have 6-12 months of near cash in reserves held in an investment such as short-term bonds that are easily accessible. This cushion provides many benefits, including increasing your insurance deductibles to lower your premiums, freeing up more cash for investing and savings. These reserves give you peace of mind and the ability to navigate short term troubles without the added stress and worry of taking on debts.

A Balanced View of 401(K)s

Your 401(K) is a powerful tool for retirement. But it’s not an investment that you have easy access to. Taking loans against your 401(K) before retirement can cause major harm to your liquidity by robbing Peter to pay Paul. Early withdrawal is not any better, as you suffer an additional 10% penalty taxed as income, typically requiring you to pay taxes owed to the government. Even if you are just investing, your 401(K) can have limited options for investment selection, you can lose your employer match, and you typically pay for more expensive funds than in other similar accounts.

None of this is to say 401(k)s are bad. If your company offers one along with a company match, you should at least participate until you achieve the match, but only if you have achieved your short-term liquidity. This can be a complex balance to achieve and is an issue you should discuss in-depth with your trusted personal financial advisor.

Short Term Debt

Your short term debt should be zero. Carrying debts can wipe out your future profits as interest accrues and gains momentum. The two most common forms of short term debt that people carry are auto loans and credit card debt. You shouldn’t consider your car as an investment because it depreciates rapidly. A brand new car loses 50% of its value after the first three years on average. If you know how to shop smart, a used car that is 25% cheaper can be driven for years and preserve more of its value as an asset. Always use your debt intelligently!

Credit card debt can be one of the most crippling things for your financial life. An average interest rate of 15% means you pay $0.15 for every dollar you don’t pay off each year. As that accelerates, it can quickly grow out of control and destroy your financial life. If you can’t pay cash for something, you probably cannot afford it. Credit cards should be avoided, but held for cases of extreme emergencies or very special circumstances.

You may need to slow down other aspects of your financial life and even explore debt restructuring to achieve your target liquidity – this safety net is the most important part of your financial life. It’s crucial to follow these rules of balance in this order to move in a direction of health, stress reductions, happiness, and the best opportunity for financial growth.

Ready to get a complete picture of your financial health? Complete this questionnaire to get started with one of our advisors.

How Volatility Affects Investment Success

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You don’t have to be a financial planner or analyst to know that the stock market ebbs and flows. But it would be wise to know why this phenomenon, known as volatility, happens and what it means for your investment success.

Let’s start with the basics.

What is Volatility?

As a measure of risk (uncertainty of loss), volatility refers to the amount of fluctuation in returns, and is typically stated as standard deviation. Rapid fluctuations in a short period of time mean high volatility, which is often caused by economic, corporate, and political changes.

Why Volatility Matters

Not to be ignored or considered par for the course, volatility has real impacts on your investments. How? Volatility diminishes compounded returns over time. As volatility increases, a portfolio’s compound returns (which is the money you eventually get) decrease. And this gets riskier and riskier the closer you are to retirement, as your portfolio has less time to bounce back. This could mean retirement delays if you don’t act quickly.

How to Minimize Volatility Risk

Diversification, or having a wide variety of investments within a portfolio, is often seen as a way to minimize volatility risk. The idea being that the good investment performance can balance the bad. But this doesn’t always work as intended. When it comes to minimizing volatility risk, you must think back to what affects volatility – often economic, corporate, or political uncertainty. And in these times of uncertainty, markets that may seem unrelated tend to act the same. Thus your diversification fails to protect your investments when needed most.

Debt funds are less prone to volatility than equity. However, there is a choice to make between short-term versus long-term debt, or income funds and dynamic bond funds, respectively. While dynamic bond funds can produce bigger wins, short-term debt offers a steadier return on investment with lower risk. Sometimes slow and steady wins the race, especially when you consider compounding returns.

Long-Term Investment Planning

Just because an average stock return is a certain percent doesn’t mean you will immediately realize that return. In fact, actual returns tend to fluctuate significantly higher and lower than the average. This is why it’s important to plan with the long-term average in mind. The long-term outlook allows good years to outweigh and balance the bad, eventually achieving the averages. However, reducing risks and volatility will be an important factor in reaching that long-term average and increasing the consistency of investment returns, which requires smart investment planning.

At JarredBunch, we support the use of financial models as the foundation for your investing strategy to help manage risks while capturing opportunities. This goes beyond traditional financial planning and portfolio management to provide a larger picture of a client’s financial life and needs. Our models help clients make smarter investment choices that reduce volatility risk, ultimately putting your investments to work for you – the way it should be.

Ready to take the next step? Drop us a line if you have questions or want help reaching your full financial potential.

What Will Your Financial Legacy Be?

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So much literature surrounding financial health is focused on the grind of building balances, eliminating debt, and taking advantage of favorable markets. When is the last time you stopped to ask yourself “What does my eventual retirement mean for future generations?” Chances are it isn’t an idea that comes up very often, meaning you’re likely neglecting the key beneficiaries of your wealth planning.

The legacy you leave behind stretches far beyond your work history, your loved ones, and cherished memories. How you prepare for your retirement, health care, and financial needs can mean the difference between boon and burden for your children and loved ones. Studies increasingly show the reality of inter-generational poverty- the financial state that you leave behind is now more important than ever.

Your Family Legacy

Thinking of death is not a comfortable thing, but it is important as you plan for your eventual retirement. Proper budgeting and planning can keep you independent and avoid putting burdens of time, emotion, and finances spent on medical care for you. A medical emergency can incur tens of thousands of dollars of debt. Leaving that burden for your children can impact their own futures and those of their children.

A financial burden like healthcare debts can also further complicate the painful emotions of saying goodbye by introducing regret and resentment. Planning your finances properly and commiting to a healthy, preventative lifestyle can preserve your retirement and their financial futures, paving the path for prosperity and plenty of happy memories.

Your Legacy of Giving

What charities, causes, or organizations matter most to you? Charitable giving is incredibly important in life, but the proper financial plan can provide for you to make a substantial contribution after your death. This generous action can put a stamp on your values and beliefs that guided your life, and help improve lives and communities long after you are gone.

The Lessons We Teach

Most importantly, your financial status in death serves as a testament to your life. No matter your age, your children will still learn from you. Creating a positive legacy in this way can pass down important lessons of dignity, preparedness, self-reliance, and the positive impacts of a giving spirit to your children and grandchildren.

Saving at least 15% of your salary is a good start on your way to reaching this goal. Truly hacking your future, though, requires some more insight and planning. Contact us today for help making the best future we can together.

Protecting Your Wealth – A Balanced Financial Life

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As we conclude our series on protecting your wealth and financial well-being, we are taking a deep dive into the importance of balancing your financial life. In order to protect your hard-earned wealth, it’s not enough to rely on risk management and a good insurance mix: you must balance your financial life entirely.

One of the most important aspects of financial balance is determining your lifestyle burn rate. Any financial choice you make that has the potential to incur debt should not remove your ability to remain in financial balance. You should still be able to save 15% – 20% of your income and maintain your core liquidity (3-6 months of income in cash, 6-12 months of income in near-cash reserves.) Those new debt payments must fit in as part of your lifestyle. If a decision you make negatively impacts your ability to maintain one of those things you are out of financial balance and the payment exceeds your lifestyle budget.

Other key guiding principles for maintaining your financial balance include:

Property and Casualty Insurance

These are important for covering the replacement value of your assets. You also want to ensure that your assets are protected if you are found to be at fault in a major accident. Do you know what amount your are responsible for versus your insurance’s responsibility? Review your policies and make sure that you can cover the terms within. If not, it’s time to shop around for a new policy with a premium and deductible tolerable for you.

Savings

You should actively be saving 15-20% of your gross income annually. Any less than this can mean missing out on millions over the course of your lifetime. You should have this amount spread across an emergency fund, liquid savings, investments, and retirement funds, each with their own financial model and game plan guiding them.

Short-Term Debt and Short-Term Capital

Any short-term debts you take on should fit into your balanced lifestyle burn rate. Zero short-term debt is preferable, but you should rebalance your lifestyle plan if short-term debts are necessary. You should also have 6 to 12 months of expenses in liquid or near-liquid assets in case of emergency or disability. Doing so will cover you in case of unexpected gaps in pay or other unforeseen emergencies.

Mortgage Size

Are you the type of person who wants the biggest, nicest home on the block? If so, make sure that your mortgage fits into your lifestyle. A good rule of thumb is that your mortgage payments should not be bigger than 15% of your gross income.

Prematurely Funding 401K

While 15% to 20% of your gross income should be saved annually, you should avoid pumping too much into your 401K and other qualified retirement accounts. These funds are effectively locked away and carry stiff penalties for taking early distributions. You should never have more of your money out of your control than in it.

Net Income

Are you living a budgeted lifestyle? Or are you lying to yourself about cash flow challenges? Saving religiously and spending the rest on your lifestyle is the first step towards balancing your finances. Be honest with yourself about where your money is and show the discipline to live within your means.

Want to get a clearer picture about balancing your financial life? Complete this questionnaire to get started with us.

Protecting Your Wealth – Death and Income Loss

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In continuing our series exploring more ways to protect your wealth, we’re taking an in-depth look at a sometimes uncomfortable subject: death and disability. These are always tragic outcomes, but the potential impacts of those can be mitigated through some careful planning and risk management.

As we’ve already discussed, taking an honest look at what a devastating loss would look like for your family and determining what coverage is most effective is essential. Doing so will help you make sure your family is taken care of in case of a tragedy.

Financial Impacts of Death and Disability

If you were to die today, what would your full economic value be? If you earn $75,000 annually at age 45, your minimum income earned until a retirement age of 67 would be $1,650,000. That is the amount of money your spouse and children would be missing out on. While many say you should ensure at a rate that will pay off debts alone, covering your full economic impact will better protect your family’s future. If you account for inflation, raises, bonuses, investments, and more, that amount needed can grow to as much as $3,000,000. Determining your full economic value can be a powerful tool in deciding what amount of insurance you need.

Term Life Insurance

Term life insurance is the simplest and cheapest option to buy. A general rule that is frequently repeated is “buy term and invest the difference.” If you are disciplined or working on a tight budget, this solution can be a powerful one. The trade off is that there is no benefit to term life unless you pass away. If you stop paying your premium, the coverage lapses as well. Some tips for buying term life insurance include:

  • Select level term so that your payments don’t creep up and decrease the affordability years from now.
  • Explore a convertible policy in case you want other options in the future
  • Understand that your protection only lasts for the time period you select and you will need a replacement strategy after it expires

Whole Life Insurance

Whole life insurance, also known as permanent life insurance, is another option. This policy has a guaranteed death benefit as well as a cash value that builds over time. You can pay a loan to yourself by accessing the cash value of this policy, accelerate death benefits if you become terminally ill, and even receive chronic illness benefits. These are often included as “riders” that you need to research and ask about to ensue they are included. As a trade-off, whole life is generally more expensive than term life insurance, so we recommend our clients to do a blend of both to keep costs manageable and receive excellent coverage and benefits. Some tips for buying whole life insurance include:

  • Buy from a  reputable mutual company
  • Make sure your policy has a guaranteed cash value growth
  • Make sure your policy has a guaranteed dividend rate (included in most policies)
  • Project what would happen if you change your premium, such as stopping payment when you retire to preserve your income

Disability Insurance

Should you experience an injury that causes your permanent disability, you may never be able to work again. If you are lucky, you will be able to find a workable solution in another industry, but it may not pay as well as your current one. In either case, you need to ensure your current income is protected with adequate disability insurance.

>Many companies offer disability insurance as a company benefit. Make sure that you understand the total amount of coverage. This way you can determine what coverage you need as a secondary policy. The goal is to replace as much of your income as possibility. Some tips for buying disability insurance include:

  • Make sure it has its own occupation coverage, which protects your income if you cannot work in your current role but can still work. (Think of a surgeon who injures their hands but can still work as a hospital administrator.)
  • Ideally, you will be the policy owner so you can transfer it outside of your current employer without it expiring.
  • Evaluate the elimination periods, the period of time before your policy starts paying a benefit. Extending your elimination can lower premiums, but you need to have a cash reserve or other solution in place to cover this time.

Determining what is right for you can be a daunting task. Plus, there are plenty of insurance salespeople out there trying to muddy the waters and sell you a confusing product. Understanding these basics will help, and we’re here to help you make sense of them. Give us a call or email for a quick conversation to see what’s right for you.