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Protecting Your Wealth: Risk Management

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When building your wealth management plan, much of the focus is on how to generate wealth, how to ensure you have enough savings for retirement, and how to optimize your returns and strategies in anticipation of your future needs. With such a focus on increasing your pool of funds and the direct risks posed by fluctuating markets and other factors, it can be easy to overlook risks everyday life can present to your finances. While they may not be a market force you can track in charts and dashboards, the potential impact of these other risks cannot be understated.

So- as in all financial risks- what’s a savvy investor to do?

Manage them appropriately.

Common key considerations of financial risk management include:

Auto Insurance

Do you know your deductible for repairs? Do you know the caps on your auto insurance coverage? When is the last time you reviewed what protection you were receiving in exchange for your hard-earned dollars? Take the time to review your policy and shop around – odds are you can get similar coverage or an improved rate from another vendor or by contacting your insurance agent.

Consider raising your deductible to reduce your premiums so you can invest the difference. You should also explore options for adding uninsured motorist coverage, so you won’t be left in the cold if an uninsured driver totals your car.

Homeowner’s Insurance

Do you have the full replacement value of your home? What extra coverage do you need? Is your sump pump covered? What about water damage? There’s a large difference in coverage and premiums between water damage and flood protection – you should make sure you understand that and have the coverage you need before your basement starts turning into a swimming pool.

As with auto insurance, explore ways to lower your premium so you can invest the difference. That liquidity can be key in setting yourself up for success and having a large enough emergency fund to help cover the unexpected.

Umbrella Policies

Whether you have renter’s insurance or homeowner’s, you should consult your insurance agent to add an umbrella policy. These add-ons to your larger policies cover additional items such as injury, personal assets, and more to extend coverage in case of a disaster. These largely affordable policies can lower the amount of money that you would be responsible for in case of an injury incurred on your property or other incidents.

Long Term Disability Coverage

Disability protections help replace your income in case of a catastrophic injury or disability that keeps you from working for an extended period of time.You should consider purchasing your full economic value in disability protection. The added premiums are worth the peace of mind knowing that your income and your family’s well-being will be protected should something happen to you. Explore what coverage is offered by your employer and look for opportunities to supplement that amount to help lower your premiums.

You should also explore extending your elimination period, or the period of time before benefits take effect, to lower your premium. Only do this if you have the liquid assets to cover more than 90 days without income. The elimination period is effectively your deductible for disability policies and you should explore its potential impacts similarly.

Other spaces you should review your risk and determine if your current strategy is optimized include life insurance, wills and estate planning, living wills, and more. We’ll take a deeper dive into those complex and emotionally-charged topics in a later post.

Need help understanding what coverage is appropriate for your economic needs? Complete our questionnaire to help us better understand your economic situation, and we’ll help you manage your risks together.

Threats to Investment Success: Three Steps Toward the Right Path

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In our conclusion to our series concerning major threats to your investment success, we’ll discuss key ways you can get your finances moving in a positive direction. For the full experience, catch up with our posts exploring sequence of returns risk and longevity risk and what they mean for your financial future.

As we’ve highlighted, your money can be negatively impacted by negative runs on the market. Outliving your returns is also a huge concern for those nearing retirement. The problem is that so many people do not consider these risks in planning for retirement. In all things, failing to prepare means preparing to fail. You should reassess your financial strategies and ensure you are following these three strategies to adequately prepare for retirement.

Implement a Financial Model

The first step to preparing for retirement is ensuring that your strategy is designed for success in any anticipated market environment. Determining the right mix, volatility risk, exposure to different markets, and more can all influence the success or failure of your investing plan. Strategizing these aspects can help you avoid devastating market volatility that can increase your sequence of returns risk, while still providing effective upside capitalization to grow your money at an effective and sustainable rate. This can be a difficult process and one that requires expert consultation to determine what strategy will work best for you.

Overcome Threats

As we’ve highlighted, sequence of returns risk and and longevity risk can be devastating to the financial stability of your retirement. Longer survival rates expose you to more opportunities for sequence of returns risk to take hold. A strong investment plan acknowledges these risks and plans accordingly for them, evolving alongside your needs and a shifting marketplace. Whether that means preserving capital or investing further in high-return opportunities is up for you and your future hacker to determine.

Eliminate Emotional Biases

The biggest threat to the success of your retirement is you. Emotionally-charged decision-making is a very real problem that can sap your investments of their momentum and lead to catastrophe down the road. Systematizing your investment through implementing automation and a strong financial model will limit the risk of you getting in your own way due to cryptocurrency “fear of missing out” (FOMO) or chasing returns that have already come and gone. In investing, there’s a lot at stake – that’s why you must proceed with a clear mind.

Ready to learn what you ideal financial model of retirement investing is? Contact us today to schedule a consultation to learn how we can hack your future together.

Threats to Investment Success: Longevity Risk

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In continuing our series on threats to your retirement investment success, we’re taking a deep dive into why a long life can cause problems for your financial future. Most people want to live a long and healthy life and survive long enough to thrive in and enjoy retirement. But, increasingly long lives pose a threat to retirement known as longevity risk. The issue itself is not the length of your life, but the additional risks your financial well-being is exposed to each additional year can contribute to a financial catastrophe. Shifting market returns, inflation, increased housing or medical costs, and other factors outside of your control can compound annually and diminish your retirement fund’s efficacy.

Why a long life increases retirement risks

When building your retirement income plan, running out of money is usually a primary concern. When your income is determined by assets and requires regular withdrawals, managing your plans can be incredibly difficult – unforeseen problems can mean the difference between future prosperity and survival. Ideally, you finance your retirement based on the interest your gain from assets, but selling the principal assets to cover unexpected costs can cause greater issues in the future.

So what’s a retiree to do? Many advisors counsel conservative investment strategies to reduce your risk of negative returns, but this can limit potential growth as well. Reduced growth means a higher likelihood of selling your principal investments. Either solution can mean reduced withdrawals in the future and a lower standard of living that can lead to a downward spiral in your financial and physical life.

How to manage longevity risk

As with sequence of returns risk, traditional portfolio management principles fail to address all the risks and possible outcomes of investment strategies. Even with an average return of 7%, you cannot count on that solving your challenges due to sequence of returns risk. Failing to plan for negative eventualities will only more pain and struggle in the long run.

The solution is an investment strategy based on financial models and sound strategies to reduce your risk exposure while still capturing upside returns. We like Warren Buffett rules to finances:

Rule #1: Don’t lose money

Rule #2: See rule #1

A large part of making these strategies a reality requires removing emotion from investment management. Making decisions based on fear, reactionary selling, FOMO, and more can reduce your return (as well as your principal) and keep you from thriving in retirement, rather than just surviving.

Our approach to managing retirement accounts has a proven track record of success. Want to learn how we can help you achieve investment success through our holistic approach to financial models? Complete our questionnaire to get a picture of what we can do for you.

Threats to Investment Success: Sequence of Returns Risk

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One of the hardest truths to accept in life is that you can lose even if you make no mistakes. This is even more devastating if it affects your financial well-being and future. For those people nearing retirement or who are already retired, these challenges can literally mean the difference between a fulfilling life in retirement or constant worry. If your retirement funds run out due to a poor sequence of returns, what are you supposed to do?

What is sequence of returns risk?

It’s not just the average of your returns over time that matter, but the sequence in which they land. You can never be certain of when markets will draw down, and if they do at the start of your retirement it can be devastating. For example, a 20% drop can wipe out 30 years of gains. Even if markets recover 20%, an initial $500,000 balance would only increase back up to $480,000.

How your return sequence can impact your life

A run of bad returns can reduce the viability of you living through retirement without working, or even having the ability to retire at all. If your portfolio isn’t properly balanced, a market downturn can undo decades of hard work and sacrifice. The potential impact of this risk cannot be overstated: sequence of returns risk can undo everything you worked towards in investing in a retirement fund.

Understanding when you can and should draw from your retirement savings means understanding how the market is performing as your approach or kickoff your retirement. Drawing too early on your funds during a bear market could crash everything you’ve worked hard for, simply because you didn’t have parameters or personal rules in place to prevent you from poor timing.

Ways to protect against this risk

Market volatility is a very real thing. Overcoming this challenge is no small achievement. At JarredBunch, we champion the use of financial models as the foundation for your investing strategy, rather than traditional portfolio management theory. This helps us manage downside risks while capturing upturn opportunities.

It’s crucial to address your entire financial life including future and retirement goals. Removing emotion from the equation limits additional losses due to panicked selling and “FOMO-investing.” Remember, portfolios that practice “buy and hold” routinely outperform those who try to time the market with selling.

Want to learn more about how we manage sequence of returns risk and help you achieve your financial goals? Complete this questionnaire so we can help you make your dreams a reality.

The Biggest Threats To Your Financial Wellness: Fear and Hesitation

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You’ve made it to the end of our three-part series about the biggest threats to your financial wellness. (Wanna catch up? Check our Part One and Part Two, then come back.) If you’ve noticed a theme, it’s because the biggest threats to your finances come from within.

In this post we’ll discuss two of the most common failings people experience: fear and hesitation. If you let these internal feelings dictate how you live your life and use your finances, you’ll struggle to achieve your goals.

Financial Fears

Money is a tool. Any good tool is designed to make a person’s work easier. You have to let your money work for you to make your life and future easier and better. But uncertainty in the market and fears powered by “what if?” thinking can threaten the power of your financial strategies. Decision making based on fear is nearly as dangerous as impulsive behaviors. Fear clouds your mind and removes objectivity, turning everything into a dire situation when you need calm and collected observation skills.

Allowing fear to dictate how you utilize your personal finance is a surefire way to reduce its potential. Panicked selling during market downturns, jumping on investment fads, and other fear-motivated behaviors can result in short-term gains but long-term lessons. It’s all about time in the market, not timing the market. Combat your fear by building a strong financial strategy and standing firm in it. Your future will thank you.

Hesitation and Personal Finance

Fear and self-doubt can do more than motivate poor decisions: they can cause paralysis by analysis. If you are facing a large problem and feel overwhelmed, useful data can make it worse. The decision becomes larger than it actually is and you end up missing out on a valuable window for your decision, leading to lost opportunity cost. When it’s time to act, you won’t have time to hesitate. Do your research, consult with a trusted advisor, and act decisively. Commit to a plan and then measure the result. Even if it doesn’t go as well as you hoped, you gain useful insight for future initiatives. It can also teach you a lot about yourself, which is always valuable for your future.

Overcoming Yourself

Unfortunately, fear and doubt will always be present in your financial life in some way. You have to accept them as part of yourself and learn to use that energy when making decisions. Any time a decision has risks associated, you will have some sense of fear or doubt. If you allow your feelings to dictate your financial life you will be stuck for a longer time than you need to be. You are master of your own destiny. If that’s not empowering, we don’t know what is.

Want to figure out a bold financial strategy that works for you? Need to determine your risk tolerance? Complete this questionnaire to determine how we can help you guide your financial future.

The Biggest Threats To Your Financial Wellness: Ignorance and Impulse

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As we continue our series exploring threats to your financial wellness, we need to discuss two of the biggest issues for American personal finance: Ignorance and Impulse.

Much of the American public is uneducated about personal finance and how best to navigate the space. There’s too little training in how to teach yourself and train against your base impulses to succeed, especially as young people go through high school courses focused on STEAM skills. We’re preparing our youth to be successful professionals but we are failing to groom them for financial wellness. This can be a painful topic, as our lack of teaching the next generation can often reflect our own blind spots.

Financial Ignorance

If you’re like most Americans, your financial education primarily consisted of two lessons: how to balance a checkbook and supply/demand economics. But checkbooks are outmoded and don’t fit today’s digital landscape and supply and demand can’t be the sole guiding principles for your financial life. This unawareness is taken advantage of by predatory institutions who use confusing language to obscure the uneven nature of their business relationships. From payday loans to confusing jargon surrounding different account types, most financial vehicles work in favor of the institution rather than the individual.

So how can a person improve themselves to push back against these practices? Through education. Whether through community college courses, Udemy.com courses, retaining a personal advisor, or spending some time reading on Investopedia.com, a wealth of resources are available online.

When determining what content deserves your attention and, potentially, money, ask yourself “who benefits?” Many thought leaders in the industry can push out books, workshops, and other media as a means to augment their sales funnel. Avoid paying for these sorts of things when possible – your local public library likely has a wide selection of useful texts. If not, you can always request they purchase what you want to read.

Impulsive Behaviors

How many Amazon purchases did you make in 2008? Compare that number to last year, and we’ll bet it increased by a factor of ten. Impulse buying fueled by credit cards, saved billing data, and intricate marketing mechanisms targeting your impulses make this sort of purchasing a pervasive and sneaky way for companies to increase their revenue while decreasing your net worth.

Credit cards.  Lunches out.

Small behaviors can become big, problematic habits. If the average lunch out costs $10, and you’re going out for lunch 5 days a week, that can add up to $2,500 annually! (Compiling your small purchases and habits into large chunks can be an eye-opening experience – do you really want to pay $4,800 over 10 years for a gym membership you never use?)

If your spending is out of hand the best thing you can do is track everything. Keep a spending journal or spreadsheet. Use an online service to track where your money is going. Whatever you have to do, identify the problematic habits that are costing future you thousands of dollars. Once you’ve found them, you can change the problematic behaviors.

Master Your Future

You are the master of your financial future. Market upswings and downswings are going to occur and you have to be ready. Before making a big decision or impulse purchase, pause for a moment and explain why you are doing what you are doing – if saying it out loud doesn’t make sense, reassess your choice. However, you are only human – you will fail to control your impulses and you will make poor judgement calls. The trick is in recognizing when you slip and correcting for it ahead of time.

Build some discretionary spending into your budget. Give yourself an allowance. Make yourself save for big purchases the way you had to as a child. It’s not enough to just arm yourself with good behaviors, though. They have to be backed up by a sound financial logic and strategy that will carry you through the good times as well as the bad. Whether this means online courses, extensive reading, or engaging with a financial advisor, you have to figure out what works best for you and then stick to it.Ready to master your financial future? Learn more about our private client services and how we can help you build your wealth.