I met friends for breakfast recently who were excited that on the same day they were leaving town for three weeks of vacation in the U.K. As we talked we agreed that planning trips is not much different than planning your financial success.
The first thing you do is determine where you want to go. Notice you don’t first determine your mode of transportation. You determine exactly where you want about the same time as you answer the question when you’re going to get there. You have a willing mind and a good deal of interest in being somewhere other than home at a particular time. When you have the money you believe this is something you can do. You don’t believe the task is impossible. Depending on how much time you have will help you determine how you are going to get from here to there.
When it comes to financial planning too many Americans get stuck in their belief the job is way too difficult. This is especially the case when you have a fundamental belief system that math is not your strong suit. So let me encourage you bless yourself with a new attitude. Just as you know you can take a vacation make up your mind that you can determine what you need to do so that you can afford to make work optional. Answer these questions for yourself. You deserve it.
- At what age after 65 would you like to make work optional?
- Assuming you were retiring at that age today, before taxes how much money do you need monthly in today’s dollars?
- Apply this simple formula. Whether one or two people are working, say the household income you want to duplicate is $100,000. What income do you expect from Social Security? We’ll assume Social Security will be $30,000, so with that income the difference needed is $70,000. Assuming the yield or withdrawal speed limit you set is 4% per year, multiply $70,000 x 25 to see your goal in 2017 dollars is $1,750,000. Now for the first time you can see your target. If you have a lot of time to pass before you intend to make work optional you may find your target is well over $3,000,000. But the point is to recognize as precisely as possible when you want to have how much money show up. Like planning your vacation, it is a job only you can tackle. It’s not like junk mail that simply shows up in the mailbox.
- Identify what have you and your advisor have learned from investing in the past. When you were contributing to your portfolio during the dot-com crash, that 2000-02 “downturn that eviscerated more than $5 trillion in market value” during that two year period, wrote Tara Clarke, associate editor, Money Morning, June 12, 2015. Clarke went on to say, “From a March 10, 2000, NASDAQ high of 5,048.62, the index tumbled to 1,139.90 on Oct. 4, 2002, for a whopping 76.81% drop. (The Dow Jones and S&P 500 also suffered, albeit less intensely – down 27.38% and 43.19%, respectively.)” The second time in the same decade there was a “stock market crash of 2008 on September 29, 2008. The Dow hit its pre-recession high on October 9, 2007 closing at 14,164.43. Less than 18 months later, it had dropped more than 50% to 6,594.44 on March 5, 2009,” wrote Kimberly Amadeo, US Economy, April 3, 2017. Amadeo put markets in greater perspective reminding investors, “That wasn’t the largest decline in history. During the Great Depression, the stock market dropped 90%. But that took three years.”
The question savvy goal investors determine in advance is how much loss can you and your goals withstand? They understand it’s not what you buy, but when you sell that is more important.
- The question about losses is particularly significant for those who are taking income from their portfolio. Let’s suppose you set your income withdrawal at 3%, in the same year your account is off -57%. You now need a gain of 150% to get back to even. Notice in the chart above had the drawdown of market loss and withdrawal totaled -25% you will need an increase of 33% to get back to your value at the beginning of the year. Since “Risk is not knowing what you’re doing,” according to Warren Buffett, that old buy & hold strategy may have been your friend when you were putting money in your investments, but the practice can be a foe when you taking money out. Consider active management strategies where you can see the evidence that your money can be moved off the tracks when the train is running.
- Billionaire Mark Cuban said he put on the “biggest hedge I’ve ever put on” before the election on November 1, 2016. I say this to you to first recognize, like you Cuban is a busy guy too. But just as you take the time to plan your vacation you too have the time to put your plans in place. Or you can be like Donald Trump, Jr. who said, now he would have handled that Russia meeting differently on Fox, July 11, 2017. Regret and guilt are two gifts that keep on giving, often for a lifetime. With markets at or near all-time highs, what additional diversification strategies should you consider now?
- Like taking a vacation, investing isn’t inexpensive. While many investors like to believe the costs are 1% per year it is worth the time to see exactly what you are paying. It’s probably more than you think. It is also worthwhile to see if you are getting what you are paying for. Let’s suppose you are paying that 1% per year on your $3M account. But you wake up to find that while the market was off -37%, your account was off -42% ($1,260,000 loss). Here’s where it gets interesting. If you paid 2% (100% more expensive) but your account was off -20% ($600,000 loss), you would have finished the year with a difference of $660,000 more dollars in your account. Is it possible you could win by losing less?
Don’t just put your money in positions without first establishing your goals. Americans spend more time clicking ‘like’ on Facebook than we spend planning our financial future, says Prudential. So I am encouraging you to take all of the time you need to plan your financial success.
The proof is in the planning.
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