The events of the past few years should serve as a good reminder to all of us that no matter what we do every day, we face risks beyond our control. However small the risk may be, there is no way to ensure that you avoid falling victim to these types of events. Not that we should live our lives in constant fear — we should just prepare for the worst and then feel very fortunate should we end up living long and healthy lives.
Preparing for the worst doesn’t just mean acknowledging that life is fragile and then living life to the fullest. You need to prepare for financial risks. This means assessing your exposure to risks beyond your control and then getting protection if you need it. If anyone relies on your life and/or your income stream, then you need to have insurance policies to replace that income if you suddenly die or face a long-term disability that prevents you from working. You need cash reserves that you can draw from immediately in an emergency. You need proper homeowners insurance. You need an estate plan that allows your finances to pass to your heirs smoothly and at a low cost.
This preparation won’t prevent you from being in the wrong place at the wrong time (and no such preparation exists), but it will help prevent financial risks from being created for your family and heirs should something happen to you.
I frequently interact with married clients who have disparate feelings about their goals with their money. Most often the differences center around their individual willingness to take on risk, and this tends to manifest in two common situations.
The first is centered around their debt burdens from their student loans or mortgages. One spouse may be adamant about paying off every penny of debt before considering saving for retirement, while the other is comfortable with making minimum monthly payments and investing any additional savings. In today’s low interest rate environment, we work to counsel debt-averse clients to take advantage of refinancing student loans into low fixed-rate loans to pay off over seven to 10 years and to just pay the minimum payment on a fixed-rate 30-year mortgage. This enables them to have the cash flow to take full advantage of tax-favored accounts, like 529 college savings accounts for young children or work-based 401(k) retirement plans or Roth IRAs to begin retirement savings as early as possible. With mortgage rates below 4%, we review historical illustrations with clients to show how, in many market environments, returns on an investment portfolio will likely outperform their mortgage interest rate, so they would likely be better off long-term by investing that additional mortgage payment instead of applying it to the loan.
The second example of wide differences in risk tolerance that I often see with married couples is how comfortable they are with taking on investment risk in their portfolios. This is especially true for investors in their 30s/40s who are students of the financial crisis in that they were just beginning their careers right around the time of the Great Recession (in my case, I entered the financial services industry coming out of undergrad in the summer of 2007). So, our first experience with retirement savings began right around the worst peak-to-trough decline in U.S. stock markets since the Great Depression. This tough initial experience with investing has left some young professionals favoring a more conservative investment allocation in their portfolio or with the tendency to hold an excess amount of cash reserves. We may have one client who is fully comfortable with a 100% equity allocation for their retirement accounts, while their spouse is terrified of market risks and wants to invest in fixed income at an early age. With long time horizons until retirement, it is critical for young investors to be positioned for growth with a focus on a globally diversified equity allocation in their retirement accounts, and many times it takes work to counsel one or both spouses to buy into this strategy.
Volatility in financial markets serves as a reminder that risk is also everywhere in the investment world.
We believe the best way to protect yourself from financial risks is to construct a diversified portfolio with an asset allocation that fits you and then stick with it. Go about your daily life knowing that your investment assets can decline at any point due to reasons beyond your control, but also know that your investment allocation fits you and that over time it will help you meet your financial goals. The same goes for health risks: Go about your daily life knowing that your health may fail or your life end short, but also know that you have made preparations that will help care for your family in your absence.
Now let’s enjoy the ride every bit of the way while we still can!
Modera Wealth Management, LLC (“Modera”) is an SEC registered investment adviser. SEC registration does not imply any level of skill or training. Modera may only transact business in those states in which it is notice filed or qualifies for an exemption or exclusion from notice filing requirements. For information pertaining to Modera’s registration status, its fees and services please contact Modera or refer to the Investment Adviser Public Disclosure Web site (www.adviserinfo.sec.gov) for a copy of our Disclosure Brochure which appears as Part 2A of Form ADV. Please read the Disclosure Brochure carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.
Investing in the markets involves gains and losses and may not be suitable for all investors. Information herein is subject to change without notice and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.