- Fear or running out of money can drive us to make poor long-term decisions.
- When it comes to investing, the notion of safety can be deceptive.
- Make sure you always have 6 to 12 months of emergency cash on hand, plus the right asset structure and plenty of diversification.
Call us anytime if you are concerned about holding too much (or too little) risk.
With the recent market correction, many clients are asking us, “Is it safe?” It reminds me of Marathon Man, the classic 1976 movie in which the evil villain (Sir Laurence Olivier) performs dental torture on poor Dustin Hoffman. Throughout the ordeal, Olivier’s character keeps asking Hoffman “Is it safe?” even though Hoffman has no idea why he’s being tortured. With investing, we can’t predict the future, but you don’t have to be in the dark about safety.
Suppose you’ve invested in a 1 percent CD that’s backed by the full faith and credit of the United States government. Most people feel that’s a pretty safe investment. But before committing a large chunk of your savings to CDs, you may be asking yourself:
- “Am I going to end up on the street?”
- “Am I going to have to go back and live with my kids?”
- “Am I going to have to go back to work?”
- “Am I going to be forced to go in a nursing home?”
These are just some of the fears people commonly have about running out of money. Remember what happened during the financial crisis of 2007-08? Many investors lost faith in the stock market and moved all their money into “safe” government CDs. And they’ve been there ever since. Technically, they haven’t lost money, but they’re only making 1 percent a year. That’s not even keeping up with inflation, and meanwhile they lost out on a huge run-up in the stock market.
How safe are “safe” investments?
If those CD holders have been drawing down the standard 4 percent of their nest egg a year, their savings would be about 20 percent lower than if they had stayed fully invested in stocks since the financial crisis. Ironically, in pursuit of safety, they ran right into the trap they were trying to avoid—loss of wealth.
There are 4 things to keep in mind when you’re looking at your investments and retirement plans:
- Establish an emergency fund. Make sure you have 6 to 12 months’ worth of emergency cash flow on hand at all times. You never know when you’ll need it.
- Have the right structure in place. Is your asset allocation in alignment with your financial and life goals?
- Have different assets for different purposes. Do you have different ways of achieving income, growth and capital preservation?
- Diversify your investments. Don’t put everything in one place, because you never know which assets will perform well at any given time and which will not. A small amount of your money might get hit badly at a given time, but you won’t sink your entire (investment) ship if you’re diversified.
Talk to your trusted advisor if you want more clarity about these topics, and certainly feel free to call us. We’re happy to walk you through the process and explain your options.
So until next time, enjoy. Gary
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