Showing posts with label finanace. Show all posts
Showing posts with label finanace. Show all posts

Monday, May 31, 2021

Investing when markets are at all-time highs

The equity markets have again pushed against all-time highs. During these times, sentiment amongst investors is often split. Some believe the markets will continue to push higher and continue to buy into the euphoria of the markets rising. Others believe the markets are due for a correction and start pulling out of investments to preserve their profits. This is an action driven by fear. Whether putting more money into the markets with the belief they will continue rising in the short term or pulling money off the table in anticipation of an impending drop, both actions are emotional responses to feelings of euphoria and fear. Investing with emotion can lead to costly mistakes.


When markets are approaching and sometimes exceeding all-time highs, and there is uncertainty about whether they will head higher or lower, what are some non-emotional actions you can take?


Stick to your investment strategy


Having an investment strategy is critical. Staying disciplined during market uncertainty is key to long-term investment success, and your investment strategy is there to protect you from reacting emotionally and making mistakes. The strategy will tell you when to buy, what types of investments to buy, and the circumstances in which it is acceptable to sell. Having this investment strategy will allow you to focus on growing your wealth in a disciplined and planned out manner, while also ignoring the outside noise.


Rebalance


The markets are often cyclical, and while one asset class may be doing well, another may be struggling. This can lead to your asset classes straying from their target percentages. Some categories may become overweighted and others underweighted. One of the keys to long-term investing is keeping your asset allocation in line with its target percentages. If some categories are over or under weight, then your policy is taking on more risk than originally intended.

There are two preferred methods of rebalancing. Option one is to sell a portion of the category that is overweight and reallocate the proceeds to underweight categories. In tax-advantaged accounts like 401(k)s and IRAs, rebalancing is relatively easy to do because you can sell investments without having to worry about capital gains taxes; however, in taxable accounts like individual, joint, and trust accounts, the tax implications of selling must be factored into the rebalancing decision. You could end up owing a hefty capital gains tax if you rebalance by selling an investment with a significant gain. For taxable accounts, rebalancing strategy option two typically works best: add more money to the account and invest in the underweight categories.


Stockpile cash, invest at opportune times


Knowing when the markets will experience a pullback or correction is nearly impossible. However, when the markets head in a negative direction, excellent buying opportunities may arise and some investments may be trading at a discount. You can be prepared to take advantage of these moments by having cash on hand.

Start by determining the amount of cash you want or feel comfortable sitting in reserves. Use this stockpile to invest in categories trading at a discount during market pullbacks. Since it is impossible to know when the market has hit its bottom, use a dollar cost averaging strategy to invest incrementally over a set period. Buying incrementally removes the risk of putting all your chips on the table at one time and have the investments continue to drop. As markets and investment values continue to fall, you will incrementally purchase at more and more advantageous prices. It may not get you quite the return as if you had perfectly picked the bottom of the market pullback, but that is a difficult, if not impossible feat to get right consistently.

No one can really know whether markets will continue climbing or experience a pullback when pushing record highs. Having a plan in place will allow you to stay disciplined and invest without emotion. Remaining well-allocated and diversified across asset classes will reduce the risk in your overall portfolio. Finally, have a little cash available in case some investments are trading at a discount.


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Friday, May 21, 2021

Financial planning impacts from the pandemic

For many high-earners, the pandemic brought forth an important reminder of the fundamentals when it comes to building wealth.


As a very simple analogy, a financial plan can be compared to building a house. In the beginning stages of the process, most of the time is spent mapping out and building a stable and reliable foundation. It is then, after this layer is built, that the rest of the structure can be constructed with confidence. Without a strong and supportive base, the architecture of the rest of the house is almost negligible when it comes time to weather unexpected storms.

A pandemic is just one example of a catastrophic event to one’s financial plan. Like anything in life, financial well-being and success depends upon proper preparation ahead of time. With many physicians being unable to operate their practice for a few months or being forced to take reduced salaries from hospitals, there are several financial planning aspects that can come in handy when it comes to reducing this increased anxiety.


Proper emergency reserve


As cliché as they may sound, emergency, or “rainy day” funds, can make or break someone’s entire financial well-being. As physicians oftentimes have higher expenses, it is crucial to ensure they have more built up in reserves than the average consumer. This money should be built up in an extremely liquid, easily accessible account such as a savings account or money market fund.

There are a few factors that should be considered to help determine the perfect balance. If you have consistent and controlled spending that is relatively low, then this number can be smaller. If you also have additional sources of reliable income and a working spouse, then this number can be lowered even further. The goal should be 3-6 months of fixed living expenses. Alternatively, if expenses are high relative to income, you have a single source of income, and your spouse doesn’t work, then it is highly encouraged to aim for an emergency fund with 6-9 months’ worth of living expenses.


Health Savings Accounts


If there was one account that is the most underused for the value it provides, it’s the Health Savings Account. Employers generally offer these where employees can defer compensation into these investment accounts, like a traditional retirement account, and receive what is often known as “triple-tax” advantaged savings specifically meant for healthcare costs. This account can be viewed as an emergency fund to take care of deductibles and astronomical health costs. Review your employer benefits to see how you can begin contributing to one of these accounts.


Long-term Disability insurance


Arguably the most critical part of a financial plan is protecting one’s income, especially when it comes to high-income earners. Oftentimes, employers offer group disability policies that will cover 50-60% of base salary if the employee is unable to work for a period of time. It’s highly encouraged that doctors elect this; however, this is oftentimes inadequate.

It is also crucial to investigate purchasing a supplemental disability policy from an insurance company to bridge the gap between full income and the employer-provided coverage. 60% is unlikely to fill a family’s needs, especially since this payout is oftentimes fully taxable. Consider what would life look like for you and your family if you had to live off 50% of your normal pay?


Non-market-correlated savings


Catastrophes, like this pandemic, remind everyone of the importance of life insurance and the unfortunate risk of premature death. To protect one’s family, it is almost unanimously most efficient to transfer the risk to insurance companies, rather than attempting to manage this risk and insure one’s own self.

One of the overlooked aspects of a vehicle such as permanent life insurance is the unique living benefits it provides. The tax-advantaged cash savings, growing at a conservative, yet above-average rate of return is one example. This can be an effective arrow to have in your quiver in times of economic and market turbulence due to the guarantees it provides. Being unaffected by any financial markets, the cash value can be utilized to take advantage of investment opportunities that present themselves during market downturns.


Wills, health care proxy, power of attorney in place and updated


It is critical for everyone to have their basic estate documents in place and up to date, especially when it comes to complex financial situations. This not only becomes a great point of consideration when assets are likely to be passed down, but also throughout life and in the late stages when potential terminal illnesses come about, and outside decision makers need to be involved. Make it a point to have these documents reviewed periodically and update beneficiaries as life changes occur.


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