Lessons Learned … Again

Lessons Learned … Again

In November 2014, I wrote about a short correction in the market. Over a period of 22 trading days in the fourth quarter of 2014, the market corrected and wiped out over $1 trillion of wealth. Clients never really felt that loss, however, because it came and rebounded before the next quarterly statement. Once again, we’re witnessing wild market swings with many clients concerned about their retirement savings fueled further by instant news and financial news outlets.  

From Aug. 17-24, we’ve seen global economic concerns impact the financial markets severely. During times of market volatility, it’s important to remember the fundamentals of financial planning and to deliver on those fundamentals through the planning process. While no planning process fully insulates you from market fluctuations, long-standing principles used in previous volatile markets can provide insights – some that have worked and some that continue to be refined. I want to offer a refresher on some of these basic principles and add some insight from what we’ve learned works best in all markets.   

Product allocation before asset allocation (i.e. focus on what’s really important to each client): In the past, we’ve focused on building a portfolio based on negative correlations and asset classes that don’t always move in the same direction. Math and science point to product allocation being just as important, if not more important. Not all products were built to accomplish the same purpose, so it’s necessary to build a portfolio of products that meet the client’s needs before we focus on asset allocation.  

Start with securing income: When using a variety of products to solve client needs, you should discuss the need for a secure retirement income. A client exponentially enjoys their retirement when they’re meeting their essential expenses and adding an inflation hedge. Secure income can come in many forms; however, planners must look at various sources that minimize the amount of capital needed to secure it.  Essential expenses should be met with dependable income streams. The liquidity-free capital can be used for other goals and desires.  

Mitigate longevity risks: Longevity is a multiplier for all risks in retirement. Statistically, the risks of asset allocation, health care costs, and long-term care costs grow when longevity is not addressed. Positioning the proper amount of assets in the proper vehicles to mitigate longevity allows a client to minimize all other risks to proper levels. Thus, the rest of the financial plan may be met with more reasonable assumptions and expectations.  

Address legacy goals: Making sure other risks, like disability and death, are addressed creates security that the family’s goals and objectives are will be met in the short term and long term. A financial plan without these elements is doomed. More importantly, cash value life insurance can provide a resource to supplement retirement income during market volatility, which is when you least want to withdraw assets from your investments.  

Evaluate tax efficiency and fee drag: When choosing financial solutions, it’s important to consider the impact of taxation, especially on income-generating vehicles. It’s not what you earn; it’s what you keep.  With the ever-changing and more complex financial solutions, many financial plans include expensive riders. As we enter a fiduciary role for all our transactions, fee drag and tax consequences must be considerations that we evaluate in our solutions.  

Bottom Line: Today more than ever, Americans need strong financial advice. During times of financial extremes – both up and down – it’s important to stay fundamentally strong. I challenge you to take a look at your financial plans. Evaluate how close you are to the fundamentals.

If you’ve strayed, my guess is that you have some anxious clients. If you’ve remained fundamentally strong through the six-year bull market, my guess is that you’re earning your clients’ trust during these volatile markets.