Life is full of trade-offs. How you navigate financial trade-offs can have a long-term impact on your lifestyle and legacy.
As everyone knows, we are living through unprecedented and uncertain times. If conditions are unprecedented, then, are not past answers based on historical data suspect? Instead of searching for the best answers, try developing better questions to help identify spending, gifting, investing and tax trade-offs.
By refocusing on simple questions, you may find clarity in the new normal.
- Do I have enough money? Too much?
- Does my investment allocation make sense for me?
- Is equity market risk a requirement or a preference?
- How can I leave money to my family or a mission-driven organization like Treasure Coast Hospice?
Sourcing your lifestyle needs from accumulated assets is the first step. Ensuring you have enough money to enjoy your ideal lifestyle is a big relief. Does an excruciatingly boring 50-page plan of your future financial self give you that relief? One could argue that past financial projections are no longer relevant in our current environment.
The next step is determining the appropriate investments for your time-horizon and risk preference. This line of inquiry often begins with a simple question: Is equity market risk a requirement, or is market risk a preference? For some, market risk may be a requirement to sustain your future lifestyle. For affluent households, market risk could be a preference to further your family and philanthropic goals.
Whether equity market risk is a requirement or preference, add a margin of safety in your planning. In our view, US asset prices are expensive. If true, the typical U.S. home country biased portfolio of 60% stocks and 40% bonds will struggle as it did from 2000 – 2009. On a forward looking five- to ten-year basis, that portfolio is not likely to earn the historical average rate of return. Why? At current valuation levels, the S&P 500 is expensive, and the yield on the 10-year US Treasury Note is near all-time historic lows.
The final step towards financial clarity is maximizing your legacy impact with surplus resources. Deciding how much money to leave your family, favorite charity or tax collector is easier for some than it is for others. In your effort to avoid future financial regret, it is important to consider the behavioral effects of family wealth transfers. Only your intuition and beliefs can answer the tough question, “How much can I leave to my family without hurting them?”
We know planning in the face of uncertainty is not easy. Until Elon Musk develops financial planning software with future market returns, I believe these questions could provide uncommon clarity.
Spectra Investment Management, LLC is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by the SEC and does not mean the adviser has achieved a specific level of skill or ability. There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit, and accounting implications and determine, together with their own professional advisers, if any investment mentioned herein is believed to be suitable to their personal goals.
