We discuss when to diversify your investments and recognize critical mass in your portfolio. Learn strategies for maximizing your savings rate and achieving financial success as you navigate your wealth-building journey.

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In one month this year, we’ve already experienced a nearly 10% decline (and have already made about half of that decline back up). The volatility experienced so far this year has renewed ever-present fears about a market crash.

One industry in particular capitalizes on any fear and uncertainty. Over the past few weeks we’ve seen headlines like, “‘Catastrophic’ Stock Market Crash Isn’t Over – Here’s How Much Worse It Could Get,” and “Stock Market Crash: Expert Warns of 41% Drop in S&P 500.” As we’ve shown before on the show, the financial media has great difficulty predicting the direction the market is headed.

Headlines are speculation at best, and can cause great harm to your financial life at worst. Notice how you never see headlines such as, “S&P 500 Headed Up Over the Long-Term, No Cause for Concern” or “Another Boring Day in the Stock Market.” Headlines are designed to instill fear and create a sense of urgency, and in the financial world, market predictions can be safely ignored.

Market “crashes,” or declines, are uncommon but regular occurrences. They shouldn’t cause you to panic and make irrational decisions about your portfolio. In fact, if you are young, you might even get excited when you see the market going down. How can you prepare for the next market crash, whether it is this year, next year, or many years from now?

Understand the importance of risk and diversification.

The best time to prepare for the next market crash is before it happens. Before you consider how to ensure your portfolio is prepared for the next market crash, you need to examine your entire financial life and make sure all of your eggs aren’t in one basket. If all of your assets are invested in the stock market, you are more likely to panic when the market starts to decline.

Not having all of your eggs in one basket means, to start, covering your insurance deductibles and maintaining a liquid and accessible emergency fund. High-yield savings accounts aren’t paying attractive rates right now, but they provide the safety and liquidity that is most important with an emergency fund. The yield of this pot of money shouldn’t override the purpose of having cash when facing uncertainty.

Insurance is also an important tool for reducing the amount of risk in your financial life. Consider your need for not just term life insurance, but disability insurance, umbrella coverage, and more. The general rule for life insurance coverage is 10x your annual income, but you may need more or less depending on how much debt you have and the amount of people depending on your income.

Disability coverage is often overlooked. One in four 20-year-olds can expect to be out of work for at least one year due to a disability before they reach retirement age. A fully-funded emergency reserve can help cover a short-term disability, and for long-term coverage, consider your need for disability insurance. You may be able to purchase disability insurance through your job, or you may have to purchase additional coverage. Generally with disability coverage you want to replace around 60% to 70% of your pre-disability income (Why not 100%? Benefits are tax-free if premiums are paid with after-tax dollars).

Once you cover financial risks outside of your portfolio, it’s time to examine the risk inside of your portfolio. Diversification becomes more important the closer you get to retirement. If you have decades until retirement, you have decades to recover from a market crash. If you are nearing or in retirement, you don’t have that luxury.

The following illustration shows the importance of a diversified portfolio, and how it often doesn’t feel great having a diversified portfolio.

It is important to note that the above example is more applicable to those approaching or in retirement, as they start with a lump sum of $100,000 and are no longer actively investing in the market. The illustration also starts at a bad time for the market; if it began in 2003 or 2009, it would look completely different.

Younger investors are actively investing in the market, and don’t have the sequence of return risk someone entering retirement would face. But the risks of owning an undiversified portfolio are very real for those with a nest egg entering retirement. If you retired in January of 2000 and were invested 100% in stocks, your retirement wouldn’t have been as great as your retirement friend invested in a diversified portfolio.

Know your financial personality.

How did you feel in March of 2020 when the S&P 500 dropped nearly 35%? If you have been investing for a little longer, how did you feel during the housing crisis, or the dot com bubble? Are you glad that you stayed disciplined or did you make some investing mistakes? Setting rules for future market downturns can help remove some of the emotional aspects from your decision-making. If you know your plan is solid long-term, you shouldn’t feel the need to make changes in the short-term. If you do plan to invest more when the market is declining, set rules for yourself before the market drops, such as contributing more when the market is down 20% or accelerating dollar cost averaging strategies.

A crash is coming, but no one knows when.

The S&P 500 experiences a 10% decline, often called a market correction, normally once every year or two. 20% market declines, which signify the start of a bear market, occur about once every four years. 30% drops, which we experienced in 2020, happen about once every decade.

Stock market crashes are uncommon, but happen with some regularity. A well-designed plan can help fix your fear of volatility. If you know you have your financial risks covered, inside and outside of your portfolio, you may not live in fear of the next market decline. If your investable portfolio has reached a critical mass, where one bad mistake could be devastating to your finances, it may be time to find a co-pilot.

For most investors, you know that having a diversified portfolio is a best practice you ought to be following. But many people think they’re diversified when they’re really not.

Diversification simply means that you hold a variety of asset classes in your investment portfolio. The reason this is a good idea is so that you minimize your risk and maximize your potential for returns. Holding a mix of investment types has historically smoothed the investor’s ride and allows you to better stabilize your portfolio against sharply negative and positive market performance, i.e. volatility.

Whether you are managing your finances on your own right now or working with a financial professional, here are six signs that your money is properly diversified and you’re on the right track to reach your financial future.

1. You don’t worry about short-term performance.

When you’re properly invested with a diversified portfolio, you’re not worried about what the market does on any particular day. For you, daily, weekly, or monthly market fluctuations is just news, nothing that keeps you up at night.

2. You don’t chase trends.

Sure, it can be easy to get caught up in hunting around for the next Amazon or other big investment opportunity, but you’re not feeling the need to chase anything. Because you have a long-term investment strategy, chances are you are less concerned with finding the next “hot” opportunity and feel secure that your current investment strategy will provide for what you need.

3. You’re invested in the Big 4 asset classes.

Stocks, bonds, real estate, and cash – these are the staples that every well-diversified investment portfolio is comprised of. Just as a refresher:

• Stocks: share in the ownership of a company and its profits
• Bonds: you are loaning money to a company or government to be paid back with interest
• Real estate: you purchase property that you believe will appreciate in value over time
• Cash: Short-term, liquid investment that provides returns in the form of interest payments, such as money market funds and certificates of deposit

4. You leverage ETFs.

ETFs (Exchange Traded Funds) are effective tools in diversifying your investment portfolio, because they offer returns at a minimal cost to the investor. Just one word of caution: just because they offer some diversification does not mean that owning an ETF ensures you are well-diversified. This is because some ETFs may be concentrated in one type of asset, so you should understand the underlying assets that comprise an ETF before you invest.

5. You understand your underlying investments.

Having redundancies in your investment portfolio can leave you overconcentrated. However, it is also possible to over-diversify certain assets classes which is not a good idea either. There is usually no reason that your investment portfolio should hold several mutual funds that invest in the exact same type of investments. If you do, you are technically diversified, but you are unnecessarily duplicating efforts. If you’re not sure, there is no shame in asking a financial advisor about your investments.

6. Your asset allocation is based on your goals, age, and risk tolerance.

Most telling that your investment portfolio is properly diversified is that it isn’t based on a whim. Your investment portfolio ought to be based on your specific financial goals, your age and years till expected retirement, and your personal tolerance for risk. Given these important variables, the investments you hold will align with your needs and flex over time. When you are 20 years old, proper diversification for you will look much different than when you are 50 years old. The allocation within the major asset classes will adjust as part of your long-term investment strategy and is a hallmark sign of proper diversification.

What questions, comments or concerns do you have over the subject of diversification? The bottom line is that your investment strategy does not need to be complicated to be effective. In fact, simple can often be most effective in helping you reach your financial goals. Never hesitate to ask a financial professional any question you have about your investments. Your continued education and understanding of your personal finances will only help you continue to make smart money decisions for you and your family.

With the DOW Jones Industrial Average striving to reach 20,000 (19,933.81 as of December 23), it creates an investment environment that can easily send investors into a frenzy over what sorts of investment moves should be made. Understandably, investors don’t want to lose out on the upside of the recent market upswing, but there are a few ways to set yourself up for success so that you don’t need to make any rash money moves based on a reaction to current market trends.

It’s important to remain focused on your long-term financial goals in the midst of short-term stock market activity. While it’s tempting to react to current market conditions, take note of a couple ways to approach investing so that you are poised for long-term financial success through all market cycles.

[Related: Ways to Overcome Investment Analysis Paralysis]

Diversify, Diversify, Diversify

If we’ve said it once, we’ve said it 1,000 times: diversifying your investment portfolio is one of the wisest ways to invest for the long-term. There will always be market volatility. Sometimes the markets perform well and go up (like they are right now). And sometimes, like at the beginning of 2016, they show stagnant or poor performance. Regardless of what the stock markets do on any particular day, having a diversified portfolio means that you hold a mix of investments ranging from stocks (domestic and international), bonds, real estate, and cash. Each of these assets respond differently to market volatility and other economic events, which winds up offering you a measure of protection against losses.

The idea is to position yourself to take advantage of some upside so that your army of dollar bills can work hard to earn you more over time (stocks), while simultaneously protecting your investment portfolio from the downside (bonds). A balance investment portfolio helps to provide a more stable ride over the course of your lifetime.

Set It and Forget It

Most of us are not day traders, nor do we have the stomach for the amount of risk involved in trying to time the market to buy and sell at just the right time. As a long-term investor, you’re not looking to gamble with your future. This is why setting your investments and then forgetting about them is a smart financial decision. In more academic terms, the concept of “set and forget” is called dollar-cost averaging. This is a systematic approach to investing that automates when you buy into the market. Investors who buy at regular intervals monthly, quarterly, or semi-annually are practicing dollar-cost averaging

Dollar-cost averaging removes the emotion from your investment decisions and sets you on a path to buy into the market regardless of what the market is doing. Sometimes you’ll buy high and other times you’ll be able to buy low and your investments will average out over the course of your investment horizon. What’s even better is that you do have some flexibility with dollar cost averaging so you can make adjustments along the way. When the markets are low, you can decide to buy more shares at the time and when the markets are high you can buy less, but the point is that you are systematically set up to buy on a regular schedule so you’re never tempted to try to time the market or pull out of the market. You are able to guard yourself against making rash emotional investment decisions with dollar cost averaging, while still leaving yourself open to financial opportunities.

Final Thoughts

At the end of the day, it’s most important to stay the course, even when markets are performing at all-time highs. Avoid the knee-jerk reactions at all costs. We have a saying, “Be greedy when others are fearful and fearful when others are greedy.” When you are invested for the long-term, you can pay attention to market activity without succumbing to a fear-based or greed-based response. And if you have questions about your investment portfolio, don’t hesitate to reach out to your financial advisor and touch base. If you’re thinking about your financial future, now is a great time to revisit your financial outlook with a financial advisor and confirm you’re doing everything you should be doing to achieve financial success.

You can always reach out to us if you have a financial question or just want to get to know us better. Don’t be a stranger. Contact us directly anytime at Brian@moneyguy.com and Bo@moneyguy.com.

How you think can often lead to how you act. When it comes to your finances this is true also. In fact, your money mindset can determine whether or not you’re successful in reaching your financial goals by how you think and approach your financial life.

Do you have a positive money mindset or a negative one? Here are three ways to find out and some tips to focus on the money mindset that will help you be most successful in your financial life.

1. Do you buy what you want immediately or defer gratification?

Let’s say you really want the latest and greatest cell phone that just hit the market. Are you someone who goes out and buys it immediately or do you think about it and plan the purchase for a later point in time? While it may not be fun to restrict or delay a purchase you really want, the act of deferring purchases so that you can align your financial resources accordingly is a hallmark of financial success. Consumption, while not inherently bad, can easily lead to overconsumption (outspending your income) that has the potential to negatively impact your financial future if you’re not careful.

Remember to pay yourself first (save for the future), cover your fixed expenses (mortgage/rent, utilities, etc.) and THEN spend what is left on wants. This may cause you to defer gratification of a purchase until next month if you’ve already spent your discretionary resources. Limiting your current wants in consideration of what’s best for your financial future is winning money mindset #1.

2. Are you energized at the thought of your future or fearful about what it will actually be like?

Positive or wishful thinking alone won’t make your vision of your financial future so. Positively thinking and envisioning your financial future can, however, help you make smart financial choices today that support your ideas for tomorrow. With a positive, “I can do this” money mindset, you’ll keep yourself motivated to set and achieve your financial goals. If you are paralyzed by negative thoughts and fear, it can result in a negative outlook that can inhibit you from taking appropriate actions towards securing your financial success. A negative internal voice can function to self-sabotage your financial potential.

If you find you tend to be a “glass is half empty” type of person, try your best to fight the tendency to be negative. Set financial goals and pragmatically tackle them one at a time. This can help you methodically work against a negative mindset and build positive outcomes over time.

[See: 5 Ways to Overcome Financial Fears]

3. Are you open to taking risks or woefully adverse?

When it comes to your long-term finances, it’s probably not the best idea to risk more than you’re able to lose without it negatively impacting your financial future. That said, carefully considering financial opportunities within the context of risk versus reward is a winning money mindset. It makes you more open-minded to financial opportunities and less susceptible to pursuing a path that doesn’t make sense for you and your financial situation.

Giving your money the opportunity to grow is why people invest in the first place. If you are so risk adverse that you won’t invest your money or only use “safe” investment vehicles like CDs and savings accounts, you are likely restricting its potential to work harder for you. There are certain financial vehicles that can offer higher rates of return historically than others. Often times, the higher the potential gains, the higher the potential risk. As an example, stocks typically offer the potential for higher rewards, but they also come with a higher risk of potential losses. Having a diversified portfolio of higher risk and lower risk investments is a smart way to take advantage of potentially advantageous investment opportunities while limiting your overall exposure to risk.

Ultimately, your money mindset can help you make financial decisions that lead to your future success or failure. Positive thinking that leads to positive financial action has a greater potential for positive outcomes.

After a polarizing election season, investors may now be wondering what happens next when it comes to their finances. If you are wondering how this year’s election results may impact your wallet, keep reading.

It is quite normal to feel a certain amount of angst about your personal finances after such a contentious presidential election season. But as the dust settles and Americans reassess where they stand on the other side of Election Day, what is the immediate and long-term impact on personal finances?

As we have seen in just a few days since the election, the stock market has dipped and soared all within 48 hours since the President-Elect Donald Trump delivered his acceptance speech with the Dow rising to 218 points Thursday, November 10 and closed at a record high for the second day in a row. In fact, according to data from Jeff Hirsch, editor of the Stock Trader’s Almanac, the average decline for the S&P 500 the day after Election Day between 1932 and 2012 was 1.1%. But the S&P 500 rose 1.1% on Wednesday, November 9. (source).

The important thing investors can keep in mind, however, is that elections don’t typically have a long-term impact on market performance and things tend to stabilize within 100 to 200 days according to Vanguard research. So, what should investors know about the impact this election can have on your finances and is there anything you should be doing?

Don’t Make Any Rash Moves. First and foremost, it is important not to make any sudden, reactive financial moves right now. Being invested for the long-term means that any short-term volatility we’re experiencing right now is temporary and will blow over soon. It is better to stay the course than try to time the market with speculation.

Consider moving certain liquid funds into savings accounts, CDs, and money market funds if you have short-term cash flow needs (up to 5 years) that could be impacted by volatility. Otherwise, continue to contribute as you have been to your long-term investment portfolios. Pulling your money out because of fear of what might happen can be much more detrimental to your growth potential, because when markets go down they usually go back up and it is beneficial to be part of such a recovery.

Keep Your Portfolio Diversified. If you’re worried about the volatility of the financial markets following the Presidential Election, make sure you are diversified. When your investments are spread across a mix of cash, bonds, stocks and real estate, you are much more likely to stay on course toward your future goals.

In fact, diversification is key to your ability to ride out market volatility no matter the cause – Presidential Election or otherwise. The careful distribution of your wealth across asset classes helps to protect you against fluctuations in the market and can make a bumpy market cycle feel much smoother for you personally.

[Read: What You Can Learn from Volatility in the Markets]

Additionally, there are three areas we’ll be watching closely as President-Elect assumes office in January that can greatly affect our personal finances:

Federal Tax Rate. According to Donald Trump’s tax plan, federal income taxes will be reduced for everyone and standard tax deductions will increase. The goal of the plan is to help working Americans keep more of their money and pay less in taxes overall.

Cost of Childcare. Trump has proposed a plan that would help working families pay for childcare costs and make them more affordable. Specifically, Trump proposes a $5,000 deduction for childcare costs and for families making $62,400, Trump’s childcare plan would offer a rebate through what’s called the Earned Income Tax Credit. Finally, a new type of savings account will become available called, “Dependent Care Savings Account” with a $2,000 annual contribution limit.  And funds in these accounts that go unused once the child turns 18 can then be used toward education costs.

Healthcare Costs and Options. Under President-Elect Donald Trump, the repealing of The Affordable Care Act will be replaced by Health Savings Accounts (HSA) and reforms that will help make healthcare more accessible and affordable.

[Read: Health Savings Accounts 101: Everything You Need to Know]

Whether all these ideas and proposed changes will come to fruition and when is yet to be seen, which is why we urge investors to stay the course, plan accordingly, and keep diversified. As financial advisors, we work with our clients to focus on the areas of their finances they can control and plan as best they can for the “what if” scenarios of life. And as we all move into the uncertain future together, we will be sure to keep you informed of all important changes and financial tools we can leverage to help you understand and maximize your finances.

There are a series of things you can do in order to set yourself up for financial success. Likewise, there are a set of things that maybe you are not doing that could be negatively impacting your financial portfolio. In this episode of The Money Guy Show, Brian and Bo walk listeners through the three easy steps you can take so you don’t screw up your portfolio.

Whether you are just getting started with your finances or you are a seasoned investor nearing retirement age, these three simple steps can help guide you to make even better money decisions. Listen in to learn ways you can keep even more of your money in your pocket by leveraging certain financial tools and methods.

Join us this week to hear about:

• What it means to keep your personal finances simple.
• How to stay well organized.
• Ways to minimize your tax exposure.
• Which fees you need to be aware of and why.
• How to know yourself and overcome emotional financial decisions.
• Why diversification is so important.
• When you should consider hiring a professional advisor.

Resources mentioned on the show:

The Wealthy Barber by David Chilton

Tune In and Go Beyond Common Sense with the Money Guys

This show would not be what it is today without the support of our wonderful listeners. We strive to continue making the show better and your feedback is an important part of that process.

If you have any questions/suggestions/comments/concerns (or just want to say hi!), feel free to reach out to us: brian@moneyguy.com and bo@moneyguy.com. You can also join the conversation on Facebook or connect on Twitter @MoneyGuyPodcast.

If you enjoyed this episode, be sure to join our community! You’ll get immediate access to 15 of our most recent shows, plus you’ll get future podcasts delivered straight to your inbox so you can get in on the action right away.

If you’ve watched business news or read any financial publications lately, you’ve probably heard a lot about market volatility. Defined simply as the day-to-day stock market swings, the topic is almost single-handedly responsible for most of the panic-inducing financial headlines produced by the media.

Many investors feel anxiety at the mere mention of the word volatility because it has the potential to threaten something that they value most: their money. But even as unsettling as a steep decline in the stock market can be, there are several key takeaways that could positively affect your long-term financial health.

Here are a few lessons that you can learn from volatility in the markets.

Volatility Is Normal

As much as the media tries to make it appear that market volatility is currently at it’s worst and climbing.. it’s not!

In fact, it’s widely understood that one of the most difficult aspects of investing in the stock market is the risk/reward trade-off that is required to realize higher returns. And although high volatility can cause concern for investors because of the inherent risk involved, it is the nature of markets to have both gains and losses in the short term.

Consider the uncertainty that was present in the market at the beginning of 2016. This is just one example of the many emotional ups and downs that the stock market takes us on from time to time.

While volatility is inevitable and there’s little that can be done to prevent it, it’s important to understand the cycle and learn to react rationally in order to meet your long-term financial goals.

Recognize Your Blind Spots

Making important financial decisions can be overwhelming, and in some cases, downright terrifying. For some, it’s conscious avoidance. In others, unintentional self-sabotage.

But no matter the underlying reason, avoiding certain aspects of your finances altogether can halt your efforts to make progress with your money.

This is why it is important to recognize your financial blind spots. To risk stating the very obvious, blind spots by nature they are difficult to observe. But don’t worry, this is nothing that a little introspective reflection can’t help.

The key to success in this assessment is to be objective and search out the aspects of your financial life that you may have neglected. And although it’s easier said than done, pinpointing your blind spots is the only way you will be able to effectively move past them.

In many cases, the expert opinion of a trusted financial planner can help identify any major areas of weakness and assist in designing a strategy to fill in the gaps.

The Importance of Perseverance

Staying the course doesn’t have quite same sizzle as actively moving in and out of the market, but it is likely the best thing to do in a volatile environment. In fact, market volatility is the primary reason that many investors engage in bad financial behaviors — specifically buying high and selling low.

Keep in mind that volatility and market fluctuations are much different than a realized loss. A temporary drop in value doesn’t present a huge problem if the investor is able to persevere.

For this reason, investors with a long-term perspective rarely show concern over volatility. They understand that a permanent loss does not occur unless they cave to the emotional pressure and sell during a downturn. Simply put, don’t allow market movement to deter you from remaining steadfast in the application of your financial strategy.

Diversification Is Key

Diversifying your investment portfolio is one of the best strategies to reduce the impact of market volatility. Although diversification does not eliminate the possibility of losses in the market, it has the potential to manage your overall risk.

Because asset classes vary in performance depending on market conditions, a decline in one type of asset is typically offset by a gain in another.

Think about the most recent financial crisis of 2008. Between the early part of the downturn in 2007 through 2009, the S&P 500 lost upwards of 55%. As you can imagine, more aggressive portfolios lost far more than that while properly diversified portfolios, overall, fared slightly better.

Now this isn’t to say that investors should completely ignore all financial news in favor of a set-it-and-forget-it diversification approach. That is a far too simplistic of a route to take. Although a significant amount of the doom and gloom rhetoric from the financial media is ratings driven, turbulence in the markets should serve as a reminder to periodically review your long-term plans and make sure that they are still on track.

Remember: the only time to adjust your portfolio is when your financial goals change, not the headlines.

In the end, the market can be a harsh teacher if we overreact to every fluctuation. But if we really pay attention and stick to our strategy, there are some valuable lessons to learn.

We’re talking about something that fires up a lot of folks in the financial world: the truth about annuities. We break down the four different types of annuities and the expensive fees associated with these investment vehicles.

We’re exposing the good, the bad, and the ugly in today’s show. If you’ve been contemplating buying an annuity for the stability and guarantee, you don’t want to miss this episode.

But before we get into the complexity of annuities, we want to take a moment to remind our loyal listeners that we’re fee-only financial planners outside of the podcast, and we always welcome having our listeners become clients. If you like our common sense approach to all things finance and want to learn more, please feel free to contact us: brian [at] money-guy.com or bo [at] money-guy.com. 

In This Episode, You’ll Learn:

• Why you need to be aware of your fears and the impact it can have on your investing
• How your perception of the market influences your investment behavior
• Why the guarantees promised by annuities aren’t as good as they seem
• How investing in a diversified portfolio can get you greater returns (more often) than an annuity
• The four different types of annuities and a brief explanation of each
• The inflation risk inherent in fixed annuities and how it hurts savers
• Why the loss of flexibility is a huge downside to annuities
• The quirky limitations of annuities, especially equity-indexed annuities
• All the different fees that make annuities such an expensive option
• When annuities are an appropriate solution for your portfolio
• Five warning signs you’re getting ripped off when it comes to purchasing an annuity
• The importance of expertise and trust in the professional you’re buying an annuity from

Resources

• Prudential Outsmart the Market Game
• Brian’s posts on US News & World Report

Go Beyond Common Sense With the Money-Guys

We are so grateful for our wonderful listeners. We couldn’t do this show without you, and your continued support and feedback is always helpful in making this podcast better.

It means the world to us that you come back time and time again to listen to what we have to say. If you ever have any concerns or questions, you can always email brian [at] money-guy.com or bo [at] money-guy.com. Don’t forget to follow us on Facebook or connect on Twitter @MoneyGuyPodcast.
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