By Mike Gertsema, CEO & Wealth Advisor
Let’s take a look into 2021.
The election is over, there are vaccines available for COVID, and maybe we will get back to the way it was – where we can socialize without fear, hug grandparents, shake hands and gather. I wonder if that’s possible.
Even though the election is over, the division in the country is not expected to change anytime soon. We will have vaccines available, but we don’t know how it’s going to get distributed or when. We also don’t know how many people will get the COVID shot because of the side effects or they’re skeptical about the long-term effects.
So, I doubt that we will ever go back to the way it was one year ago – only a “new normal.”
We have no idea what’s going to happen – including how much damage was done to the economy in 2020.
How Will the Economy React?
We don’t know how many businesses will fail due to the recession, the number of layoffs coming due to the businesses shutting down or downsizing, or the number of new company startups due to the shift in the consumer’s buying habits and behavior.
The big plus going forward for the economy is low-interest rates, but it’s just the opposite for retirees because they’re living on income or interest on their investments.
Generally, in order to get a higher income from fixed-income investments, like bonds, the bonds are low-rated – which can mean lower quality and can lead to more risk of default.
So, what are we telling clients?
It depends on their age, their goals, their risk tolerance, and their financial plan.
We take an objective look at everyone’s situation differently because everyone’s plan is different and we incorporate other concerns like:
- Cash flow
- Income taxes
- And, risk assessment of the portfolios
- This helps us make sure our clients understand that in a lot of cases, they do not have to take the high-risk route with investing, which eases their minds, reducing stress, anxiety, and nerves.
Let’s face it, 2020 has been an extremely stressful year and by doing financial planning, tax planning, and risk management, we have been able to help our clients navigate through the year quite well.
Financial Game Plans
There are many ways to invest money and everyone may tell you that theirs is the best, but we have a proven process for managing portfolios that’s based on a simple process.
We know everyone is unique and their portfolio allocations are too.
We take into consideration age, financial goals, risk tolerance, cash flow needs, income taxes, insurance, and build a personal financial game plan.
Our process is structured and based on the client’s income needs.
When people get close to retirement or are currently retired, they normally wonder if they need to be more conservative with their investments and the answer is yes with some of the investments, but generally not all of it.
There is a percentage of the portfolio that requires a growth element to keep up with inflation and to potentially raise the average rate of return on the total portfolio.
So in other words, investing 100% of the portfolio in very conservative investments like CDs will reduce the ability to retire because the rate of return on the portfolio is too low and will not keep up with inflation, leaving people with a miserable retirement and possibly running out of money.
Investing the money based on when you’ll need it is a great alternative.
For example, if we invest part of your portfolio conservatively and generate income to support your income needs for 1 to 2 years, it makes sense, right? We call it irreplaceable capital.
While that part of your portfolio is supporting your immediate needs, we invest another portion of your portfolio in conservative income and growth investment strategies, for your needs three to five years from now for a moderate type portfolio.
It’s conservative income and growth and lower volatility, risk and growth, but with a potentially much better rate of return than the money invested for the first one to two years.
Now that we have the first five years covered from an investment standpoint, let’s look at the percentage of your portfolio that we can invest for growth – which can be determined by doing financial planning and cash flow analysis.
The money is given time to grow.
It reminds me of a young man that called and wanted to invest $5,000 with the hope of doubling it in a year. I explained that wasn’t a realistic goal and that if he was willing to give the money more time in the market, his odds would increase exponentially.It’s like planting an apple tree, you have to give it time to grow before we start getting apples.
In a sense, we are allocating your investments in buckets.
The first bucket is conservative, the second bucket conservative income and growth, and the third bucket for the growth portion.
So, when the markets drop or turn very volatile, your first bucket is conservatively covering your immediate monthly needs.
When the opposite happens and markets are going up, we use the rally as an opportunity to harvest profits and rebalance all three buckets taking profits and work on increasing the overall rate of return in the portfolio.
It’s the same logic we use for young people saving money in their 401(k) retirement plans.
Since a younger person has time to let the portfolio grow and can survive market highs and lows because it’s a long-term investment, it makes sense to be more aggressive, however, when they get older, they will allocate a smaller percentage of their investments in aggressive growth.
Most retired individuals do not invest in aggressive growth like they did when they were younger but will invest in moderate growth, reducing risk and volatility.
There’s Still Hope
When we look at 2021, we are expecting a good year and we think it’s going to offer us a lot of opportunities to help our clients build wealth.
We will keep our clients updated on tax law changes, government regulation, government legislation, and investment opportunities to enhance their overall wellbeing and quality of life.
We will continually update our client’s financial plan, manage risks in their portfolios, guide them in implementing investment and income tax strategies to bring them more value above and beyond investment performance.
If you’re interested in financial planning or our money management process, let’s get in touch and start the conversation!
I look forward to hearing from you!