This Is A Good Time To Review Your Financial Objectives And Risks

For decades, I have worked in or with financial institutions, especially banks, identifying risks and finding ways to measure and mitigate them.  Since early last year I have been advising my clients, that enough macro and credit data lead me to believe that we could be in a recession by the end of this year or in 2020 at the latest.  Hence, when a fellow, graduate school alumnus, Paul Aris, invited me to attend his presentation “Your Personal Financial Journey: A Road Map to Success via Planning for your Major Life Events,” I was intrigued. “If I spend so much time telling clients to take stock of the risks to which they are exposed, was I applying this advice to myself?”

Aris, a wealth management advisor at Janney Montgomery Scott, recommended to audience members that before thinking of investments, they need to take stock of the riskiness of their profession and of potential personal risks such as someone suing you, becoming unhealthy or disabled, or dying before one had anticipated.  These days, however, Aris reminded the audience, another risk that we have is that we may live much longer than our parents and grandparents and run out of savings for our retirement and long-term care needs.

Aris counseled the audience to analyze carefully all the assets they have such as a house, earnings, investments, and cash, and to compare that to all their liabilities such as a mortgage, expenses for college aged progeny, retirement, and wanting to maintain a comfortable life style.

In his remarks, Aris emphasized risk transference  There are a variety of ways that he recommended that individuals can minimize their risks. First, in order to protect your family, buying life insurance as young as possible is important. While there are a variety of term and whole life insurance products, all of them are much cheaper the younger you are. Aris also discussed disability insurance. A simple fall or traffic accident can cause a disability, which could significantly curb a person’s earnings. He emphasized that you want to think of disability insurance, not for any type of job, but for the one you have. I mentioned that women, due to the fact that we tend to be smaller than men, have a higher probability than men of being exposed to having a physical disability, as such this is a risk transference product that women should consider. In addition, Aris explained that individuals need to look carefully at health and long-term care insurance as a way to protect their families’ assets. “The price of a nursing home has been rising much higher than CPI,” he said.

Aris explained his wealth management process. First you identify your objectives, such as saving for children’s college education or your own retirement. You should bifurcate your goals into short-and longer-term goals. In the short-term goals, you need to determine how much you need for a ‘rainy day’ reserve, life and health insurance coverage, as well as for a home purchase. When a fellow alumnus asked him how much one should have for a rainy day reserve, Aris responded that we should consider “one to two years expenses for a rainy day reserve.”

For longer-term, you need to ask how much money you need for all your current and future expenses and determine which ones will be fixed as opposed to variable ones, where you may have more control to reduce them.

You then establish your asset allocation based on your risk appetite and tolerance. It is important to be mindful of the level of return per level of risk you are willing to take.

Thirdly, you construct your portfolio to meet your objectives and risk appetite. Aris warned against “being too overconfident in predicting how markets will behave.”  Past performance is certainly no guarantee of future performance. The winners and losers can change every year depending on a wide range of macro, fiscal, and company specific factors.

Lastly, you monitor your portfolio.  Aris recommended reviewing objectives and asset allocation at least once a year, more often if a life event such as wedding, birth of a child, divorce, or death of a spouse happens. Tax time is also a good time to review your asset allocation. He warned against constantly checking one’s portfolio constantly. “These days with all your electronic devices, you could be tempted to look at your portfolio on a daily or hourly basis. If you start to trade based on that, you could make mistakes and start losing money.”

Importantly, Aris explained that it is never too early to plan for retirement. In a piece by his firm, there are useful questions that people should be asking themselves as they plan for retirement.  Having cash as part of your portfolio is very important.  “Sometimes people think that cash is trash,” Aris said, “but cash is an option to be deployed at opportune times.”  As part of retirement planning, Aris advises that people have a last will and testament and a living will in place. Unfortunately, all too often, people do not organize their affairs before they pass away or become incapacitated. This means that you could be leaving the settlement of your estate to the government.  Sometimes “part of my job is protecting clients from themselves” said Aris.