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Investor Behavior: Are You Your Own Worst Enemy?

Your poor investment returns may be entirely your fault! I say that tongue in cheek but Dalbar’s Quantitaive Analysis of Investor Behavior study shows how poorly investors perform relative to benchmarks and the reasons for that underperformance.

DALBAR publishes a study every year. Here are some key takeaways from the 2017 study:

  • In 2016, the average equity mutual fund investor underperformed the S&P 500 by a margin of -4.70%. While the broader market made gains of 11.96%, the average equity investor earned only 7.26%.
  • In 2016, the average fixed income mutual fund investor underperformed the Bloomberg Barclays Aggregate Bond Index by a margin of -1.42%. The broader bond market realized a return of 2.65% while the average fixed income fund investor earned 1.23%.
  • Equity fund retention rates decreased materially in 2016 from 4.10 years to 3.80 years. (This is directly related to psychology and behavior.)
  • In 2016, the 20-year annualized S&P return was 7.68% while the 20-year annualized return for the Average Equity Fund Investor was only 4.79%, a gap of -2.89% annualized.
  • 2016 was a great study in investor behavior as fear generally won out as evidenced by several months of steep outflows.

Investor Psychology

Analysis of the underperformance DALBAR data shows concludes that investor behavior is the number one cause of this. Fees are the second leading cause. It’s more than just buying and selling at the wrong time, it’s about breaking down the emotional triggers and traps that plague the investor psyche. This is why it’s important to understand the thoughts and actions that drive poor decision making.

There are nine distinct behaviors that can wreak havoc on investor’s portfolios:

1. Loss Aversion. Loss is felt much deeper than the gratification that comes with gaining. Many bad investor behaviors arise from this, including holding on too long to avoid realizing loss, expecting high returns with low risk and stock picking only those stocks they believe will produce large returns.

2. Narrow Framing. This is when decisions are made without considering all of the implications. Market bubbles are great examples of this. Most of those investments are made based on the hype and initial skyrocketing growth. What often isn’t factored in to those decisions are the economic implications down the road.

3. Mental Accounting. Investments may be mentally segregated, with different criteria and due diligence applied to them. You end up taking undue risk in one area while avoiding rational risk in another. Examples include how people spend tax returns, bonuses, etc.

4. Diversification. While important, investors often tell themselves they are seeking to reduce risk, when they are actually using different sources that may be just as risky. Diversification should again be evaluated as a whole, examining the risks of the different investments. These make up the overall risk of the portfolio. You may not be as “diversified” as you think.

5. Herding. We like to copy the behavior of others even in the face of unfavorable outcomes. This is a representation of confirmation bias to a certain extent. There’s comfort in following the crowd, but it often leads to dire consequences.

6. Regret Aversion. We tend to treat errors of commission more seriously than errors of omission. For example, this causes investors to sell winners prematurely in order to lock in profits before they turn into a loss. It can also cause them to hold losing positions too long, in the hope they may turn profitable.

7. Media Response. It’s easy to react to news from television personalities and financial “gurus” without reasonable examination. Confirmation bias plays a big role here too. If the information investors are listening to and gathering confirms their own beliefs, actions and/or opinions, they fail to gauge how that decision may negatively impact them. They fail to look to other sources of information that challenge their own way of thinking or offer other perspectives.

8. Overconfidence. A natural human thought is that good things happen to me, bad things happen to others. For investors, this causes them to think that they have the skills and knowledge to consistently beat the market. And they’ll succeed, because blow ups don’t happen to them. However, they quickly learn otherwise.

9. Anchoring. We determine how to behave based on previous experiences, and relevant facts. Investors tend to anchor their thoughts to a reference point – like that time they took a risky leap and lucked out with a big reward – even if that reference point has no relevance to the decision at hand.

The long term consequences of poor decision making

Dalbar notes that, since 1994, they have seen that investors are impatient and move into and out of investments too frequently, typically 36 to 56 months depending on the type of fund. These flows tend to happen at the worst possible time. This behavior has been observed every year since 1994. The results are an equity performance gap of 4.7%. In terms of dollars, on a $100,000 account invested for 20 years the difference is shortfall of $185,471*.

*($100,000 invested at market return of 7.69% vs 4.79% over 20 years = $440,874 vs $255,403 respectively.)

These behaviors can be harnessed. They can even be eliminated. Using a rules-based system is one way to do it. Our Factor VI portfolios were created on this very premise and are designed to keep you invested, create a smoother investment experience and remove emotion/bias from the decision-making process.

Ready to learn how to reach your full financial potential by adjusting your behaviors? We’ll teach you how. Get in touch with us today and let’s work together!

An Investment Strategy with Downside Risk Protection 

If the market returns around 9% on average why would I need downside risk protection? And, what is that exactly?

While the market may average 9% annual return you aren’t getting that. First, no one can achieve the average, only the returns that make up the average. Those returns fluctuate from up 54% to down 43%. Most people just can’t stomach those wild swings. So what happens? They bail too early and get in too late. Investing is the only industry where most people sell when things go on sale and buy when they are not.

The market spends a lot of time in drawdown. The chart below shows drawdowns of 5% or more nearly 50% of the time. Historically, the market has always rebounded and grown. Your performance depends on your ability to psychologically weather the storm. Or, if you need money from your portfolio during a drawdown, well…yikes.

Given enough time you might be okay. How much time? 20, 30, 40 years maybe. You just can’t say with any certainty.

We also know this volatility robs your returns over time. It’s a mathematical fact that two funds with equal rates of return but with differing levels of volatility, the lower volatility fund would have a higher compound return. Not only does lower volatility make for a smoother investment ride, but it also helps create wealth.

What can you do about it?

The largest portion of our portfolios use momentum as a factor for lower volatility and downside risk protection.

Momentum

Momentum is simply using price to determine the appropriate allocation. Price works as the ultimate indicator because of supply and demand. The irrefutable law of supply and demand has been the ultimate guide to navigating markets for centuries. Supply and demand govern how prices move. Therefore, price tells the true story. For example, if there are more buyers than sellers, prices will rise. If there are more sellers than buyers, prices will fall (Dorsey, 2007).   

Our belief is that markets are not always priced efficiently and that investors do not always act rationally. Since markets rarely act the way textbooks say they should, markets can and do rise and fall. Investors can and do act irrationally for long periods of time. Using price momentum to capture these waves in a portfolio makes a lot of sense. In fact, its been studied for centuries.

Our equity strategies invest in equities when they are strong, according to absolute momentum, in order to capture the highest return amount. When equities are weak, we can switch to bonds, which offer a more modest return. Since the equity market is a leading economic indicator, a weak market can indicate a future economic slowdown, declining interest rates, and a healthy bond market. Stocks and bonds may complement each other in this manner. So instead of holding them as a permanent allocation in your portfolio, we can move in and out based on the trend of the market. This also is used with different asset classes within equities and within bonds.

The Benefits of a Momentum-Based Strategy

While momentum strategies does not avoid declines, they can greatly minimize volatility and drawdowns. The beauty of momentum lies in avoiding the BIG declines. Investors have to minimize the big declines to create greater success when investing. We’ve designed our momentum strategies to minimize these large drawdowns while still being able to capture upside. Over the long term you should be able to experience compound returns and greater investment performance. Contact one of our advisors or visit explore more of our website for detailed information.

What does this really mean for you? Momentum strategies may offer a smoother investment ride, allow you to stay invested (instead of bailing at the wrong time), and enhance long term performance.

How a Healthy Lifestyle Affects Your Financial Future

As financial consultants, we spend a lot of time focused on the health of your financial accounts. We take deep looks at your rates of return, cash flow, investment mix, and more to determine the ideal financial model for building your life. But we don’t often talk about your physical health, something that can have a huge impact on your financial future.

As the US has found itself in the midst of an obesity epidemic, skyrocketing health care costs, and uncertainty surrounding how to solve these issues, it is more important than ever that you take care of your physical health. Not only will this help you live longer, but maintaining a healthy lifestyle can mean a huge difference in your net worth and financial legacy.

Poor Health Can Cost You More Than $150K+ Over a Lifetime

Read that heading again. We aren’t referring solely to the costs of healthcare here. A National Bureau of Economic Research paper published in 2017 found that the average difference in net worth between a healthy 65-year-old man and an unhealthy 65-year-old man to be over $150,000. They also found that workers who led unhealthy lifestyles for more than 16 years lost approximately $4,000 in annual wages.

Think of the lost opportunity to make smarter investments! Imagine how you could grow your nest egg with the savings from fewer visits to the doctor’s office. Being more active contributes to the confidence necessary to compete for and win business opportunities that can increase your cash flow and your lifestyle. Taking time to maintain and improve your physical health can transform your present as well as your financial future. Some steps you can take to begin that transformation include.

  • Eliminate Vices for Better Cash Flow – We all fall prey to vices sometimes. If your weakness is for smoking, alcohol, fast food, or sweets, reducing or eliminating that habit can have a twofold effect on the trajectory of your life. Not only will you have cost savings from going without, but your body’s health will improve as well. That discipline can go a long way in saving you the costs of medical treatment and expensive habits.
  • Investing in Healthy Food OptionsEating healthily can be intimidating – not only is there the initial cash outlay of buying better produce and ingredients, but also the labor of shopping, preparing, and cooking the meals. However, eating healthier foods keeps you fuller longer due to better, more plentiful nutrients. There are numerous free recipe websites and how-to videos online to help you make healthy choices easier to make as well. And while it will take some time to get used to, once you’ve detoxed from processed junk foods you will feel better eating these healthy options.
  • Alternative Transport OptionsCommuting is a necessary evil in life. If you live close to your workplace, have you considered walking, jogging, or cycling to work? These options all save you money by reducing fuel and maintenance costs on your personal vehicle while pulling double-duty to help you get a little hidden exercise in your day. Sometimes this can help reduce insurance costs for your personal vehicle too, if your policy is based on an average annual mileage.

It’s not always easy to make these disciplined, healthy choices, but it’s worth it. Take some time to figure out how you can fit some healthier decisions into your daily life to help put a little juice behind your financial model.

While we aren’t certified personal trainers, we are qualified to take a look at your financial path for the future. Interested in improving your current financial situation and living the live you want today? Complete this questionnaire to get started!

The Rules of Financial Balancing

Achieving financial balance is no easy feat, but it provides countless benefits to your life in personal finance and beyond. Following the rules of financial balancing helps reduce your reliance on your paycheck and removes the fear and uncertainty that comes with living in debt or living hand to mouth.

Follow these basic rules to help get your financial house in order and start moving towards true financial freedom:

Maximum Protection

As discussed in our series on protecting your wealth and risk management, it is not enough to only protect your current possessions and investments. You must protect your full economic value- including future earnings- to achieve maximum protection. You can find a more in depth guide to achieving this in our previous posts, but building this safety around your income, investments, property, and life will help to protect yourself and your loved ones in case of a terrible tragedy. It may seem daunting at first, but the diligence needed to protect yourself and future is as important as the rest of these rules.

Annual Savings

What percentage of your income are you saving? We recommend that you save and invest 15% of your income annually. This may seem like a large number, but it is essential to achieving your full economic potential. If something is standing in your way of completing this goal, you must figure out how to break down that barrier – without this amount of liquidity and cash reserves, you put your family and future at a greater risk of financial catastrophe or failure. If you’ve struggled with debts, you can recapture those losses with the right financial model after you’ve eliminated that dead weight from your financial life.

Short Term Liquidity

You should always have 3-6 months of cash reserves on hand – this means enough cash to cover ALL of your expenses for that span of time, in case of a job loss or emergency. It is also smart to have 6-12 months of near cash in reserves held in an investment such as short-term bonds that are easily accessible. This cushion provides many benefits, including increasing your insurance deductibles to lower your premiums, freeing up more cash for investing and savings. These reserves give you peace of mind and the ability to navigate short term troubles without the added stress and worry of taking on debts.

A Balanced View of 401(K)s

Your 401(K) is a powerful tool for retirement. But it’s not an investment that you have easy access to. Taking loans against your 401(K) before retirement can cause major harm to your liquidity by robbing Peter to pay Paul. Early withdrawal is not any better, as you suffer an additional 10% penalty taxed as income, typically requiring you to pay taxes owed to the government. Even if you are just investing, your 401(K) can have limited options for investment selection, you can lose your employer match, and you typically pay for more expensive funds than in other similar accounts.

None of this is to say 401(k)s are bad. If your company offers one along with a company match, you should at least participate until you achieve the match, but only if you have achieved your short-term liquidity. This can be a complex balance to achieve and is an issue you should discuss in-depth with your trusted personal financial advisor.

Short Term Debt

Your short term debt should be zero. Carrying debts can wipe out your future profits as interest accrues and gains momentum. The two most common forms of short term debt that people carry are auto loans and credit card debt. You shouldn’t consider your car as an investment because it depreciates rapidly. A brand new car loses 50% of its value after the first three years on average. If you know how to shop smart, a used car that is 25% cheaper can be driven for years and preserve more of its value as an asset. Always use your debt intelligently!

Credit card debt can be one of the most crippling things for your financial life. An average interest rate of 15% means you pay $0.15 for every dollar you don’t pay off each year. As that accelerates, it can quickly grow out of control and destroy your financial life. If you can’t pay cash for something, you probably cannot afford it. Credit cards should be avoided, but held for cases of extreme emergencies or very special circumstances.

You may need to slow down other aspects of your financial life and even explore debt restructuring to achieve your target liquidity – this safety net is the most important part of your financial life. It’s crucial to follow these rules of balance in this order to move in a direction of health, stress reductions, happiness, and the best opportunity for financial growth.

Ready to get a complete picture of your financial health? Complete this questionnaire to get started with one of our advisors.

How Volatility Affects Investment Success

You don’t have to be a financial planner or analyst to know that the stock market ebbs and flows. But it would be wise to know why this phenomenon, known as volatility, happens and what it means for your investment success.

Let’s start with the basics.

What is Volatility?

As a measure of risk (uncertainty of loss), volatility refers to the amount of fluctuation in returns, and is typically stated as standard deviation. Rapid fluctuations in a short period of time mean high volatility, which is often caused by economic, corporate, and political changes.

Why Volatility Matters

Not to be ignored or considered par for the course, volatility has real impacts on your investments. How? Volatility diminishes compounded returns over time. As volatility increases, a portfolio’s compound returns (which is the money you eventually get) decrease. And this gets riskier and riskier the closer you are to retirement, as your portfolio has less time to bounce back. This could mean retirement delays if you don’t act quickly.

How to Minimize Volatility Risk

Diversification, or having a wide variety of investments within a portfolio, is often seen as a way to minimize volatility risk. The idea being that the good investment performance can balance the bad. But this doesn’t always work as intended. When it comes to minimizing volatility risk, you must think back to what affects volatility – often economic, corporate, or political uncertainty. And in these times of uncertainty, markets that may seem unrelated tend to act the same. Thus your diversification fails to protect your investments when needed most.

Debt funds are less prone to volatility than equity. However, there is a choice to make between short-term versus long-term debt, or income funds and dynamic bond funds, respectively. While dynamic bond funds can produce bigger wins, short-term debt offers a steadier return on investment with lower risk. Sometimes slow and steady wins the race, especially when you consider compounding returns.

Long-Term Investment Planning

Just because an average stock return is a certain percent doesn’t mean you will immediately realize that return. In fact, actual returns tend to fluctuate significantly higher and lower than the average. This is why it’s important to plan with the long-term average in mind. The long-term outlook allows good years to outweigh and balance the bad, eventually achieving the averages. However, reducing risks and volatility will be an important factor in reaching that long-term average and increasing the consistency of investment returns, which requires smart investment planning.

At JarredBunch, we support the use of financial models as the foundation for your investing strategy to help manage risks while capturing opportunities. This goes beyond traditional financial planning and portfolio management to provide a larger picture of a client’s financial life and needs. Our models help clients make smarter investment choices that reduce volatility risk, ultimately putting your investments to work for you – the way it should be.

Ready to take the next step? Drop us a line if you have questions or want help reaching your full financial potential.

What Will Your Financial Legacy Be?

So much literature surrounding financial health is focused on the grind of building balances, eliminating debt, and taking advantage of favorable markets. When is the last time you stopped to ask yourself “What does my eventual retirement mean for future generations?” Chances are it isn’t an idea that comes up very often, meaning you’re likely neglecting the key beneficiaries of your wealth planning.

The legacy you leave behind stretches far beyond your work history, your loved ones, and cherished memories. How you prepare for your retirement, health care, and financial needs can mean the difference between boon and burden for your children and loved ones. Studies increasingly show the reality of inter-generational poverty- the financial state that you leave behind is now more important than ever.

Your Family Legacy

Thinking of death is not a comfortable thing, but it is important as you plan for your eventual retirement. Proper budgeting and planning can keep you independent and avoid putting burdens of time, emotion, and finances spent on medical care for you. A medical emergency can incur tens of thousands of dollars of debt. Leaving that burden for your children can impact their own futures and those of their children.

A financial burden like healthcare debts can also further complicate the painful emotions of saying goodbye by introducing regret and resentment. Planning your finances properly and commiting to a healthy, preventative lifestyle can preserve your retirement and their financial futures, paving the path for prosperity and plenty of happy memories.

Your Legacy of Giving

What charities, causes, or organizations matter most to you? Charitable giving is incredibly important in life, but the proper financial plan can provide for you to make a substantial contribution after your death. This generous action can put a stamp on your values and beliefs that guided your life, and help improve lives and communities long after you are gone.

The Lessons We Teach

Most importantly, your financial status in death serves as a testament to your life. No matter your age, your children will still learn from you. Creating a positive legacy in this way can pass down important lessons of dignity, preparedness, self-reliance, and the positive impacts of a giving spirit to your children and grandchildren.

Saving at least 15% of your salary is a good start on your way to reaching this goal. Truly hacking your future, though, requires some more insight and planning. Contact us today for help making the best future we can together.

Protecting Your Wealth – A Balanced Financial Life

As we conclude our series on protecting your wealth and financial well-being, we are taking a deep dive into the importance of balancing your financial life. In order to protect your hard-earned wealth, it’s not enough to rely on risk management and a good insurance mix: you must balance your financial life entirely.

One of the most important aspects of financial balance is determining your lifestyle burn rate. Any financial choice you make that has the potential to incur debt should not remove your ability to remain in financial balance. You should still be able to save 15% – 20% of your income and maintain your core liquidity (3-6 months of income in cash, 6-12 months of income in near-cash reserves.) Those new debt payments must fit in as part of your lifestyle. If a decision you make negatively impacts your ability to maintain one of those things you are out of financial balance and the payment exceeds your lifestyle budget.

Other key guiding principles for maintaining your financial balance include:

Property and Casualty Insurance

These are important for covering the replacement value of your assets. You also want to ensure that your assets are protected if you are found to be at fault in a major accident. Do you know what amount your are responsible for versus your insurance’s responsibility? Review your policies and make sure that you can cover the terms within. If not, it’s time to shop around for a new policy with a premium and deductible tolerable for you.

Savings

You should actively be saving 15-20% of your gross income annually. Any less than this can mean missing out on millions over the course of your lifetime. You should have this amount spread across an emergency fund, liquid savings, investments, and retirement funds, each with their own financial model and game plan guiding them.

Short-Term Debt and Short-Term Capital

Any short-term debts you take on should fit into your balanced lifestyle burn rate. Zero short-term debt is preferable, but you should rebalance your lifestyle plan if short-term debts are necessary. You should also have 6 to 12 months of expenses in liquid or near-liquid assets in case of emergency or disability. Doing so will cover you in case of unexpected gaps in pay or other unforeseen emergencies.

Mortgage Size

Are you the type of person who wants the biggest, nicest home on the block? If so, make sure that your mortgage fits into your lifestyle. A good rule of thumb is that your mortgage payments should not be bigger than 15% of your gross income.

Prematurely Funding 401K

While 15% to 20% of your gross income should be saved annually, you should avoid pumping too much into your 401K and other qualified retirement accounts. These funds are effectively locked away and carry stiff penalties for taking early distributions. You should never have more of your money out of your control than in it.

Net Income

Are you living a budgeted lifestyle? Or are you lying to yourself about cash flow challenges? Saving religiously and spending the rest on your lifestyle is the first step towards balancing your finances. Be honest with yourself about where your money is and show the discipline to live within your means.

Want to get a clearer picture about balancing your financial life? Complete this questionnaire to get started with us.

Protecting Your Wealth – Death and Income Loss

In continuing our series exploring more ways to protect your wealth, we’re taking an in-depth look at a sometimes uncomfortable subject: death and disability. These are always tragic outcomes, but the potential impacts of those can be mitigated through some careful planning and risk management.

As we’ve already discussed, taking an honest look at what a devastating loss would look like for your family and determining what coverage is most effective is essential. Doing so will help you make sure your family is taken care of in case of a tragedy.

Financial Impacts of Death and Disability

If you were to die today, what would your full economic value be? If you earn $75,000 annually at age 45, your minimum income earned until a retirement age of 67 would be $1,650,000. That is the amount of money your spouse and children would be missing out on. While many say you should ensure at a rate that will pay off debts alone, covering your full economic impact will better protect your family’s future. If you account for inflation, raises, bonuses, investments, and more, that amount needed can grow to as much as $3,000,000. Determining your full economic value can be a powerful tool in deciding what amount of insurance you need.

Term Life Insurance

Term life insurance is the simplest and cheapest option to buy. A general rule that is frequently repeated is “buy term and invest the difference.” If you are disciplined or working on a tight budget, this solution can be a powerful one. The trade off is that there is no benefit to term life unless you pass away. If you stop paying your premium, the coverage lapses as well. Some tips for buying term life insurance include:

  • Select level term so that your payments don’t creep up and decrease the affordability years from now.
  • Explore a convertible policy in case you want other options in the future
  • Understand that your protection only lasts for the time period you select and you will need a replacement strategy after it expires

Whole Life Insurance

Whole life insurance, also known as permanent life insurance, is another option. This policy has a guaranteed death benefit as well as a cash value that builds over time. You can pay a loan to yourself by accessing the cash value of this policy, accelerate death benefits if you become terminally ill, and even receive chronic illness benefits. These are often included as “riders” that you need to research and ask about to ensue they are included. As a trade-off, whole life is generally more expensive than term life insurance, so we recommend our clients to do a blend of both to keep costs manageable and receive excellent coverage and benefits. Some tips for buying whole life insurance include:

  • Buy from a  reputable mutual company
  • Make sure your policy has a guaranteed cash value growth
  • Make sure your policy has a guaranteed dividend rate (included in most policies)
  • Project what would happen if you change your premium, such as stopping payment when you retire to preserve your income

Disability Insurance

Should you experience an injury that causes your permanent disability, you may never be able to work again. If you are lucky, you will be able to find a workable solution in another industry, but it may not pay as well as your current one. In either case, you need to ensure your current income is protected with adequate disability insurance.

>Many companies offer disability insurance as a company benefit. Make sure that you understand the total amount of coverage. This way you can determine what coverage you need as a secondary policy. The goal is to replace as much of your income as possibility. Some tips for buying disability insurance include:

  • Make sure it has its own occupation coverage, which protects your income if you cannot work in your current role but can still work. (Think of a surgeon who injures their hands but can still work as a hospital administrator.)
  • Ideally, you will be the policy owner so you can transfer it outside of your current employer without it expiring.
  • Evaluate the elimination periods, the period of time before your policy starts paying a benefit. Extending your elimination can lower premiums, but you need to have a cash reserve or other solution in place to cover this time.

Determining what is right for you can be a daunting task. Plus, there are plenty of insurance salespeople out there trying to muddy the waters and sell you a confusing product. Understanding these basics will help, and we’re here to help you make sense of them. Give us a call or email for a quick conversation to see what’s right for you.

Protecting Your Wealth: Risk Management

When building your wealth management plan, much of the focus is on how to generate wealth, how to ensure you have enough savings for retirement, and how to optimize your returns and strategies in anticipation of your future needs. With such a focus on increasing your pool of funds and the direct risks posed by fluctuating markets and other factors, it can be easy to overlook risks everyday life can present to your finances. While they may not be a market force you can track in charts and dashboards, the potential impact of these other risks cannot be understated.

So- as in all financial risks- what’s a savvy investor to do?

Manage them appropriately.

Common key considerations of financial risk management include:

Auto Insurance

Do you know your deductible for repairs? Do you know the caps on your auto insurance coverage? When is the last time you reviewed what protection you were receiving in exchange for your hard-earned dollars? Take the time to review your policy and shop around – odds are you can get similar coverage or an improved rate from another vendor or by contacting your insurance agent.

Consider raising your deductible to reduce your premiums so you can invest the difference. You should also explore options for adding uninsured motorist coverage, so you won’t be left in the cold if an uninsured driver totals your car.

Homeowner’s Insurance

Do you have the full replacement value of your home? What extra coverage do you need? Is your sump pump covered? What about water damage? There’s a large difference in coverage and premiums between water damage and flood protection – you should make sure you understand that and have the coverage you need before your basement starts turning into a swimming pool.

As with auto insurance, explore ways to lower your premium so you can invest the difference. That liquidity can be key in setting yourself up for success and having a large enough emergency fund to help cover the unexpected.

Umbrella Policies

Whether you have renter’s insurance or homeowner’s, you should consult your insurance agent to add an umbrella policy. These add-ons to your larger policies cover additional items such as injury, personal assets, and more to extend coverage in case of a disaster. These largely affordable policies can lower the amount of money that you would be responsible for in case of an injury incurred on your property or other incidents.

Long Term Disability Coverage

Disability protections help replace your income in case of a catastrophic injury or disability that keeps you from working for an extended period of time.You should consider purchasing your full economic value in disability protection. The added premiums are worth the peace of mind knowing that your income and your family’s well-being will be protected should something happen to you. Explore what coverage is offered by your employer and look for opportunities to supplement that amount to help lower your premiums.

You should also explore extending your elimination period, or the period of time before benefits take effect, to lower your premium. Only do this if you have the liquid assets to cover more than 90 days without income. The elimination period is effectively your deductible for disability policies and you should explore its potential impacts similarly.

Other spaces you should review your risk and determine if your current strategy is optimized include life insurance, wills and estate planning, living wills, and more. We’ll take a deeper dive into those complex and emotionally-charged topics in a later post.

Need help understanding what coverage is appropriate for your economic needs? Complete our questionnaire to help us better understand your economic situation, and we’ll help you manage your risks together.

Threats to Investment Success: Three Steps Toward the Right Path

In our conclusion to our series concerning major threats to your investment success, we’ll discuss key ways you can get your finances moving in a positive direction. For the full experience, catch up with our posts exploring sequence of returns risk and longevity risk and what they mean for your financial future.

As we’ve highlighted, your money can be negatively impacted by negative runs on the market. Outliving your returns is also a huge concern for those nearing retirement. The problem is that so many people do not consider these risks in planning for retirement. In all things, failing to prepare means preparing to fail. You should reassess your financial strategies and ensure you are following these three strategies to adequately prepare for retirement.

Implement a Financial Model

The first step to preparing for retirement is ensuring that your strategy is designed for success in any anticipated market environment. Determining the right mix, volatility risk, exposure to different markets, and more can all influence the success or failure of your investing plan. Strategizing these aspects can help you avoid devastating market volatility that can increase your sequence of returns risk, while still providing effective upside capitalization to grow your money at an effective and sustainable rate. This can be a difficult process and one that requires expert consultation to determine what strategy will work best for you.

Overcome Threats

As we’ve highlighted, sequence of returns risk and and longevity risk can be devastating to the financial stability of your retirement. Longer survival rates expose you to more opportunities for sequence of returns risk to take hold. A strong investment plan acknowledges these risks and plans accordingly for them, evolving alongside your needs and a shifting marketplace. Whether that means preserving capital or investing further in high-return opportunities is up for you and your future hacker to determine.

Eliminate Emotional Biases

The biggest threat to the success of your retirement is you. Emotionally-charged decision-making is a very real problem that can sap your investments of their momentum and lead to catastrophe down the road. Systematizing your investment through implementing automation and a strong financial model will limit the risk of you getting in your own way due to cryptocurrency “fear of missing out” (FOMO) or chasing returns that have already come and gone. In investing, there’s a lot at stake – that’s why you must proceed with a clear mind.

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Threats to Investment Success: Longevity Risk

In continuing our series on threats to your retirement investment success, we’re taking a deep dive into why a long life can cause problems for your financial future. Most people want to live a long and healthy life and survive long enough to thrive in and enjoy retirement. But, increasingly long lives pose a threat to retirement known as longevity risk. The issue itself is not the length of your life, but the additional risks your financial well-being is exposed to each additional year can contribute to a financial catastrophe. Shifting market returns, inflation, increased housing or medical costs, and other factors outside of your control can compound annually and diminish your retirement fund’s efficacy.

Why a long life increases retirement risks

When building your retirement income plan, running out of money is usually a primary concern. When your income is determined by assets and requires regular withdrawals, managing your plans can be incredibly difficult – unforeseen problems can mean the difference between future prosperity and survival. Ideally, you finance your retirement based on the interest your gain from assets, but selling the principal assets to cover unexpected costs can cause greater issues in the future.

So what’s a retiree to do? Many advisors counsel conservative investment strategies to reduce your risk of negative returns, but this can limit potential growth as well. Reduced growth means a higher likelihood of selling your principal investments. Either solution can mean reduced withdrawals in the future and a lower standard of living that can lead to a downward spiral in your financial and physical life.

How to manage longevity risk

As with sequence of returns risk, traditional portfolio management principles fail to address all the risks and possible outcomes of investment strategies. Even with an average return of 7%, you cannot count on that solving your challenges due to sequence of returns risk. Failing to plan for negative eventualities will only more pain and struggle in the long run.

The solution is an investment strategy based on financial models and sound strategies to reduce your risk exposure while still capturing upside returns. We like Warren Buffett rules to finances:

Rule #1: Don’t lose money

Rule #2: See rule #1

A large part of making these strategies a reality requires removing emotion from investment management. Making decisions based on fear, reactionary selling, FOMO, and more can reduce your return (as well as your principal) and keep you from thriving in retirement, rather than just surviving.

Our approach to managing retirement accounts has a proven track record of success. Want to learn how we can help you achieve investment success through our holistic approach to financial models? Complete our questionnaire to get a picture of what we can do for you.

Threats to Investment Success: Sequence of Returns Risk

One of the hardest truths to accept in life is that you can lose even if you make no mistakes. This is even more devastating if it affects your financial well-being and future. For those people nearing retirement or who are already retired, these challenges can literally mean the difference between a fulfilling life in retirement or constant worry. If your retirement funds run out due to a poor sequence of returns, what are you supposed to do?

What is sequence of returns risk?

It’s not just the average of your returns over time that matter, but the sequence in which they land. You can never be certain of when markets will draw down, and if they do at the start of your retirement it can be devastating. For example, a 20% drop can wipe out 30 years of gains. Even if markets recover 20%, an initial $500,000 balance would only increase back up to $480,000.

How your return sequence can impact your life

A run of bad returns can reduce the viability of you living through retirement without working, or even having the ability to retire at all. If your portfolio isn’t properly balanced, a market downturn can undo decades of hard work and sacrifice. The potential impact of this risk cannot be overstated: sequence of returns risk can undo everything you worked towards in investing in a retirement fund.

Understanding when you can and should draw from your retirement savings means understanding how the market is performing as your approach or kickoff your retirement. Drawing too early on your funds during a bear market could crash everything you’ve worked hard for, simply because you didn’t have parameters or personal rules in place to prevent you from poor timing.

Ways to protect against this risk

Market volatility is a very real thing. Overcoming this challenge is no small achievement. At JarredBunch, we champion the use of financial models as the foundation for your investing strategy, rather than traditional portfolio management theory. This helps us manage downside risks while capturing upturn opportunities.

It’s crucial to address your entire financial life including future and retirement goals. Removing emotion from the equation limits additional losses due to panicked selling and “FOMO-investing.” Remember, portfolios that practice “buy and hold” routinely outperform those who try to time the market with selling.

Want to learn more about how we manage sequence of returns risk and help you achieve your financial goals? Complete this questionnaire so we can help you make your dreams a reality.