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Wealth Eroding Factors in Retirement 

You think once you get to retirement its easy living, smooth sailing, you’ve made it, right? Don’t think so fast. There are a whole set of new factors trying to eat at your wealth. Here are a few you may have to deal with:

Eroding Factors in Retirement

There are six eroding factors that will specifically affect your retirement:  

Duration of Retirement: How long do you anticipate your retirement lasting? You may retire at 55 or 73 and that makes a big difference. How long you plan on pulling from your assets impacts how much you can take and how much you need to save.  Plus, people are living much longer so you may have to stretch your retirement dollars to age 100 or beyond.  

Distribution Rate: A recent study by Merrill Lynch surveyed wealthy individuals and 20% of individuals did not know what distribution rate would enable them to sustain their wealth indefinitely. Nearly a quarter thought that a 10% distribution rate was reasonable and would last forever. Only about 1/6 had a more realistic distribution rate of 3% or lower. Most financial institutions site a 4% or lower safe withdrawal rate in order to have the best chance of sustaining your wealth.  This really impacts how you invest both now and into retirement.  

Children and Grandchildren: Having children and grandchildren is a wonderful thing. I have three children and they are the absolute joys of my life. As they get older, they get more expensive. Even when you enter your retirement years they can be a financial drain. It’s not that you won’t happily help them but you need to make that part of your financial model. How will you handle it should it happen?   

A friend of mine had to adopt his daughter’s two young children just as he was entering retirement. That’s a significant financial commitment that is affecting his retirement. You don’t know what will happen with your children, grandchildren, or spouse. Stress test it with your financial model so that if it happens you won’t be financially devastated.   

Legacy: Also, consider what you want to leave behind. What is your legacy? This is an area you really need to search inside yourself to figure out. Each person is different – money for the children, a charity, a cause, or nothing (spend it all). There’s no right answer, it’s just what you want to do. But it’s definitely part of your financial life.  

Risk: While risk is an issue throughout your life, it becomes more pronounced when 1) you are older and approaching your retirement years, and 2) when you have a lot at risk. Our entire approach is about risk management for your entire financial life, no matter how old you are. From protecting your assets (which includes you), to your investments, to maintaining financial balance.   

If you’ve done all that we’ve suggested to this point then you are probably good to go. However, you may need to look at tilting your investment style more conservatively, or reallocating to allow for more income. Or making sure your strategy has downside risk protection that allows you to be in equities for a longer period even well into retirement. Have uncorrelated buckets of money is critical as well. 

For investments, one of your biggest risks is sequence of return risk. That’s the risk of your investments being caught in a downturn at a critical time when you need them most. For example, what happens if the market crashes when you are 67 and retired? What about when you are 70 or 75? This is where having a defined investment policy statement and buckets of “cash” will allow you to weather the storms you may encounter. See the section on a strong financial position later in this booklet.  

Communication: This is a critical area that most people don’t even consider. Your loved ones should know where your most important financial information lies. Introduce whoever may be taking over your estate, not matter how small it may/may not be, to your financial advisor(s). Let them know your plans, wishes, goals for your assets. It seems a bit morbid for some people but it’s a critical conversation to have and to maintain as you get older. Communication plays a role in planning your legacy as well. It’s not enough to state your wishes out loud. You need to put them on paper and protect them by communicating your wishes through a will or a trust.

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There are many other areas to consider but most people ignore these. If you need help designing your plan for retirement or just a second look, we’re happy to help. Jumpstart YOUR knowledge of all the major wealth eroding factors by downloading our free ebook today:

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Two Major Risk Factors to Retirement Success

For most people its not until they hit 50 do they have the O.S. moment – do I have enough money for retirement? Am I on track to continue my lifestyle when I stop working?

There are many principles we focus on early and often in financial life management, but a couple very few address are a couple risk factors that are largely out of your control but you must prepare for – Sequence of Return Risk and Longevity Risk. Traditional financial planning just can’t address these two issues so they largely are ignored, however, they are critical to what your “retirement’ lifestyle will be if you don’t address them now.

#1 - Sequence of Return Risk  is the order in which you get returns on your portfolio, i.e. 5% year one, 12% year two, 8% year three, -9% year four, etc. It’s not just the real return which matters, but also the order of these returns. Getting negative returns at the start of retirement can have a devastating impact on your retirement and how long you can live without running out of money. A 20% drop could wipe out 30 years of gains!  You never know when the down market will appear and its effects on your portfolio.

The sequence of returns leading up to and into retirement make a huge impact on the amount of income you will have. Suppose you have a $500,000 retirement fund and need to know how much you can withdraw to live on for the next 20 years. The stock market has averaged 10.24% annual return from 1926-2014. So you would think you should be able to pull at least 10% per year, on average, and have your money last 20 years. On $500,000 that gives you $50,000 annual income. Even if the return fluctuates in the future, as long as it averages at least 10 percent per year, the fund should last 20 years, right?

Wrong! Given typical levels of stock market volatility there are only slim odds that the fund will survive the full time. The following charts simulate this retirement strategy with actual S&P 500 returns starting in various years from 1992 – 1995.

As Ed Easterling puts it in Unexpected Returns, “The cycles that occur during an individual’s period of investment will dramatically influence the returns that investor realizes.” For investors to ignore the strategic implications of this investing reality is folly.

Even with the same behavior and doing everything “right,” you can get very different results even with the same average return.  This is sequence of returns risk!

#2 - Longevity Risk – The risk that you will live a long life and outlast your money. In retirement, longevity risk becomes the greatest risk because the longer retirement lasts (the longer you live) the greater the chance you will succumb to other forms of risk. Increased longevity means more time for another financial crisis, increased chances for health problems, housing costs, more time for inflation to compound, and so on.

Running out of money is usually at the top of the list of concerns when building a retirement income plan. And, it should be!

Once you get into retirement you no longer have an income. Your income is determined by your assets. Retirees often require regular withdrawals from their portfolio to pay for living expenses. Traditional methodology is that you spend the interest off your assets (hope that is enough!) or a combination of interest and the assets themselves.

To ensure your money will last your advisor says to invest more conservatively to lessen your chances of losing money. But at the same time you are diminishing your returns, which means a greater likelihood of dipping into your principal. Neither is a prospect for success!

Maintaining some acceptable level of return means a portion of your portfolio is at higher risk. High portfolio volatility increases the likelihood that you will have to withdraw funds while the portfolio is down, maybe even deep down. The amount of remaining principal determines the amount you can safely withdraw each year. High portfolio volatility and suffering a large loss requires a reduction in retirement income (and lower standard of living). This matters a lot because now you’ve begun a downward spiral from which you may never be able to recover. Sharp  drawdowns  and roller-coaster volatility can drive you to sell equity holdings to cover living expenses. As a result, you get to experience the decline but not the recovery, which will quickly erode the portfolio and leave you without any income.

Diversification is traditional portfolio theory’s answer to managing these risks. While diversification may manage non-systematic risk (specific risk), it fails to manage systematic risk (market risk, day-to-day fluctuations in the market), particularly during bear markets. Asset allocation, as we’ve noted above, only gets you so far. Many markets that were once normally non-correlated now move together under economic stress. Diversification can then fall short when it is needed the most.

So what’s the answer? We’ve studied this A LOT and have come up with some unique answers that are easy to understand and simple to implement.

Download our free guide to learn how we avoid these major risks to your retirement and start living the life YOU want:

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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.

Investment Noise: Know It and Forget It

There’s a simple strategy for being a successful investor – tune out the investment noise. The noise that we’re bombarded with daily, from the talking heads on television and radio, to the printed press. The noise that is perfectly exemplified in the video clip above.

I’ll never forget watching that whole thing play out. Jon Stewart wasn’t the only one to come down hard on Jim Cramer – he got flack for his Bear Stearns praises right before their collapse from all sides. But again, he was just creating noise, creating hype in an already tense time, not unlike many of his media counterparts.

The Noise is Never-ending

This isn’t meant to pick on Cramer. He’s just the lucky example that I remembered when sitting down to write this article. The truth is, investment noise is endless.

Look at what took place in the last few weeks – the Dow saw its biggest drop since mid-May over the growing tension with North Korea. International markets in Asia and Europe followed suit. After these reports surfaced in the media, the VIX, a volatility index widely used to gauge market fear, soared by 44% – its highest level since Trump was elected. That’s how big of an effect investment noise can have on our sense of well-being.

It seems there’s more noise than ever right now. Noise about foreign affairs. Noise about politics. Noise about noise. There is no shortage of pundits attempting to explain how all of this swirling mayhem will impact the market and your investments.

All this noise is irrelevant to long-term investors. Since we use lifetime strategies, the noise of the day makes no impact on our investment decisions. However, even the best investors can easily get spooked by investment noise overload.

Related: The 6 Most Common Bad Investor Behaviors to Avoid

That’s because what we read and listen to ultimately affects our actions. According to a study from Pew Research, we listen for bad news almost three times more than we listen for good news. This negativity bias makes it appear that bad news overwhelms good news, even if that’s not the case in reality.

In reality, a 1% drop in the stock market is normal – even to be expected. But when it happens, the stories in the media are all negative, full of gloom and doom. The positive rebounds that follow rarely get as much attention.

Investment Noise: Know It and Know How to Forget It

For you to find true investing success, you have to know investment noise when you hear it, and be able to forget it just as fast.

Related: These 9 Principles Can Lead You to Investing Success

Shawn Achor, Harvard educator and New York Times bestselling author, has become one of the leading experts on the connection between happiness and success. His 2013 book, Before Happiness, has a key focus on noise-canceling strategies. Achor used this strategy to explore the link between tuning out irrelevant information (noise), and how this increased the likelihood of you reaching your goal.

So, if reaching your full financial potential is at the top of your list, tuning out investment noise is going to play a critical role in reaching that goal.

Achor even defines what noise is, and classifies it into these four categories:

1. Unusable. Information is likely to be noise if your behavior will not be altered by it. For instance, look at our human tendency to obsess over current events and the short-term effect it may have on your portfolio. If the event in question has no effect on your long-term strategy, then you need to ignore the noise.

2. Untimely. I can’t stress this enough – by the time you hear about it, it’s too late. You’ve missed your window of opportunity to capitalize on the market movement. Frequently engaging in stock picking or market timing will almost always cause you more harm than good. If the story could change tomorrow, it’s noise.

3. Hypothetical. This is the most popular type of investment noise. Everything you hear in the media is based on what someone thinks will happen. Listening to expert predictions and market gurus is noise 99% of the time. That’s because it’s all hypothetical until it actually happens.

4. Distracting. An easy way to tell if something is noise is if it distracts you from your long-term goals. Changing your investment allocation based on which hot stock the talking heads are endorsing today is not a long-term strategy for success. Heck, it’s not a strategy at all – it’s simply a distraction.

Why Does it Matter to You?

Successful investors don’t let noise dictate their actions. Instead, successful investing begins with a real plan. We believe that plan should be rules-based, and built on your values. This helps remove emotion and subjectivity, and provides a policy by which you can make better investment decisions. Not only that, but our strategies are designed to mitigate market volatility, which makes for a smoother investment ride. This is key in reducing your vulnerability to investment noise.

Related: The Best Way to Guide Your Investment Decisions

Stay the course, recognize and tune out the noise, and you will have better investing results for it.

Compound Interest – Myth or 8th Wonder of the World?

Einstein is credited with saying compound interest is the 8th wonder of the world. While I’m nowhere near as smart as Einstein, I have good reason to believe there is only partial truth in his statement. Specifically because of two myths surrounding compound interest that we will discuss here.

Myth #1: I will earn 7% consistently.

Mathematically, the power of compound interest is incredible. The financial industry consistently tells you to save early, save often, save (then invest) as much as you can. At an annual growth rate of 7%, you will be a millionaire at retirement. You’ve seen the graph. Just save a little each pay period, and it will growth exponentially. And they’re right…to a point.

To maximize the effects of compounding interest, two elements must exist: 1) Time. 2) Consistency.

To get the exponential growth Einstein was referring to takes years. How many years? Most likely 20+. If you are in your 20’s and methodically saving for retirement, compounding works in your favor. If you are 55 and want to retire in 10 years, it won’t help you. Most people don’t realize this until it’s too late.

Another big problem with compound growth is figuring out where you’ll get that consistent return. Interest rates are near zero and bonds aren’t returning anywhere near 7%. The stock market is the only place to achieve an annual growth rate of 7%. At least that’s what the market has delivered over the past 20 years. But does that mean you’ll get a 7% compounded return? Probably not…but, why?

The type of compounded return from the market is only seen over very long periods, at least 20 years or more. So, for long-term savings like a 401k, you can expect to achieve this type of growth as long as you leave it there. The problem is when you have to take distributions on that account. You never know what the market will be doing at that time. If it’s in a bear market, you better have another source of funds to draw from, otherwise you’ll start eating principle. This is called sequence of returns risk. You can see the grand fluctuations in the chart below.

Myth #2: It’s easy to withstand wild market fluctuations.

The other problem is whether you have the stomach to weather large drawdowns. Large, and even not-so-large, market drawdowns have a direct impact on your ability to compound returns. In the early 2000s it took several years just to get back to even. In 2008 there was such a drop that many investors sold out, just in time to lock in big losses. Withstanding wild fluctuations over a 20-year plus period is hard, very hard. You have to be true to yourself to know if you can handle it. Otherwise you’ll never see compounded returns from the market.

Why Does It Matter to You?

These are big issues for our clients. Many of whom are entrepreneurs or business owners who’ve made great sums in their businesses. While they still want to grow their investments, the overriding goal is Warren Buffet’s two rules of investing: 1) Don’t lose money. 2) Never forget rule #1.

To help our clients accomplish this we use rules-based trend following strategies. Our strategies use trends to capture upside momentum, as well as trying to limit drawdowns. This provides downside risk management with upside market potential. By providing a smoother investment ride, our investors are more likely to stick with the strategy long-term. That’s when they have a better chance to capture impressive compounded returns. That’s when they have a better chance of reaching their full financial potential.

Volatility Gremlins Are Killing Your Bottom Line

If you have an investment account you’ve no doubt heard the terms risk and volatility. Every investment has elements of each. But what does it really mean for you?

Understanding Risk

Risk is the uncertainty of loss. Risk is the likelihood that your investment will lose money. You know there is risk involved when investing in the stock market (whether through individual stocks, mutual funds, or ETFs), and you likely understand much of this risk. What may be less likely for you to understand is that increased risk does not mean increased return. It just means increased probability of losing money.

You must understand that risk does not drive returns.

As you faithfully save into your investment or 401k accounts each month (and you should be!) you may expect, and are often told, that the market provides a 7% real return on average. The actual return will fluctuate with a standard deviation of around 20%. This means the return normally fluctuates +/-20%.  Over time an investor would expect the returns to go up and down, but average around 7%. The kicker is that your wealth won’t compound at this rate, but more likely at a rate of around 5% per year. Why is that?

Wild fluctuations can kill your returns – Volatility Gremlins!

Volatility Gremlins

As a measure of risk, volatility refers to the amount of fluctuation in returns, and is typically stated as standard deviation. The lower the volatility the better. Ed Easterling, of Crestmont Research, coined the term Volatility Gremlins. Volatility diminishes compounded returns over time. This matters to you  since compounded returns are what you get to spend  (you can’t spend average returns).

As portfolio volatility increases and returns become more erratic, the portfolio’s compound returns (what you actually get) get lower and lower compared to the average returns. Here’s an example from Easterling to show the volatility gremlins “eating your returns.”

Even a diversified portfolio can exhibit large volatility spikes and variations regardless of risk. For example, the charts below show the volatility of a typical portfolio consisting of 60% stocks/40% bonds and with the S&P 500.

Why Does it Matter to You?

Controlling portfolio volatility is important for every investor – it’s what protects your bottom line. It’s especially important for retirees, or investors who are approaching retirement. As you get closer to retirement, a major investment decline means your portfolio won’t have enough time to recover, which may require you to postpone retirement to make up for the shortfall. Traditional asset allocation and diversification does very little to address volatility.

That’s why we’ve designed our investment strategies to do just that. When you reduce volatility, it increases the consistency of your investment returns, and can make for a less stressful, even enjoyable, investment ride. You can also realize higher compounded returns (we’ll discuss how volatility impacts your ability to compound returns in a future post, The Myth of Compounding).

Secrets from the Rockefellers: How They’ve Protected Their Wealth for Generations

The Rockefeller name has been a prestigious image of wealth, power and business in American history. Other names that would rival it include Walton, Ford, Mars and S.C. Johnson. And they’ve all managed to keep their billion dollar clans intact for generations.

Wealth Eroding Factors: Gift and Estate Taxes

One of the biggest wealth eroding factors can be estate and gift taxes that you will incur at the time of your death. Luckily, as of 2016, the Estate, Gift and Generation Skipping Transfer (GST) tax exemptions are $5.45 million per individual and $10.9 million for married couples. This means you can leave a minimum of $5.45 million and a maximum of $10.9 million (if married) to your heirs and pay no federal estate or gift tax.

What’s that? You’re in the clear because this won’t affect you? Well, great. But that doesn’t mean you don’t need to protect your wealth now and at the time of your death. Even fortunes worth far less than $5.45 million are still substantial sums of money.

How do you know that your assets will be distributed according to your wishes? How do you ensure that your estate will avoid the costs of probate? How do you protect your wealth from divorce, creditors and the like now and when it’s passed to your beneficiaries? How do you pass your wealth to your beneficiaries without them incurring large income taxes? These are all important factors to consider.

Protecting Your Legacy

Regardless of where you fall on the wealth-o-meter, the wealthy have three important estate planning goals:

1. Maintain satisfactory streams of income.

2. Protect their wealth from creditors forever.

3.Keep their money outside of the wealth transfer system.

Dynasty Trusts

For the ultra-wealthy (i.e. Rockefeller status) a fourth goal may be preserving their wealth for generations, far beyond their death. This is the core function of a Dynasty Trust.

Dynasty Trusts allow you to fund up to the amount of the exemption ($5.45 or $10.9 million) into the trust. These types of trusts allow the assets to be gifted to heirs who are more than one generation younger than the Grantor (creator of the trust), free of tax. This is a key function of Dynasty Trusts, because they protect your wealth against the GST tax. Leaving part of your legacy to those more than one generation younger than you is effectively “skipping” a generation in the government’s eyes. Because of this, there are special regulations that can cause you to get hit the hardest with taxes in these instances if your wealth isn’t properly protected.

Initially, the Rule of Perpetuities limited Dynasty Trusts to a maximum period of 21 years after the death of the last identifiable beneficiary living at the time the trust was created. So, if you set up a Dynasty Trust today and have a 2-year old grandchild, the trust would remain in effect until 21 years after their death. So, even with the rule in effect, this trust could easily remain in-force for 100 years. However, if done properly, Dynasty Trusts can last indefinitely. Many states have done away with the rule, allowing these trusts to essentially go on auto-pilot. The Grantor can also opt to extend the time period with verbiage in the trust that amends the rule. Either way, the value of your trust, and its appreciation, will pass to your descendants over multiple generations free from estate, gift and income taxes.

Revocable Living Trusts

A Revocable Living Trust is very ideal for the rest of us mortals who may not reach or exceed the $5.45 million exemption, but still want to protect our wealth and accomplish those three important goals.

First, “Revocable” means that you retain the right during your lifetime to amend, change, revoke or terminate the trust at your discretion. Second, “Living Trust” means that the trust is created while you’re alive, and goes into effect at the time of your death.

There are many benefits associated with a Revocable Living Trust, the first being its ability to avoid probate. Probate can get costly rather quickly, and are extra costs that exist in addition to any gift or estate taxes. If Uncle Sam can’t get you there, he can get you here. It can also become a drawn out, time consuming process. Rather than putting your loved ones through the time, stress and expense of probate, this trust can keep your estate out of probate. Also, many probate records are open to the public, so a trust ensures maximum privacy for your family. The amount of your estate and your beneficiaries are not public knowledge.

Another key element is that all your assets are coordinated according to one set of instructions – your wishes for how you want your legacy to be distributed. The inheritance also passes to your beneficiaries free from estate, gift and even federal income taxes. Assets that are owned by the trust protect both you and beneficiaries from creditors, spouses, divorce and future death taxes.

Why Does It Matter to You?

To fully appreciate the core benefit of any trust, understand this – estate and gift taxes hit every generational level. If your wealth isn’t properly protected, your legacy may only last a generation or two, simply because of tax erosion and nothing else. Whether through a Dynasty Trust or Revocable Living Trust, you can avoid these losses by keeping your wealth outside of the wealth transfer system. It also maintains substantial income for your heirs, whether it be for education, business opportunities, healthcare or general living purposes. Limiting the control of your beneficiaries means that their inheritance from the trust remains protected from a multitude of threats, including creditors and divorce, because it remains outside of their estate.

Both Dynasty and Revocable Living Trusts are excellent strategies for creating a structure around a family legacy, depending what your most important goals are along with your net worth.

3 Dangers of Ignoring Your True Cost of Living

Understanding your true cost of living is one of the most commonly overlooked concepts. That’s because traditional planning does little to examine lost opportunity costs, much less offset them. But how can you reach your full financial potential when you don’t attempt to overcome one of the biggest wealth eroding factors you’ll encounter?

Lost Opportunity Cost

First, you have to understand just what I mean when I say “lost opportunity cost.” In relation to finance, it represents the actual amount of money you lose when making a financial decision. A great way to illustrate this is by using David Bach’s Latte Factor®.

Let’s say that every week-day morning you stop and buy a Venti Vanilla Latte from Starbucks on your way to work. This specific beverage will cost you $4.85. We’ll round that to $5 just for simplicity. This means that you are spending roughly $960 a year on coffee. Say you usually buy lunch three days a week as well, and spend about $10 every time. That’s $1,440 a year on lunches. Add this to the $960 you’re spending on coffee and you have a combined total of $2,400 a year.

So, what are coffee and lunches costing you? The answer isn’t $2,400.

What if you had invested that money instead?

Investing $2,400 annually earning 5% growth produces a gross value in 10 years of $30,351. In 30 years, it produces a gross value of $162,671.

THAT’S your true cost of living. THAT’S lost opportunity cost. See why you need to understand it, account for it and offset it?

3 Dangers of Ignoring Your True Cost of Living

There are three dangers that arise from ignoring your true cost of living:

1. Widespread wealth erosion. What we just examined is only one small area of your life. What about new technologies, goods and services that are created almost daily? I can barely keep up with having the latest and greatest in computers, smart phones and iPads. And now my kids are demanding the best when it comes to these gadgets. What about the planned obsolescence of everyday items, like appliances and cars? These products are made to break down so that you will have to buy them again. What about insurance premiums, investment fees, commissions and taxes? Add all of this lost opportunity cost to the previous totals and you can see your true cost of living.

2. The inability to recapture lost dollars. Two of the most common forms of lost opportunity cost are insurance premiums and financial fees/taxes. People have high insurance premiums because they want low deductibles. But if you were saving the ideal rate of 15%-20% of your income, you would have enough liquidity to cover expenses. Then you could raise you deductible and possible lower your premium costs. All fees associated with any investment account should be completely transparent, and justifiable based on the return and size of the account. Taxes can drastically reduce your net return as well; make sure that your investment accounts are tax managed to help control this erosion. Once you discover the areas where you may be spending money inefficiently, you can then recapture those dollars and put your money back to work for you.

3. Not reaching your full financial potential. Almost every decision you make can result in lost opportunity cost. This makes it one of the largest wealth eroding factors you will encounter and one of the biggest threats to your financial success, now and in the future. If you saw someone casually throw a $100 bill in the trash can, wouldn’t you think they may be a little crazy? Well, if you do nothing to mitigate this risk, you might as well join them. Doing nothing to mitigate this risk can result in you forfeiting millions of dollar over your lifetime.

How a Financial Model Can Help

This doesn’t mean you have to restrict yourself from your favorite coffee, dining out, taking that dream vacation or purchasing things you want. But it does mean that you need to understand your true cost of living, which can be hard to do in traditional financial planning.

A financial model can pick up where tradition falls short. For example, our digital financial model, JB Wealth Builder, can allow you to see where your money is actually going. It can diagnose problem areas where you may be spending money inefficiently. You can then evaluate your degree of lost opportunity cost, and implement strategies to recapture that money and put it back to work.

This can help you remain in the proper financial position where you are able to enjoy the sweet indulgences of life, but also have a financial backbone capable of helping you reach your full financial potential.

How to Lose Your Money in 5 Different Ways

It’s easier to lose money than it is to accumulate it. This is because accumulating wealth requires you to make a conscious effort. Losing your wealth doesn’t require much thought at all.

You don’t build wealth without some form of discipline, good habits that you practice religiously and that inch you closer toward your goals. This is the conscious effort. Often, the conscious effort tends to disappear once you’ve achieved success. This is the part where you want to enjoy all the hard work you’ve put into building the life you’ve dreamt of. Your conscious effort can even disappear while you’re still working toward your goals. Reaching new milestones of financial success can enable you to do things you couldn’t do previously; it’s easy to get swept up in your newfound freedom. This is why it can feel like you’re constantly taking one step forward and two steps back.

5 Ways to Lose Your Money

The things that can prevent you from reaching your full financial potential are the same things that can wipe out your wealth once you’ve accumulated it. Here are five ways to lose your money in both instances:

1. Not protecting yourself for your full economic value. People want to pay as little insurance costs as possible for the minimum amount of coverage. Most think that leaving enough behind to cover the mortgage or a few years of their salary is sufficient. But your full economic value is worth much more than this. It’s worth the money you will now and in the future, your net worth now and in the future and your legacy now and in the future. Protecting yourself means protecting against premature death or disability, accounting for excess liability coverage and properly structuring your estate. Failing to do any of these things can leave your wealth exposed to a handful of threats.

2. Failing to offset taxes and inflation. These are two of the biggest wealth eroding factors that are out of your control. First, your money needs to outpace inflation, which is the natural erosion of your money’s purchasing power. For example, if inflation is 3%, then your $10,000 this year will only be worth $9,700 next year. Investing your money is a way to offset inflation. While the goal of most investors is to achieve the most efficient after-tax returns, many of them forget to evaluate the tax implications of their portfolio as a whole. Your return doesn’t mean much if you lose most of it to taxes.

3. Living beyond your means. One of the simplest, cardinal get rich rules is to spend less than you earn. Sure, you may have the huge dream home or the exotic foreign car, but if you can’t truly afford it, this doesn’t make you rich. It makes you house poor and car poor, two of the best ways to lose your money faster than you can earn it. It also probably means that you’re building up a substantial amount of wealth. Here’s another cardinal get rich rule: If you have to finance it, you probably can’t afford it. Debt detracts from your net worth, from your ability to save and achieve your goals.

4. Not saving enough money. If you’re not consistently saving a substantial portion of your income every month, then you’re violating another cardinal get rich rule: Pay yourself first. With American savings rates teetering around 5%, it may seem drastic that I’m telling you to aim for a savings rate of 15% – 20%. But this is what funds your core liquidity, your ability to save for and achieve short-term goals. It also funds your future, and includes saving into different unqualified and qualified investment accounts for retirement, your child’s college tuition, and more.

5. Lacking a defined investment philosophy. One of the best things you can do for yourself before you start investing is to create an Investment Policy Statement. This is a guiding statement of how you will invest according to your values and desires, your most important financial goals. Otherwise, you can find yourself making emotionally charged decisions and engaging in bad investor behavior. This includes stock picking, market timing and forecasting, following investment trends and more. Investors who engage in these behaviors often get burned big time.

Why Does it Matter to You?

If you want to reach your full financial potential, you must understand how each of these five things can deter your success. For instance, protection isn’t just about insurance. It’s about protecting your life’s work from the numerous threats that can destroy it. Inflation alone is enough to erode your wealth. You have to put fear of the market to the wayside, and let your money work for you. Taxes will have a direct effect on the real returns your money produces and can significantly erode them. Include low-turnover and tax-managed investments in your portfolio. We can also offer our clients Separately Managed Accounts, which offer the greatest level of tax control.

Acting rich doesn’t count for much of anything. Most of the truly wealthy people would more than likely tell you that they would rather defy society’s image of being rich than being deceptively poor. Neglecting to pay yourself first means that you may lack the funds to achieve your most important goals or living a reduced lifestyle in retirement. Engaging in bad investor behavior can also guarantee these things. But how can you avoid it? How do you know if you’re making the right investment decision? Easy, refer to your Investment Policy Statement. If an investment doesn’t meet its criteria, then you shouldn’t invest. Period.

Building wealth is no small task, but the work doesn’t end there. If you can’t sustain your wealth, then all your hard work means nothing. Sustaining your wealth is where the real work happens.

The 6 Most Common Bad Investor Behaviors to Avoid

While humans are creatures of great intelligence, when it comes to investing, we repeatedly make dumb decisions. And most of the time, investors are their own worst enemy. You see, it’s not just the performance of the funds in your portfolio that drive success. Investing success is also a function of the decisions you make along the way; in essence, bad investor behavior can have an even greater impact on your portfolio’s performance than the market itself.

Aside from what traditional theories like to assume, investors do not always act rationally. In the reality, they are quite vulnerable to irrational behavior. This is because money is emotional, and emotions can overtake even the best laid plans. Unfortunately, impulsive or “feel good” financial actions don’t always support positive long-term growth. They tend to support poor decisions that can leave investors worse off than when they started.

6 Bad Investing Behaviors to Avoid

We can’t discuss irrational investor behavior without understanding the actions that drive investors there. After all, it’s the psychological traps and misconceptions that ultimately trigger bad behavior. Bad behavior then leads to buying and selling at the wrong time, which can prevent investors from reaching their full financial potential.

Almost every investor is familiar with the general rulebook for building wealth. The problem is that many investors are often blind to their own bad habits. In order to overcome them, investors first have to be able to see them.

Here are six investor behaviors that are important to recognize and avoid:

1. Loss aversion. This theory reveals that loss is felt much more deeply than the gratification that comes with gaining. In other words, losing $5,000 will always hurt more than gaining $10,000. This mindset can cause several poor decisions to take place however, including holding onto losing funds for too long in order to avoid realizing a loss. On the other hand, it can drive investors stock pick, only investing in funds they believe will produce the largest returns.

2. Overconfidence. It’s human nature to think that you are superior to others around you. So naturally, investors think that they have the skills and knowledge to consistently beat the market. What usually happens is that investors find themselves continuously trading stocks they believe will outperform with little to show for it – aside from steep portfolio costs. Don’t be fooled by Wall Street’s appeal to our inherent above average mindset.

3. Just going with it. While many investors have financial goals in mind, a shocking percentage of them have no plan to actually achieve them. Investors who wing it and have no clear understanding of the “why” behind their investments will be hard pressed to develop a disciplined approach that results in success. And a disciplined plan is paramount. Remember, a goal without a plan is simply a wish.

4. Chasing the winners. Investors routinely tend to take an all or nothing approach. For example, say you’re holding 50% bonds and 50% stocks. Depending who’s winning at the end of the year may leave you feeling inclined to dump the loser altogether because you want to yield positive returns. But chasing the winner isn’t always a formula for success; when you dump the losers, you dump the possibility for gaining tomorrow’s winners.

5. Information overload. Believe it or not, there is such a thing as too much information. Our media outlets are saturated with financial talking heads all claiming to have the answers to investing success. But investors routinely seek out information that confirms their own biases and beliefs. When you listen to someone who is simply telling you what you want to hear, that information can have a greater likelihood of hurting rather than helping you.

6. Market timing. Wading back and forth between trading and investing can be detrimental to your success. Investing is simple: You’re gradually building wealth over a lifetime. Investors have a hard time with this, and engage in trading for instant gratification. They become obsessed with the high. But many will find themselves chasing it more than experiencing it, as it’s been proven time and again that investors are horrible at timing the market.

Why Does it Matter to You?

Reaching your full financial potential depends on more than where you put your money. You have to recognize the role that good habits play in your journey. And the importance of avoiding the bad habits that can deter your success. Understanding this is crucial, and until you do, you can’t form a disciplined investment philosophy based on your most important goals.

Protecting Your Portfolio Against Market Downturns

How can I protect my portfolio against large market downturns?

This is one of the questions I’m asked most often by clients. And I’m always frank with my answer: We can never eliminate downturns, risk or volatility. If you’re going to play the game, you have to be able to accept that there will be wins and losses. But, there is good news: We can apply proven principles that are designed to further the goals of today’s investor, aiming to increase returns, minimize downside risk and reduce volatility.

So, why then isn’t everyone walking around with a new found sense of investment peace of mind? Why isn’t everyone confident in their retirement nest egg?

Because many people – advisors and investors alike – still don’t truly understand the critical factors that impact your financial success. Much less how to build an investment strategy that adequately overcomes them.

Risk and Volatility: What’s the difference?

First, it’s essential to understand the role that both risk and volatility play in your investing success. Repeatedly, I see a large disconnect between the investor’s interpretation of what these things mean compared to what they really mean.

At its core, risk means the probability that your investment will lose money. However, I see investors routinely take unnecessary risk with their portfolio. They’ve been taught that greater risk means greater returns. This is the disconnect. Risk isn’t a knob you crank up to spit out a higher return. Cranking up the risk-o-meter only means that you have a greater chance of losing money, it doesn’t do much of anything in driving your returns.

Volatility – or standard deviation – is a measure of risk, and refers to the amount of fluctuation your investment returns may see. If your investment experiences increased volatility, its returns become more unstable. This diminishes your compound return, especially in comparison to the average return.

If an investment’s returns are erratic (they fluctuate up and down regularly), this means that the investment probably has a high degree of volatility. In essence, volatility has a direct impact on your returns.

It’s ironic, isn’t it? That risk – the one thing we can control when investing – has little to no impact on returns, while volatility – the one thing out of our control – has a large impact on your returns.

So, how can I protect my portfolio against large market downturns, you ask?

Investment Strategies Built for Modern Investors

It was in the middle of last year that I had an awakening, an epiphany you could say. One that opened my eye to the fact that even our firm didn’t have the best solutions for how to help our clients protect their portfolio against market downturns. Sure, we stuck to the traditional principles that have propelled investing academia to where it is today. We built well-diversified, adequately allocated portfolios. We determined our clients’ true risk tolerance, and invested them accordingly. We prided ourselves on helping our clients build a disciplined, sound approach to investing.

If we were doing everything “right,” giving our clients that best possible investment solutions, then why was anxiety over the market still running rampant among our client base? Why were they still feeling the sharp pains of market fluctuations?

It was in this moment that I looked up, and saw our slogan on our conference room windows: Making money work for people. Our mission statement echoed in my head: Educate, guide and counsel people to reach their full financial potential. These are our promises to our clients, our promises to the world. And our investment solutions weren’t living up to them.

With the help of new and improved research, we found the simple answer to our clients’ investing limitations: Traditional investment theories are incomplete.

So, we decided to do something about it.

Maximize Your Investing Success

To help our clients maximize their investment success and protect their portfolios against market downturns, we had to acknowledge the disconnect between traditional theories and today’s investors, the gaps that exist when comparing reality versus theory.

Our new momentum strategies are designed to fill in these gaps. While we kept a handful of traditional elements in place, we expanded upon them to include practical application for the real investor before and during retirement:

Avoid large declines. Period. As we said before, we can’t eliminate downturns, risk or volatility. Our momentum strategies are not designed to avoid declines; they can and do move with the market most of the time. However, they are designed to minimize the impact of volatility and avoid the large declines. The steep declines have the most potential for irreparable damage to your wealth.

Markets aren’t always priced efficiently and investors can be irrational. In a perfect world, investors wouldn’t take risks with their money or make emotionally charged financial decisions. Then we just might have a market that is priced efficiently 100% of the time. Unfortunately, we have irrational and risk-seeking investors, and large market participants who can influence prices. This means that stock prices can be bought and sold both at undervalued and inflated prices.

Fama & French were on to something. The 3-Factor Model created by the Nobel Prize-winning economist Eugene Fama is still used today to describe stock returns. In 2015, they extended the model to include five factors. They also discovered a persistent anomaly in the market – momentum –  which we believe to be the sixth factor. So, we designed our momentum strategies using all six factors.

Asset allocation matters. Remember, there is still something to be said about a portfolio that is well-diversified. Asset allocation accounts for 90% of portfolio returns. Investing isn’t just about choosing where to put your money, but choosing the right combination of stocks and bonds to help balance your risk to return ratio.

Understanding how the factors discussed here impact your investing success before and during retirement is only the first step. You then need an investment strategy that can truly overcome them.


7 Things Wealthy Investors do With Their Money – that you should consider too

We can learn a lot from watching how the wealthy handle their money.

Perhaps that’s why there has been so much “noise” created in the industry, though. Everyone wants to know what the secret is to successful investing. We want to know the secret to creating sustainable wealth. And there are plenty of talking heads who claim that they’ve found it.

But when it comes down to it, there isn’t a lot of variation in how the ultra-wealthy seek to keep their dollars growing. In fact, they have a lot more in common in how they manage their money in comparison to what they don’t do. Take Warren Buffet for example, he’s stuck to many of the same investing principals for decades. And who wouldn’t kill for the chance to spend 24 hours in a room with Warren Buffet learning his “age old” investing habits?

7 Things Wealthy Investors do With Their Money – that you should consider too

U.S. Trust completed a recent survey of nearly 700 high net worth investors (those with investible assets of at least $3 million) that explored these commonalities. Here are seven key findings from the survey that a majority of high net worth investors do with their money that you may want to consider doing too:

1. They understand the importance of liquidity. Some may see keeping substantial amounts of cash on hand as being too conservative or having a fear of the market. A high net worth investor would be quick to tell you otherwise. More than half of these investors keep their liquidity high so that they are in a position to act quickly when great opportunities present themselves. Not only do they make sure that they have access to cash before they need it by forming healthy savings habits, but they also make sure they have access to multiple sources of liquidity.

2. Large cash positions are commonly found in their portfolios. To add to our above point, nearly 6 in 10 high net worth investors have at least 10% of their portfolio in cash. Remember that for these investors, this isn’t sign of ultra-conservatism. It’s a sign of their desire to capitalize on the right opportunities at a moment’s notice. This serves as another source of liquidity, allowing their cash on hand to flow opportunistically.

3. Their investment philosophy is geared toward the long-term. Six in 10 high net worth investors seek well-balanced, risk-managed growth. Even if it means lower returns, it was still more important for them to lower the risk of their investments. The wealthy keep their focus on funding long-term goals, while keeping near-term opportunities in mind as they go. A vast majority (83%) have made their investment gains through a long-term buy and hold strategy. Take it straight from Warren Buffet, who has said time and again that money is made in investments by investing, and by owning good companies for long periods of time. This disciplined approach to investing helps the wealthy minimize their emotions and tune out market noise.

4. They make tax-conscious investment choices. More than half of high net worth investors say that it’s more important to minimize the impact of taxes when making investment decisions. Even more important than pursuing higher returns regardless of the tax consequences. This can be attributed to the point that really counts is your net pay – how much you are really making in returns after taxes. Poor tax management will add up over the long haul, and can easily cause you to sacrifice large portions of your gains for the year.

5. They invest in tangible assets. Almost half of high net worth investors own some sort of tangible asset, such as a real estate investment. These assets can produce income for the investor, and grow in value over time. While choosing what to include in your portfolio aside from stocks and bonds should be an individualized decision, there is no doubt that the wealthy understand how tangible assets can be a key element for a well-rounded portfolio.

6. Many know how to use credit as a wealth building strategy. Nearly 65% of high net worth investors agree that credit is a strategic way to build wealth. While 8 in 10 say that they know how to use credit to their financial advantage, it’s worth noting that this strategy does come with some risks. Credit can be costly. But there are small ways that you can accomplish this as well, such as using a credit card with rewards for spending you would be doing anyways. Instead of racing to pay down fixed, low-interest loans (mortgages, student loans, etc.) consider paying them down on schedule and saving or investing the extra money.

7. Their interest in impact investing is growing. This is the practice of investing into companies and organizations with the intention to generate a beneficial social or environmental impact alongside a financial return. Over the past year, the percentage of high net worth investors who own impact investments has tripled. Of those investors surveyed, 11% currently own impact-focused investments in their portfolio. Almost half of these investors believe companies that adhere to good social and environmental practices are less risky. Not only that, but they want to invest in a positive social impact and support issues they strongly care about.