It's been a very rough year for everyone. The purpose of this article is not to trivialize the pain that many have suffered and continue to suffer. Nor to any manner imply that recent economic events could have been anticipated or planned around. Recognizing this, and that hindsight is always 20-20, lessons can be learned from the carnage. Although the observations following are not profound, and many are quite simplistic, they are drawn from problems others have experienced, and can hopefully provide some relevant ideas.
■ Time Horizons.
Too many investors forgot the concept of time and accepted asset allocations that were out of sync with the time frame that was appropriate for them. Yes, asset allocation can reduce risk and increase return, but it's was never intended as a two dimensional decision. The almost mechanistic application of what some advisers passed off as investment planning too often ignored the investor's time horizon. This same essential lesson is now being ignored by investors again. Some investors have abandoned equities because of the risk they now associate with them. That decision should consider the investment time horizon. Just as many investors were hurt by assuming too long a time horizon, many will be hurt in future years from now ignoring the lengthy time horizon they have.
■ It's Not One Investment Pot.
One lesson from the carnage of the 2008 meltdown seems to be that too many investors, or their advisers, viewed the entirety of their investment assets as a single pot for asset allocation purposes. It was not uncommon for many investors to have a financial planner run a fairly boilerplate financial analysis and come up with an allocation that would then be applied to the investors overall portfolio. This was always too simplistic an approach. Assume that your overall allocation was 60% stock: 40% bonds. If you have a college fund for your children, and have a child in college and one two years from college, an allocation to cash and near cash investments, such as laddered CDs and money market funds, might be appropriate. Your rainy day money to get you through a job layoff, health emergency, and so forth could be pure cash. Saving for the purchase of a vacation home five years out, would warrant a less aggressive allocation because of the limited time duration, but certainly not the allocation to cash of the college or rainy day funds. If your remaining portfolio is $10 million and you're spending about $350,000/year. $8 million of this portion of your portfolio might be used to support your expenses assuming a withdrawal rate of a bit over 4%/year. The remainder of your portfolio may in fact be funds almost assuredly being held to bequeath and have a much longer time horizon. Thus, breaking up your overall portfolio into separate pots for different purposes might not only yield a much more appropriate asset allocation for each major objective, but will better reflect the time horizon and risk each "pot" should bear [pun intended]. Does the hammering your portfolio took in 2008 undermine the integrity of asset allocation theory? No. But maybe the application of the theory deserves a more carefully crafted approach then many had used.
■ Budget is not a Four Letter Word.
You're rich, you don't need to budget! Wrong. Sorry, budgets are for everyone, even the wealthiest. The following scenario has been replayed too many times. A successful entrepreneur sales the family business for far more than imagined. The family is on easy street. Money is no object. Or is it. The family adjusts its lifestyle accordingly, and its' spending grows to $750,000/year. While the $10 million net of tax you pocketed on the business might feel substantial, if you're spending 7.5% on you investment assets (even forgetting the recent market meltdown) unless you quite old or infirm, you'll long outlive your money. Do some simple math. Put together a balance sheet. Subtract off all the "B's" bungalow, boat, and bling. What's left is your investment assets. Multiply by 5%. If you're spending more, you have a definite problem. If you want real assurance you won't outlive your money, your spending probably should be closer to 3.5%. Its not that wealth cannot enable you to avoid the unpleasantness of budgeting, it can, but only if your spending is within reason of your asset base. Market meltdown or not, too many wealthy investors simply don't control the relationship of their spending to their investable wealth. Read The Millionaire Next Door (Stanley and Danko). The surest way to become a millionaire is to live below your means. The surest way to fall from the ranks of the wealthy to the middle class (other than having invested with Madoff) is to spend well beyond your means. Wealth, and the status it supposedly brings, are seductive. It is as easy, as it is dangerous to your financial health, to be lured into excessive spending. The next few suggestions will help.
■ Annual Meetings are Vital.
To assure the success of your financial, estate, insurance and other planning you need to meet with your advisers at least annually. Meeting with your wealth manager quarterly is a prudent step. Meeting with your accountant to review and sign your tax return is also advisable. But an annual meeting of all your advisers and key family members is crucial and the above don't substitute for it. Your annual review can range from a large board meeting spanning an entire day, or a mere hour long consultation with your estate planner who sequential calls your other advisers, depending on your budget and the complexity of your situation. The annual meeting will assure, if properly done (see below), that the expertise of each of your advisers is marshaled for your best interest. An annual review assures that no one looses site of the "big picture" of your planning. This is especially important during tumultuous times.
■ Coordinate your Adviser Team.
Too many people are realizing that investment, business, spending and other decisions were not made optimally. But many of those people did not have all of their key advisers: accountant, estate planner, business attorney, insurance consultant, wealth manager, trust officer, etc. coordinated and fully informed. A team approach can help identify gaps in planning, an adviser who is not following through, miscommunications between advisers that can result in duplication of efforts on your dime, or worse, dropped balls. To succeed, your advisers should work in consort. Backstabbing or one-upmanship don't help you. Foster an atmosphere that welcomes identification of opportunities for improvement, and even mistakes. If the first thing that happens when a mistake is identified is one adviser blaming another (rightfully or wrongly), you loose. Be certain each adviser has the opportunity to be heard and voice their concerns. Don't let your longest, or loudest, adviser dominate. Typically one of your advisers assumes the quarterback role. Be certain it is clear to everyone who it is, and then be sure to give the quarterback the authority to do what he or she believes needs to be done to protect you. Calling your estate planner your quarterback and not providing her with the annual meetings to keep current of your affairs, or leaving her off key memorandum from your other advisers, will never work.
■ Your Accountant is more than a Bean Counter.
Use your accountant as more than a bookkeeper and tax return preparer. Without intent to second guess the many shrewd investors taken in by histories biggest Ponzi scheme, your accountant might well have identified some concerns if you brought a proposed investment with Madoff to your annual advisory meeting. Your accountant might of raised concerns over the funds use of a small accounting firm, in a small town (New City, New York), operating from a 13 x 18 foot storefront office between a pediatrician's office and another medical office. Your accountant might have determined that the auditor had not had a peer review since 1993. While this is all past history, using each of your advisers' abilities to the fullest, in the context of a pro-active and collegial team, might help you avoid the next Madoff, or other pitfalls.
■ The Key Planning Question Too Many Forgot.
"What if". Simple, obvious, almost trite, but that is the key to all planning. "What if". Too many people just stopped asking enough "what if" questions in their planning. Let's leave aside the market meltdown. "What if" you were disabled tomorrow and couldn't work again. "What if" you were diagnosed with a debilitating, but not terminal disease, that would prevent you from working and increase your costs of daily living substantially? These are not farfetched or unreasonable questions. Millions of people face just such tough news every year. What if you were hit by a major lawsuit, one that had nothing to do with your work, perhaps a colleague stabbed you in the back by filing an incorrect document and setting it up to look as if you had done it. Your savings and career could be jeopardized. If you had asked these unpleasant but not implausible "what if" questions would you have fared differently through the economic turmoil?
■ Count Your Blessings.
"…Count your many blessings Money cannot buy…" (Johnson Oatman, Jr.). Focus on what is really important. Keep your perspective. It will help you get through the current economic problems with less pain. It will help you make better decisions going forward.
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