How to Handle Uncertainty

Magnolia flower in bloom, Earl Eliason, Getty Images

"Steeled" Magnolia

The state flower of Louisiana is the Southern Magnolia.  The sweet aroma of the blossoms is intoxicating and the flower dwarfs nearly all others in a typical garden.  Magnolia trees are very common in New Orleans and are especially noticeable as we enter spring. What is most remarkable about the magnolia tree is its hardiness in some of the harshest environments. It was designed to balance both delicateness and strength.

What does a "steeled" magnolia have to do with personal finance?  To be steeled is 'to mentally prepare (oneself) to do or face something difficult.'  In the most difficult of world events and market turmoil, we have to 'steel' ourselves.  Only then can our financial goals fully blossom, even in the most uncertain of times.

Investing in Uncertain Times

There is an old adage that says, "the only constant is change."  This is especially true with investing, world events, and our own personal lives.  Nothing stays the same, at least not for very long.

Ironically, we are surprised, sometimes shocked, when things change.  I will save my thoughts on why this is for another day, but as a financial planner, I have the responsibility of ensuring Clients are prepared for when the markets and life change.  How do we do this?

Step I: Determine the Goal and the Timeline

Every Client needs to establish for themselves two things for each investment account:  1) the goal, and 2) the timeline.  The goal may be retirement with a timeline of 30 years, or it may be for a downpayment on a home planned for next year.  These are vastly different goals and timelines, which highlights the critical importance of this first step.

Step II: Risk Tolerance Survey

At Acadia, all Clients complete an eight-question Risk Tolerance Survey which walks them through both objective and subjective self-assessments that ultimately result in a numerical score.  That score leads us to a stock / bond ratio (also called an allocation), for the investment account. 

Note:  The account may be a 401k / 403b / 457, an IRA, or an investment account. The type of account is neutral compared to the pivotal nature of the goal and timeline.

Step III: Apply, Revisit, and Maybe Revise

This stock / bond ratio (allocation) is then applied to the account and monitored. Perhaps annually or when necessary, the account is rebalanced to maintain the desired allocation (and commensurate risk tolerance). However, over time, the goal and/or timeline may change. Perhaps a Client retires early, or has decided to try semi-retirement.  Maybe the Client decides to not buy a home for a few more years.  There are as many possible changes as there are Clients!  Regardless of the reason, Clients revisit their Risk Tolerance Survey to possibly recalibrate their sensitivity to risk. If so, then we revise the allocation and apply it to the account.

This 'apply, revisit, revise' cycle never ends, which makes sense when you consider that your timeline is always changing.

Step IV: Trust the Process

Have I made this all sound too easy?  Unfortunately, what normally happens along the way is some significant world event or market turmoil creates anxiety and unease.  It can cause people to forget their long-term goals and become overly focused on the short-term crisis.  It is at times like this that we have to trust the process.  When we remember that the Risk Tolerance Survey includes questions about volatility, timeline, and loss tolerance, it can calm our nerves and help us avoid costly mistakes.

Step V: Invest with Wisdom

Lastly, as a bit of a refresher, the following are a few key components of the Acadia Investment Wisdom Statement.

The Fundamentals

Investing with wisdom requires understanding the basics. Here are the top seven considerations:

• Investments are a tool, and not an end
• Time is your friend
• Know when to invest
• Know why to invest
• Know where to invest
• Know what to invest in, based on your goals
• Know how to invest

Economic Context

All investing occurs within a greater financial context. Here are the enduring truths about this environment:

• Economic uncertainty is certain
• Economic prosperity is certain in retrospect
• Economic cycles are normative
• The future is unpredictable

Worldly Perspective

Let us also consider the opposite of wisdom: foolishness. Here is what the world (news, social media, sales people, etc.), says about how to achieve financial success:

• Get rich quick
• Short time horizon (time is an enemy)
• Spend and consume first
• Expect upward trends always
• There's a secret to investing success
• If you buy this (fill in the blank with any sales pitch), you're guaranteed to be rich

Remember, if it sounds too good to be true, it probably is.

Investing Wisdom

1. Establish a Financial Plan. Before you can invest wisely, you must have an overarching plan to achieve your goals.
2. Save / Invest Today. Before you spend any income, decide how you will save or invest for your future. This is a parallel to the adage, "pay your self first." Do not allow discretionary income to steal your dreams.
3. Establish an Emergency Fund. If you are not financially prepared to withstand a financial emergency, then you are vulnerable to disaster. Start small, but be consistent, until you eventually have enough to cover 3-6 months of living expenses.
4. Understand Your Risk Tolerance. Do stocks make you nervous, or are you a day trader? Understanding where your anxiety level rests in investing is critical to peaceful planning.
5. Think Long Term. Aways plan with the long view in mind. This even includes your decisions about cash. What are your long term goals and needs? Determine those and then develop your short term (cash) positions to achieve these goals. Thinking long-term also allows you to ignore the latest investing craze.
6. Diversify. This is the opposite of "putting all your eggs in one basket." Diversification includes the investments but should reflect time period, asset class, and geography.
7. Always Count the Cost. Investing is not free. Ensure you know how much the index fund, mutual fund, etc., is costing you. Fees matter and have a long term impact on performance.
8. Understand Taxes. Ordinary income isn't just for your wages. It can also be found in certain investments, along with capital gains (both investments and real estate), Net Investment Income Tax, wash sales taxes.
9. Manage Your Emotions. When the news, world events, politics, or even a coworker's latest "hot stock tip" cause you some anxiety, simply pause, review your plan, and remember your long term goals. Investing peace comes from having a long term strategy and sticking to it.
10. Talk to a Professional. This might seem like a self-serving tip from a financial advisor, but it has proven itself over and over as I work through life issues with my Clients. There are simply too many variables, too much complexity, and not enough time to stay proficient on your own. Life only gets more complicated.

Investing wisely is always a challenge, even in the most accommodating markets. Do you have questions about investing or your financial plan? Schedule a meeting so we can discuss investing in an uncertain world.

Laissez les bons temps rouler

Mary's Recipe Corner

Enjoy this family recipe from Mary:

Buttermilk Syrup

Trust me, this is divine, even if you don't like buttermilk! It reminds me of a sugar cookie. Pretty much anytime we have company for brunch pancakes, I serve this syrup. You can refrigerate the leftovers, but it never seems exactly the same again, so I half the recipe if that is all I think I need for the meal.

• 1 stick butter
• 2/3 cup sugar
• 1/2 cup buttermilk
• 1 tsp vanilla
• 1/2 tsp baking soda
• Dash nutmeg

Bring butter, sugar, and buttermilk to a boil. Boil for one minute. Take off heat and add remaining ingredients. Serve warm.

Blessings and bon appétit!

Mary

[email protected]

For Art's Sake

If you grow up in New Orleans you learn to appreciate art (and food and music and parades, etc.), so it's appropriate to share a bit of art with our readers.  

Referring back to the magnolia flower, people are also both delicate and strong.  I'm reminded of how the great people of New Orleans and the surrounding areas (Who Dat Nation) survived and then thrived following Hurricane Katrina. 

Artist David Bates (b. 1952) produced several powerful works in his The Katrina Paintings collection following the massively destructive hurricane which struck in 2005.  His art somehow powerfully reflects both vulnerability and determination. This "Katrina Couple" reminds me of all my family and friends that endured the worst of life's events, yet managed to survive and then thrive.

Perhaps this can give us some perspective and hope in uncertain times.

The Karina Paintings, 2010, David Bates