Personal Finance column: Answers to your questions
July 23, 2017
People call the office: "I just have a quick question." At a party, someone will approach me, cocktail in hand and ask something like: "The domestic equities market has a high P/E ratio. Are we headed for a downturn?" Or, "I'm about to retire, how should I invest?" Or, "Interest rates are rising, how risky are bonds?"
My answer is always "It depends…."
The answers lie in understanding the seasons. In the financial world, there are three seasonal elements that need to be considered.
What economic season are we in?
Just as we experience summer, winter, spring and fall and the inherent benefits of each, the economy has a healthy way of functioning. Terms such as innovation, boom, maturing boom, shake out; or early and late expansion and early and late contraction are commonly used to describe economic seasons. We have always had them and always will.
People survived the economic winter that started in December 2007 and lasted until June 2009. We will experience another brutal financial winter — it is not a matter of if, but when. Following a winter, spring and summer always unfold. The current bull market turned 8 in May. How long will this economic summer last? I believe it is still expanding and growing, but it is not endless. Whatever cycle we are in, domestically or abroad, how do you want to prepare and protect yourself as well as maximize your opportunities to take advantage of and thrive in each of them?
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What personal, physical season are you in?
Are you starting a family or spoiling your grandkids? You may be in the spring of your life or transitioning towards fall. The personal season you are in has financial implications in how you regard and utilize your assets. Your human capital (ability to work) will be a primary asset in your spring and summer season. Your investment and pension assets will be more central in the fall of your physical life. How you manage market volatility, risk management, cash flow needs, and taxation questions are heavily dependent on what personal life season you are in.
What financial season are you in?
You will experience a need to pay for large expenses (school, weddings, home purchase) during different personal, physical seasons. You may want to take a sabbatical from, or change your career path and need financial sustenance to see you through. How do you prepare for a financial fall (distribution) when you are in the middle of your physical summer? A death or divorce may put you in an unexpected financial winter, that can be tempered with proper planning.
When you combine these three components — economic, physical and financial seasons — together, you can see how challenging the answers to any monetary inquiry can be.
What happens when you are in a fall personal or financial season (taking distributions) and we experience a period of economic fall or winter? It can be devastating to your lifestyle and cash flow as you succumb to "sequence of return risk." It may jeopardize your ability to pay for planned goals if you have not reviewed, rearranged, reallocated or rebalanced your assets to incorporate all aspects of your life. On the other hand, if you are prepared, you can take advantage of an economic winter in buying investments (real estate, stocks, etc.) on sale no matter what personal life season you are in.
I am thoroughly enjoying summer (meteorological, economic, personal and financial) right now. Like the weather, I know life can turn on a dime. I know that there are things within my control and many things outside of it. I understand that the approaching seasons warrant attention and intention. I encourage you to keep asking great questions of yourself and of your professional teams. With this new framework, the answers will be personalized to your life circumstances and you can get beyond "it depends."
Danielle Howard is a Certified Financial Planner practitioner. Her office, Wealth By Design LLC, is in Basalt. Visit her at http://www.wealthbydesign4u.com. Advisory Services offered through Cambridge Investment Research Advisors Inc., a Registered Investment Advisor. Securities offered through Cambridge Investment Research Inc., a broker/dealer, member FINRA/SIPC. Cambridge and WBD are not affiliated.
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