Things to Consider

To help you achieve your financial goals, we need to learn more about what you are hoping to accomplish. When filling out our Introductory Questionnaire in preparation for an initial meeting, set aside some time to think about your goals, as well as their relative priority. Be as specific as you can about any amounts and time-frames. Discuss them with anyone you deem appropriate. You may find that visualizing and clarifying your goals is motivating and even exciting!

Why are you investing?

People save and invest the money that they have today so they can dispose of it (and hopefully more) tomorrow. Beyond this fact, the reasons to invest are limitless. Most people want to retire someday, or at least know that they can stop working if they so choose. Parents may want to fund a child’s education. Others may want to leave a large amount to a favored charity when they pass away. Goals are as individual as each person, and you should consider what your goals are, as well as their relative priority, before making any investment.

When will you need this money?

A critical consideration for deciding upon an investment strategy is the “time horizon” for each goal. If you are planning to buy a home or retire in the next few years, you should have a very different investment strategy from someone planning to buy a vacation home in 10 years or retire in 25 years. We do not recommend investing short-term funds in the stock market. This is because while the stock markets have historically offered higher returns than cash or bonds, that is a long-term observation. Over short periods of a year or even several years, the stock market’s returns can be deeply negative.

It is important to note the difference between needing some of the money and all of the money. Someone planning to retire in a few years at age 65 will (hopefully) remain retired and spend their money for another 30 years. That person does not need to spend every dollar on the first day of retirement. With improving health care and longer lifespans, most people will need the higher returns of the stock market to keep up with inflation throughout retirement. So while this near-retired person’s funds would likely be invested more conservatively than a 25 year-old’s, some portion will still likely need to be in stocks.

What kind of debt (if any) do you have?

Debt comes in many flavors. As a general rule, “good” debt is taken on to purchase an appreciating asset, like a house or further education. “Bad” debt is taken on for current living expenses (i.e. credit cards), typically has higher interest rates than “good debt” and lacks its tax advantages.

Depending on the nature of your existing debts, you may be better off paying down some or all of it before investing. For example, if you are in a combined 25% marginal tax bracket, paying 18% APY interest on a credit card balance while investing your spare cash, you would need to earn 24% on your investments to break even. This is not realistic. On the other hand, if your only debt is a 30-year low fixed-rate mortgage, investing your spare cash makes much more sense.

Do you have a cash/emergency fund?

An important part of your financial picture is the amount of cash reserves you have set aside. A major home repair, unexpected layoff, or sudden illness could increase your expenses and/or lower your income without warning. While you may be able to tap family, credit cards, or similar resources, these options come at their own emotional or financial cost.

We strongly recommend that clients have at least 3 to 6 months’ worth of living expenses set aside in cash equivalents, possibly more depending on your circumstances. Use our Client-Cash-Flow-Worksheet  to help you calculate your cash reserve needs. In addition to the peace of mind and liquidity this offers you, it will also avoid excessive trading and its related expenses in your investment portfolio. By holding your cash reserve separately, you avoid management fees on that portion of your assets and allow us to minimize trading costs in your account.

We prefer to invest all of the money you have with us (aside from a nominal amount for management fees) to maximize your potential return. If you would like to have a steady withdrawal amount, which is typical for retirees, that can be factored into our investment strategy. The cash reserve is meant for the unanticipated expenses – without one, we would need to make trades to create the cash each time you request a withdrawal, while maintaining the asset allocation. While transaction fees may seem minimal, they do add up and hurt your returns over the long run.

Obviously the money is yours and you can never anticipate all of life’s unexpected events, but for your own benefit, we do recommend that you keep a cash reserve on hand to minimize this cost. We’d be happy to make cash reserve recommendations if you do not have such an account already.

What is your risk tolerance?

Losing sleep at night over your investments is a high price to pay for an increase in potential returns. While no one likes to see a decline in portfolio value, some people can psychologically handle challenging markets better than others. By selecting a portfolio suitable to your risk tolerance, we can help you avoid damaging, emotionally driven investment decisions. Statistics show that investor outflows from stock funds tend to peak at market bottoms, while inflows peak at market tops. This “buying high, selling low” behavior severely damages long term investor returns.

To measure your personal attitude toward risk, we use a carefully tested risk profiling tool with our clients. If there are two of you, each would take the short survey involved at your convenience. Depending on the results, we may have to further discuss goals and investment strategy before making portfolio recommendations, as your goals and risk tolerance may require some type of compromise.