Mindful triggers to keep us on track with our goals
Over almost any extended period of time, the equity markets generally can significantly outperform the bond markets. We believe this statement is for all intents and purposes irrefutable. The simple reason is that equity valuations typically track the earnings of the underlying companies, and for the most part, these earnings have shown to be exceedingly more attractive than those of fixed income investments. However, when our time frame shortens, one of two things can and usually does occur: 1) the human element, both fear and greed, get in the way of solid fundamentals, and 2) economic fundamentals themselves change over a shorter time period.
When our time frame shortens one of two tings can and usually does occur: 1) the human element, both fear and greed, get in the way of solid fundamentals, and 2) economic fundamentals themselves change over a shorter time period.
At Dashboard, we are still very much convinced of the long-term prospects of the equity markets, and continue to build portfolios utilizing both the longer-term growth potential of the equity markets coupled with the desired “safety” of the fixed income markets based on our client’s risk profile and financial planning needs. However, at times, we find ourselves as much called upon to help manage the emotional side of investing. As such, we’ve amassed some of our best “Coping Mechanisms”. These mechanisms are not meant to relieve volatility or embedded uncertainty, but to more closely align our investment strategies with client's own specific goals. See if any of these relate to you!
Simple and powerful. Disciplined additions of new funds to an overall investment strategy is HUGE to help not only reduce volatility, but take advantage of the upward bias of the equity markets. For those clients who haven’t amassed a sizable portfolio yet, adding monthly to 401k’s, IRA’s and after-tax investments goes a long way to smoothing out the ride and increasing one’s odds for a successful retirement. This is a great way to actually embrace the inevitable market downturns.
As previously stated, equities significantly outperform fixed income over almost any extended period of time. However, as we are thoughtful and prudent fiduciaries, we acknowledge that fixed income has its place in a portfolio when either dollar cost averaging doesn’t have a big enough effect anymore, or someone is on track or ahead of track to achieve financial independence. When we build out “Pension Style” portfolios, these contain 30-40% fixed income. We find ourselves constantly reminding families that part of our strategy prepares for volatility and we have built in portfolio bumper-cushions with fixed income.
Invariably, the most frequent phone calls and emails from those most affected by the recent volatility come from those recently retired, or soon to be retired. The common phrase heard is “I can’t afford portfolio losses now, I’m retired….”. A key concept that we are all aware of, but quite frequently forget, is that upon retirement we don’t spend the entirety of our retirement funds in any given year. In actuality, it is our experience that retirees spend somewhere between 3-5% of their retirement nest egg annually. Therefore, although it does create a bit of heartburn, truly keeping in mind that one’s retirement assets need to last upwards of 30-35 years is critical. Without a solid portion of these assets in equity type investments, one’s quality of life could be compromised.
When we were all young and impetuous, and flying by the seat of our pants, we most likely ran our checking accounts at or near a zero balance. We’d take a quick look at the balances on a Friday afternoon and if there wasn’t much cash left, we’d either decide to stay home that weekend, or at least have “alligator arms” as it came time to split the bill. Having a near “Zero Balance” has a way of adding some discipline to our spend rates. Now that we’re all grown up, we still yearn for that same level of discipline, but don’t necessarily want to bounce any checks on a regular basis. A key concept we always discuss in our Dashboard Planning conversations is maintaining a “Cash Zero”. You may think of this as your “rainy day” or “emergency” cash. We encourage all clients to keep 6-12 months of spending cash in their checking/savings to create a cushion for any unexpected expenses or life events. By segmenting and maintaining a “Cash Zero”, we are prepared for any short-term surprises that may come our way…we can live our lives as usual without having to tap into our portfolio and interrupting our long-term investment plans.
We encourage all clients to identify major capital expenditures (large family trips, new windows for the home, new car, basement renovation costs, education costs, etc.) and actually set these funds aside. These expenditures are truly short-term in nature and have no business being invested in the equity markets. By carving out these amounts from the portfolio, it often gives us the psychological edge of longer-term perspective.
Those of you who’ve known us for a while might have seen us walking around with a clipping or two from the Chicago Tribune. These clipping would depict a horrific airplane accident, dreadful outbreaks of some type of medical disease, a tumultuous fall in the stock market, etc. Quite often however, these events, although terrible in their own right, are not world-ending. Unbeknownst to many……the media……thrives on and profits from SENSATIONALISM. According to a recent study by the Economic Policy Institute, the AVERAGE TOTAL RETIREMENT SAVINGS of all participating families is $95,776*. TV and news sources target their messaging to the “average” family. In our opinion, the media is NOT in the know, and they are NOT looking out for your best interest. They are profiting from you reading their missives. Sometimes, the best thing to do is tune the media out.
*Source: Here's how much the average American family has saved for retirement by Kathleen Elkins
Everyone knows that cash is king! Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it……He who doesn’t……pays it”. Hidden within the overall returns of the equity markets -- and one of the reasons to take solace even in the face of volatility -- is our great friend, the reinvested dividend. As of 12/6/18, the dividend yield of the S&P 500 is almost 2% (1.94% to be exact), and that of the international markets is over 3% (MSCI EAFE index 3.34%) . These dividend yields are meaningful and during volatile periods can help provide some real as well as psychological stability.