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Protect Yourself from Financial Avalanches

By | 2016, Money Moxie, Newsletter | No Comments

All too often you hear the unfortunate story of a backcountry skier, snowboarder, or snowmobile rider that was killed in an avalanche. The lucky ones are buried, but quickly rescued. They report the harrowing tumble down the mountain, the overwhelming weight of the snow, and the feeling of utter helplessness.

We have seen too many people get caught in financial avalanches that have the same feeling of fear, heavy weight, and hopelessness. What can you learn from their experiences that may help you protect yourself from a financial avalanche?

avalanche

1) Chart your course: After a big storm, backcountry adventurists will feel the urge to “shred” the powder. However, excitement may open the door to danger if one heads out without doing the homework or creating a plan. You need to understand what risks exist and then chart a course that will keep you away from potentially hazardous slopes. Investors that put all of their assets in one “hot” area risk being buried. We have seen retirement dreams destroyed. To help protect your assets, you can employ a certified professional guide. While they can’t guarantee that there won’t be avalanches, they can help guide you out of danger’s path.

2) Make course corrections: Any skier knows that you rarely take the exact line down the mountain that you envisioned. That is due to obstacles, changes in terrain, or skier error. Your financial plan needs to have a balanced approach that can still help get you where you need to go despite the minor variations in your path.

3) Take the right amount of risk and stick with it: Investors that pull out at the bottom and never reinvest are like skiers that decide to ski down the mountain and then hike back up because the ski lift is too risky. With the current environment, some investors feel nervous and look for investments that don’t have any risk. While this may be a good approach for some of your assets, it is rarely a good approach for all of your assets. Make sure that before you get into a new investment, you understand all of the risks. Be cautious with investments that lock your money up for 7-10 years.

If you feel like you have already been buried by an avalanche, there is still hope. You have friends that can help dig you out and get you back on track.

Learn from the experiences of others and don’t become the victim of a financial avalanche.

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Worst-Case Planning May Be Your Best Financial Tool

By | 2015, Executive Message | No Comments

Dear Valued Financial Partners and Friends,

You may profit by learning how we, as wealth managers at Smedley Financial, engage in two different processes on your behalf. Both on the financial planning side and on the investment management side, we strive to turn the tables upside down by asking the tough “What if” questions.

Regarding your financial planning with us, we first look at the positive side of helping you plan your financial future. But then we flip things upside down and strive to plan for worst-case scenarios as well.

What if you needed more money in your emergency fund? Where will the money come from? What if you or your spouse became disabled? What if you or your spouse died prematurely? What if the younger or healthier spouse dies first? Would you or your survivors be financially okay? What if one or both of you lives 10 or 15 years longer than you expect? What if one or both of you have to go to an assisted living facility? Where will the funds come from? What if you die without a will and possibly a trust? What will happen to your estate?

We hope you can see how this type of reverse thinking in your financial planning is not only beneficial, but essential.

Regarding our investment management philosophy, we strive to emulate this same type of reverse thinking. Rather than being persuaded by best investment case scenarios, the Smedley investment management team continually seeks to ask
itself the tough questions. Over the past 34 years, we at Smedley Financial have seen many people make financial mistakes–some serious and some not so serious.

What if high returns, you know, too good to be true, are promised? Many people lose much of their life savings and perhaps their homes because of the promise of high returns. What if you change your mind and want your money back the next day? Can you get your money back without severe penalties? What if something goes wrong in the future with a proposed investment? What if an investment stops performing? What if an investment drops in value? Who is minding your portfolio and continually looking out for your best interest? When someone boldly states how much money he or she made on an investment ask, “How much risk did you take to get that return?” Are you properly diversified and allocated?

Keep in mind the Will Rogers adage, “I am not as concerned about the return on my money as the return of my money.”
As a nationally recognized Wealth Manager, Smedley Financial’s motto is, “Your financial success is our passion!”

Bullish Best Wishes,

Roger M. Smedley, CFP®
President

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What’s Your Risk Number?

By | 2015, Money Moxie, Newsletter | No Comments

Tolerance to market risk can be a tricky thing. When markets are growing it is easy to believe that we are more tolerant of risk than we may actually be. For example, if an account grows by 10 percent we feel good about the growth; that is until we see that one area of the market grew by 20 percent. Suddenly, we feel slighted. In response we reposition investments to take on more risk. This is a common mistake. Risk tolerance should be based on our willingness to lose money. After all, who has a limit on how much money they are willing to make?

Smedley Financial has a new tool that helps our clients identify their risk tolerance. We use this tool to confirm your investments are properly aligned with your actual tolerance for risk. It encompasses all investments regardless of where they are held.

risk score

Potential Long Term Return 8.3%

 

Through a 5 minute quiz covering topics such as portfolio size, top financial goals, and what you are willing to risk for potential gains, we will pinpoint your exact Risk Number.

This technology empowers us to make sure the Risk Number of your portfolio, including all investments, matches your personal Risk Number.

Taking the quiz is easy and can be done in the privacy of your home or office, on a computer or mobile device, at any time. We email you the link and after you have completed the quiz we will see the result. By pinpointing your Risk Number we can analyze your personal portfolio to verify everything is on track.

Call today and request your risk tolerance analysis.

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What is the Riskiest Part of Your 401(k)?

By | 2013, Money Moxie, Newsletter | No Comments

You have control over the most important factors that determine successful retirement savings in your 401(k). You control the contributions, investments, and withdrawals. You are the riskiest part of your 401(k)!

Inherent risk does not exist in a 401(k). Why? A 401(k), 403(b), IRA, or Roth IRA is not an actual investment. These are merely vehicles or accounts that allow us to save money for the future in a tax-preferred environment.

The risks come in other areas, most of which we have the ability to control. This article will discuss four of the most misunderstood risks: investment risk, active user risk, savings rate risk, and self-plundering risk.Investment Risk

Within the 401(k) or qualified retirement account, there is generally a wide variety of investment options. These include different sectors of the market and ranges of risk, as measured by volatility. These options can be conservative, aggressive, or anywhere in between.
We cannot control what the world stock and bond markets do, but we do have some control over how our money is invested and how much risk we are going to take.  As participants, we choose which of the investment options we will use. This requires us to know which mix of the options will meet our investment risk tolerance, emotional needs, and time-frame.

Active User Risk

We drive the level of risk. If we choose investment options that are too aggressive, we increase our risk. If we do not diversify among the options, we increase our risk. If we change investment options in response to information we hear or read, we may increase our risk.

The chart to the left shows how volatility in the market changes from year to year. Investors evaluate each year based on the ending market price. Was it positive or negative? Participants tend to forget that even though a year may have ended positive, we could have experienced significant volatility mid-term. Take for instance 2009. The market ended up 23.5 percent by year end. Looking back, it’s easy to forget that during that year the market was down 27.6 percent.

These periods of volatility can cause investors to get sidetracked. They forget their long-term plans. They try to outguess the market by moving in and out. These decisions are often based on emotion, and it is generally to their financial detriment.

On the flip side, some participants remember the volatility and become risk averse. They forget that over time they have experienced more positive years than negative. They forget their long-term objectives and become too conservative.

Savings Rate Risk

We have seen a significant decline in the personal saving rate among Americans. While a 401(k) allows contributions up to $17,500 each year ($23,000 for those 50 and older), many make minimal contributions. Just like investing too conservatively, saving too little will leave many far short of living a desired lifestyle at retirement.

One of the benefits of a 401(k) is that you can make systematic investments directly from your paycheck. You don’t have to sit down and write a check each month. It happens automatically. Not only that, the company may offer a matching contribution. That’s free money! Our clients experience greater success when their savings plan is set on autopilot.

At any time, investors have the ability to increase their investment amount. Unfortunately, as raises and bonuses come, rather than increase their contributions, investors often allow the raise or bonus to be absorbed into their cash flow.

Self-plundering Risk

Participants who view their 401(k) as a savings account or emergency fund fall prey to this particular risk. They access their money by taking loans or withdrawals, diminishing the opportunity for long-term growth. Even if a participant takes a loan and pays it back, they will experience opportunity loss. This is the difference between the interest rate they paid themselves through the loan and the market returns they missed out on. The difference becomes more significant when you compound the missed opportunities over their working years and throughout retirement. Taking early withdrawals is even more damaging. Participants not only miss out on long-term savings and compounding returns, but they will also pay taxes and penalties. The taxes are based on marginal tax rates, but the 10 percent early withdrawal penalty is exact.

For example, say that a participant has a 25 percent federal tax rate and a 5 percent state tax rate. If they were to take a $20,000 withdrawal from their 401(k), they would lose $8,000 (40 percent) to taxes and penalties, netting a meager $12,000. Suddenly that withdrawal doesn’t sound so enticing.

There are many misconceptions regarding risk when it comes to 401(k)s. We want to make sure you are well informed about the benefits and risks in these accounts.

As we see it, a 401(k) is an ideal vehicle that provides us with a tax-preferred way to save for the future. Will a 401(k) be enough to support someone in retirement? Probably not. While most companies offer a company-match to 401(k) participants, many no longer offer pension plans. This makes it paramount that we save more on our own for retirement.

Our investment decisions, savings habits, and our willingness to stick to a plan can prevent us from increasing our risks. Working with one of our wealth consultants can help you make the most of your 401(k) opportunities and avoid some of these risks. Having a plan and making educated choices is just the beginning.

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