"Should I..." Series: Invest Now or After Election Day?

I have money in savings and want to invest it. Should I wait until after Tuesday, November 6 – the midterm elections – to get my money invested?

No matter who you are, there are likely two things that have crossed your mind recently: market volatility and political discourse. Thus, it would seem natural that both factor together when deciding whether now is the time to invest idle cash.

I was recently asked this very question, and along with that, I was asked what the market did recently. My response was that the market was higher than where it was a week ago and lower than where it was a month ago.

But so what? That is what the market has done. It does not tell us anything about what the market will do. And there is certainly no such thing as what the market is doing. Notice the subtle, but extremely important, differences there.

Markets don’t always act in ways that we think are rational. It is impossible to silo independent drivers of what makes the market go up or down for any given period of time. Election day, tariffs, taxes, earnings reports, jobs reports…these are all just some of the factors that we’ve heard about recently which work in beautiful harmony and can impact what drives market movements. Or at least our perception of what drives market movements.

To decide whether now is the time to get cash invested, focus instead of what you know and what you can control:

1.       We know that mathematically speaking, a dollar invested today has a higher expected return than a dollar invested tomorrow. Simple enough concept, but there is more to it than that behaviorally.

2.       How much cash am I looking to invest relative to my overall wealth or net worth? Is it a material amount or just another contribution in a long line of contributions?

3.       What is the money for? It goes without saying that if you’ll need this money for something in the short term, then it likely should not be invested at all. If this money is for long term wealth building and/or retirement, then it should be invested according to your overall investment strategy in accordance with your specific risk tolerance.

If you’re investing for the long-term and have an investment strategy in place, then what happens this week, next month, or the next 12 months is almost irrelevant. It’s also unpredictable.

Notice we haven’t even touched on the psychological factors that go along with sitting on cash. That is vitally important to understand, and we’ll cover that next time.

Wild Wild Week

Last week was a wild, wild week.

For a few days, it was one of those weeks where we were reminded what it feels like to lose money. On Wednesday, we experienced a very rough day in the market. S&P was down 3.29%, Dow down 3.15%, Nasdaq down 4.08%. In fact, it was the worst day in the market since February. Eight whole months – an eternity! Thursday was not any better.

Here comes Friday, with surging stocks and the S&P 500’s biggest gain since April 10. What are we to make of all of this?

If you’re like many, you turned to news outlets to get a better understanding and probably saw things like “Fed policy: crazy or sane?” or “S&P 500 rises for first time in 7 days” but still having “Worst month since March” but at the same time “Nasdaq has biggest jump since March.” By the way, all of the aforementioned headlines came in one 15-minute window on Friday morning. Make sense yet?!

To be blunt, I do not recommend you changing your investment strategy based on what happened last week, this past month, or even this year. If what happened last week has left you in emotional distress, you may need a reality check. Returns are only possible by taking risk. Rather than chasing returns, it’s imperative that you understand the risks you take in your investments.

Arguably the biggest rule about investing is that no one has a crystal ball. Worth repeating – no one can predict what will happen and when. It’s not cliché…it’s reality!

The best remedy for a week or month like we just experienced is having an investment strategy. Whether you are a DIY’er or work with an advisor, you should have a strategy and know what that strategy is well in advance of any shakeups.

However, even when we have reasonable evidence that a particular investment strategy will work, the hardest part is the discipline it takes to stick to that strategy through thick and thin.  It is so difficult because that little voice in your head says, “What if this doesn’t work anymore?  What if I’m wrong? What if my neighbor/friend is supposedly doing better than me?” Often times, that little doubt is all it takes to turn steadfastness into the emotional turmoil that has ruined generations of investors.

The key to successful investing as I see it is two things, listed in order of importance.

  1. Stay disciplined. This requires hard work. It’s easy to be disciplined when everything is going your way, but it’s much harder when the tide is turned against you.

  2. Remain diversified. Over-concentration of investments (to one company, one sector, one asset class, or one country) is one of the top reasons anyone ever ends up bankrupt and has a poor investment experience.

Last week was a wild, wild week. It felt like that 2010 Wimbledon match between John Isner and Nicolas Mahut. You know, the one that started on a Tuesday and ended on a Thursday? Where the 3rd and 4th sets went to a tie-break, and the match finally ended in the 5th set at 70-68. You remember, because it was emotional!

The Importance of Personal Umbrella Policies

What would happen if you or your child caused a car accident that resulted in serious injuries or the deaths of others?

How would you pay for the treatment and damages of someone who was hurt in your home and claimed negligence? What happens when they claim to have suffered greatly because of the injury?

What if your dog was attacked by a stranger on your property and bit the person in self-defense—but you were still sued?

These are questions that anyone could face. However, one component of a wealth protection plan that is often overlooked or underused—even by the affluent—is the umbrella policy.

Here’s why an umbrella policy can make sense if you have significant assets.

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The benefits of umbrellas

You have insurance policies on your house and vehicles. You might also insure other types of property you own (boats, airplanes, etc.). But do you have enough coverage, considering your personal wealth?

If you’re financially successful, the answer may be a resounding no.

The reason is that most insurance policies top out at around $500,000 of liability coverage. That may not be enough if you find yourself involved in a serious accident. For example, people who get hurt on your property may seek much more than $500,000 in damages.

That’s where an umbrella policy (also called an excess liability policy) can make a big difference. An umbrella policy kicks in when your other liability policies (such as your car insurance) hit their limit. For instance, let’s say you are involved in an accident and are being sued for $1 million, but your car insurance covers only $300,000. In that case, your umbrella policy could cover the difference so you don’t have to use personal assets.

Clearly, then, an umbrella policy can be useful in helping to protect your assets from larger claims and lawsuits.

To have an umbrella policy, you need to have the other insurance policies, such as car or homeowner’s insurance, already in place.

Make sure there isn’t a gap between your other policies and your umbrella policy. Where your car insurance ends, for example, the umbrella should take over—otherwise, you’re on the hook for that gap. And if the underlying car insurance policy is not addressing certain risks, then the umbrella policy can also miss covering these risks.

A BIG ENOUGH UMBRELLA? 

We find that most wealthy individuals and families don’t have large enough umbrella policies to adequately protect their assets. If a legal judgment is greater than your liability coverage, you are going to have to come up with the difference—which may mean selling assets, possibly at fire-sale prices because of the bind you’re in.

A general rule of thumb is that if your net worth is $20 million or less, make sure your umbrella policy covers what you’re worth. If you are worth more than $20 million, it becomes a question of how much risk you’re comfortable taking on.

Many ultra-wealthy individuals, for instance, will get as large and comprehensive an umbrella policy as possible. While the odds of having to use it are in their favor and it’s even more unlikely that they will reach the limits of the policy, the possible financial downside from a serious accident and substantial lawsuit is something they prefer not to even consider. As one person with a $10 million umbrella policy told us, “It costs less than putting an attorney on retainer to defend you in the event of a suit.”

That said, it can be challenging to insure up to the amount you wish. That’s because some insurance companies cap the size of the policies they offer, usually at $5 million. If you require more than $5 million in coverage, you may need to enlist a specialty insurance company, which might be able to offer policies of up to $100 million.

The cost of coverage

How much will a hefty umbrella policy set you back? A number of factors determine the cost of coverage, including:

·         Number of homes and where they are located

·         Number of cars and the number of people being covered (including their driving histories)

·         Number of boats and planes

·         Amount of existing liability coverage you have before adding the umbrella policy

The good news is that umbrella policies tend to be relatively inexpensive, because the severe occurrences that trigger them are uncommon.

The upshot? If you don’t have an umbrella policy, run—don’t walk—and get one. If you do have an umbrella policy, make sure you’re sufficiently covered—and boost that coverage amount if you’re not.

ACKNOWLEDGMENT: This article was published by the BSW Inner Circle, a global financial concierge group working with affluent individuals and families and is distributed with its permission. Copyright 2018 by AES Nation, LLC. This report is intended to be used for educational purposes only and does not constitute a solicitation to purchase any security or advisory services.

Return on Investment

Defined as the ratio between net profit and cost of investment of some resources.

Return on investment, or ROI, is used to evaluate the efficiency of an investment and also to make a comparison of the efficiencies of different investments. The calculation is both straight-forward as well as versatile, and can be applied to many settings. Most often in the financial world, we might look at the ROI of our favorite stock holding (which is undoubtedly APPL or AMZN at the current time, right?). Say you bought AAPL at $100/share in July 2016 and about two years later it’s worth$222/share.

ROI = (Gain from investment - Cost of investment) / Cost of investment

ROI APPL = ($222 - $100) / $100 = 122% …Not bad!

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In the above example, the resource we invested was capital. However, one could argue that time is our most valuable resource. This morning I attended a great event hosted by Roswell NEXT, a local community organization which I am a part of. There, I had a conversation with someone about ROI.

It seems natural that with our finite amount of time in each day, we look to join organizations, attend certain events, or talk to certain people based upon our perceived (or desired) ROI on that time spent. It makes good business sense, and hopefully you will be able to measure that by way of landing a new account or signing a new contract.

But have you ever considered the importance of being involved with or doing something simply because of your interest in it? Volunteering with an non-profit you are passionate about; joining a local community organization; introducing yourself to the new neighbors who just moved in; or trying a new sport or activity.

Time is our most valuable resource. Time spent on personal pursuits should be considered independently of professional networking and business development, but they should hold equal weight. There’s an ROI to those personal pursuits, though it may not be as efficiently measured.

"Should I..." Series: Start My Dream Business, But Leave My Secure Job

Should I start my dream business while the economy is good?  I have enough money to get my business started, but I would be leaving a secure job.  What advice can you give me based on what you have seen from your clients?

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If you are even considering being an entrepreneur, then chances are you already have the work ethic and drive to be successful. If you are thinking of becoming a business owner, then surely a strong and growing economy can only help your cause. 

In addition to having enough money to start the business itself, you need to have money saved to replace the paycheck you are giving up. What if you can’t afford to pay yourself for 6 or 12 months? How will you pay your mortgage, car insurance, children’s daycare, or the multitude of other expenses that you have? Where will your health insurance come from? 

You also need to have a source of additional capital for your business. This may be additional savings you have, a loan from a family member, or a line of credit with a bank. One thing is almost certain, once you open the doors you will need more money at some point or another. 

Starting a business has infinite challenges and obstacles that must be overcome…there are entire books written on this very subject. The risks you take will hopefully lead to a great reward down the line. Make sure you are financially prepared before taking the plunge.

More About the S&P 500

Recently, we took a look at the S&P 500 which included a great visualization of the market cap of companies that make up the index. 

To many in the investment world, the stock market is still on its bull-market run (though there is some disagreement on the technical length of it). This means that companies which make up the index have grown in value as a whole. Individual companies have jockeyed for position with some being added to the list of largest 500 companies in the U.S. while others have fallen off.

Josh Wolfe brings us another great visualization comparing the 10 largest companies in the S&P 500, from March 2009 to August 2018. 

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Time surely flies, and there are so many historical lessons gleaned from market data. Arguably none more obvious than the rise of Amazon. But what about the tumultuous decade that Bank of America experienced? Or the fall of IBM, relatively speaking? Only three companies in the top 10 in March 2009 remained there in August 2018. 

Perhaps the most simple lesson learned from a chart like this is that we don't know what will happen in the future. What we believe to be the best companies at the current time may fall off in the not-too-distant future. Companies that we don't yet know anything about or are not evenly publicly traded may one day dominate the headlines and market share. 

"Should I..." Series: Interest-Free Credit Cards

Should I take advantage of a 0% interest credit card?  What are good rules to follow regarding these offers?

Full disclosure -- I have fallen for this before. When I was just out of college, I was making a big purchase and was offered to open a store credit card to give me 5% cash back and 0% interest for a period of time. I accepted, with the plan of immediately paying off the purchase with cash I had. In my mind, that was a free 5% discount. 

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The unfortunate reality for most people is that store cards will end up costing them more in the long run. Even if they start with good intentions, many people do not fully pay the purchase off before the deadline.  If you can’t pay it off quickly before the interest charges kick in, it will cost you more over time. 

Many store credit cards carry interest rates of 20% or higher. A good question to ask is, would I be willing to pay 120% of the retail price for that item? Stick to cash or debit cards, or credit cards you already have if you are capable of paying them off each month. 

One last thing:  never open a new credit card if you are in the process of getting approved for a loan, or think you may in the next 3-6 months.

About the S&P 500

The S&P 500 is an index of the 500 largest U.S. companies. It is market-capitalization-weighted based on those companies' values. When people talk about "the market," they are often referring to the S&P 500 (other times the "Dow" which is an index of just 30 stocks).

Michael Batnick, Director of Research at Ritholtz Wealth Management, took the finance world by storm recently by putting together the following chart and data. He points out that the market cap of the top 5 S&P 500 companies is $4,095,058,706,432 while the market cap of the bottom 282 S&P 500 companies is $4,092,769,755,136 (as of July 2018). 

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Astounding!

What we can learn from this is that there are a few select companies that can control the narrative of "the market." These are companies that we all know, recognize, and may even love. But that should not dictate how we invest.

It's true that FAANG and other mega-cap stocks have performed well, but so have companies in other deciles of the S&P. It is just as important to remember that there are about 3,000 other publicly-traded companies in the US and thousands more abroad.

 

"Should I..." Series: Buy a House Now or Wait

Welcome to my “Should I…” series!  In this series, I will answer questions that I hear frequently from my clients.  I would love to answer your questions too.  So leave any questions you may have in the comments below and I will answer them in a future “Should I…” post.

Should I buy a house now?  I have a down payment saved up but I know home prices are high right now.  Should I wait and hope they fall?

You know what they say about trying to time the market, right? Well, the same can be true for real estate. As a buyer, you are obviously looking for the best house your money can buy you, and right now, houses are expensive. But don’t let that deter you from purchasing a home…if you are ready. Instead of focusing as much on the perceived “hotness” of the housing market right now and what you think it may or may not do in the future, turn your attention to the other factors that matter just as much. 

First, get pre-approved for a loan before you even start to look. Even better, after you’ve been pre-approved, look at your budget to determine what you can actually afford, not just what the bank will lend you. Where do you fall within the Housing Expense Ratio and Debt-to-Income Ratio? In addition to a down payment, will you need additional capital up front to update anything before you move in? There are ALWAYS unexpected expenses that come with owning a new home.

Second, find a reputable realtor that will help you with your buying process. Most often, the seller pays real estate commissions for both sides of the transaction, so there is no cost to you in having a good realtor. It could, however, be costly if you don’t. 

Third, determine where you want to be. You may envision yourself in a specific neighborhood or part of town because it fits your life right now. But have you considered the schools in that area (even if you don’t have kids)? Have you checked out the property taxes there?  How about traffic and your commute, growth of the city and surrounding areas, parks and community resources, or other variables? These may not necessarily matter to you now, but they may in the future and can also affect re-sale down the road. 

Buying a home should not be done solely based on the purchase price. It is one of the biggest purchases one will make in their lifetime. Be pro-active, and when the time is right for you, you will find a great place to call home.

"Should I..." Series: Sell My House to Realize the Equity

Welcome to my “Should I…” series!  In this series, I will answer questions that I hear frequently from my clients.  I would love to answer your questions too.  So leave any questions you may have in the comments below and I will answer them in a future “Should I…” post.

Should I sell my house now to take advantage of the equity while prices are still high?

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You can certainly cash in the equity you have to move into a house that is bigger, in a better neighborhood or school district, or just better meets your family’s needs. 

But keep in mind that chances are the new house you’re looking at has also increased in value and thus your equity may not get you as far as you think (or hoped) it would. Crunch the numbers to be sure you will be able to afford the new monthly expenses associated with a larger, more expensive house and that the equity you take out of your home will cover the down payment for a new one. And will you have to use any of that equity for moving expenses, new furnishings, or remodeling?

Conversely, we get the question all the time of whether it makes sense to sell your current house to downsize to something smaller, and keep that equity. In all likelihood, downsizing to a smaller house in the same area may still require all of the equity you get out of your current house, after paying off any mortgage.

Some people consider selling their home, investing the equity and renting until housing prices come back down. But can you truthfully say you know when that will be? Not to mention, you give up a fixed monthly mortgage payment for the risk of paying increasing rents which are beyond your control.  

 

You CAN Have Too Much Money in the Bank

Diversifying your financial portfolio is the best way to ensure you are protected in all kinds of economies.  That means your investments in the stock market should be diversified, but it also means your money should be working for you in several different sectors.  Easily accessible savings or money market accounts, stocks, bonds, retirement accounts and real estate are all important to have in your repertoire.  Finding the proper balance is key.  This piece from CNN.com explores the risks of avoiding risks.  When you keep a large percentage of your net worth in the bank rather than investing it, you miss out on returns that could mean a much more comfortable retirement.  It's worth the read.  Please feel free to contact me if you would like to discuss your own financial portfolio and whether it is setting you up for the future.

"Should I..." Series: Sell My Business

Welcome to my “Should I…” series!  In this series, I will answer questions that I hear frequently from my clients.  I would love to answer your questions too.  So leave any questions you may have in the comments below and I will answer them in a future “Should I…” post.

Should I sell my business while the economy is up?  I had planned to sell in about two years, but I am wondering if I should do it now while the economy is good, since we don’t know what the future will bring.

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One thing I can say unequivocally is that it takes longer to sell a company than most business owners envision it will. There are so many factors that go into a successful sale or transition of ownership. In fact, research from the Exit Planning Institute has found that 70% of businesses that are put on the market do not end up selling. So what can you do if you plan to sell in two years or 10 years? Start planning now! 

Ask yourself important questions like:

·     When do I want to exit?

·     How much after-tax income in today’s dollars do I need?

·     What would an ideal transition look like to me?

·     Do I have a transition plan in place?

·     Could my business operate effectively if I wasn’t here?

The truth is, this simple question requires such a complex analysis and answer that you should speak with an advisor who can help you through this process. To get you started, I have written a book called One Shot that can be a great resource for you. You can click here to read it.  hen you’re ready, let’s discuss an action plan to maximize the wealth you generate from the sale of your business.

How Do You Choose An Advisor?

You may have never worked with an advisor before and are exploring how to go about finding one that is right for you.

You may be working with an advisor you like, but wondering if you are getting the best advice.

Either way, watch below to see how working with the right advisor can help position you for long-term success!

"Should I..." Series: Sole Proprietor

Welcome to my “Should I…” series!  In this series, I will answer questions that I hear frequently from my clients.  I would love to answer your questions too.  So leave any questions you may have in the comments below and I will answer them in a future “Should I…” post.

As a sole proprietor, should I open a SOLO 401k plan?  Or is an IRA or a Roth IRA a better idea?  I am just starting my consulting business and expect to gross roughly 200k this year with a 140k income.

Solo 401k

I recommend you open both a SOLO 401k and a Roth IRA.  With a Roth IRA, you invest after-tax dollars and get the benefit of taking out the money free and clear (with no taxes) when you retire.  You are also able to withdraw the money from your Roth IRA should you need it pre-retirement with no penalties. If your adjusted gross income exceeds $120k (assuming you are single), you cannot fully contribute to a Roth IRA, so talk to a financial advisor about a backdoor Roth IRA, which is a great option.  If you want to save more than the Roth IRA max ($5500 if you are under 50; $6500 if you are over 50), opening a SOLO 401k is a good way to do it.  It will allow you to contribute up to  $18,500 if you are under 50, and $24,500 if you are over 50.  Plus, you can contribute 25% of your salary up to a maximum $55,000 (or $61,000 if you are over 50).  There are lots of factors and regulations to consider, so please let me know If I can help!

"Should I..." Series: Close to Retirement

Welcome to my “Should I…” series!  In this series, I will answer questions that I hear frequently from my clients.  I would love to answer your questions too.  So leave any questions you may have in the comments below and I will answer them in a future “Should I…” post.

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Should I come out of the stock market when it fluctuates if I am 5 years from retirement?

At five years out from retirement, your portfolio should be diversified to provide both safety and growth.  You will be withdrawing money from your retirement fund a little at a time over as many as 20 – 30 years.  So, some of your funds should be in safe investments and readily available and some should remain in growth stocks so the money you won’t need to access for 20 years or more will still be working for you and taking advantage of market upswings.  If your portfolio is well-structured and diversified, there is no need to panic when the market fluctuates – even if you are five years from retirement.

Not sure if you are invested correctly? Click here to find out.

"Should I..." Series: 401k

Welcome to my “Should I…” series!  In this series, I will answer questions that I hear frequently from my clients.  I would love to answer your questions too.  So leave any questions you may have in the comments below and I will answer them in a future “Should I…” post.

Should I invest in my 401k beyond the employer match?

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Yes!  I know that sometimes a financial advisor will suggest that you should just invest in your 401k to the point of the employer match, and use any remaining money you have earmarked for savings in an investment account, Roth IRA or traditional IRA. Unless you are a seriously disciplined investor who will, consistently and without question, invest additional money monthly into an investment account, I say put it in your 401k.  It’s simple, it’s done automatically, you don’t have to think about it and you won’t be tempted to skip a month or two to spend that money on a vacation.  Being a disciplined investor is the only way to set yourself up for a comfortable and worry-free retirement.  

Enlightening Summer Reading

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There are a lot of light summer reads out there for your beach vacation. But if you want to read a book this summer that will inspire you as your run and grow your business, take a look at Mark Cuban's summer reading list, as told to Inc.com

They aren't light, but they are enlightening. 

And, if you are a small business owner who is thinking about selling your business, take a look at the book I wrote specifically on that subject. It is called One Shot, and you can read it here

One Shot is about a process that all successful entrepreneurs can go through to ask the right questions, pursue the appropriate conversations, and ultimately implement the best solutions for you and your business.

Inspiring Podcasts - You Owe It to Yourself to Listen

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Part of what I do at Baer Wealth Management is work with business owners to help them determine the right time to sell their business and maximize their profits from the sale.

I often recommend that they listen to this podcast: Built to Sell

The Built to Sell podcast focuses on business owners who have recently sold their companies and takes an excellent look at the good, the bad, and the ugly of the selling process.  It works so well because those interviewed are honest and open about the challenges they faced and give insightful information about the decisions they made along the way.

If you are thinking about selling your business, I think you will find the information valuable and suggest you first listen to the episode with Sue Hrib, who recently sold her consulting firm.  

And, if you get inspired by listening to podcasts like I do, take a look at this piece from Inc.com, which suggests several other podcasts that business owners and entrepreneurs might find interesting.  I know I will be checking some of them out this summer!