The Legacy Perspective - July 2019

By Steve Wachs, CFP ®

"Everybody has a plan until they get punched in the mouth"

- Mike Tyson

As financial planners, we believe it is extremely important to have a plan. For those who have been through our financial life planning process, you know it is time intensive and a lot of serious questions are asked. One client termed this process as “invasive.” I think Roger took that as a compliment. The biggest advantage our investment team has in designing and customizing portfolios is the information we discover during this financial planning time. We have a clear understanding of what is important to each client, their risk profile, their unique goals, and the timeframe associated with those goals.

So, what “punches” can derail the best laid plans? Current headlines spotlight tariffs, political animosity, the Fed’s interest rate decisions, and a slowing economy. Continuing with the boxing vernacular, we consider these events as “jabs.” They are expected and will always be part of the conversation. We want to focus on the punches that will knock you down. Events like 9/11 and the 2008-09 financial meltdown were not front and center until they happened.  Let’s look at what some of these events might be and how we prepare for them.

Unexpected Inflation

We have been in low inflation environment for a long time, and it can be easy to forget the negative impact of inflation.  Inflation has a direct effect on purchasing power. That is a fancy way of saying that your money just doesn’t go as far as it used to. Gas prices have escalated (gas taxes were raised in 12 states as of July 1), housing prices have increased dramatically over the past 5 years, costs of healthcare have surged, and trade wars can escalate costs. We don’t know if these things are the harbinger of unexpected inflation. We do know cash and many fixed income investments are investments that are most impacted by rising inflation. We can address this risk with the use of different types of bond instruments and employing laddering strategies in which bonds mature at different times. Certain companies and industries are more inflation sensitive. That’s why we diversity across multiple companies, industries, and even different countries. We also use alternative investment strategies that can actually benefit from higher inflation. Income producing real estate is one such asset class.

Outbreak of War

I recently heard Dr. Robert Gates speak. Dr Gates served as Secretary of Defense under both President Bush and President Obama. He is the only Secretary of Defense to remain in office under two presidents of different political parties. For all of our Aggie friends, he said his most “fun job” was being president of Texas A&M. He shared his concern about Iran, Russia and North Korea. Regarding Iran, he said “the administration is underestimating how brutal the theocracy and Islamic Guard are.” As to Russia, their goal is to be a “spoiler” to the United States and that will only change when Putin dies. Finally, North Korea will never give up all their nuclear weapons as “every country that did that is gone.” This doesn’t even take into account potential cyberwar attacks from China and other countries. Not a very rosy picture. These kinds of potential events are scary and difficult to plan for. When something like this happens, equity markets fall because of fear and uncertainty. We plan for these types of short-term declines by making sure that any planned distributions that are needed are protected from stock market risk.

Unexpected Portfolio Distributions

A quote Roger often shares is that “spreadsheets are linear, life is not.” The older I get, the more I know this to be true. During our planning process and update meetings, we discuss and recommend actions to guard against obstacles that can put a client’s financial independence at risk. We also get clarity regarding both the amount and timing of any distributions that may be needed from the investment portfolio. Knowing and planning for both of these variables, timeframe and amount, are crucial to investment success. The financial markets have been extraordinary strong this year. Bonds have generated returns between 6% to 9%. Both U.S. and international equity indices have seen mid-to-high teen percentage gains. When the financial markets perform like this, we are able to capture gains and set aside the amounts needed for future distributions into interest bearing investments that are not subject to stock market risk. Even when unexpected distributions are needed, we can find different investments within a portfolio to sell. However, there will be a time when the financial markets decline, and it will take a longer period to recover. Having to sell at these times for unplanned distributions does not allow the investment portfolio to recover and can be a “punch” that can knock you down. That is why we continually remind our clients to let us know as soon as possible if there are any changes to potential distributions that may be needed.

Most of you heard the name Mike Tyson, but I suspect many don’t know who Cus D'Amato is. No, he is not Warren Buffet’s successor. He was the manager, trainer and father figure to Mike Tyson. When Tyson was at the peak of his success, Cus was literally in his corner training, encouraging, leading, and doing what was needed to help Tyson win. When Cus died, Tyson went off the deep end and his boxing career dwindled. Please know we are in your corner helping you proactively stay on course with your plan and avoid the proverbial knock-out punch that may be thrown.

Disclosures

• Legacy Consulting Group is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.

• Information presented is believed to be current. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed.

• All investments and strategies have the potential for profit or loss. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. There are no assurances that an investor’s portfolio will match or exceed any particular benchmark.

• Historical performance returns for investment indexes and/or categories, usually do not deduct transaction and/or custodial charges or an advisory fee, which would decrease historical performance results.