For over 20 years I’ve been introducing my Four Cornerstone Investment and Retirement Planning Process to partner with couples and individuals alike, to assist them in achieving their needs, goals, and financial dreams. During these 20 years we have endured the dot.com bubble busting in 2000 followed by 9/11 and a deep recession, the 2008 financial collapse, trade war fears in the fall of 2018, and of Course the onset of Covid in 2020. Fortunately, my process was designed to deal with these types of financial events to assist my clients in having confidence in their investment and retirement plans.
However, I can’t personally remember a time going into a new year where I’ve received so many calls and emails concerned about an upcoming year. I believe some of this is due to Covid fatigue. But I also believe there is real concern and rightfully so regarding inflation, supply chain disruptions, employee shortages, political infighting, upcoming mid-term elections and our ever-growing national debt.
So, I thought I would take a moment and share my 10 ways to prepare financially for 2022(and beyond) that can provide greater confidence going forward. So here we go….
#1 Take a deep breath and focus on how blessed we really are both individually and as a nation.
This may seem like an odd #1 thing to do to prepare. But I actually believe it is essential. You know that old saying, “You can’t see the forest for the trees”? I think it is so easy to get caught up in the never-ending bombardment of information coming from 24/7 news channels, talk radio, and friends and family that never tire of focusing on what’s wrong with life, that we lose focus on how blessed we really are. I’m not suggesting we should just take the approach of “what will be will be”. I definitely believe in preparing(or there wouldn’t be 9 more tips to follow-lol). But I am suggesting having a positive perspective and outlook based on our own personal lives and those we love can make a huge impact in our confidence in the future.
#2 Know your investment risk tolerance and set realistic expectations.
Most financial advisors in one way or another try to establish a clients risk tolerance early in the planning stages. It is quite common that a client will say they are “conservative”. And yet when I look at their portfolio they are in primarily stock funds that saw a 30%-40% decline in value in the 2008 financial crisis. Or the other extreme, they say they are “aggressive” investors and wonder why their portfolio only grew at 3% or less. But when I examine their portfolio, it is filled with “Income” funds, “US Bond” funds, CD’s, and other low growth vehicles. I believe it is important to know what type of risk you are comfortable with, set a realistic expectation of growth you would like to achieve over the next 10 years, then invest in a portfolio that is designed to achieve your expectation. I often say to my clients, “Take no more risk then you have to, to achieve your expectations”.
#3 Have your financial advisor perform a risk analysis on your current portfolio which includes a “stress” test.
Know your personal risk tolerance and expectation, then work with an advisor who uses third party resources to perform a risk analysis on your current investments. This is how I discover people like I mentioned above in tip #2 where they say one thing about risk but are invested in another. In this analysis it is especially important to perform “stress” tests to see how your portfolio performed in the past challenges such as Covid downturn, trade war fears of 2018, 2008 financial crisis, and if your portfolio has been around a long time, all the way back to the severe recession of 2000-2002. Although past performance is no indicator of future results, seeing how a portfolio performed during these “stressors” on the market helps form reasonable expectations for the future.
#4 Examine your exposure to bonds in your portfolio.
Due to the record inflation we are now experiencing, it is possible that the Federal Reserve will begin raising interest rates this year. Generally, when interest rates rise, bond prices fall. Traditionally, advisors add bonds to a portfolio to lessen risk. And that is certainly acceptable. But it may be necessary to examine the risk that may be in a conservative portfolio due to excessive bond exposure and look for alternatives that can provide principal conservation and yet still have growth potential.
#5 Research alternatives to CD and High Yield Savings accounts
Although possible interest rates will rise, they are still at historical lows. If you have more money then you need sitting in bank accounts paying half a percent or less, it might be a good time to reach out to an advisor who has alternatives for short term money.
#6 If you have a mortgage on your home and haven’t refinanced over the past several years, consider doing so before rates begin to rise
It is common to find people who purchased their home 5-10 years ago and have the same mortgage at the rates from then. Rates have dropped considerably. It is worth taking a look at the interest rate you are paying and then comparing to what is available today before rates start rising. Especially if you have a 30 year mortgage. See if with lower interest rates and increased cash flow from when you purchased if you can refinance for a shorter period of time such as a 15 year loan.
#7 Accelerate payoff of credit card debt if possible
This is always a good recommendation but especially as it is possible interest rates will be increasing over the next few years. Work with an advisor to develop a debt reduction plan that can eliminate credit card debt as quickly as possible
#8 Postpone big ticket purchases such as home and cars if possible
Many people think now is the time with lower rates to purchase. But housing costs have increased over 20% in many places in the country in 2 years or less, building supplies have in some cases doubled during that time, and due to supply distribution channel disruptions, there are fewer cars available. It may be time to pause and allow some sense of normal to return to availability of homes and vehicles.
#9 Review your plan often with your financial advisor
During challenging financial times, it is even more important to review regularly with your financial advisor. Schedule a minimum of at least 2 reviews for 2022 and possibly more should there be a great deal of market volatility.
#10 Focus more on a financial planning Process and less on financial products
This simply means plan first, invest second. Make sure your advisor has a defined process that is built on the Fiduciary standard (recommending what is in your best interest). The process will focus more on what you are trying to accomplish, what your risk tolerance is, what your growth expectations are, and even what your personal investing biases are. Then once the “Process” produces a “Plan” then find the investment strategies that are likely to fulfill your plan. All that I’ve written about above is part of the Stivers Financial Services “Four Cornerstone Investment and Retirement Planning Process”. It may have seemed overwhelming when you were reading through the above 9 points. But when built inside a process it is really quite simple. If you don’t have a financial advisor or if you don’t have a “process”, feel free to reach out to us through our appointment setting link on our home page at www.stiversfinancial.com. Or give us a call at (865)288-7685
Check back here at my blog in the weeks and months ahead where will be discussing many different topics such as inflation, passive vs active investing, are annuities good or bad or indifferent, how to choose a financial advisor, in-service distribution, Required Minimum Distribution planning, 401k rollovers, Traditional vs Roth IRA’s, and a host of other financial and non-financial topics.
Have a great 2022!