Financial Organization – Part 5

Money in Motion

Taking care of first things first, our prior blogs talked about the importance of the Protection and Savings levels of the model. In the fifth and last part of our Financial Organization series, we deal with the third level, Growth.

Investing is a good thing, right? We should be investing our money to make more money shouldn’t we??

The answer to those questions is “yes”, but people put money into securities before they have established adequate liquidity and that can create a problem. In the Savings area we have already talked about the importance of putting aside funds for things like emergencies. We also discussed the importance of having money that’s not in securities, or other growth oriented investments such as real estate, which if needed, could force you to sell in a down market causing you to lose some of your wealth.
We believe there should be a progression and that progression is protection first, then adequate savings, then putting your money into growth oriented vehicles such as:

• Bonds
• Stocks
• Mutual Funds
• Managed Investment Accounts
• Real Estate
• Investment Real Estate

These growth vehicles are attractive from the perspective of long-term overall yield as well as the potential tax benefits they have. But first, let’s examine some of the common mistakes we see in the area of Growth.
Concentration Risk

Many people build their income around employment with a specific company. Not only is their income tied to that organization’s success but a significant part of their wealth is attached to that single entity. Their retirement account, stock options, investments are all tied to that one company. We call that concentration risk – having too much money concentrated into the stock of the company they work for.
Another type of concentration risk is when people fall in love with a particular security. While reviewing our clients’ asset allocation we sometimes find they have a lot of money tied to the success of one organization. Again, not only is their income attached to it but their savings, assets and investments. This is potentially very dangerous to their lifetime goals of growing while also protecting their wealth.
Emotional Decision Making

Most people have no overall strategy for making investment decisions. Traditionally people invest emotionally; when the market is high, they invest in the market and when it goes down they sell, which is the exact opposite of what they should be doing.
When many of our clients had market corrections to their accounts in 2008 and 2009, our advice was to stay the current path or buy more in the market. But most people felt the pressure to sell which is exactly what we want to try and avoid.
We also have found that many people have no idea how they will react to those times when the pressure is on and the market is down. Often they feel this overriding sense of “Let me get out.” The big challenge for those who did get out is what to do now because since then the market recovered quite a bit and they lost that period of time. When you sell you also have to figure out how you are going to get back in. We want to guide our clients to avoid those mistakes so that when they look back they don’t say “Wow, I shouldn’t have done that.” Avoid the emotions of investing.
Reinvesting All Dividends and Capital Gains

Like in the savings blog, we find a similar pattern in the growth area where people reinvest all of their capital gains, dividends and interest, buying more of the same security or mutual fund, the effect of which is no movement of money. It also creates more concentration risk, more taxes, and a stagnant personal economy. Our philosophy is to help clients move money from one place in their financial model to another picking up more benefits, lowering their risk, lowering their taxes and protecting the wealth that they have. Money in motion stays in motion.
Mortgages

Mortgages can be an excellent tool and help in the purchase of real estate, but selecting the wrong type of mortgage can leave you with a debt that is higher than the value of the property. As mortgages and real estate started skyrocketing, many people took too much money out of their homes, got interest only mortgages, or took out variable interest loans that went up. Many of these people really got hurt by what happened when the real estate market went down. In retrospect, many people took an aggressive position toward purchasing real estate and/or used home equity and then found their debt/loan was higher than their property’s worth. They were challenged, as the mortgage rates went up, to make their payments. The result of this, unfortunately was that some people had to resort to short sales or were forced to move out of the home they loved. These are the things that we want to help people avoid so that they position themselves in a way that will save them from looking back with regret.
What we offer people is a way to assess their present situation, look at what they’ve done with their protection, savings and growth and position themselves in an objective way that makes sense. It all starts with gathering all the information and seeing how your financial world stacks up in this model so that you have a clear picture and can be objective in seeing if you have the right stuff in your financial plan.