What does financial fitness mean to you?

It’s probably not just about having a pile of money in a bank account or a fat portfolio of stocks and bonds. From our perspective, financial fitness enables you to make good financial decisions because you have developed the skills and knowledge to pursue goals that will enhance your wellbeing and that of those you love and care about.

We’ve covered goal setting in various other posts and it seems to go without saying that if you don’t know where you are going, you leave the destination up to chance. Most of my readers know that I follow Michael Hyatt’s idea of SMARTER goals set forth in his book, Your Best Year Ever. Smarter goals are Specific, Measurable, Actionable, Risky, Time-keyed, Exciting, Relevant to your life.

You’ll never get a handle on finances if you don’t track your outlays. We have tried to make that simpler by providing clients access to a web-based tool, eMoney. When we pose the question about outlay, most people start at the bottom by identifying one expenditure and then another and they ultimately wind up with a large unidentified amount. I have not found many people who will stick with that until they have accounted for nearly all their outflow. Remember my old adage: there are five things, and only five things, that you do with all the money that comes in each month or year: pay your taxes, pay on debts (if you have any), save some, give some, and spend the rest. In the final analysis, there is nothing left over. If you did nothing more than capture that breakdown, you would be miles ahead of most people. Try it for a month.

Invest, but not simply for the sake of investing. Why do you save and invest for the future? Most people give us answers like a new car or something else that they have wanted to buy. Some say retirement, or an education fund for children or grandchildren. The why is arguably more important than the “how” or “what.” After hearing that the goal is “retirement” I like to drill just a bit deeper and ask why is having a retirement fund important to you? I listen carefully for values and look to tie the financial plan to those values that matter most to each client. Is it that thing (car, house, etc.) or is it really about freedom from worry and / or independence from others that you value? These are the things that will prompt you to overcome procrastination and take action now in order to be more financially fit in the future.

If you would like a copy of my firm’s financial fitness checkup questionnaire, give us a call.

While many find it anxiety-provoking to think about, creating a legally binding plan to distribute your assets after your death ultimately provides you with peace of mind. You can rest easy knowing that your wishes will be carried out as you have requested.

Some folks prefer a DIY, or do-it-yourself approach, but this may not be the best option for everyone. One reason is because each state has its own set of laws and requirements. You can find various templates online, but some of the documents may fall short of their claim to meet your state’s requirements.

It is crucial that your estate plan meets your state’s legal requirements to ensure your final wishes are honored, so expert help is recommended. Consult with an estate planning attorney to ensure that documents are correctly prepared, avoiding costly and time-consuming missteps.

While we encourage you to sit down with a legal professional, we also want to provide some general guidelines you can think through independently. Estate planning is a complex field, but a general outline can clear up some of the mystery.

What do you want to accomplish? Will you be providing for children under 18? Or are your beneficiaries young adults, older adults, relatives, or charities? Exactly how might you provide for your children?

Options you may consider include a trust and/or a will.

What is a trust? Trusts provide control over the distribution of assets, privacy, and potential tax advantages. A trust is a fiduciary arrangement that allows a trustee to hold assets on behalf of a beneficiary or beneficiaries. Trusts can be arranged in many ways, specifying exactly how and when the assets pass to the heirs.

For example, are you concerned that a young adult might fritter away his or her inheritance? A spendthrift trust might be the answer. Instead of an account that allows immediate access to the assets, the trustee of a spendthrift trust dispenses the assets over time.

Additionally, a spendthrift trust typically protects assets from creditors, bankruptcy, divorce, and lawsuits.

Is there a need to minimize taxes? An irrevocable trust might fit into your plan. By placing assets into an irrevocable trust, the estate’s value is reduced regarding estate taxes. Besides tax considerations, irrevocable trusts also help protect assets in lawsuits.

You may also decide to create a living trust, which transfers your assets to your beneficiaries and avoids probate.

Other trusts that you may find advantageous include charitable trusts, special needs trusts, generation-skipping trusts, and bypass trusts. The latter two offer ways to reduce the estate tax.

You may also consider a will. A will is a legal document that takes effect upon your death. It outlines your wishes, including provisions for guardianship of your minor children.

As we already mentioned, complexities abound. We would be delighted to answer any inquiries you may have. Again, consulting with an estate planning attorney can help you decide if a trust, a will, or both are best for securing your assets for your heirs.

Don’t wait until it’s too late to secure the future of your loved ones. Take action today.

• Have you taken stock of your possessions? It’s important to create an inventory of your assets, such as bank accounts, insurance policies, investment accounts, and personal belongings.
• Don’t avoid the difficult conversation. If you were to pass away suddenly, do your loved ones have access to important documents, financial statements, etc.? It is important to inform your loved ones about the location of your will and the legal professionals who will handle the process.

In other words, it’s important to ensure that your heirs won’t be forced to embark on an unexpected scavenger hunt in the event of your unexpected passing.

• Choose the right executor or trustee. Select a trustworthy individual or institution to act on your behalf. You need someone dependable, trustworthy, organized, fair, and financially savvy. Identifying the best candidate can be made easier if you focus on these important attributes.
• Be sure to designate and regularly update your beneficiaries. It’s common to list a beneficiary or beneficiaries for an IRA and life insurance policy.

However, it’s crucial to ensure that your designated beneficiaries align with your will. For instance, if the will you drafted last year names Bob as the recipient of your IRA at ABC Brokerage, but the beneficiary listed 15 years ago is Sally, Sally will be the recipient of the assets.

• Prepare for medical decisions. Estate planning isn’t complete unless you prepare legal documents such as a durable power of attorney for financial matters and a medical power of attorney for medical decisions. It is crucial in the event you are incapacitated.

These documents appoint trusted individuals to make decisions on your behalf when you can’t.

• Update your estate plan regularly. Life is full of unexpected turns. Milestone events such as marriage, divorce, births, and deaths can significantly impact your wishes and create gaps in your plan.

In addition, charities that used to hold significance may not have the same impact anymore. Therefore, it is crucial to periodically review and make necessary adjustments to your plan.

Estate planning is a personalized process, and we want to emphasize that the above-mentioned steps are merely an outline.

Our objective is to initiate a dialogue and assist you in developing a plan or motivate you to revise an existing one. We are always available to address any questions you may have.

By now, you should have received your year end statement from your advisor or broker and perhaps you have reviewed it and had a conversation. In the first two weeks of this new year (2023) I have had several conversations with other financial advisors and have read a lot of commentary by various “experts” in our field. So far, nearly all of the advisors have told me that they simply stayed with a buy-hold-rebalance style (commonly referred to as asset allocation) investment strategy throughout 2022. That’s didn’t work out too well for their clients because stocks were down more than 18% and U.S. bonds dropped by more than 13%; the typical balanced portfolio of 40% bonds and 60% stocks was down about 16% for 2022.

At D. Scott Neal, Inc. we saw structural changes taking shape in 2021 and materializing in the first half of 2022. Geopolitical power shifts, unprecedented debt levels, shifting population demographics, new technologies, decades of loose monetary policy, and high inflation have permanently altered the investment world. As a result of these seismic economic changes, we made significant updates to our portfolio allocations, risk controls, and modeling in the first half of 2022.  For those clients who went along with our strategy (or gave us complete discretion to do so) we had the new, more active, strategy implemented by June. 

As you may recall from our previous writing about this, we blended our two long term strategies (wealth preservation and momentum growth) into one and varied the amount of each according to a client’s specific risk profile.  Risk profiling is a combination of risk tolerance and risk capacity.

We added several individual stocks along with some inverse ETFs (those that go up anytime the market index falls) to our portfolios. In our attempt to address ways to moderate the riskiness that we saw, we also paid close attention to the size of each investment (i.e. that portion of the total portfolio invested in any one individual investment) and how the size could impact risk and return. Picking a specific number of shares to add to the portfolio has an impact on total return as well as risk.

Since making these changes, the D. Scott Neal, Inc. model portfolio has enjoyed a much smoother ride than a traditionally allocated portfolio or the markets themselves.

Outlook

 We anticipate a recession in 2023 and we are well positioned to take advantage of it should that happen.  (We hope that we are wrong about that.)  However, if that comes about, it will put a lot of stress on those investment managers who are holding tightly to the notion that simply buying the dips (or buying and periodically rebalancing) is enough to ensure that their clients’ portfolio will be okay. Instead, we prefer a more adaptable approach that will minimize risk over the largest set of possible circumstances.  For those clients who let us, we have positioned their portfolio accordingly.  While we model what we think will be best, we are keeping our eye on the data and can make changes as the world unfolds in unanticipated ways.

We look forward to having conversation with you about your goals and how our work together can improve your chances of achieving them. In our next post we will be looking forward to next steps along this journey. Hope you will join me then.