We like maritime analogies, even if one of us lives far from any major body of water.
Investors in 2021 find themselves caught between two strong opposing tides.
- One is that financial market valuations are at a historically high tide. Speculation (think Tesla, bitcoin, options, Robinhood) pervades the space. In similar prior conditions, future returns have been disappointing. This would suggest a careful, maybe even defensive stance.
- The other is that monetary policy has pushed interest rates to a historically low tide. Future returns can be reasonably estimated by current yields. Such yields are slim and almost none. This is causing some otherwise careful investors to consider riskier strategies. We would resist that inclination.
But here’s the key take-away: Tides change! The problem with financial markets is that there isn’t a reference tide table app. There’s just lots of data, sailors with different vessels, incentives, and imperatives, and the capricious winds of fear and greed.
Your incentives and imperatives likely fall into three categories: Liquidity, capital preservation, and wealth-building.
Everyone needs liquidity. It’s what you use to pay the bills and manage lumpy, more or less random deposits and withdrawals. That's the cash in checking accounts, savings accounts, maybe CDs. Some call this an emergency fund; we like to call it a Reserve. You don't need to rationalize an “emergency” to spend out of a Reserve.
Capital preservation means to sustain the purchasing power of financial assets over the next 5-10 years. We want to be confident that we’ll be able to make equivalent purchases in the future that we can make today. That means offsetting the effects of inflation and taxes. With interest rates at low tide, this is not easily attained, if at all.
Wealth-building means to accumulate financial assets that go far beyond capital preservation. This is appropriate for younger people and anyone with goals that are 10 years or more in the future. A diversified, globally-allocated portfolio of equities (stocks) is likely to be the most reliable path to this objective. The “cost” will be to live through inevitable periods of downside volatility and perhaps several years of poor performance.
Your incentives and imperatives will change over time. We’re here to have the discussion that helps you stay aligned with them, and let the tides do what they do.
Jim Cosgrove, CFP, Plano, TX jim.cosgrove@verizon.net 972-489-0262
Jim Cosgrove, Partner, San Jose, CA jimcos42@gmail.com 408-674-6315
👉A TAX TIP
Secure your tax identity: Get an IRS Tax ID Number!
The IRS now offers tax identity protection to all taxpayers in every state. This is a voluntary program designed to block fraudulent returns that might be filed by someone else in your name. The program is called Identity Protection PIN Opt-In Program (IP PIN). An 84-second YouTube video here briefly introduces the program.
Start here: https://www.irs.gov/identity-theft-fraud-scams/get-an-identity-protection-pin
Half-way down the page, click on this: Get an IP Pin
Click ‘Yes’ to create an account. (If you’re married, both people must do this individually.)
This takes about 14 minutes.
