When markets are rising, risk management seems easy—invest, sit back, and watch your investments grow. Things get a bit trickier when the markets experience volatility and decline. These are the times when you need to understand the amount of risk your investments are subject to and how that risk relates to your financial plan.
The first and least tangible measure of risk is qualitative in nature: how much risk are you willing to take? How would you feel, for example, if the markets declined more than 20%? What if the markets fell by more than 40%? Generally, what is the level of decline that you are comfortable with that will encourage you to stay invested and allow for your plan to thrive? Take some time to think about it. While it is easy to come up with a threshold or a hypothetical number, it is different in real time (consider the financial crisis or the markets’ initial response to the COVID outbreak, for example).
Once we have a handle on your subjective feelings around risk, there are a variety of tools we use here at Merriman Wealth Management to help our clients manage the quantitative measures of risk.
First and most important is answering this question: what is the amount of risk my portfolio can take within the context of my financial plan? This is a super important question. Too often, folks will bifurcate their investment and financial plans. This does not typically lead to successful outcomes. We manage this for clients by calculating statistically valid risk and return measures for our clients’ portfolios—i.e., we expect an all-equity portfolio to return 9.52% net of fees per year with a standard deviation of 20.49. A more moderate 60% equity portfolio would return at 7.95% and 13.06, respectively. Understanding these figures within the context of your accumulation and distribution plans is what matters. The typical recipe is for folks in their early years to take on more risk, as they have time for the markets to recover from declines. In contrast, folks later in life have less time to recover, and a more moderate portfolio is conducive to their plan.
The next risk management tool to understand centers around the sequence of returns. While one can craft statistically valid long-term expectations for portfolio risk and return, it is extremely difficult to predict returns in any given year. Consider 2020: who would have thought the markets would have rebounded so swiftly?
One thing to keep in mind with respect to sequence risk is what we call “bad timing.” What happens if you retire (switch from accumulating to decumulating) and the markets have two successive bad years? This is a good stress test for your portfolio. Pass this test, and your plan is likely in good shape.
The next measure to consider is the longer-term variability of returns. We measure this by running 1,000 different return trials for our clients (Monte Carlo analysis), effectively looking at everything from years of sustained above-average performance to years of sustained below-average performance and everything in between. The results are considered a success if greater than approximately 80% of the trials result in money remaining at the “end” of your plan.
In conclusion, consider the list of questions below as you evaluate the risk metrics of your plan:
What are the risk dynamics of my current portfolio, and how do these relate to my financial plan?
What is the outcome of my financial plan if I retire and the markets have two successive bad years?
How am I accounting for the sequence of returns? What is my plan’s probability of success—will I have money left at the end of my plan?
Here at Merriman Wealth Management, we live by our tagline of “Invest Wisely. Live Fully.” If you are a Merriman client, we’ve got you covered. If you are not a Merriman client and would like a holistic review of your financial plan and corresponding risk metrics, let us know, and we would be happy to take you through our complimentary Discovery process.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Nothing in this presentation in intended to serve as personalized investment, tax, or insurance advice, as such advice depends on your individual facts and circumstances. Past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.
At Merriman, we partner with our clients to ensure no stone goes unturned with respect to their complete Wealth Management plan. One of the more complicated issues clients face is crafting and updating their estate plans.
This is not surprising as estate planning preparation and upkeep come with difficult questions—both qualitative and quantitative. The burden of these questions can often drive folks to put off the discussion and leave their plan vulnerable. The purpose of this brief post is to let you know that it does not have to be so difficult.
This article serves as a starting point to initiate the estate planning discussion. It is a discussion of the various estate planning roles you need to fulfill. Like most things, having a process and a plan will lead to peace of mind and planned success.
Let’s start with the various roles that need to be filled:
Financial Power of Attorney (POA)
One commonality for all these roles is proximity. If you can find someone close, that is a prudent solution. For example, in selecting a guardian for your children, it is best they are local to avoid changing schools, establishing new friends, etc. Similarly, if there is property to sell in your estate, it is best to have a local executor, as opposed to having someone across the country who is unfamiliar with the local scene and would have to travel extensively to manage the estate.
A Guardian is someone who looks after and is legally responsible for your children until they are adults. This person should embody all the traits you would want in someone who will take care of your kids in the event you are no longer around. Often, this is a family member with close proximity (as outlined above). Keeping your kids in their current environment is so important, especially when they are already trying to deal with your absence.
A Trustee is the person who has control or powers of administration over the trust assets in your estate. The trust assets do NOT belong to the Trustee. Rather, the Trustee is safeguarding the assets per the terms of the trust and for the trust benefactors.
The role of Executor “triggers” if one or both spouses pass away. This person’s job is to fulfill all of the requests and wishes as outlined in your will. This person should have high financial competence and a good understanding of what you own and how you want your assets distributed. Technically, they will follow the wishes as outlined in your estate plan. However, we advise clients to draft a less formal letter of instruction to confirm your wishes are carried out as precisely as possible.
The next two items are in effect during your lifetime. A Financial POA grants that person the ability to make financial decisions on your behalf if/when you no longer have the ability to do so of your own accord. A Medical POA functions the same but is related to medical decisions. Both of these roles should be set up with your initial estate plan.
If you have already crafted your estate plan, take a few minutes to consider who is currently filling these roles. Are they still the right person for the job? If not, who is better suited? If changes are required, let your estate planning attorney know and get to work on updating your documents. If you have yet to complete your estate plan, consider who would best serve in the aforementioned roles. If you already have an estate planning attorney, get to work on crafting your plan. If not, let us know, and we can connect you with one.
Another tool you can use to begin to formulate your plan is our “After Death Occurs” checklist. While this outlines a post-mortem list, it also serves as a great tool to get you thinking about the roles described above.
At Merriman, our goal is to ensure clients’ plans are buttoned up from top to bottom. While we emphasize financial planning and investment portfolio management, we also partner with our clients to ensure they are covered in the areas of estate planning, taxes, and insurance. Ensuring your estate plan is taken care of will provide peace of mind on your journey to Investing Wisely to Live Fully.
For additional reading on this topic, check out our ebook The Transparent Legacy for advice on conversations you must have with your loved ones before it’s too late.
Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such. Advisory services are only offered to clients or prospective clients where Merriman and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Merriman unless a client service agreement is in place.”
Lowell: I’ve worked at Merriman for 13 years. I started in client services before moving to my current advisor role. I made the switch because I wanted to help people achieve their goals and provide peace of mind along the way.
Scott: What do you love about working here?
Lowell: The opportunity to help my clients articulate, achieve, and expand upon their financial and associated life goals.
Scott: What’s on your wish list for the next 10 years?
Lowell: To raise my children in a way that they are responsible, give back, and are well rounded. Professionally, I want to continue developing in my career; and now that I’m getting older, I’m excited to help the next generation do well and advance through their careers.
Scott: If you could give one piece of advice, what would it be?
“‘Would you tell me, please, which way I ought to go from here?’ said Alice.
‘That depends a good deal on where you want to get to,’ said the Cat.
‘I don’t much care where—’ said Alice.
‘Then it doesn’t matter which way you go,’ said the Cat.”
–Lewis Carroll, Alice’s Adventures in Wonderland
What an amazing quote! My takeaway is that if you have clear direction, you can achieve whatever you set out to do.
Scott: Where are you originally from?
Lowell: Issaquah/Preston/Enumclaw, WA.
Scott: What’s the weirdest thing you’ve ever eaten?
Lowell: Chicken feet at Dim Sum in Vancouver, BC.
Scott: How was it?
Scott: What’s your hidden talent?
Lowell: I took up the guitar about 20 years ago and have steadily improved. My next level goal is to start playing acoustic sets at local venues.
Scott: What is the last experience that made you a stronger person?
Lowell: Coaching my son’s basketball team. Patience and repetition!
Scott: Merriman has employees take the StrengthsFinder quiz so we can understand how to best work with each other. What are your top five strengths?
Achiever: Those with the Achiever theme have a constant need for achievement. Every day they need to achieve, no matter how small. They take immense satisfaction in being busy and productive.
Learner: Those with the Learner theme love to learn. The process, more than the content or the results, is especially exciting for them.
Self-Assurance: People with this strength feel confident in their ability to take risks and manage their own lives. They have an inner compass that gives them certainty in their decisions.
Competition: People exceptionally talented in the Competition theme measure their progress against the performance of others. They strive to win first place and revel in contests.
Focus: People exceptionally talented in the Focus theme can take a direction, follow through, and make the corrections necessary to stay on track. They prioritize, then act.
Maui was always a favorite vacation spot of mine growing up. One of the best parts was my aunt and uncle’s snorkel business. We would wake up early for the calm water, quickly eat a pineapple donut for breakfast, and set sail. Having been in business for decades, they knew the island well. Whatever you were looking for (or not looking for, like sharks), they could find it.
Thirty years later, I am now taking my family to Hawaii. While we still enjoy the water and all it has to offer, things have changed, most notably the coral reefs and the ecosystems they support. (more…)
This post was co-authored by Wealth Advisor Lowell Parker, CFP® and Information Systems Manager Rodney Gonzales.
As banks become increasingly difficult for cybercriminals to hack, high net-worth families are the next logical targets. These criminals are organized, patient, and in some cases, well-funded. Cybercrime is also underreported, and while the court system is catching up with the expansion of laws and penalties for cyber-related crimes, cases remain hard to solve or even prove.
Having your personal information compromised isn’t a matter of “if,” but “when.” It’s less expensive to take preventative measures than it is to investigate and eliminate threats. It’s imperative that you take the right precautions both externally, with your vendors and service providers, as well as internally with your home computers and networked systems. (more…)
Joe grew up in a financially relaxed household. Money came easily to his parents and when they needed something, it was there. He wasn’t spoiled, just well taken care of. Lucy was just the opposite. Money was scarce. Choices had to be made.
When Joe and Lucy got married, their two very different financial tracks had to merge. Much like Joe and Lucy, all of us have stories about what money was like growing up. As we enter into and manage relationships, merging those financial stories is a crucial element to the relationships’ long-term success. The following points provide guidance on how to do so.
Set expectations around your goals
Funding your children’s schooling is a classic example. For the Joe-like individuals, the answer seems obvious – their parents paid for their schooling, so they feel obligated to do the same. The Lucy answer is starkly different. Whether it’s paying for schooling themselves, or getting some kind of scholarship, they need to have some skin in the game. Whatever the outcome, being proactive with a plan is what matters.
Couples at or near retirement can face equally difficult crossroads. One person may be under the impression they’re going to downsize the home to buy a small condo and spend their time traveling. The other person is completely attached to the home they’ve lived in for 40 years and has no intention of selling it. They want to stay closer to their family and the community relationships they have built. Wow! Sounds like fireworks. Again, plan ahead. Don’t wait until your last day of work to have this discussion. Have it now.
If your goals align, great. If not, tweak them to arrive at a compromise. Goals, plans and circumstances change, so continue to have the conversation. I suggest an annual check in. That way things can evolve naturally and you’re not stuck dealing with a dramatic change 20 years down the road.
Who manages the finances?
It’s completely natural for one person in the relationship to gravitate to the finances. In our example, it’s typically the Lucy types – those that had to make choices about how to spend their money. Over time, that person comes to know their finances like the back of their hand. So what happens if that person is suddenly no longer around? Financial relationships can often live on a teeter totter. One person carries the weight, and the other is left suspended in air. Once the weight is gone, the other person may land pretty hard. Neither person in the relationship wants this, so it’s best to take steps to ensure both people have a baseline understanding of the household finances.
Tip: If you’re working with professionals (CFP®, CPA, etc.), make sure the non-financial person attends all meetings. This allows all parties to increase their plan acumen steadily over time and establish relationships with the professionals.
Be honest with yourself and with your partner about your financial habits. Until recently, I’d never encountered a “secret bank account.” In this case, someone siphoned money into a bank account their spouse was completely unaware of. The intention was to create a pool of money that could continually fund their spending habits. A secret like this is a ticking time bomb. It’s probably one of the primary factors behind the statistic that finance-related issues are the number one cause of divorce. Divorce is much more catastrophic than a secret bank account. Again, it’s best to have full disclosure.
Review your various account statements – bank, investment, credit cards, loans, etc. I know it’s easy to toss them into the shredder with the envelope still sealed, but most of us need to be aware of what we spend, so it’s good to get in the habit of reviewing the statements. Twenty minutes a month is all it should take. The intent is for you to get a rough baseline of where your money is going. Knowledge is power. Understanding the big picture of your spending and savings habits is crucial to your long-term success.
Like Joe and Lucy, we all come from different financial backgrounds. The above discussion topics will help those looking to merge paths as well as those who are on an independent path. Start with setting the expectations and defining goals together. From there, ensure that all parties have a baseline understanding of the financial picture. Move to full disclosure – for most of us, this should be nothing more than getting all of the information on the table. Before you know it, you’ll have a mutually agreed upon plan. Day by day and week by week, you’ll live this plan so you can accomplish all that is important to you.