We at Hibbs Financial Advisors are often asked, “How do we know where we should invest our money so that we don’t lose sleep at night when the market goes down, but also have a decent return?” It’s a common question for most investors. They want to know how much money they should have in market-risk assets and how much they should have in protected assets. In order to answer the question I simply have them go through “The ABC’s of Investing.” So, let’s go through it together.
First, imagine that all your investable assets are liquid and we could set them up any way we like, starting today. This is important because you want to have your assets set up for your needs going forward, not left in accounts that will jeopardize your future. We realize that not all your assets are liquid and in a position to move to your ideal situation. However, this illustration will provide a sense of the “ideal” investing scenario.
Second, imagine three columns titled A, B and C. The first column, A, represents assets that historically earn 1-5%, the principal is protected and you are simply adding interest to the accounts. They are typically taxable and liquid. They can also be set up as IRA’s and tax-deferred. These are typically bank-held assets like CDs, Savings accounts, etc.
The second column, B, represents assets that historically yield about 6-8% with the principal guaranteed and all previous years' gains retained as interest. They are typically tax-deferred and moderately liquid. These are indexed annuities where the interest is linked to the performance of a market index such as the S&P 500, DOW, Russell 2000, etc. We prefer short-term annuities with no fees.
The third column, C, represents assets that historically go up or DOWN 10-30%. With these assets, the principal isn’t protected and last year’s gains may be lost in a downturn in the market. The accounts are typically liquid and taxable, although large amounts are in IRAs, 401k's, and tax-deferred. These are brokerage accounts, mutual funds, stocks, corporate bonds, etc.
So, let’s say you want 10% of your assets in Column A, and 30% of your assets in Column C, which would leave 60% in Column B. This strategy only exposes 30% of your portfolio to risk while allowing 60% to potentially earn higher rates than CDs. So, if you had $100,000 divided up as such, and the market went down 20%, while your CDs earned 3% and your indexed annuity earned 0% because the market went down, your net result would be a loss of 5.7%. Now, you may not want to lose anything but in a year when the market goes down 20% and you could have lost $20,000, you only are down $5,700! If that’s not appealing to you, then you might consider a smaller amount in the market or even no risk at all.
If you can stomach seeing a 20% loss on only 30% of your money then this strategy works for you. But, the genius of the ABC system is that it’s your choice how much you want at risk in the market. Some people have a “head” for the market but not the “stomach." If you are like this, you would obviously choose a smaller number if any at all. Yet, those of you who have the “stomach” for the market may want a higher percent in the “C” column. It’s really up to you.
Most advisors try to push product like street car vendors. As a client of Hibbs Financial Advisors, you have the assurances that we are looking to help you achieve your goals through your risk tolerance while partnering with you to formulate your plan! There isn’t any single product or answer to every case….we can utilize any number of financial tools -annuities, managed accounts (stock and/or bond funds), advanced insurance policies and more – to craft the unique plan to address your goals as our client. The key is that we really listen to you as you develop your own ABC’s!
Innvestment advice is offered through Brookstone Capital Management, LLC, an SEC Registered Investment Adviser. Insurance products are sold through Hibbs Wealth Management Group, Inc. Brookstone Capital Management, LLC and Hibbs Wealth Management Group, Inc. are not affiliated companies. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting, or specific advice to your situation.
Copyright 2009. Hibbs Wealth Management Group, Inc.. All rights reserved.
