With 2020 in the rearview mirror, Legacy One would like to remind clients to look ahead and continue to focus on their long-term goal. Areas of the economy have been damaged and may never fully recover, but other areas will adapt, reinvent, and help reinvigorate growth. Covid-19 vaccines and a stimulus package offer promise, but headwinds remain in the near-term. The below are a few general principles we have reiterated throughout the year and will continue to highlight as you focus on your personal economy.
1. Review & Build Your Emergency Savings Fund
A global emergency with the capacity to affect every individual’s health or job status, has served as a good reminder to maintain an emergency fund to help in the face of unexpected circumstances (accident, loss of income, required home repair). A thoughtful allocation to cash and liquid alternatives should help provide comfort when you need it most. These savings can assist in both small and large unplanned expenses that come up and are not part of your typical bills and spending. Make sure that you have adequate savings or begin building a fund if you don’t have one. Reach out to us to discuss our recommendations for “cash and cash equivalents”.
2. Remain Accountable to Your Budget Plan
Without a good plan, you will not meet your financial goals. There are many ways to set up a budget, but the most important is that it works for your situation, and you can stick to it. Separate average expenses into two categories: needs and wants. Needs are bills you have to pay, like housing, food, insurance, basic utilities, minimum loan repayments, and transportation. Everything else is a want. Manage wants by controlling impulse purchases and “little luxuries”. One simple, yet effective budget is the 50/20/30 plan. According to this budgeting method, 50% of a person’s income should go towards needs, 20% toward paying off loans and aggregating savings, while the remaining 30% is for everything else. Remember that budgeting is an ongoing process-reach out to us to revisit your budget as part of your financial plan to make sure you are on track.
3. Optimize Your Debt
If you find yourself in the position of choosing between paying down your debt or investing, there are plenty of factors to consider, and this would be something to consult with our team about. Working together, we may find that paying off debt will serve you better over increasing your investments.
With interest rates dropping, there have been some excellent mortgage rates available recently. Especially if your interest rate is 4% or higher, it could be an excellent time to refinance. But with such low rates recently, demand for refinancing has been exceptionally high and rates have popped up a bit because of it. Reach out to us to discuss current rates and opportunities.
4. Stay Invested for Your Time Horizon
Despite intense volatility and an intra-year decline of -34% (the largest since the great recession), as of 12/18/2020 the stock market returned +13% this year. The market has shown to be capable of recovering from intra-year drops and finishing the year in positive territory, which should encourage investors to stay the course when markets get choppy.
Markets will continue to act like markets, there will be more volatility, more drops, more all-time highs, etc. Volatility and market declines are the price that we pay for the potential long-term gains that the market has historically provided. It’s understandably stressful when you feel the security of your investments is threatened - but don’t allow a volatile market to cause you too much distress. Reach out to us to discuss the differences in your realized vs unrealized and short-term vs long-term gains and/or losses.
5. Invest Your Portfolio Across Broad Asset Classes
We suggest an allocation that is diversified across numerous asset classes. Diversification reduces risk because different asset classes generally act as a hedge against one another. Stocks, bonds, cash, real assets, and alternatives generally do not react identically in changing economic or market conditions. Over the long run, one of the main advantages of diversification is reducing risk, not necessarily increasing return. Diversification does not eliminate the risk of investment losses; however, it may help provide protection. Reach out to us to review your current portfolio and for some ideas for enhancement.
Please let us know what else we can do to serve you. We wish you good health and prosperity in the New Year.