Hortz: What risk management measures should you take in this environment?
Scharar: Here are some points I recommend:
1. Don't confuse gambling with investing. If you can't explain or understand what you are buying, don't buy it.
2. While good quality stocks can go down in price, the quality aspects of the firm help them recover so align with good managements.
3. Develop your own 3 R’s of searching for real companies, real products and real financials and apply a few basic tests to your investment decision process.
4. Be sure you have access to adequate cash-like assets to cover your expenses for several years in case asset values continue to decline and we end up in a recession.
5. Have more than one deposit institution and electronic funds transfer set up to move funds quick if needed.
6. Passive index investing is essentially a market performance taker — great in up markets, painful in down markets. Important tip here is to be aware of retirement accounts. Since many retirement funds only provide passive options — often only with broad market indexes like the S&P 500 and very little opportunity to manage the fixed income — keep this in mind as you construct your client’s entire portfolio outside of their retirement accounts.
Hortz: Any other thoughts you share with investors?
Scharar: Take stock of where you are at. We always have our clients prepare at least annually a financial inventory. Many people look at their investment portfolios in a vacuum. You need to list everything, bank accounts, real estate, insurance and pension benefits, annuities, private investments, personal property and trusts of which you are a beneficiary, and detail on what and who you owe money to. The assets less your liabilities represent your net worth. You should track this from year to year
Categorize these assets between those that are lifestyle and those that are investable. While lifestyle assets like your home may grow in value, until you dispose of them, they are a user of cash flow. Investable assets can produce cash flow and or appreciation for current or future needs.
Access your spending needs and what is important. Are these sustainable on your current cash flow?
Don't forget to factor in the income taxes. Be tax smart — with ordinary federal tax rates at up to almost 40% and some states over 10%, you need to consider different ways to minimize, eliminate or defer taxes. Take tax considerations into account when repositioning assets or taking more than your required RMD from you IRA
Once you understand the above, you are in a better position to determine the returns, risks and types of investment products you can use.
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