InSight

Divorce Playbook: Remember inflation and accountant for it

Financial Planning Dentist

It is important to remember that all goods and services inflate over time, but they don’t inflate at the same rate. Healthcare and Education have been, by far, the most inflationary elements of financial life for decades. The rising costs of education and healthcare are seemingly limitless. So, if your divorce settlement is going to require you to account for healthcare costs or provide education to a child or spouse, then use a more aggressive strategy for inflation expectations. 

It’s also important to remember that inflation is hyperbolic, no longer. So the younger a child is, the more exposure they have to the effects of education inflation.

A good lawyer will have some expectations for the rising costs of goods and services and should account for that in a settlement. But a great lawyer will make special considerations for parts of the inflation landscape that will uniquely impact you in a post-divorce world.

It is unlikely, you will be able to redress these calculations in post-divorce negotiations, so it is especially important to understand your inflation exposure now, and get accommodations made in writing during the divorce.

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How to Survive a Bear Attack? (Pt. 2)

Don’t Discard your Strategy During a Recession We own stocks for a very deliberate reason. These equities are inflation resistant, generate cash, and the good companies grow at a rate faster than the economy they are a part of. They change prices wildly in a recession as people try to determine the long-term value of those features, but at the end of a recession, it is the only asset class that will be worth more after the economic slowdown. Stock prices might be down, but that doesn’t mean you need to change the way you invest. Remember you own these assets for a reason. This thought process applies to both long-term and short-term investors, and retirees. Long-Term Investors Long Term investors have the most to gain from a recession. It is very likely younger investors have been buying stocks at historically high prices. Any investor that began building their portfolio after 2001 has only had three windows where the broad market was trading below its historical average. That’s right, with the exception of three small windows in the last 20 years investors have been “overpaying” for their exposure to the market. Long-term investors might see the next window opening before their eyes right now.  If you’re regularly adding funds to a long-term account, such as a 401(k) or IRA, don’t stop during a recession. That’s huge! If you place most of your money in stocks, don’t “chase performance” and sell out of them. They may be falling in price while bonds are rising in price. Don’t chase bonds, don’t chase life insurance schemes, and don’t try to buy and sell rapidly. Don’t change what you are buying for the long term, in favor of what you see in the short term. Take advantage of the discount in prices – and keep saving.  Short-Term Investors and Retirees Although you may be uncomfortable during a bear market, don’t be tempted to sell your stocks or stock mutual funds at a loss across the board. Make two things a priority, lower your risk, and focus on cash flow. This is a time to focus on quality investments, and pair down the speculative portions of the portfolio – this isn’t the market for moonshots. Begin by accepting that speculative bets might be lost forever and start looking for investments that will survive economic contraction.  If you need income right away, it would be best to have money set aside in cash and bonds before the downturn. That way, you can withdraw from your cash while you wait for stock prices to recover. Then look for investments that can safely replace the cash you need on an annual basis – bonds, real estate, and dividend stalwarts are the keys here. If you can create a cash balance, then you can keep your more speculative investments grinding through the economic slowdown. Ideally, if you are retired, you and your CFP® know what your annual need for cash is, and what investments and institutions are working to replace that cash as fast as it is used. Investing Before and During a Recession It’s easy to go wrong during a recession if you forget or don’t understand how certain investments perform during a downturn. Or how they are related to each other. The stock market is a forward-looking vehicle. Stocks represent your right to a company’s future cash flows. So when warning signs of a recession “hit” these are the most skittish assets and will react the most violently. This doesn’t necessarily mean these companies won’t survive the recession or even become better as a result. What it means is that the amount that other people are willing to pay for a company’s future earnings is lower. When the recession becomes a thing of the past, people will begin to overpay for earnings again, and this is where you want to be in a position to sell shares to those people.  Stock prices often fall months before a recession begins, which also means that they often bounce back up before the recession is declared over. You can miss an entire downturn if you only follow the news. That is why it is vital to know the signs of a recession and recovery, and how assets perform during those periods.  These are our general expectations of asset behavior during a recession: Stocks: Prices for stocks tend to fall before the downturn begins, often selling off even at the scent of a recession. Stocks are the most volatile and skittish, during a recession. But they also have the most to gain. Good companies buy back their own stock during a recession, smart investors buy more shares at lower prices, and recessions make good companies leaner, and more financially fit for the next business cycle.  Real Estate: After stocks, Real Estate is the second most appetizing asset in a recession. And for some, it might be the most appropriate risk. Real Estate investors get the luxury of not having the mark-to-market value of their portfolio put in front of their face. During a recession, they make known their real estate is “down” but they are rarely bombarded with the daily and hourly reminders of the real estate market. This does two things, it reinforces patience for the investor and shifts their focus to the income the property produces. Both of these are things we noted above that stock investors need to learn in a recession.  Bonds: Prices for bonds tend to rise during a recession which means their yield declines. Good bonds (that is to say Bond from good companies) will often be over pursued their security – leading to an opportunity to sell overpriced bonds to scared or unprepared investors. Historically, The Federal Reserve (the Fed) stimulates the economy by lowering interest rates and purchasing Treasury bonds. But for the coming recession, this may not be the expectation as the Fed is in the first innings of raising its rates. This might be the macroeconomic element that causes this

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The Ethical Implications of AI Investing

Artificial intelligence (AI) is revolutionizing the way we live and work, and as a result, there has been a surge of interest in AI investing. While AI has the potential to create significant value for investors and society as a whole, there are also ethical implications that must be considered. As AI technology continues to develop, there are growing concerns about its impact on privacy, employment, and overall societal well-being. In this blog post, we will explore some of these concerns and suggest ways that we can use AI in a responsible manner. Privacy Concerns One of the primary ethical concerns related to AI is privacy. As AI becomes more prevalent, it has the potential to collect and analyze vast amounts of data about individuals, raising questions about who has access to this data and how it is being used. AI algorithms can also inadvertently perpetuate bias, particularly if they are trained on biased data sets. To mitigate these concerns, AI investors can take steps to ensure that the companies they invest in are committed to privacy and transparency. This could include conducting due diligence on companies’ data collection practices, advocating for responsible data governance, and supporting the development of ethical AI frameworks. Conflict with Environmental, Social, and Governance (ESG) Environmental, Social, and Governance (ESG) investing has gained significant popularity in recent years as investors increasingly consider the social and environmental impact of their investments. However, there is a growing conflict between ESG investing and the new push into AI. On the one hand, AI has the potential to significantly reduce carbon emissions and improve sustainability by optimizing energy consumption, reducing waste, and improving supply chain management. For example, AI can be used to optimize building energy usage, reducing energy consumption and lowering carbon emissions. AI can also help companies optimize their supply chains, reducing waste and improving the efficiency of logistics. However, there are also concerns about the ethical and social implications of AI. AI systems can inadvertently perpetuate bias, and there are concerns about the potential for AI to be used for surveillance or manipulation. There are also concerns about the impact of AI on employment, particularly in industries that are heavily reliant on low-skilled labor. These concerns pose a significant challenge for ESG investors, who must balance the potential environmental benefits of AI with its ethical and social implications. To address this challenge, ESG investors can advocate for greater transparency and accountability in the development and deployment of AI technologies. They can also support the development of ethical AI frameworks and regulations that guide the responsible use of AI. In addition, ESG investors can support the development of AI technologies that are aligned with ESG principles, such as those focused on improving sustainability, reducing carbon emissions, and improving social outcomes. This could include investing in companies that are focused on developing renewable energy solutions, or that are developing AI systems that can help improve access to healthcare or education. Societal Well-being Concerns Finally, there are concerns about the broader societal impact of AI. As AI technology becomes more ubiquitous, there are concerns about its potential to exacerbate existing social inequalities, perpetuate bias, or even be used to manipulate individuals or governments. To address these concerns, AI investors can support the development of AI technologies that are aligned with societal goals, such as improving access to healthcare or reducing carbon emissions. They can also advocate for greater transparency and accountability in the development and deployment of AI technologies, and support the development of ethical frameworks and regulations that guide the responsible use of AI. Conclusion AI investing offers significant potential for investors, but it also comes with ethical considerations that cannot be ignored. By advocating for responsible AI development and supporting companies that are committed to transparency, accountability, and ethical governance, we can help ensure that AI is used in a way that benefits society as a whole. Ultimately, it is up to us as investors to take an active role in shaping the development and deployment of AI technologies so that they are aligned with our values and priorities.

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Definitions: Fiduciary

A fiduciary is a person or organization that acts on behalf of another person or persons. They at all times must put their clients’ interest ahead of their own. Being a fiduciary thus requires being bound both legally and ethically to act in the other’s best interests, and having a documented process that reflect and enshrines this standard. Registered investment advisors have a fiduciary duty to clients. Alternatively, broker-dealers, insurance companies, and financial advisors just have to meet the less-stringent suitability standard, which doesn’t require putting the client’s interests ahead of their own. This gap in their understanding of the duty to the client is what causes contamination in the client-advisor relationship. The Difference between suitability and fiduciary: Investment advisers and investment brokers, who work for broker-dealers, both tailor their investment advice to individuals and institutional clients. However, they are not governed by the same standards. Investment advisers work directly for clients and must place clients’ interests ahead of their own, according to the Investment Advisers Act of 1940. The majority of advisors, particularly those selling packaged financial products like insurance and mutual funds access simply meet the suitability standard. Meaning, that the products are an appropriate fit for other investors ‘like’ you and the due diligence ends there. This suitability standard is loosely defined as making recommendations that suit the best interests of their client. That is notably different from a standard of without conflict of interest. So while investments A and B might both suitable, A pays the advisor a substantial fee and is thus recommended more frequently and to a wide selection of clients. The law however has gone further to define what a fiduciary means, and it stipulates that advisers must place their interests below that of their clients. It consists of a duty of loyalty and care and generally is accompanied by a professional code of conduct that includes: Employ and provide the client information on the Prudent Practices when serving as an investment fiduciary and/or advising other investment fiduciaries. Act with honesty and integrity and avoid conflicts of interest, real or perceived. Ensure the timely and understandable disclosure of relevant information that is accurate, complete, and objective. Be responsible when determining the value of my services and my form of compensation; taking into consideration the time, skill, experience, and special circumstances involved in providing my services. Know the limits of my expertise, and refer my clients to colleagues and/or other professionals in connection with issues beyond my knowledge and skills. Respect the confidentiality of information acquired in the course of my work, and not disclose such information to others, except when authorized or otherwise legally obligated to do so. I will not use confidential information acquired in the course of my work for my personal advantage. Not exploit any relationship or responsibility that has been entrusted to me. There are three quick tests to determine if an advisor is a fiduciary: are they compensated at different ‘rate’ for any of their products are they encouraged though compensation or organizationally, to keep assets in a particular fund, strategy, or asset class are the fees solely paid by the client

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