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Kevin Taylor

Should you own Zombie Apocalypse Insurance?

Should you own Zombie Apocalypse Insurance?: Four risk mitigation disciplines to get familiar with Zombie Insurance exists…yes really, if only as a marketing ploy for insurance shops. But it gives us a great reason to discuss the different types of risks, and the disciplines that exist to mitigate the given risk set. Zombie Apocalypse Risk is both an unmitigable risk, there is little if anything you can do to avoid an apocalypse. And it’s also not cost-effective, the replacement of anything lost in the apocalypse is unlikely – the insurer after all is very likely a zombie in this scenario. So it’s an easy “don’t buy it” recommendation. But how about others’ risks? Tax, fire, disability, market, etc. all exist daily, and all have nuanced methods for handling them. Cost-Effective Not Cost-Effective Mitigable Homeowners Insurance (Buy it) Annual Downside Puts for Market Protection (likely don’t buy it) Unmitigable Life Insurance (Buy it sometimes) Zombie Insurance (come on?!?!) Effective risk mitigation requires understanding both the financial risk at play and the full length of consequences that result from the strategy a person or family chooses. Tax Risk is a great topic to think about. Most investors “Accept” Tax Risk and pay their taxes at the end of each year depending on their income and gains from the year before. You bought the stock, it went up 20% forgo 5% as a cost of doing business and pay your income and gains tax on it. Some Investors might “avoid” tax risk by using investment strategies, 401ks, IRA’s, or other legal means of tax avoidance. Further, still, some may limit their tax exposure by using several different investment strategies and holding strategies by spreading out the tax risk over time or using income streams that are taxed in different ways. Further still, some may use tax risk transference through trusts, gifting, and other asset location strategies to manage it. Tax risk is just one flavor of risk, but almost every conceivable risk can be filtered through the strategies below to make the existence of risk far more tolerable. Risk Acceptance There are several risks you “accept” every day regardless of the calculus. The risk of an airplane part striking you at a wedding is really low, so you simply accept that risk and head outside. The risk of a single down month in the stock market is high, and so is the cost to insure against it. Risk acceptance as a strategy is about balancing the likelihood of that risk happening, the financial impact it would have, and properly pricing the below strategies to handle the risk. Risk acceptance does not reduce any effects however it is still considered a strategy. The “acceptance” strategy is a common option when the cost of other risk management options such as avoidance or limitation may outweigh the cost of the risk itself. A company that doesn’t want to spend a lot of money on avoiding risks that do not have a high possibility of occurring will use the risk acceptance strategy. Traditionally, risk acceptance can be the key to investment upside. The performance of the S&P 500 is a great example. If you simply accept the risk you will have more up years than down years, and the result will be net returns of about 9% year over year. If you used financial products to mitigate the financial consequence of a down year, it could cost you between 8-10% of the return to fully inoculate the risk. Leaving you with little to no return. So there are several times where risk acceptance is the more rewarding outcome. Risk Avoidance The risk management effort is a process to target and control the damages and financial consequences of threatening events, risk avoidance seeks to avoid compromising events entirely. This is equally an activity you likely engage in regularly. You, like me, may not attempt amateur base jumping daily for a myriad of reasons. This simple act of not participating is a risk management strategy. When determining how you will approach risk, it’s important to not confuse the strategies of risk avoidance and risk acceptance with a very different concept “risk ignorance.” Risk ignorance stems from two very different but connected problems. The first is a knowledge gap, this is a problem with risk-takers’ understanding of a market, investment, process, etc. where they simply don’t have the skill set required to uncover and handicap all of the potential risks. When I don’t work on the inner workings of my vehicle it’s an acknowledgment of that knowledge gap. The second gap, and likely harder to uncover, is a competency gap. This is the knowledge that the risk exists, but poor reconciliation of an investor or person’s skill to overcome the difficulties. Think about new building construction. The builder might know that the risk of financing can fall through, so they have crossed the knowledge gap, but if a project still falls through because of a lack of coordination, effort, or something else entirely it fell victim to mispricing of the competency gap. Risk avoidance is one of the least understood methods used by investors and as a result drives two negative behaviors. Rationalization or compartmentalization. In this first, investors fall in love with an idea, stated returns, or a story and begin down a path they believe is “risk avoidance” but is actually rationalizing them into risk ignorance. The second “compartmentalization” is a form of risk avoidance but for the wrong reasons. An investor may not understand a product or service and as a result, shut down a whole category of strategies. A great example is in derivatives, many people attribute the financial crises to derivative products and thus write off the whole group regardless of other tactics that might support their goals. A lack of sophistication and understanding of risk is a common source of aversion, failure to change advisors, or even seek investment advice in the first place. Risk Limitation Risk limitation is the most common strategy.

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Boulder
Articles
Peter Locke

Why I moved to Boulder, Colorado and started my own Registered Investment Advisory Business

To start, I grew up in Northern Virginia, right outside of Washington D.C. I am the youngest of three boys who live all over the United States and proud son of my mother and father. Growing up my parents or schools never taught me the importance of investing or planning. My parents taught me to work hard, get a good job, and make sure you buy things on sale. My mother, no matter what, cooked every night and took pride in providing us the best life possible.  Health was her main focus and my father’s area of expertise was academia. However, my great grandfather was a pioneer in the investing space.  His legacy provided three generations the ability to go to college debt free. This provided my parents the opportunity to give us the best that education had to offer and catapulted me into where I am today here in Boulder. His desire to give future generations this opportunity is something I’ve now dedicated my life to as well. Early in my life I learned that the greatest currency in life is the effect that you have on other people. When I was at summer camp as a young man, I learned invaluable lessons that I still live by today. Those lessons taught me that if I dedicate myself to others and help guide them through one of the most difficult things we have to handle as individuals, finances, then I will find all of the fulfillment I need.  Unfortunately, our education system does a very poor job of educating our youth to make good financial decisions. We’re taught the more you make the more you can have and we live in a never ending cycle of wanting more. Over the past decade of working in Boulder with individual clients and families, I’ve learned some of the biggest mistakes people have made and why they make them. I’ve also learned what the most successful people in some of the most affluent cities in the U.S. do to accumulate and keep wealth. The financial advising world, however, has a bad name and for good reason. For far too long, advisors were and still are, compensated for the wrong reasons like selling their own products for commissions. In my opinion, financial advisors should never be able to sell products for commissions. It represents far too big of a conflict of interest and should be done away with. However, we aren’t there yet even though there is a big movement to do so.  That leaves me with where I am today.  Starting my own advisory firm with a business partner that shares my same vision in Boulder, CO.  Now I can proudly say, I’ve never sold my own product or fund to a client. At big firms, you’re told to stay in the corporate lanes of what can be offered to clients. This goes beyond not being able to help clients with questions around stock advice. You’re given strict instructions to never tell clients about third-party solutions that would better meet their needs, or share a name of a company/person for tax planning, estate planning, insurance planning, mortgages, 529 plans, brokers, or retirement plan administrators or companies.  Even when you’re a CFP® professional, you’re bound by the same restrictions.  How could I continue serving clients in a holistic manner as their fiduciary when I can really only help them with the investment piece? The investment solutions I was selling though were fine. They gave clients well-diversified portfolios for a percentage of assets under management. The problem was, we were giving clients a solution that met the company’s guidelines, meaning, it wasn’t really my advice. If the clients had a certain net worth, made a certain income, and said they could handle a certain amount of risk, the ‘algorithm’ spit out a couple of portfolios that the company said we could give to the client. This is not financial planning. Although it was appropriate for some clients that just wanted something very safe and didn’t have the time, desire, or expertise to do it on their own, it wasn’t adequate if you truly wanted to be their fiduciary and meet the standards of the CFP® Board. So I left.   I no longer could work for a firm that wasn’t allowing me to serve clients in the manner they need to be served. I needed to offer clients solutions that would serve them more than investment management based on a theory (Modern Portfolio Theory) that was developed almost 70 years ago. Now I am not saying or attempting to say the theory is incorrect by any stretch of the imagination, but what I am saying is, right now a large portion of the theory isn’t doing what it has in the past and portfolio managers across the country aren’t adapting accordingly.  The clients I worked with for many years here in Boulder, knew they didn’t get rich with their investment strategy. They got rich with their savings and spending strategy. They focused on key elements like automating a certain amount of savings for their retirement and after-tax accounts before spending. They knew if they could save 20%-30% of their income they could retire earlier and live a more fulfilling life. To clarify, they didn’t live a better life because they had more in their retirement accounts. They had prioritized what was important, like focusing on shared experiences with family and friends, traveling, exercising, eating better instead of buying the newest and shiniest clothes, cars, and things. They stayed disciplined with their strategies as they knew that tinkering with their investments or savings meant prolonging their working days. They surrounded themselves with the right people, the right process, and the policies to hold them accountable and that’s what my business partner and I at InSight will do for our clients.  As fiduciaries in Boulder, we will always put the client first. 

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Articles
Kevin Taylor

How to Survive a Bear Attack? (Pt. 1)

Growing your Investment Balance During a Recession One of the biggest reasons the rank and file investor loses money during a recession is a lack of focus and plan. It is true that markets will get volatile from time to time. But why institutions tend to make money during these periods and private investors lose money is all in how they react. The pejorative term “smart money and dumb money” is never more clear than when tracking behaviors during a pandemic.  “Smart Money” is patient, it knows what it owns and why, and has a long-term view. Institutions watch markets daily and don’t react. They know what they’re looking for in market trends before the headlines tell them what to be excited about.  “Dumb Money” is reactive and follows markets where headlines lead them. They are concerned with “account balances” and what they hold. They will routinely sell and buy in synchrony with headlines and sentiment.  That being said, it’s easy to get fearful when the economy is down (a recession), and it’s even easier to react to what you hear about the market. Likewise, it is entirely normal for you to be curious about how you can make money by investing in these times.  Certain investments, such as stocks, can be riskier in a down market, this is true. However, you might be able to see large returns from a recession if you follow these basic and timeless strategies. While it’s tempting to try to “time the market” when stock prices are low and falling, what you end up doing is trying to front run other speculative investors. This is a costly and often errant strategy. You might be shocked then to hear that the best way to invest during a recession is the same as when the economy is growing. They are investors who own what they want and slowly accumulate more of it in a routine and measured way over a long period of time. You can do this as well by setting a monthly cadence and doing the following: Continue to Dollar-Cost Average (DCA) Whether you’re regularly contributing to a 401(k) or an IRA, or investing through your broker, it’s wise to continue doing so during a recession if you can. Recessions are not a permanent state of affairs and anyone who can tell you how and why they will end is guessing. The best investors work with CFP®s to develop a cadence to keep buying through the whole troughing phase of the recession. This allows the investor to capture the stocks they want, at typically lower prices and continually buy throughout the entirety of the business cycle.  You will likely miss out on important dividends and reinvestment opportunities if you are out of the market. However, buying more shares when the economy is weakened is some of the best buying opportunities an investor has. Those who are in the accumulation stage of investing should hold tight, know what they want, and put themselves in a position to own more of what they want.  As you continue to buy lower, you are making the average price you pay for stock lower, which tends to boost returns in the long run and allows you to be more tactical with your selling come to the retirement phase.  Rebalance Your Portfolio We own companies for a reason, some are essential businesses that will do well during or following the emergence of a recession; even if their activities beneath the surface are not immediately reflected in the share price. A good example of this was Amazon during the ‘08 financial crisis. This is a company that saw the stock fall from the mid $80s to the low $30s all while consumers were looking for a cheaper way to get their goods and shore up their own home economics. A gap Amazon was willing and able to step into. They grew their customer base incredibly through this period resulting in an appreciation of their stock price for the next decade.   You can change the balance of your holdings when you notice prices falling. You then rebalance your holdings or return your asset allocation to its original targets. This maneuver allows you to deliberately increase your exposure to “oversold” and “undervalued” positions in your portfolio. When these stocks rebound, you bring the exposure back down to the desired levels. This small and subtle re-posturing allows investors to take advantage of the short-term price dislocations in a long-term, value-based strategy.  For example, if your target balance is 20% software and technology, but the price drops to 15% in the portfolio, adjusting this back to 20% in the throes of a bear market will mean that when the sector or stock returns to a higher price, you will have a higher exposure (say 25%) and you will be in a position to sell.  Keep a Long-Term View If you’re buying stocks, ETFs, or stock mutual funds, you won’t need to withdraw from your account(s) for at least five years to ten years. If that is your timeframe, the current recession will be well in the rearview mirror before you need these funds. The average “recession” since World War II is one year (11.2 months). This is a combination of a few economic reasons, but suffice it to say, that while the sentiment becomes bleak, relative to the length of a bullish economy, it is a very small part of the investment cycle. That being said, it’s important to keep the long-term view – markets restore balance and are still the best way to increase your individual wealth. The historic 10.5% return of the S&P 500 takes into account these slowed economic times. In fact, if you step out of the market, don’t reinvest dividends at these levels, and don’t rebalance your portfolios, you will likely lower the long-term return that you are expecting. The Bottom Line Financial markets are the single most efficient way of transferring money from the national and global markets

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