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Articles
Kevin Taylor

Mastering Risk Management: Emergency Funds and Financial Planning – A Comprehensive Guide

Risk management goes beyond protecting yourself from unforeseen events; it also involves securing your financial stability. In this blog post, we will delve into the importance of having a well-funded emergency fund separate from your spending money, the value of having a financial plan, automating your savings, and creating deliberate tax-specific buckets for investing. By mastering risk management in these areas, you can enhance your financial security and navigate uncertainties with confidence. Building a Robust Emergency Fund: Understand the Importance: An emergency fund acts as a safety net, providing financial stability during unexpected events such as job loss, medical emergencies, or major repairs. It ensures that you have funds readily available without compromising your day-to-day expenses or long-term investments. Set a Target Amount: Aim to save three to six months’ worth of living expenses in your emergency fund. This amount can vary based on factors like job security, income stability, and personal circumstances. Keep it Separate: Maintain a separate account for your emergency fund to avoid commingling it with your spending money. This separation helps prevent the temptation to dip into the funds for non-emergency purposes. Creating a Financial Plan: Establish Clear Goals: Determine your short-term and long-term financial objectives, such as saving for retirement, buying a home, or funding your child’s education. Establishing clear goals will guide your financial planning efforts and provide a roadmap for managing risks. Assess Risk Tolerance: Understand your risk tolerance and align your investment strategies accordingly. Consider your age, financial obligations, income stability, and personal preferences when determining the level of risk you are comfortable with. Seek Professional Advice: Consider consulting with a financial planner or advisor to create a comprehensive financial plan tailored to your specific needs. They can provide insights, analyze your financial situation, and offer guidance on risk management and investment strategies. Automating Your Savings: Pay Yourself First: Automate your savings by setting up recurring transfers from your income to your savings or investment accounts. By prioritizing savings, you build a disciplined approach to risk management and ensure a consistent contribution to your financial goals. Take Advantage of Employer Programs: If your employer offers retirement plans, such as a 401(k) or pension, contribute regularly and take full advantage of any matching contributions. This maximizes your savings potential and reduces the risk of not saving enough for retirement. Deliberate Tax-Specific Buckets for Investing: Utilize Tax-Advantaged Accounts: Take advantage of tax-advantaged accounts like IRAs (Individual Retirement Accounts), 401(k)s, or 529 plans (for education savings). These accounts provide tax benefits and can help optimize your investments by minimizing tax liabilities. Diversify Your Investments: Spread your investments across different asset classes to reduce risk and increase potential returns. Consider a mix of stocks, bonds, real estate, and other investment vehicles that align with your risk tolerance and long-term financial goals. Mastering risk management in emergency funds and financial planning is crucial for achieving long-term financial security. By maintaining a well-funded emergency fund, creating a comprehensive financial plan, automating your savings, and leveraging tax-specific investment buckets, you can protect yourself from unforeseen events, minimize financial risks, and work towards your financial goals. Remember, risk management is an ongoing process that requires regular evaluation and adjustment. By adopting these practices, you can navigate financial uncertainties with confidence and achieve a solid foundation for your financial future.  

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June 1, 2023 No Comments
saving automation
Articles
Peter Locke

Saving Automation 101: Routine, habitual, saving

At the foundation of any planning conversation is saving and saving automation can help make that easier and promote good money habits. Those that start saving early and do it throughout their entire working days are setting themselves up for a life without being employed. If you want to work until you pass away you almost can but I sure don’t. In this article I will share the best savings techniques I’ve seen and how the millionaires I work with got to where they are. Surprise, it’s not because they picked the next Apple. Although you can swing for the fence and be the next Barry Bonds with a great stock pick, you could also be the next Clint Hartung and make the wrong pick and lose it all. To us, risk is worth taking at the right times and with the right amount. But those that stay wealthy develop strong habits early. There’s a reason that over 60% of NFL and NBA players are bankrupt or under financial stress within 5 years of leaving their sport. Making a lot of money doesn’t necessarily correlate with long term wealth. So what should you be doing now for it to be habitual?  Here is my trick to saving: Automation Trick one is automating your savings. There is a reason why people’s biggest investments are their home and then their 401k. Take your income and give yourself a goal. If you make less than $100,000 try to save 15%. If you make more than $100,000 save 20%-30%. Then whatever is left over is your spending for expenses. The formula is not Income-Expense=Savings. Most companies allow you to automatically take money out of your paycheck (go into your payroll system) and have it go into an investment account that is set up to automatically invest for you. If you have to invest it yourself then you’re creating a step for yourself and therefore creating an obstacle which is what makes automating your savings so valuable. Once you’ve established how much you save then it’s a matter of where to save. The younger you’re the better it is to save in a Roth IRA and a regular brokerage account. But any savings vehicle is great! If you’re fortunate enough to have an employer that gives you a 401(k) match, meaning they will give you free money to participate in the 401(k) plan then max that out. If you have a family, make sure you have a minimum of 3 months of expenses in cash saved to support everyone if you lose your job. If you’re the primary breadwinner then have 6 months saved. After you have that saved in a savings account, then look to contribute to your 401(k). In 2020 you can save up to $19,500 if you’re under the age of 50 and $26,500 if you’re older than 50. If you’re in a lower tax bracket, look to save in a Roth 401(k) as this money will grow tax free (read Investing 101). If you’re looking to have a diverse group of accounts you can put half into your Traditional 401(k) and half into your Roth 401(k) as this will prepare you for whatever the tax situation may be in the future. I like maxing out my 401(k) then anything extra goes to a joint account that is invested in stocks and ETFs. Whatever the savings vehicle, especially when you’re young will do amazing things for you. The main reason why we like the Roth 401(k) over the other accounts is because you won’t be tempted to use it, it grows tax free, and with good investments you can hopefully stop working sooner.  Don’t let the politics or the status of the global economy get in the way of savings. It doesn’t matter where the world is when you automate your savings. All that matters is that you’re dollar cost averaging over time (lowering the overall cost basis of your investment) regardless of where the markets are. If they’re high don’t try to time the market. If they’re low then try to adjust your spending down and increase your savings during that time as you’re getting great discounts that only present themselves a couple of times per year on average. To review, saving as much as possible early is made possible through automation. Accumulating good debt (student loan, mortgage, starting a business, etc) is fine but stay away from erosive debt (credit card, expensive cars, etc). Automate your savings and investments. Income-savings=expenses. 

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December 19, 2020 No Comments
Denver Investment Experts Financial Planning
Articles
Kevin Taylor

Nikola Jokic was Robbed – and is a good lesson about this market

Let me tell you about Nikola Jokic, the Denver Nuggets’ skilled center, and basketball poet. Despite his impressive performance, he was unfairly overlooked and missed out on his third MVP recognition. Jokic’s numbers in the 2022-2023 season were exceptional – and he represents the most “value” any player in the NBA brings to his team. When Jokic is on the court, the team boasts an impressive +380 plus/minus* rating for the season. However, when he is not playing, their plus/minus rating drops to -201. His individual contributions are highlighted by his average plus/minus per game of +6.1. If the Nuggets performed at an average level without him, their win/loss record is projected at 58-24. However, without Jokic, their Net Rating plummets to -7.7, resulting in an expected win/loss record of 22-60, a significant decline of 36 wins. Although it’s disappointing that Jokic didn’t win his third MVP title, it’s crucial to recognize and appreciate the impact he makes, similar to the mega-cap group of $1T companies discussed below, and how it relates to the U.S. stock market. Likewise, when the five largest companies by market cap are removed from the S&P 500 we see a much different performance than we’re seeing right now…  A tale of two indexes:  On May 30th, Nvidia made headlines by joining the exclusive $1 trillion club for the first time. As a maker and designer of A.I. hardware and software, Nvidia achieved this remarkable milestone by raising its valuation by a staggering $280 billion or nearly 40% since May 15th. This extraordinary leap in value is unparalleled in the history of capital markets, although the company closed just below the trillion-dollar mark. However, there is a downside to Nvidia’s success, which reflects the overall trend of trillion-dollar companies this year. The five members of the Trillion-Dollar Club, including Apple, Microsoft, Google parent Alphabet, Amazon, and now Nvidia, have witnessed a synchronized surge in their market valuations. This surge among a select few has single-handedly propelled the S&P 500 index to +9% YTD. Without these “Super 7” (including Facebook and Tesla) the rest of the SP500 has moved less than 1% for the year. While the +9% move of the SP500 may seem positive at first, it raises concerns about the market’s dependency on these few mega-cap companies. The exorbitant prices they have reached may already be stretched to their limits, making it unlikely for them to sustain the market’s upward trajectory. The rise of Nvidia exemplifies the frothiness that has enveloped the Trillion-Dollar Club. The Trillion-Dollar Club has accounted for nearly all the gains made by the S&P 500 this year. Apple, Microsoft, Alphabet, Amazon, and Nvidia have each experienced significant increases in their market caps since January, with Nvidia leading the pack at a remarkable 176%. Together, the current members of the Trillion-Dollar Club have added a staggering $2.87 trillion to their combined market cap since the beginning of 2023. These were names that we were and in some cases still are bullish on, but the concern then comes from looming weakness in other parts of the market.  Interestingly, this rise is only slightly higher than the overall increase in the S&P 500, which stands at $2.98 trillion. Consequently, the Trillion-Dollar Club’s contribution amounts to 96% of the 9.5% year-to-date increase in the index. In essence, we can think of the Trillion-Dollar Club as a company called “Big 5 Llc”. This “company” has seen its valuation surge by 46.2% from $6.2 to $9.1 trillion. On the other hand, the remaining 495 companies in the S&P 500 have only experienced a combined gain of 0.3%.  Without the tremendous boost from the Trillion-Dollar Club, the S&P 500 would essentially be flat for the year. We have been bullish on these chip makers and tech companies for some time (examples below) but think the recent run is getting a little too exuberant and divorcing from the broader market.  Places where we discussed the potential in the AI and Chips group: The Bifercated Landscape of the “Technology” Group: Exciting Investment Trends to Follow The investment opportunity in semiconductors When does a Bear look like a Bull? The overwhelming weight of the Trillion-Dollar Club has made the S&P 500 lopsided. At the end of 2022, the club accounted for 17.6% of the S&P’s total valuation. Now, it represents 25.6%, meaning that more than one dollar in four is attributed to these mega-cap companies. As their combined market cap has increased by nearly $3 trillion in just five months, the Big Five have become significantly more expensive. Their overall price-to-earnings (P/E) ratio, which is the total valuation divided by combined net earnings, has risen from 27.7 to 40.6. This indicates that investors are receiving 33% fewer dollars in earnings for every $100 they invest compared to Christmas of 2022. To put it in perspective, the current P/E ratio for the Trillion-Dollar Club is almost twice that of the overall S&P 500. This situation is concerning, considering that the Trillion-Dollar Club has already achieved substantial earnings growth since the start of the pandemic. In 2022, these seven companies generated approximately $224 billion in net profits, which was 50% more than their pre-COVID earnings in 2019. Therefore, the high multiples at which they are currently trading come on top of potentially unsustainable profit levels. The concern from here is that any weakness in this small group would be felt significantly in the broader market.  This narrow leadership can be a good sign if the momentum becomes contagious and the cash on the sidelines is brought into the market. But while cash is so lucrative, the velocity at which the cash comes into a market expecting a recession is unlikely. However, three main risks persist: Interest Rate Risk – More Constrained Lending Coming: One significant risk in the current market is the potential for more constrained lending due to interest rate changes. When interest rates rise, borrowing becomes more expensive, which can lead to reduced consumer spending and business investment. Higher interest

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June 5, 2023 No Comments

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