Reprinted Courtesy of
Will Robbins
Equity Portfolio Manager
March 29, 2023
We have been here before.
The failure of Silicon Valley Bank on March 10 reminds me of what I experienced firsthand as a bank analyst during the global financial crisis in 2007 and 2008.
As a professional investor for 30 years, I rely on my own experiences to help guide my investment approach. When I was a bank analyst then, I captured the 10 lessons below to serve as a guide for myself and colleagues to help get us to the other side of the valley.
Every crisis is different, but they often have things in common. Today’s turmoil shares some striking similarities, though, in my view, this current episode is much smaller in scale and far less damaging.
Last summer, with rates rising, inflation high and the prospect of recession looming, I unearthed these lessons from 15 years ago and shared them again. And when Silicon Valley Bank failed a few weeks ago, I circulated them once more to offer perspective and help colleagues manage the uncertainty. Here are those lessons, which I believe bear repeating.Wisdom earned in crisis
1. When the weathermen pack umbrellas, the forecast is for rain. Bank treasurers started hoarding liquidity — assets that can easily be converted to cash — in mid-2007 when liquidity was not on anyone’s radar screen. It should have been a clear warning sign.
2. Liquidity is a coward. Regardless of balance sheet strength or franchise value, if liquidity evaporates, which it has tended to do at the first sign of trouble, perception of weakness becomes reality.
3. The long-term outlook only matters if you can make it to the long term. The 2007–2008 cycle progressed from one of concern about earnings to concern about capital to concern about liquidity. Not until we reverse the cycle and return to a focus on earnings do I expect this cycle to end, and by then many institutions may no longer be with us.
4. There is no silver bullet. Selling into every rally on government fixes would have been the right call during the early stages of the global financial crisis. Drastic events require drastic measures; anything less would be a disappointment.
5. Avoid the most aggressive companies. When you hear the words growth and innovation as they relate to lending businesses, proceed with caution. Making cross-industry comparisons can help provide guard rails for assessing where the dangers might be. Variations in outcomes between the least and most aggressive companies can be huge.
6. Bad news is bad news. If a company needs capital and/or has to cut its dividend, consider getting out of the way, even if it looks like it’s priced into the stock.
7. Don’t try to navigate uncharted waters. When circumstances change so drastically that even an experienced investment analyst has a hard time digesting events, I think it’s best to walk away. This was true in the technology boom-bust cycle in the late-1990s as well as the global financial crisis. The break with the past was so significant in both cases that history no longer served as a guide.
8. Good loans are made in bad times and bad loans are made in good times. The winners in a credit cycle will usually be those with the capital and liquidity to capitalize on the distress.
9. Trust your instincts and act. The discontinuity of a crisis can be paralyzing, but it’s important to remain flexible and continue to take action with a forward-thinking mindset.
10. Take care of yourself. Sleep, exercise and healthy diet are important to maintaining a constructive attitude. We owe it to ourselves, our families and our clients to stay healthy.
Few people enjoy thinking about their insurance needs, shopping for coverage, or
reading through a policy’s fine print. Once they do buy a policy, many people rarely think about it again, other than when they pay the premiums. But that tendency to avoid thinking about insurance can lead to insurance mistakes that can put a person’s assets at risk. Below are some of the most common
insurance mistakes:
Expecting the best — Some people may think they can skip various types of essential insurance (like auto or health insurance) because it won’t happen to them. Or they may buy a bare-bones policy thinking they won’t ever need to make a claim. But the reality is that accidents and injuries can happen to anyone. A comprehensive insurance plan protects you when they do.
Not shopping around — If you’re in the market for a new policy, shop around and compare prices to get the best deal. But make sure you’re comparing equivalent policies and coverage — an ultra-cheap policy may offer skimpy benefits.
Buying too much insurance — While insurance is a valuable part of your overall financial plan, there is such a thing as being over-insured. If you’re paying
high premiums for insurance coverage you don’t really need, you’re wasting money. What types of insurance might you skip? Extended warranties, cell phone insurance, insurance for specific diseases (like cancer), rental car insurance, and mortgage life insurance are usually not worth the premium you pay.
Not negotiating on insurance rates — Here’s a little-known tip: The premium price you’re quoted isn’t set in stone. Depending on the type of coverage you need, you may be able to get discounts based on your profession, the age of your car, installing an alarm system in your home, choosing a higher deductible, and more. Bundling — buying several policies through the same carrier — can also lead to premium price breaks.
Forgetting to pay the premium — It’s a simple but potentially devastating mistake. Missing premium payments could cause your policy to lapse, leaving you without coverage. Reduce the risk of this happening by automating your payments.
Dropping coverage to save money — When your budget is tight, dropping insurance coverage may seem like a good way to save cash. You may save money in the short term, but you could end up worse off in the long term if you need to make a claim. If premium payments are straining your budget, consider raising your deductible or asking your insurer if you’re eligible for any discounts.
Forgetting to update life insurance beneficiaries — As your life changes, so should the people named as beneficiaries on your life insurance policy. Divorce, remarriage, the death of a spouse, or the birth or death of a child are all times when you should update these designations. If you fail to take this simple step, your life insurance may not do its job when you need it most. After all, do you
want your insurance benefits to go to your ex-spouse or have one child receive a generous insurance payment while the other receives nothing? Keeping your beneficiary designations up-to-date can help you avoid those outcomes.
Having coverage gaps — Everyone faces different risks, and thus has different insurance needs. Sometimes, it’s easy to overlook a risk until it’s too late. For example, if you live in an earthquake-prone area, you likely need separate earthquake insurance. If you serve on a nonprofit board of directors, you may need personal liability coverage. If you own ATVs, snowmobiles, or other vehicles, you may need special policies to protect yourself in case of damage to the vehicle or a lawsuit. The list of possible risks goes on and on.
Not researching an insurance company before you buy — Not every insurance company is created equal, and what looks like a great deal today may be less appealing tomorrow when you are struggling to get a claim processed quickly. Before you buy, get multiple quotes, read the policy’s fine print, review the insurer’s complaint record with the state department of insurance, and check the company’s ratings with ratings agencies like Fitch, Moody’s, and A.M. Best.
Not thinking about insurance as part of your overall financial plan — Insurance isn’t something you should think about in isolation. In fact, it’s an essential part of your overall financial plan. A solid risk management strategy protects your hard-earned wealth and your family’s future.
Please call if you’d like to discuss insurance in more detail.
We all know the process. Estimate how much is needed in retirement
(which can range anywhere from 70% to over 100% of pre-retirement
income), determine available income sources, and then calculate how much to save annually to reach those goals. As you go through this largely mathematical exercise, however, don’t forget the most important part. You need to give serious thought to the type of retirement you want — visualize what retirement will be like.
Retirement is no longer viewed as a time to slow down, but considered a new beginning in life. That means your current living expenses may have very little to do with your retirement expenses. To help you visualize your retirement so you can estimate retirement expenses, consider these questions:
When do you want to retire?
Will you realistically have the resources to retire at that age?
Do you plan to stay in your current home, trade down to a smaller one, or move to a different city? If you plan to move, is the cost of living there more or less expensive than your present city?
Will your mortgage be paid off by retirement? What about other debts?
Will you continue to work after retirement? If so, will you work part- or full-time? Where will you work and how much can you expect to earn? Do you have any hobbies or interests That can be turned into paying job s? Are you planning to start a business after retiring?
How will you spend your free time? What hobbies will you pursue? How much and where will you travel? How much will all these activities cost?
How will you pay for medical costs? Will your employer provide health insurance or will you need to purchase insurance to supplement Medicare coverage?
Do you have any medical conditions that are likely to impact your quality of life in retirement? What would you do if you became physically disabled? Would your spouse take care of you, would you move in with your children, or would you go to a nursing home? How will you provide for long-term-care costs?
How much of your income will be provided by personal investments, including 401(k) funds? Are you confident those investments will last your entire retirement?
What would happen financially if your spouse dies? If you die, would your spouse be able to support himself/herself financially?
Answering these questions should give you a clearer picture of what your retirement will be like.
If you’d like to review these questions in more detail, please call or contact me.
The English astronomer Edmund Halley prepared the first detailed mortality table in 1693. Life and death could now be studied statistically,and the life insurance industry was born. – Mathshistory.st-andrews.ac.uk
Summertime an’ the livin’s easy, fish are jumpin’ & the market is high…And where is RISK when the Market is HIGH? Where is the market today? You got it – HIGH! And what can you do about it? Ever hear of Guaranteed Income Accounts*? Or ‘Buffered’ accounts, either Exchange Traded Funds or (God forbid) annuities*? They each offer downside protection in exchange for a ‘cap’ on gains. So, WHEN do you think the next correction will occur? Sooner or later?
*All guarantees and protections are subject to the claims-paying ability of the issuing company.
To enjoy your retirement without financial worries, make sure you have enough money saved when you retire. This calculation can be a daunting task, since a variety of factors affect your required amount and inaccurate estimates for any factor can leave you with way too little in savings. Some of the more significant factors
include:
You can find various rules of thumb indicating you need anywhere from 70% to over 100% of your preretirement income. On the surface, it seems like you should need less than 100% of your income. After all, you won’t have any work-related
expenses, such as clothing, lunch, or commuting costs. But look carefully at your current expenses and how you plan to spend your retirement before deciding how much you’ll need. If you pay off your mortgage, stay in good health, live in a city with a low cost of living, and engage in inexpensive
hobbies, then you might need less than 100% of your income. However, if you travel extensively, pay for
pay for health insurance, and maintain significant debt levels, even 100% of your income may not be enough. You need to take a close look at your expenses and planned retirement activities to come up with a reasonable estimate.
Your retirement date determines how long you have to save and how long investment returns can compound. You want to make sure your retirement savings and other income sources, such as Social Security and pension benefits, will support you for what could be a very lengthy retirement. Even extending your retirement age by a couple of years can significantly affect the ultimate amount you need.
Today, the average life expectancy of a 65-year-old man is 81 and of a 65-year-old woman is 84 (Source: Social Security Administration). Most people use average life expectancies to estimate this, but average life expectancy means you have a 50% chance of living beyond that age and a 50% chance of dying before that age. Since you can’t be sure which will apply to you, it’s typically better to assume you’ll live at least a few years past that age. When deciding how many years to add, consider your health as well as how long other family members have lived.
A few years ago, many retirement plans were calculated using fairly high rates of return. Those high returns don’t look so assured now. At a
minimum, make sure your expectations are based on average returns over a very long period. You might even want to be more conservative, assuming a rate of return lower than long-term averages suggest. Even a small difference in your estimated and actual rate of return can make a big difference in your ultimate savings.
Even modest levels of inflation can significantly impact the purchasing power of your money over long time periods. For instance, after 30 years of just 2% inflation, your portfolio’s purchasing power will decline by 45%. When estimating an inflation figure, don’t just look at the historically low inflation rates of the recent past. Also consider long- term inflation rates, since your retirement could last for decades.
Especially if you save significant amounts in
tax-deferred investments that will be taxable when withdrawn, your tax rate can significantly affect the amount you’ll have available for spending. You may find your tax rate is the same or higher fter retirement.
Once you’ve estimated these factors, you can calculate how much you’ll need for retirement.
Please call if you’d like help with this calculation.
Retirement planning is a life-long process. Below are some of the key retirement-planning actions you need to be taking from your 20s through your 60s.
Start saving. The sooner you can start saving for retirement, the less you’ll have to save overall. If you start saving $5,000 per year at age 25, you’ll have just under $775,000 by age 65, assuming annual returns of 6%. Wait until age 35 to start saving and you’ll have about $395,000 — more than $300,000 less. Also, since you’re still decades away from your retirement date, don’t be afraid to take some risk with your investments. You’ll have to stomach some ups and downs, but earning higher returns from equity (or stock) in-vestments now means more money (and less to save) as you get older. Other steps to take when you’re young: start budgeting, avoid debt, and save for other goals, like buying a house. Even if you’re not earning a lot right now, adopting healthy money habits today will pay big dividends later in life.
As you enter your 30s, your in-come is probably heading upward and your life is beginning to stabilize. You may find that you can contribute more to your retirement savings accounts than you could in your 20s. As your income increases, consider increasing your retirement contributions by the amount of your annual raise so you don’t fall behind on saving. Reassess your savings rate and consider meeting with a financial advisor to make sure you’re saving as much as you can — and investing it well.
You’re at the halfway point to retirement. If you’ve been saving for the past 10 or 20 years, you should have a nice nest egg by now. If you
haven’t gotten serious about saving, now is the time to do so. You’ll have to be fairly aggressive, but you still have some time to build a respectable financial cushion. Whether you’re an accomplished saver or just getting started, you may also want to consider meeting with a financial advisor to help you make sure you’re saving enough to meet your goals and investing in the best way possible.
A special note: people in their late 40s and early 50s are often looking at steep college tuition bills for their children. Don’t make the mistake of sacrificing your retirement goals to pay for your children’s college educations. Stay focused and on track so your children don’t have to jeopardize their financial future to support you as you get older.
Once you turn 50, you have the option to make catch-up contributions to retirement savings accounts like 401(k)s and IRAs. You can save an additional $6,500 a year in your 401(k) plan and $1,000 a year in your IRA in 2021. That’s great news if you’re already maxing out your savings in those accounts. Your fifth decade is also the time to start thinking seriously about what’s going to happen when you retire — when exactly you’re going to stop working, where you want to
live, whether you plan to work in retirement, and other lifestyle is-sues. It’s also the time to take stock of your overall financial situation. You’ll still want to keep saving as much as you can, but you may also want to make an extra effort to be debt-free at retirement by paying special attention to paying off your mortgage, car loans, credit card debt, and any remaining student loans.
Retirement is just a few years away. If you haven’t already, you’ll want to dial down the risk in your portfolio so you don’t take a large loss on the eve of your retirement. You’ll also want to start thinking about a firm retirement date and estimating your expected expenses and income in retirement. If your calculations show that you’re falling short, it’s better to know before you stop working. You can make up a shortfall in a number of ways — reducing living expenses, working a bit longer, and even delaying Social Security payments so you get a larger check. Whatever your age, the key to retirement is having a plan and consistently executing that plan. Not sure how to get started? Please call so we can discuss this in more detail.