The stock market is at an all-time high, interest rates are at historic lows and cap rates on investment properties are also low. Investors are searching for yield where ever they can find it and risky bond offering are being bought up as quickly as they are put to market. All this suggests that assets are expensive. Expensive assets are risky assets. This backdrop has left a number of people frozen and unable to act to secure their future. In fact this paralysis has led to an enormous stock pile of dollars in money markets and savings accounts. A greater amount than we have ever seen. Does this mean that cash is not worth what we think? Is inflation next?
Strange times. To paraphrase; Bear markets are all horrible in the same way, Bull Markets are all terrifying in unique ways. Yet we live through all of them, bulls and bears. And we need to make progress for our families and our futures. A long term plan will give you a backdrop to use to make decisions.
Today’s Important planning actions depend upon your age and situation.
First let’s start with some simple assumptions. First, If assets are expensive today, then near term (0-5 years) investment returns will be lower. Longer term Returns will return to long term averages. Second, compound interest is the best interest. The Rule of 72 is a short cut to estimating the number of years required to double you money at a given annual interest rate. Divide 72 by the interest rate and that is the years required to double your assets. It is the second and third doubling that we like to see. This takes time. Start early. Third, interest rates are low and the Federal Reserve is looking to raise rates. Fourth, you play an A game in your career. By staying sharp and current your experience keeps you in demand as you age.
If you are younger you need to be concentrating on building the base of your investment portfolio. IRAs, 401ks and pension plans should be maximized. In 40 years, you will not remember if the market was relatively high or relatively low when you started investing. You will simply know that you are glad that you invested as the funds that you put away today have the most time in the market and therefore the most potential for multiple doubling.
You have kids, a mortgage, a house that needs attention and a strong desire for a vacation. You also should have been funding your retirement plan for the last 10 years and starting to see it add up. If not, you had better get on this. The money that you invest needs time and today is the best day to get this started. Look at your house and look at stretching to get the right house by age 40 to carry you through the next 20 years with kids. Interest rates are low and you are locking in your payment for 30 years. It will take 10 years but that mortgage will start to look small relative to your increasing income as your reach later career. Also, are you with the right employer or should you be starting your own business?
At this point you are experienced, knowledgeable and sought out for your wisdom. Your income is strong and you may still be paying for kid’s education, but your mortgage is relatively low and cash flow is strong. Revisit your holdings to be sure that you are locking in your success and not taking risks that you do not understand or cannot afford to recover from. Do not rush to pay off your mortgage, instead build a portfolio of investments outside your pension plan that you will use to live on while your pension plan has a final doubling. This should be a relatively lower risk portfolio as it is the first place you look to for funding post retirement.
This is when the current market is of most concern. If you are financially weak, move to conservative assets in the funds you will be using first and consider delaying retirement. A couple of years can be important. If you are strong, you will be taping your after tax holdings or the sale of your business to cover expenses. Ideally you have enough ready assets to give your retirement assets time for one more doubling.
If you finances are strong, live it up now! Too many people delay the enjoyment until it is too late. If you are only in a marginal financial position, be certain that your holdings are conservative and you maintain enough cash to cover the near term of up to a year during the next market decline.