July 30, 2014

One Size Does Not Fit All!

I love Halloween. Sure, it’s partially because of the Snickers and the Whoppers, and definitely because of the Reese’s, but it’s also because I love dressing up. Ever since I was old enough to trick-or-treat with my trusty, plastic jack-o-lantern in hand, I’ve always enjoyed pretending I’m someone or something I’m not one night a year. You can only imagine my disappointment when I tried on my “one size fits all” Batman outfit a couple of hours before it got dark on an All Hallows’ Eve only to find that one size did not fit Tom!

Sort of like a Batman costume that might look super cool on one person, but look like some sort of oversized armadillo costume on another, one investment strategy does not fit all. One investment strategy may not even fit one individual with multiple accounts!

I get to work with clients of all ages with all sorts of needs from and expectations of their investment portfolios. I get to work with clients who are frighteningly conservative with their investments, and I get to work with clients who are frighteningly willing to roll the investment dice. One of my jobs as a financial planner is to help someone have enough prudently diversified investment assets to sustain their desired standard of living, and I can tell you unequivocally that one size does not fit all! Your age and stage in life can somewhat dictate an appropriate investment strategy that might fit most, but it takes an understanding of your entire financial position, tax situation, tolerance for market volatility, and life goals to make an investment strategy a custom fit.

Suppose you have a taxable brokerage account and a 401(k). Let's say you’re going to need a car in the next year or two, and your taxable brokerage account is going to need to supply the funds. Do you think your taxable brokerage account, which you are going to be taking a significant withdrawal from in the short term, and your 401(k), which you are not going to need to touch for many years, should be invested in the same manner? Maybe, but probably not. You should probably have a little more cash or bonds in your taxable account than you do in your 401(k), so that you can buy that car even if there is a stock market downturn, but you should probably also have a few more stocks in your 401(k), so that you can have a real shot at growing and increasing your 401(k) balance in the long run.

If you’re in one of the higher tax brackets, you might want municipal bonds for your taxable brokerage account. These bonds are tax-free for federal income tax purposes, so even though they pay a slightly lower yield, they may offer a higher net (after-tax) yield. That being said, there is rarely any reason you would want municipal bonds in a retirement account such as a 401(k) or IRA because you don’t have to worry about income taxes until you actually take withdrawals from them. If you don’t have to worry about income generated inside a 401(k) or IRA, you might as well go with a normal, taxable bond that will pay a slightly higher yield than municipal bonds. Just keep in mind that one type of bond might not be optimal for your different types of investment accounts.

What if you find yourself watching the markets too closely and checking your portfolios every day? You may still be making money, but you’re losing sleep. It might not be the ideal investment strategy, but finding a strategy that is a little less volatile and a little more conservative might be the antidote if it helps you sleep at night. Of course there are also people who have set enough prudently diversified investment assets aside to support their lifestyle and really enjoy the idea of trying to “play the stock market.” Setting aside a little extra cash in a “sandbox account” to play with can be just what the doctor ordered for those people. They can give their speculative and undiversified strategy a go without having to worry about sinking their overall financial position.

There are also a lot of age-based or retirement date-based investment strategies out there, and they’re usually pretty good, but they are kind of one size fits all. Maybe you’re “normal” and one of these strategies fits just fine, but you may want to look at it closely and try it on before it gets too late, unlike me and the Batman costume.

I can’t sew a lick. I almost bled to death in Home Economics sewing a pillow, so unfortunately, I can’t help you with a costume. However, I can help with investment strategy and allocations, and make sure they're a good fit.


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