Last week we discussed time horizon and I explained why I believe defining your investment time horizon accurately is one of the most important factors for designing a sound investment plan.
Let’s assume you took this advice to heart, defined your investment time horizon, and adjusted your investment allocations accordingly. What now?
You’ve heard the old adage a watched pot never boils. This proverb rings true in the world of investing. Perhaps you are the investor who checks their portfolio balance every day. Some day’s you have a smile ear to ear and others you bury your head in your hands in disgust.
Imagine planting an apple seed in the backyard and then setting up a lawn chair while you await an apple to eat. Investing time horizons are not days, weeks, or months, they are years. For compounding to work its magic, it needs time and lots of it.
So… we are called to be patient, a tough task in itself, right? If Chaucer was a financial advisor his concern here might be that idle hands are the devil’s tools; investors attempting to be patient might begin to tinker with their investments and cause more harm than help.
What we need are some timely and fruitful personal finance activities that we can engage in while we await our apple. Something productive to keep us busy.
Today we will look at 3 simple personal finance activities to help you improve your plan and stay engaged.
1) Make Future Purchases Today?
Looking out at your financial plan, is there a large purchase that you have coming in the near future? Perhaps a new car? Special anniversary trip? Expensive jewelry or clothing you had your eye on? Home improvement? Furniture? Appliances?
I am referring to things that you were already planning to purchase. Maybe you had them earmarked for the end of the year or 2021. Would it make sense to shop for those items now? A lot of businesses are struggling, which is understandable, and this does present an opportunity for you to shop at bargain prices and work out favorable financing options.
I am in no way advocating that you go out and engage in predatory haggling with a business owner that is struggling to stay open. Quite the opposite. Right now businesses need your business – support them. If you need a new dishwasher and it just went on sale for 25% off with 0% financing, then it could make sense to pull the trigger now rather than later.
I know, I know… it’s odd for a personal finance blogger to provide you with shopping tips, but this could be a favorable season for pulling forward those big-ticket items that were planned for tomorrow. All the normal advice – don’t spend beyond what you can afford and stay within you means – but be supportive of businesses and opportunistic based on the environment we find ourselves in.
2) Refinance Debt
Your personal balance sheet is made up of two parts – assets and liabilities. In the month of March, you probably saw a lot of your assets (stocks, real estate, businesses, etc.) depreciate in value. I believe that for many of these assets this will be a temporary hiccup and a recovery of value will eventually come.
The great thing is that you’re not alone. Investors around the world experienced this same downside. In response, the financial system recalibrated. This came in the former of lower interest rates that all participants – investors like you and I – can benefit from.
Take inventory of all your liabilities; your credit cards, student loans, mortgages, car loans, lines of credit, etc.
Are you maximizing the cashback on your credit cards? Does it make sense in your situation to take advantage of a balance transfer with a temporary 0% rate?
As of April 30th, the average 30-year mortgage in the United States fell to a historical low of 3.23%. I would encourage you to review your own mortgage. Work with your advisor to explore all the options available to you. I know I have helped clients with some traditional financing options, but we have also created some outside-the-box strategies that were very impactful too.
Have you ever looked into a portfolio line of credit? Many custodians (Fidelity, Schwab, etc.) offer extremely attractive borrowing rates when using your investments as collateral. This is not an area I would encourage you to venture alone, but definitely a conversation you should have with your advisor.
Although your assets may have seen a temporary dip in price, this may allow for a long-term reduction in your borrowing costs.
3) Adjust Cash Allocations
Some investors came into 2020 with an above-average cash allocation. Maybe it was an end of year bonus that found its way to your saving account or just an accumulation of cash over time.
Financial planning 101 tells us that it is prudent to always have 3-6 months worth of expenses in our emergency savings. Maybe your situation warrants straying from this benchmark. We all have unique circumstances that help define the appropriate target.
Here’s my question, is your current cash savings above your personal target? Maybe well above this target? Now is a great time to review and explore options for employing this cash.
This adjustment doesn’t need to be “all in” or all at once. Work with your advisor to build out a strategy to dollar-cost-average (incremental investments over time) into the investments that best fit your financial plan.
Reminder, interest rates went down, which means the rate on your savings account is somewhere close to 0%. Excess cash on your balance sheet over time, in and of itself, is a risk and one that needs to be accounted for.
Idle Hands
Again, these are all activities to engage in that will be additive to your financial plan and distract you from unnecessarily tinkering with your investment account. Obviously this list is not exhaustive, but it is a good place to start.
Maybe some of the items from this task list sparked some questions. Feel free to reach out with any questions or comments. You can reach me at tcummings@thebahnsengroup.com.
I hope everyone is staying safe and healthy.
Until next week… This is TOM signing off…
