00:00 Danny Howes: Good morning, welcome to The Financial Pulse Show. I’m your host, Danny Howes, CEO of East Coast Tax and Financial Planning. Welcome, welcome. I hope everybody had a wonderful Thanksgiving last week; we certainly did. We spent our time with the family up in Ohio, and it was a great time seeing family and friends, but we definitely are happy to be back down in Florida where it’s sunny and a little bit warmer. It’s actually starting to get a little bit of a cold front here but, nonetheless, we’re happy to be back down. I hope everybody had a good holiday and, going into the Christmas season, I just wish you a Merry Christmas, Happy Hanukkah. But most importantly, this show, I wanna talk about market risk. And the reason why I wanna talk about that, we talked quite a bit about this throughout the year on the show because it’s just something very important to take in consideration when you’re thinking about building your retirement and your savings, but risk is real right now. Yeah, and it’s back, just better than ever. In fact, I was reading yesterday and looking at the numbers and yeah, the… If you look at fourth quarter so far of 2018, it’s not been this bad for quarterly results on the S&P 500 for fourth quarter since 2008.

01:19 Danny Howes: So that kind of sends shivers down some people’s spine, I know. There’s a lot of speculation of whether we’re just in a simple correction where markets are supposed to correct, that the healthy thing for them to go through a correction to make sure that they don’t get wildly overpriced and so forth, to not… Hopefully not create too much of a bubble. But then there’s other sentiment out there among analysts that we could be in a bear market already, given the fact that we pretty much erased all of 2018’s gains on all the major indices. And so we’re in this spot now of, what do we do? And do we do anything? Do we just kinda stick buy-and-hold? We had the elections and we saw that the House did change hands, and so that we have a little bit more of a polarized, if not a lot more polarized government. And so that means a number of things.

02:13 Danny Howes: With a polarized government, that means probably not gonna be a whole lot of legislative changes that happen because of the President’s veto power and the fact it’s gonna be very difficult to get both sides of the aisle to agree on anything at this point. That being said, there’s a lot of sentiment out there in the investment world that, well, the market’s kind of like that because there’s a little bit more predictability. When you’re talking about legislative risk, meaning the risk that comes out of Congress, meaning we don’t know what they’re gonna do, we don’t know what kind of decisions they’re gonna make or what kind of policies they’re gonna put forth, there’s no measurement for that. There’s no historical preference… There’s no historic reference that we can go by that says, “Okay, well, when we have this situation, that situation, chances are by this percentage we’re gonna see this kind of law or legislation passed.” It doesn’t work that way. We can look at systemic risk, we can look at monetary risk, we can look at interest rate risk, we can look at all these different things and we can look at history and it kinda gives us a little story of what to expect. But when you look at legislative risk, it becomes really, really uncertain and could create either a real positive reaction or a real negative one.

03:32 Danny Howes: So going forward, it’s gonna be really interesting to see, now that the conservative agenda is not necessarily gonna be fully met with a lot of praise with the Democrats, then we’re probably gonna see a lot less movement on that front, as far as taxes and reform and things like that as it relates to the economy. But for you personally, what does this all mean? Chances are you have an investment advisor, or a stockbroker, financial planner, somebody that helps you make decisions. Maybe you’re still working, you’ve got a 401k. And so, at work, you’ve got a company that’s just managing the 401k. Maybe you checked off a couple of boxes and you keep putting in your money, hope you’re mixing it out and you’re just dollar cost averaging in there. And when things are low, you’re buying when they’re low. And when things come up, things are good. That’s called dollar cost averaging, and that allows you to smooth out your returns over the years. But as we get closer to retirement, and especially when we have one foot in the door of retirement, one foot out of the door of retirement, that’s when we have to be really prudent, especially, because we don’t wanna wake up financially disappointed in the fact that, “Oh no, we had another 2008 situation happen. And 20, 30, 40% of your money’s gone, your retirement money, or a 2000 situation where we saw after the tech bubble busted and we had the terrorist attacks,” and so on and so forth.

05:01 Danny Howes: Well, we don’t necessarily have those events going on right now, but what we do have is a lot of uncertainty in the world with regards to just tension among governments. We also have a market that has been in a bull run for so many months consecutively in a row, and now we’re starting to see things wobble a little bit. So what I wanna make sure of is that our listeners, and people that like to tune in, and maybe you’re listening to this on a podcast on our website. Our website is eastcoasttaxandfinancial.com.

05:34 Danny Howes: And you could go there and you can listen to past radio shows, podcasts, our blogs and things like that, but regardless of how you’re getting this information, I wanna make sure that, fundamentally speaking, you have these things included in your financial plan. And one of the very first things when we’re talking about risk, we’re talking about the situation or environment that we’re in right now, how do you make a decision going forward? How do you make a decision on whether you should just continue doing what you’re doing, no changes at all, or whether you should take maybe a little bit less risk or a lot less risk, or whether you should double down and take more risk? And the answer to that lies in what I call the investment policy statement. And the investment policy statement basically helps take a lot of the emotions out of future decisions. The investment policy statement, your personal investment policy statement, basically helps you take the emotion out of your future decisions when it comes to investments if you’re invested in the market. And that investment policy statement is a living, breathing thing. It can change according to how you feel about the world, about the economy and so on and so forth.

06:43 Danny Howes: So even though it is there to help you manage your emotions as you’re making these important decisions, it’s also something that’s fluid. It can change because, let’s face it, money is emotional for us, and as we get older, or as market conditions change, as life experience changes and so forth, and our environment around us, then we can revisit that investment policy statement to make sure it really, truly aligns with how we feel. And especially if you’re married, it’s vitally important that both of you are intimately involved in crafting that statement, with the help of a financial professional, obviously, so that you both are on the same page. You see, one the number one reasons why marriages end up in divorce, and that’s finances, right? Tension around finances. And so a big part of finances, obviously, is your retirement plans, you’re savings. And so, many people have never done an investment policy statement ever, or never did a true risk tolerance where they look at everything and they say, “Yeah, I’m fine with the potential of my investments falling within that range of down or up.”

07:56 Danny Howes: So how do we create that investment policy statement? First we have to get a risk assessment. So the risk assessment answers the question, the vital question, the risk-reward question, and that is, “How much risk, how much upside am I looking for, for… How much downside potential, how much risk am I willing to take for the upside or reward that I’m looking to get?” And so you could start on either side of this coin, you can say, “I refuse to take this much risk.” In other words, if my investments fall below X, whether it’s a percentage or whether it’s a dollar amount, and I personally like the dollar amount. Somebody could say all day long, “I’m fine with being down 5%,” and then I say, “Okay, well, if you’re fine being down 5%, you have $500,000 between all your investments and your nest egg, so you’re fine losing $25,000?” And then, it’s amazing to me how many people say, “No, I’m not fine with that at all. That’s too much money.”

09:00 Danny Howes: So then, all of a sudden, the light bulb pops up and it says, “Wow, I’ve been thinking about this all wrong, because yeah, if my investments were down by $25,000, not just 5%, but $25,000, that makes a whole lot of difference for me than if I just think of it in percentage terms.” The other side of the coin you can start off with is, “What is my goal? What is my reward that I’m looking to get as a result of investing?” And most people start there, like, “Man, if we could only make X, we would be just fine.” And so finding the sweet spot of, what do we need to make? Reverse engineer, what do we have to earn on our investments in order to make sure we don’t outlive our money, be able to maintain our lifestyle, take care of the things we need to take care of, and so on and so forth. For those what-ifs in life pop up, we’re still okay. What kind of interest rate do we have to get in order to do that?

09:49 Danny Howes: When we come back for the next segment, we’re gonna drive deeper in how that risk-reward conversation happens, how it plays into this current market, and how you can assess where you are now, how it works, how it affects you to make good, solid decisions moving forward. I’m Danny Howes for The Financial Pulse, we’ll be back in just a bit.

00:00 Danny Howes: Well welcome back to the Financial Pulse Radio show I’m your host Danny Howes CEO of East Coast Tax and Financial Planning and if you’re just joining us, I hope you had a wonderful Thanksgiving. And we are talking about market risk, and particularly the investment policy statement that is a crucial element to a successful financial plan for anyone.

00:20 Danny Howes: And if you’re just tuning in, and maybe you’re younger, you’re in your 30s, 40s, and you’re putting money away into a 401k at work, or maybe you’re a business owner and you’re trying to put some money away in your own 401K or just IRAs brokerage accounts, and so forth or if you’re almost retired, maybe you’re over 55, maybe you’re even over 60 and you got one foot in the door, one foot out of the door retirement, and then you have another segment of people that might be listening that are already retired, maybe even, retired for a decade or two already.

00:52 Danny Howes: It doesn’t really matter where you are and it doesn’t really matter where you are on the economic scale, as far as how much money you have invested as far as what… How you determine your investment policy statement. Everybody should have one, and one of the biggest tragedies for just financial awareness and understanding that I see just the financial illiteracy on everyday type of things, is the fact that because we typically go to work for a corporation or company whether it be a small business or a large corporation, they will have different retirement planning options. It’s usually in a way of a 401K or if you’re a municipality worker 403B or 457 plan, these are tax-deferred retirement plans you could put away and save money now on taxes and have that money grow tax-deferred, so that you don’t have to pay taxes on that money until you decide to take money out and then you’ll pay ordinary income tax on all the distributions out of those retirement plans.

01:55 Danny Howes: In that though, there’s a huge disconnect. So if you think about when you get hired or maybe periodically when you go into your online account and you look at your 401K or 403B you can go in, you could check off a couple of boxes you can answer a couple questions about risk tolerance, and just kinda, choose a couple mutual funds are typically what are used in 401K plans. And you just kind of let it ride. And there’s a huge disconnect there because there’s no real financial planning involved in at other than just… Okay, what’s your risk tolerance? Or really even worse, just… Hey, which funds do you want? There’s really very little that goes into assessing where you are, where you want to be reverse engineering how much you need to make or how much you wanna make and how much risk you’re willing to take in order to make smart decisions. And if you don’t get anything out of this, this group of people that are working… You have 401Ks and so forth. Go ahead and open those statements go online, log-in and see what your investments are doing, see how they perform the rest of the year and then ask yourself this question: Brush up, take a look at what the markets have done so far this year.

03:06 Danny Howes: Think about the fact that we just had a major election and we’ve had some changes in our legislative structure. So now, decisions going forward are gonna be made a little bit different. Policies could be different. And then on top of that, we’ve had a long run of a good market and last year, 2017, was a Stellar Market… Going into the beginning of 2018 but then we saw some hiccups in the beginning and then and now we’ve seen pretty much all the games for 2018, virtually erased and all the major indices. And so, how do you respond to that? In the last segment, we talked about the importance of having an investment policy statement, An investment Policy Statement obviously has a risk versus reward, involved in it, and there’s typically risk assessments that you can take. We use a couple of different systems, but I like to use the systems that actually identify the dollar amount that you’re comfortable with instead of looking at percentages, like… Oh, I don’t know, I scratch my head, I guess, I’m willing to take a 10% hit or I’m willing to take a 5% hit.

04:12 Danny Howes: The big thing is to look at the dollar amount of what that hit actually means it is 10%. $50000 is 10%, $100000 is 5%, 50000 or 100 whatever your number is and when you look at that number, that number is gonna cause a reaction from you. It’s gonna either cause a “I’m fine, no big deal” or it’s gonna cause a “Yeah, I’m not happy with that at all”. I was like, “Well you just said you were fine with 5% down, or 10% down, in a market that’s not doing so well, yeah, but looking at that number, I would feel really upset if I lost $100000, or $70000, or $50000, and… Okay, if you’re really upset, what’s your reaction well my reaction? Does it make a change? What kind of change probably to get out? Okay, so you’re gonna lock in that large loss because of the fear of that number being where it is. Once we identify that, then we kinda shrink it up and we say, “Okay well, if that’s uncomfortable for you, then what number is? In other words, the market isn’t perfect, the only thing that’s certain about to the market is, it’s uncertain the only thing that’s predictable about the stock market is that it’s unpredictable.

05:19 Danny Howes: Nobody has a crystal ball. And if I did, I probably wouldn’t be on the show right now, I’d probably be on my own private island, just looking at my jets and cars and things like that, right? So if we know that, we know that there’s going to be swings on a market up and there’s gonna be swings on a market down on a second-by-second minute by minute, day by day, month by month, quarter by quarter year by year basis, if there’s gonna be gyrations in the market due to buying and selling it just a natural course of things when it comes to stock market investing. So once we figure out that sweet spot of like, “Okay well, if I could have the opportunity the reward to make 10%, but with knowing that, statistically speaking, and historically speaking, that I shouldn’t endure a loss of more than say 5% over a certain period of time, maybe it’s a six-month period of time a year period of time, whatever we’re measuring then that’s how you find your sweet spot to help you sleep well at night, knowing that you are going to be investing a quarter of your investment policy statement that says “We are going to try to keep in this range, we’re only gonna take as much risk for the reward that we’re looking to get”. When we closed out last segment we talked more about the reward, we said, “Okay”, we ended on the reward we said, “How much reward do we want?

06:37 Danny Howes: And that’s a very tricky question. You gotta be able to make sure that that that’s an honest one. And it’s an honest answer, and the question is framed in a number of different ways. The question is,” How much money do you need to make sure you don’t outlive your money?” Just if you were to just meet all your daily basic expenses and so forth and maintain your lifestyle. But there’s another element to that question, and that’s also what if something happens. So it’s not only enough to not outlive your money, but what if something big happens along the way if you’re retired like a long-term care event that cost a significant amount of money or a premature death where there’s a huge loss of income, all those variables are just air conditioners going out. And someone, and so forth, or hurricanes coming through, if those big expenses pop-up, does that derail me outliving my money and maintaining my lifestyle. So now I have multiple fronts on my money. If you think about all the threats to your money, it’s more than just whether the Dow Jones is up or down. That’s a very important part of it, when you’re investing, but then what are you investing for? Well, you’re investing this money for your future, to be able to make sure you don’t outlive your money, and so on and so forth. So then you have to also take a consideration these things that are outside the stock market.

07:56 Danny Howes: Those what-ifs in life that I talk about so often those issues that can pop up, whether it’s… There’s a downturn in the economy. We wanna help our adult children because they have children, we make sure that they got food on their table, or there’s a downturn in economy and our business is down 10, 15% just because everybody’s down or there’s a bear market and there’s a big hiccup and so that’s the real… My investment I was gonna retire in five years, but now it looks like it’s gonna take maybe 10, just to get my investments up to where they were before the crash.

08:26 Danny Howes: All these things go into helping you identify how much risk you’re willing to take, but then that reward is how much interest… How much gain how much return on my investment do I need to make in order to meet the expectations that I’m setting forth. In order to meet those expectations that even if all those things happen A, B, C, those things that can pop up in life, that derail or cost a lot of money, I could still most likely handle those things or we have enough insurance and things like that, in place that we can make sure that we’re gonna be able to continue to make live our desired lifestyle.

09:05 Danny Howes: This is just a tip of the iceberg folks on when you’re thinking about the market that we’re in now, the volatility that’s heated up. And just how there’s a lot of anxiety, almost of is the good stuff over. We don’t have an indicator that 100% of the good stuff is over. But it’s very important at this time of the year, especially going into a new year and then with what’s going on in the market to go ahead and sit down and look at all these things find yourself a risk tolerance. If you don’t have a financial advisor, find yourself a risk tolerance assessment online, do a Google take it pick out where you are and compare that to your investments. And if you have a financial advisor ask them.

09:47 Danny Howes: “What is my investment policy statement and what is your plan for when things don’t go right because that’s crucial. It’s not about getting it when it’s really great, it’s about when things don’t go right, is when they start making their money. Well, just like always we’re outta time. Every single Thursday, right here at 10:30 AM. Go ahead, go to our website, eastcoasttaxandfinancial.com. You can listen to past radio shows our podcasts are on there, we have blogs on there, and we’re just filling it up with more and more information. I’m Danny Howes for the Financial Pulse. We’ll talk to you next week. Make sure you protect that money folks, but most importantly, make sure you know who and what you’re protecting it from. We’ll talk to you next week.