The Art of Asset Allocation

Posted on October 16, 2024September 4, 2024 by Brian Colvert

In the world of financial planning, one term that often comes up is “asset allocation.” Asset allocation is the practice of dividing an investment portfolio across different asset classes to balance risk. Think a pie chart. It’s a foundational concept that plays a crucial role in designing investment portfolios. But while it may sound straightforward, the reality is far more nuanced. In fact, I’d argue that asset allocation is more of an art than a science.

Listen anywhere you stream Podcasts

iTunes | Spotify | iHeartRadio | Amazon Music

What is Asset Allocation?

At its core, asset allocation refers to how an investment portfolio is divided among different asset classes. These can include equities (stocks), fixed income (bonds), private equity, commodities, real estate, and even modern additions like cryptocurrencies such as Bitcoin. The goal is to find the right mix that balances risk and reward based on the investor’s goals, time horizon, and risk tolerance.

Often, the first step in determining asset allocation is through some sort of quiz or a conversation with a financial advisor. These quizzes typically ask questions designed to assess risk tolerance—how much market volatility an investor can stomach. They aim to gauge whether someone would prefer a conservative approach, leaning more towards fixed income and less risky investments, or a more aggressive strategy, favoring equities and other higher-risk assets.

Why Asset Allocation is an Art, Not a Science

Why do I call asset allocation an art rather than a science? The answer lies in the human element. For the many years I’ve been in this industry, I have yet to see a quiz that can’t be manipulated or one where people don’t try to put their best foot forward.

Investors often say they want all the upside and none of the downside. And why wouldn’t they? If we could guarantee such outcomes, everyone would be wealthy, and financial planning would be a breeze. But reality doesn’t work like that. There’s no perfect formula that offers maximum returns with zero risks. Even the best investors can’t avoid downturns entirely.

Most quizzes ask questions like, “Would you be willing to take a 50% loss for the chance of a 150% gain?” People tend to focus on the potential gains and say “yes” without fully understanding the emotional impact of actual losses. Here’s another issue: quizzes often frame things in percentages, but real-life losses are felt in dollars. For example, a 10% loss on a $2 million portfolio isn’t just 10%; it’s $200,000. When markets are down, people think about what those lost dollars could have bought—a new car, a home, years of living expenses. These losses are visceral and deeply personal.

Conversely, when the market is up, we often think in percentages rather than dollar gains. We may say, “My portfolio is up 20%,” without immediately converting that to actual dollar gains. This inconsistency in how we perceive gains versus losses underscores the complexity of human emotions in investing, making asset allocation an art that requires understanding psychology, not just spreadsheets.

The Role of Emotions in Investing

The emotional response to gains and losses can lead investors to make irrational decisions. Fear and greed are two powerful emotions that drive market behavior. During a market downturn, investors may panic, thinking, “This time is different; it’s going to zero. I need to get out now.” This reaction is called capitulation, and it’s the point at which investors sell off their investments to avoid further losses. But by selling when the market is low, they lock in their losses and miss the eventual recovery.

For instance, during the 2008 financial crisis, the markets fell over 50%. If you were heavily invested in equities and panicked, selling your investments to move into a more conservative portfolio, you would have locked in those losses. When the markets rebounded, as they historically have, those conservative investments wouldn’t have recovered as quickly as a diversified portfolio that stayed the course. This is why it’s essential to maintain a consistent risk tolerance. Selling low and buying high is a recipe for long-term underperformance.

Learning from the Great Investors

Even the most successful investors have faced significant downturns. Ray Dalio, known for his “All Weather” portfolio designed to perform well in any economic environment, still saw his strategy down by 20% in 2022. Warren Buffett, perhaps the most renowned investor of our time, saw his portfolio down by approximately 24% in 2022 and nearly 50% during the 2008 crisis. Yet, over the long term, these investors have achieved phenomenal returns. The key is their ability to stay invested through the tough times, not letting fear dictate their investment decisions.

Finding Your Comfort Zone

Working with a CERTIFIED FINANCIAL PLANNER™ can help tailor an asset allocation strategy that aligns with your comfort zone, goals, and life situation. A good advisor takes the time to understand your emotional triggers. They’ll know how to guide you through downturns without making knee-jerk reactions that could harm your financial future.

Risk tolerance isn’t static—it changes with life events, age, and personal circumstances. When you’re working and have a steady income, you might feel more comfortable taking on risk than when you’re retired and living off your investments. The birth of a child, the death of a parent, or even market news can shift your risk tolerance.

Timing the Market vs. Time in the Market

One of the common misconceptions among investors is the idea of timing the market—getting out when things are bad and getting back in when things look good. While it sounds logical, it’s nearly impossible to do consistently. The market often moves without clear signals, and by the time you react, it’s usually too late. Instead, a more reliable strategy is to focus on “time in the market.” Staying invested over the long term allows you to ride out the volatility and benefit from compounding returns.

The Value of Diversification

Another crucial aspect of asset allocation is diversification—not putting all your eggs in one basket. By spreading investments across various asset classes, sectors, and geographies, you reduce the impact of a downturn in any single area on your overall portfolio. Diversification doesn’t eliminate risk, but it can mitigate it, providing a smoother ride during turbulent times.

The Science of Asset Allocation: Data and Analysis

While I’ve emphasized the art side, there’s no denying that science plays a role in asset allocation. Data analysis, historical performance, economic forecasts, and quantitative models all contribute to determining the optimal asset mix. However, these tools should be seen as guides rather than definitive answers. They provide valuable insights, but they can’t predict the future or account for every nuance of human behavior.

Making Asset Allocation Work for You

Creating a well-balanced portfolio that aligns with your risk tolerance and investment goals is the ultimate aim of asset allocation. It’s about managing the trade-off between risk and return, ensuring you’re neither too aggressive nor too conservative. A portfolio should reflect not just your financial goals but your emotional comfort zone. The peace of mind that comes from knowing you’re invested in a way that feels right for you is invaluable.

Final Thoughts

Navigating the complexities of asset allocation can be daunting. Partnering with a knowledgeable advisor can provide clarity and guidance, helping you avoid emotional pitfalls and stay focused on your long-term goals. An advisor serves as a steady hand, keeping you grounded during market turbulence and ensuring your portfolio evolves with your changing needs.

At Bonfire Financial, we specialize in helping clients find that balance and strategically slice up your investments. We listen to your goals, understand your risk tolerance, and craft a personalized asset allocation strategy and financial plan that aligns with your financial and emotional well-being. If you’re ready to take the next step in your financial journey, reach out to us.

How I Invest: A look inside a CFPs Portfolio

Posted on August 21, 2024August 12, 2024 by Brian Colvert

iTunes | Spotify | iHeartRadio | Amazon Music

Today we are diving into a question that doesn’t come up as often as it should: How do I personally invest? This is a crucial question that any prospective client should ask. Are you curious what is inside your CFPs portfolio?

Transparency in Investment

I firmly believe that transparency is the foundation of a trustworthy advisor-client relationship. The investments I recommend to my clients are the same ones I would consider for my own portfolio. This principle stems from a straightforward idea: if I am advising on an investment, it should be a good enough investment for my money.

However, investing one’s own money in the same assets recommended to clients requires careful navigation of compliance and regulatory frameworks. These measures exist to protect investors from unethical practices like “front-running,” where unscrupulous advisors manipulate stock prices to their advantage at the expense of their clients. While these regulations add a layer of complexity, they are essential for maintaining trust and integrity in the financial industry. Regarless, a CFPs portfolio should be transparent.

The Core of My Investment Philosophy

At the heart of my investment philosophy is the belief in asset allocation and diversification. It’s a strategy that aligns with the needs and goals of my clients, and it’s the same approach I apply to my own portfolio. Here’s how I break it down:

Asset Allocation and Diversification

I advocate for a well-diversified portfolio as a cornerstone of a sound investment strategy. This involves spreading investments across various asset classes to mitigate risk and capture opportunities in different market environments. For my clients, I develop customized models—equity and fixed-income models—that consider their risk tolerance, time horizon, and specific goals.

For instance, some clients may prefer a heavier weighting in equities for higher growth potential, while others might opt for a more conservative approach with a focus on fixed income. My own portfolio is similarly tailored, reflecting my unique preferences and risk profile. The underlying investments might be consistent across portfolios, but the allocation percentages vary according to individual needs.

The Role of Cash

Cash is an integral component of any investment strategy. I aim to ensure my money is always working for me, and I advise my clients to do the same. With interest rates currently favorable, options like money market accounts, treasury bills, and CDs offer attractive returns with minimal risk. While these conditions may change as the Federal Reserve adjusts its policies, having cash reserves that generate returns is a prudent approach, as should be part of any CFPs portfolio. .

The Fun Side of Investing: Asymmetric Risk

Beyond the traditional asset allocation model, I incorporate a “fun” element into my portfolio—investments characterized by asymmetric risk. This strategy involves committing a small portion of capital to opportunities with significant upside potential but manageable downside risk. It’s a calculated risk that can lead to substantial rewards without jeopardizing financial stability.

Real Estate Investments

Real estate is a key area where I apply this principle. Whether through direct ownership, private placements, or limited partnerships, real estate investments offers a tangible and potentially lucrative investment avenue. However, the critical factor is ensuring the investment generates positive cash flow from the start. It’s essential to avoid properties that drain resources monthly, banking solely on long-term appreciation. Cash flow is vital for managing unforeseen expenses and mitigating risks.

Cryptocurrencies

Cryptocurrencies, particularly Bitcoin, also feature in my investment portfolio. I believe in the underlying technology and the potential future of digital currencies. Despite the volatility and skepticism surrounding crypto, I see it as a valuable addition to a diversified investment strategy. Engaging in this space requires an open mind and a willingness to understand the intricacies of blockchain technology.

Art and Collectibles

Art and collectibles offer another avenue for asymmetric risk investments. The art market can be lucrative, with opportunities to own fractional shares in masterpieces by renowned artists like Jackson Pollock, Van Gogh, or Banksy. While not everyone can afford a multi-million-dollar painting, platforms exist that democratize art ownership. Whether it’s art, collectible cars, or fine wines, these investments provide a fun investment for a passionate investor and the potential for financial gain.

Maintaining a Balanced CFP Portfolio

Despite the allure of high-risk, high-reward investments, the bulk of my portfolio as a CFP remains in more traditional, “vanilla” investments. This conservative approach ensures a stable financial foundation while allowing room for growth. Here are some core principles I follow:

Diversification: Spread investments across different asset classes to minimize risk.
Risk Management: Ensure risky investments are limited to a small portion of the portfolio.
Regular Review: Continuously assess and adjust the portfolio as circumstances and markets change.
Financial Goals Alignment: Keep investments aligned with long-term financial objectives.

Adapting to Change

As an investor, it’s crucial to stay informed and adaptable when it comes to an investment portfolio. Markets evolve, new investment opportunities arise, and personal circumstances change. Regularly reviewing and adjusting the portfolio ensures it remains aligned with current goals and market conditions.

My approach emphasizes flexibility and resilience, allowing for strategic adjustments without losing sight of the core investment principles. This adaptability is crucial, particularly in a rapidly changing financial landscape.

Conclusion

There you have it, a backstage look into a CFPs portfolio. My investment strategy combines traditional asset allocation with innovative, risk-managed opportunities. By aligning my investments with those of my clients, I ensure transparency and shared interests. Whether exploring the potential of cryptocurrencies, the tangible value of real estate, or the fun of art and collectibles, my approach remains grounded in diversification and risk management.

For those interested in exploring these strategies further, I invite you to connect with us!

Understanding the Yield Curve: Trends and Implications

Posted on July 31, 2024July 23, 2024 by Brian Colvert

Understanding the Yield Curve: Trends and Implications

iTunes | Spotify | iHeartRadio | Amazon Music | Castbox

When it comes to finance and economics, the yield curve is a crucial concept that often garners significant attention. Despite its complexity, understanding the yield curve can provide valuable insights into economic trends and investment strategies. This guide aims to demystify the yield curve, explaining what it is, why it matters, and how it can be used to predict economic conditions.

What is the Yield Curve?

The yield curve is a graphical representation of the interest rates on debt for a range of maturities. It shows the relationship between the yield (interest rate) and the time to maturity for debt securities of similar credit quality, typically U.S. Treasury bonds. The curve can take on various shapes, each reflecting different economic conditions.

Types of Yield Curves

Normal: This curve slopes upward, indicating that longer-term bonds have higher yields compared to shorter-term bonds. This shape suggests a healthy, growing economy where investors expect higher returns for taking on the risk of longer-term investments.

Flat: In a flat curve, short-term and long-term yields are very close to each other. This situation often occurs during transitions between normal and inverted yield curves and can indicate uncertainty in the economic outlook.

Inverted: An inverted yield curve slopes downward, meaning that short-term yields are higher than long-term yields. This unusual situation often signals that investors expect economic downturns or recessions, as they prefer to lock in long-term investments at lower yields rather than risk short-term investments.

Why Does the Yield Curve Matter?

The yield curve is a critical indicator for economists, investors, and policymakers for several reasons:

Economic Indicator

The yield curve is often used to predict economic conditions. A normal yield curve typically indicates a strong economy, while an inverted yield curve has historically preceded recessions. For example, since the 1950s, each U.S. recession has been preceded by an inverted yield curve, making it a valuable forecasting tool.

Interest Rate Expectations

The shape of the curve reflects market expectations about future interest rates. If the curve is steeply upward-sloping, it suggests that investors expect interest rates to rise in the future. Conversely, an inverted curve indicates expectations of falling interest rates, often due to anticipated economic slowdowns.

Investment Strategies

Investors use the curve to inform their investment decisions. For instance, a steep yield curve might encourage investments in long-term bonds to capitalize on higher yields. Conversely, an inverted curve may prompt investors to shift to shorter-term securities or other asset classes to avoid potential losses from falling interest rates.

Components of the Yield Curve

To fully understand the yield curve, it is essential to grasp its key components:

1. Interest Rates: The yield curve primarily reflects the interest rates of bonds, which are influenced by various factors, including monetary policy, inflation expectations, and economic growth.

2. Maturity: Maturity refers to the time remaining until the bond’s principal amount is repaid. It typically includes bonds with maturities ranging from one month to 30 years.

3. Credit Quality: The curve often focuses on bonds of similar credit quality, such as U.S. Treasury securities, which are considered risk-free. Comparing bonds of different credit qualities can lead to misleading conclusions.

Factors Influencing the Yield Curve

Several factors influence the shape and movement of the yield curve:

1. Monetary Policy

The Federal Reserve (Fed) plays a significant role in shaping the yield curve through its monetary policy actions. By adjusting the federal funds rate, the Fed influences short-term interest rates. For instance, if the Fed raises rates to combat inflation, short-term yields may increase, steepening the yield curve. Conversely, if the Fed lowers rates to stimulate the economy, short-term yields may decrease, flattening or inverting the curve.

2. Inflation Expectations

Inflation expectations are a critical driver of long-term yields. If investors expect higher inflation in the future, they demand higher yields on long-term bonds to compensate for the erosion of purchasing power. This expectation can steepen the curve. On the other hand, if inflation is expected to remain low, long-term yields may stay subdued, leading to a flatter curve.

3. Economic Growth

The yield curve reflects market sentiment about future economic growth. In a growing economy, investors expect higher returns from long-term investments, resulting in a normal or steep curve. Conversely, during periods of economic uncertainty or anticipated slowdowns, investors may prefer the safety of long-term bonds, flattening or inverting the curve.

4. Supply and Demand Dynamics

The supply and demand for bonds also impact the yield curve. For instance, if the government issues a large number of long-term bonds, the increased supply may push long-term yields higher. Similarly, strong demand for short-term bonds can drive short-term yields lower, influencing the overall shape of the yield curve.

Economic Predictions

The yield curve’s ability to predict economic trends is one of its most valuable features. Let’s explore how different curve shapes correlate with economic conditions:

Normal: A Sign of Economic Health

A normal curve indicates that the economy is growing steadily. In this scenario, short-term interest rates are lower than long-term rates, reflecting investor confidence in future economic expansion. Businesses and consumers are likely to borrow and invest more, fueling further growth.

Flat: A Transition Phase

A flat curve often signals a transition phase in the economy. It can occur when the economy is moving from growth to stagnation or vice versa. This shape suggests uncertainty, with investors unsure about the direction of future interest rates and economic conditions.

Inverted : A Recession Warning

An inverted curve is a strong predictor of economic recessions. When short-term yields exceed long-term yields, it indicates that investors expect future economic difficulties and lower interest rates. This inversion typically occurs when the Fed raises short-term rates to combat inflation, but long-term rates remain low due to expectations of slowing growth.

Historical Examples and Predictions

1. The 2008 Financial Crisis

The yield curve accurately predicted the 2008 financial crisis. In 2006, it was inverted, signaling an impending recession. By late 2007, the economy entered a severe downturn, culminating in the financial crisis of 2008. The inversion provided a clear warning of the economic troubles ahead.

2. The COVID-19 Pandemic

The yield curve also played a role in predicting the economic impact of the COVID-19 pandemic. In 2019, it briefly inverted, raising concerns about a potential recession. While the pandemic was an unforeseen event, the inverted curve reflected underlying economic vulnerabilities that were exacerbated by the crisis.

Practical Applications

Understanding the yield curve can help investors and policymakers make informed decisions. Here are some practical applications:

1. Investment Strategies

Investors can use this graph to develop investment strategies that align with their risk tolerance and economic outlook. For instance, during a steep curve, investors might prefer long-term bonds to capitalize on higher yields. Conversely, an inverted curve might prompt a shift to shorter-term securities or alternative investments.

2. Portfolio Management

Portfolio managers often monitor it to adjust their asset allocations. By analyzing the curve’s shape and movement, they can make informed decisions about bond durations, sector allocations, and risk management strategies. For example, during periods of economic uncertainty, managers might increase exposure to high-quality, shorter-term bonds to reduce risk.

3. Economic Policy

Policymakers, including central banks, use the yield curve to guide monetary policy decisions. By understanding the curve’s implications for economic growth and inflation, they can adjust interest rates, implement quantitative easing, or take other measures to stabilize the economy. It provides valuable insights into market expectations and helps policymakers anticipate potential economic challenges.

Conclusion

The yield curve is a powerful tool that offers valuable insights into economic trends, interest rate expectations, and investment strategies. By understanding the different shapes and the factors influencing it, investors and policymakers can make more informed decisions. Whether predicting economic recessions or guiding investment strategies, it remains an essential indicator in the world of finance and economics.

For personalized financial advice and to learn how the yield curve might impact your financial plan, give us a call. We are here to help you navigate the complexities of the financial markets and achieve your financial goals.

Hamilton’s Legacy: Modern Insights into U.S. Treasuries

Posted on July 24, 2024August 6, 2024 by Brian Colvert

iTunes | Spotify | iHeartRadio | Amazon Music | Castbox

In the realm of “safe” investments, U.S. Treasuries hold a paramount position. These securities, issued by the federal government, are often considered the gold standard for low-risk investments. Their history dates back to the very foundation of the United States, with roots tracing to one of the nation’s Founding Fathers, Alexander Hamilton. Today we are diving into the origins of U.S. Treasuries, their evolution, and their continued relevance in today’s financial markets.

The Birth of U.S. Treasuries: A Historical Perspective

To understand the significance of U.S. Treasuries, one must first appreciate their historical context. Following the American Revolutionary War, the newly formed United States faced a monumental challenge: a staggering national debt. It was Alexander Hamilton, the first Secretary of the Treasury, who devised a solution that would lay the foundation for the nation’s financial system.

In 1790, Hamilton proposed the federal government assume the war debts of the individual states, a controversial plan aimed at stabilizing the fledgling nation’s economy. To finance this debt, the government issued securities known as U.S. Treasuries. This move not only helped establish creditworthiness but also paved the way for a robust financial infrastructure.

Understanding U.S. Treasuries: Types and Terms

U.S. Treasuries come in various forms, each catering to different investment horizons and risk appetites. Broadly, they can be categorized into Treasury bills (T-bills), Treasury notes (T-notes), and Treasury bonds (T-bonds).

Treasury Bills (T-bills): These are short-term securities with maturities ranging from a few days to one year. T-bills are sold at a discount to their face value, and investors receive the face value upon maturity. The difference between the purchase price and the face value represents the interest earned.
Treasury Notes (T-notes): These securities have maturities ranging from two to ten years. For example, T-notes pay interest every six months and are typically used by investors looking for a balance between short-term and long-term investments.
Treasury Bonds (T-bonds): With maturities exceeding ten years, T-bonds are long-term investments. Moreover, they pay interest semi-annually and are favored by investors seeking stable, long-term returns.

The Modern Relevance of U.S. Treasuries

Over two centuries since their inception, U.S. Treasuries remain a cornerstone of the global financial system. Their appeal lies in their perceived safety and reliability. Here are some key reasons why U.S. Treasuries continue to be a favored investment:

Safety and Stability: U.S. Treasuries are backed by the full faith and credit of the U.S. government, making them one of the safest investments available. The likelihood of the U.S. government defaulting on its debt is extremely low, providing investors with peace of mind.
Liquidity: U.S. Treasuries are highly liquid, meaning they can be easily bought and sold in the secondary market. This liquidity ensures that investors can quickly convert their holdings into cash if needed.
Benchmark for Risk-Free Rate: Treasuries are often used as a benchmark for the risk-free rate of return. As such, this benchmark is crucial for evaluating other investments, such as stocks and corporate bonds, and for determining their risk premiums.
Diversification: Including U.S. Treasuries in a diversified investment portfolio can help mitigate risk. Their low correlation with other asset classes, such as equities, makes them an effective tool for balancing overall portfolio risk.

Global Influence and Demand

The global influence of U.S. Treasuries cannot be overstated. Many foreign governments and institutions hold significant amounts of U.S. debt, viewing it as a safe store of value. As of the latest reports, approximately 24% of all U.S. debt is owned by foreign entities. Japan, China, and the United Kingdom are among the largest holders, with investments in the hundreds of billions.

This international demand underscores the confidence that the global financial community places in U.S. Treasuries. Despite geopolitical uncertainties and economic fluctuations, the stability of U.S. Treasuries makes them a reliable choice for foreign investors looking to safeguard their wealth.

Interest Rates and Market Dynamics

Interest rates play a critical role in the appeal of U.S. Treasuries. When the Federal Reserve adjusts interest rates, the yields on Treasuries typically follow suit. In recent years, the U.S. has experienced historically low interest rates, which have influenced the returns on Treasuries.

However, the recent trend of rising interest rates has made Treasuries more attractive. For instance, short-term T-bills have seen yields climb to around 5-5.5%, providing a risk-free rate of return that is appealing to investors seeking income stability.

The Inverted Yield Curve Phenomenon

An interesting phenomenon in the world of Treasuries is the inverted yield curve. This occurs when short-term interest rates are higher than long-term rates, which can signal economic uncertainty or a potential recession. While this topic warrants a separate discussion, it is worth noting that such market dynamics can influence investor behavior and the overall attractiveness of different Treasury maturities.

Practical Applications for Investors

For individual investors, U.S. Treasuries can serve various purposes within a portfolio. Here are some practical applications:

Income Generation: For retirees or those seeking steady income, T-notes and T-bonds offer predictable interest payments, making them ideal for income generation.
Risk Mitigation: Investors with higher-risk assets, such as stocks or speculative investments, can use Treasuries to balance their portfolios and reduce overall risk.
Emergency Fund: The liquidity and safety of T-bills make them a suitable option for an emergency fund, ensuring that funds are easily accessible when needed.
Capital Preservation: For investors looking to preserve capital, especially in uncertain economic times, U.S. Treasuries provide a secure place to park funds without the risk of significant loss.

In Conclusion

The legacy of Alexander Hamilton and the creation of U.S. Treasuries have had a profound and lasting impact on the financial world. From their historical roots in the aftermath of the Revolutionary War to their modern-day role as a pillar of financial stability, Treasuries continue to be an indispensable tool for investors.

As we navigate an ever-changing economic landscape, the safety, liquidity, and reliability of U.S. Treasuries ensure their enduring relevance. Whether you are a seasoned investor or just beginning your financial journey, understanding the role and benefits of Treasuries can help you make informed decisions and build a resilient investment portfolio.

Next Steps

For more insights and personalized advice on how U.S. Treasuries can fit into your investment strategy, feel free to reach out to us at Bonfire Financial. Our team of Certified Financial Planner™ professionals always here to help you navigate the complexities of the financial markets and achieve your investment goals.

Cash Clarity: Navigating Money Markets

Posted on July 17, 2024July 16, 2024 by Brian Colvert

iTunes | Spotify | iHeartRadio | Amazon Music | Castbox

Money Market Accounts and Funds

Making informed decisions about where to park your cash is crucial. Whether you’re saving for a short-term goal or looking for a safe place to store funds between investments, understanding money markets and the differences between money market accounts and money market funds can help you make the best choice for your financial plan. In this post, we’ll delve into the intricacies of these two popular options, exploring their benefits, risks, and ideal scenarios for use.

Understanding Money Markets

Money market accounts (MMAs) are interest-bearing accounts offered by banks and credit unions. They are similar to savings accounts but typically offer higher interest rates in exchange for higher minimum balance requirements. One of the key features of money market accounts is their safety, thanks to Federal Deposit Insurance Corporation (FDIC) insurance.

Key Features of Money Market Accounts

FDIC Insurance: Money market accounts are insured by the FDIC up to $250,000 per depositor, per institution. This means that even if the bank or credit union fails, your deposits are protected.
Higher Interest Rates: MMAs usually offer higher interest rates compared to traditional savings accounts. Rates can vary depending on the institution and the amount of your deposit.
Liquidity: Money market accounts provide easy access to your funds. You can typically write checks, make transfers, or use a debit card to withdraw money, making it a flexible option for managing cash.
Minimum Balance Requirements: These accounts often require a higher minimum balance than regular savings accounts. Failing to maintain the minimum balance can result in fees or lower interest rates.

Exploring Money Market Funds

Money market funds (MMFs) are a type of mutual fund that invests in short-term, low-risk securities such as U.S. Treasury bills, certificates of deposit (CDs), and commercial paper. Unlike money market accounts, MMFs are not FDIC insured. Instead, they are regulated by the Securities and Exchange Commission (SEC).

Key Features of Money Market Funds

Not FDIC Insured: The primary distinction between MMFs and MMAs is that money market funds do not offer FDIC insurance. While they are generally considered safe, there is no guarantee of principal preservation.
Investment in Short-Term Securities: MMFs invest in high-quality, short-term securities, which tend to be relatively low-risk. This makes them a suitable option for conservative investors seeking liquidity and stability.
Potential for Higher Yields: Money market funds often offer competitive yields that can exceed those of traditional savings accounts and MMAs, depending on market conditions.
Liquidity and Accessibility: MMFs are highly liquid, allowing investors to easily buy and sell shares. They are often used as a place to park cash temporarily within brokerage accounts.

Comparing Money Market Accounts and Funds

Safety and Security

When it comes to safety, money market accounts have the upper hand due to FDIC insurance. This provides peace of mind, knowing that your deposits are protected up to $250,000 per institution. On the other hand, money market funds, while typically safe, do not offer this same level of security. The value of your investment in a money market fund can fluctuate, and there is a risk, albeit small, of losing principal.

Interest Rates and Yields

Money market accounts generally offer higher interest rates than traditional savings accounts, but they may not always match the potential yields of money market funds. MMFs can provide higher returns, especially in a rising interest rate environment, as they invest in short-term securities that benefit from higher rates. However, these yields are not guaranteed and can fluctuate based on market conditions.

Accessibility and Liquidity

Both money market accounts and funds offer high liquidity, but they differ in how you can access your funds. MMAs provide check-writing privileges, debit card access, and easy transfers, making them suitable for everyday cash management. In contrast, MMFs are more commonly used within brokerage accounts and might require selling shares to access cash, which can take a day or two to settle.

Minimum Balance Requirements

Money market accounts often have higher minimum balance requirements than regular savings accounts. If your balance falls below the required minimum, you may incur fees or receive a lower interest rate. Money market funds typically have lower initial investment requirements, making them more accessible for investors with smaller amounts of cash to invest.

Ideal Scenarios for Money Market Accounts

Emergency Fund: Money market accounts are an excellent option for holding your emergency fund. The combination of FDIC insurance, higher interest rates, and easy access to funds makes them a safe and practical choice.
Short-Term Savings Goals: If you’re saving for a short-term goal, such as a vacation or a down payment on a car, a money market account can help you earn more interest while keeping your funds accessible.
Safety and Security: For conservative investors who prioritize the safety of their principal, MMAs provide the security of FDIC insurance.

Ideal Scenarios for Money Market Funds

Temporary Cash Parking: Money market funds are ideal for parking cash temporarily between investments. They offer higher potential yields and easy liquidity within brokerage accounts.
Investment Portfolio Component: MMFs can be used as a conservative component of an investment portfolio, providing liquidity and stability while earning competitive yields.
Low Minimum Investment: For investors with smaller amounts of cash to invest, money market funds offer a lower entry barrier compared to some MMAs.

Making the Right Choice- Are Money Markets Right for You?

When deciding between money markets, consider your financial goals, risk tolerance, and need for liquidity. If safety and security are your top priorities, and you prefer the peace of mind that comes with FDIC insurance, a money market account may be the better choice. However, if you’re looking for higher potential yields and are comfortable with the slight risk associated with money market funds, an MMF could be more suitable.

Conclusion

Understanding the differences between money market accounts and money market funds is essential for making informed decisions about where to park your cash. Both options offer unique benefits and can play important roles in your overall financial strategy. By considering your individual needs and preferences, you can choose the right option to help you achieve your financial goals.

For personalized advice tailored to your specific situation, don’t hesitate to reach out to us.

Certificates of Deposit: An Old-School Investment Making a Modern Comeback

Posted on July 10, 2024July 10, 2024 by Brian Colvert

iTunes | Spotify | iHeartRadio | Amazon Music | Castbox

Certificates of Deposit

In the ever-evolving landscape of investment opportunities, some strategies remain steadfast, proving their worth across decades. One such strategy is the use of Certificates of Deposit (CDs). Often overlooked in favor of more glamorous investment options, CDs are now regaining attention due to their stability and attractive returns in the current high-interest-rate environment. Today we are delving into the mechanics of CDs, their benefits, and why they should be considered a valuable component of a well-rounded investment portfolio.

What is a Certificate of Deposit (CD)?

A Certificate of Deposit (CD) is a financial product offered by banks and credit unions that provides a fixed interest rate for a specified term. When you invest in a CD, you are essentially lending your money to the bank for a predetermined period, which can range from a few months to several years. In return, the bank pays you interest at a rate that is typically higher than that of regular savings accounts. At the end of the term, known as the maturity date, you receive your initial investment back along with the accrued interest.

The Mechanics of CDs

CDs operate on a simple premise: you deposit a sum of money for a fixed term, and in exchange, the bank agrees to pay you a fixed interest rate. The key components of a CD include:

Principal: The initial amount of money you invest.
Term: The length of time your money is held by the bank, which can range from a few months to several years.
Interest Rate: The fixed rate at which your money grows during the term.
Maturity Date: The date on which the term ends and you can withdraw your principal plus interest.

For example, if you invest $10,000 in a one-year CD with an interest rate of 5%, you will earn $500 in interest over the term. At the end of the year, you will receive $10,500.

Benefits of Investing in Certificates of Deposit

1. Stability and Security

One of the primary advantages of Certificates of Deposit is their stability. Unlike stocks or mutual funds, which can fluctuate in value, CDs offer a guaranteed return. This makes them an attractive option for risk-averse investors or those seeking a safe place to park their money during uncertain times. Additionally, CDs are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor, per institution. This means that even if the bank fails, your investment is protected.

2. Predictable Returns

With a fixed interest rate, CDs provide predictable returns. You know exactly how much interest you will earn over the term, allowing you to plan your finances with confidence. This predictability can be especially valuable for retirees or others who rely on their investments for steady income.

3. Higher Interest Rates

CDs typically offer higher interest rates than regular savings accounts. In the current high-interest-rate environment, this difference can be significant. For example, while a savings account might offer an interest rate of 0.5%, a one-year CD might offer 5%. This higher rate can make a substantial difference in your overall returns, especially for larger investments.

4. Protection Against Market Volatility

In times of market volatility, Certificates of Deposit can serve as a safe haven for your money. Unlike stocks or bonds, which can lose value in a downturn, the principal and interest of a CD are guaranteed as long as you hold the CD to maturity. This can provide peace of mind during turbulent economic periods.

Why CDs Are Regaining Popularity

In recent years, CDs have been overshadowed by other investment options due to historically low interest rates. However, as interest rates have risen, CDs have become more attractive. Here are a few reasons why CDs are regaining popularity:

1. Rising Interest Rates

As central banks have raised interest rates to combat inflation, the returns on CDs have become more appealing. Investors can now find CDs offering 5% or more, making them competitive with other fixed-income investments.

2. Low-Risk Environment

With economic uncertainty and market volatility, many investors are seeking low-risk options. CDs provide a secure place to invest money without the risk of loss, making them an attractive choice for conservative investors.

3. Diversification

CDs can be an excellent tool for diversifying an investment portfolio. By including a mix of stocks, bonds, and CDs, investors can balance risk and return, ensuring that a portion of their portfolio remains safe and stable.

4. Liquidity Planning

For those who may need access to their funds at specific times, CDs offer predictable liquidity. By laddering CDs—purchasing multiple CDs with staggered maturity dates—investors can ensure that they have access to cash at regular intervals while still earning higher interest rates.

Considerations When Investing in CDs

While CDs offer many benefits, there are some considerations to keep in mind:

1. Limited Liquidity

When you invest in a CD, your money is tied up for the duration of the term. If you need to access your funds before the maturity date, you may incur early withdrawal penalties, which can eat into your returns. It’s essential to ensure that you won’t need the money before the CD matures.

2. Inflation Risk

While CDs provide a fixed return, inflation can erode the purchasing power of your money over time. If inflation rates are higher than the interest rate on your CD, your real return (adjusted for inflation) may be negative. It’s crucial to consider inflation when evaluating the potential returns on a CD.

3. Opportunity Cost

By locking your money into a CD, you may miss out on other investment opportunities that could offer higher returns. It’s essential to balance the security of a CD with the potential for higher returns from other investments.

How to Get Started with CDs

If you’re considering adding CDs to your investment strategy, here are a few steps to get started:

1. Research Interest Rates

Shop around to find the best interest rates on CDs. Different banks and credit unions offer varying rates, so it pays to compare options.

2. Determine Your Investment Amount

Decide how much money you want to invest in CDs. Consider your overall financial goals and how much liquidity you need.

3. Choose Your Term

Select a term that aligns with your financial needs. Shorter terms offer more liquidity but may have lower interest rates, while longer terms lock in higher rates but require you to commit your funds for a more extended period.

4. Ladder Your CDs

Consider laddering your CDs to provide regular access to funds while maximizing your returns. This involves purchasing multiple CDs with different maturity dates.

5. Monitor and Reinvest

Keep an eye on your CDs and their maturity dates. When a CD matures, evaluate the current interest rates and decide whether to reinvest in a new CD or use the funds for other purposes.

Conclusion

In today’s high-interest-rate environment, Certificates of Deposit are once again becoming a valuable tool for investors seeking stability and attractive returns. With their guaranteed interest rates, FDIC insurance, and protection against market volatility, CDs offer a secure investment option for those looking to balance their portfolios. By understanding the mechanics of CDs and considering their benefits and limitations, you can make informed decisions to enhance your financial strategy. Whether you’re a conservative investor or simply looking for a safe place to park your money, CDs deserve a closer look in the modern investment landscape.

Next Steps:

Are you wondering if Certificates of Deposit are right for your specific situation? Feel free to set up a call with us to get personalized advice.

Alternative Investments: Beyond Stocks and Bonds

Posted on May 15, 2024May 21, 2024 by Brian Colvert

Exploring Alternative Investments

Investing offers a wide range of options to cater to different financial goals and risk tolerances. While traditional investments like stocks, bonds, and cash are well-known, alternative investments often remain less understood. On the most recent episode of The Field Guide Podcast, Brian Colvert, CFP® explores alternative investments, their benefits, challenges, and the essential steps to navigate them successfully.

Listen now!

iTunes | Spotify | iHeartRadio | Amazon Music

What Are Alternative Investments?

Alternative investments include asset classes that differ from traditional investments such as stocks, bonds, and cash. These can be real estate, commodities, private equity, hedge funds, collectibles, cryptocurrency, and venture capital. Unlike traditional investments, alternatives usually require a longer-term commitment and are less liquid, meaning they cannot be easily converted to cash.

Real Estate: A Tangible Alternative

Real estate is one of the most straightforward and accessible forms of alternative investments. When you invest in real estate, you purchase physical property, whether residential, commercial, or industrial. Selling real estate is not as quick or easy as selling stocks or bonds. It involves finding a buyer, negotiating terms, and completing legal and financial paperwork.

Investing in real estate can provide a steady income stream through rental income and potential appreciation in property value. However, it also comes with challenges such as property management, maintenance costs, and vacancies. The illiquidity of real estate makes it a long-term investment, suitable for those who do not need immediate access to their funds.

Regulatory Considerations and Accessibility

Alternative investments typically have fewer regulations compared to traditional investments, making them riskier but also potentially more rewarding. Due to the higher risk and complexity, these investments are generally available only to accredited investors.

An accredited investor is someone with a net worth of over one million dollars (excluding their primary residence) or an annual income of over $200,000 for the past two years, with a reasonable expectation of the same income level in the current year. This requirement is based on the assumption that wealthier individuals can better understand and manage the risks of less regulated investments.

Diversification and Non-Correlation

One of the main reasons investors are drawn to alternative investments is the diversification they offer. Traditional investments like stocks and bonds are often correlated, meaning their values can move together with market conditions. Alternatives, however, tend to be non-correlated assets, meaning their performance does not necessarily follow the same patterns as the stock market.

For instance, the value of real estate or commodities may not drop when the stock market declines, providing a hedge against market volatility. This non-correlation can help smooth out the overall performance of an investment portfolio, reducing risk and potentially enhancing returns.

Potential for High Returns

Alternative investments can offer attractive returns, sometimes outperforming traditional investments. For example, venture capital investments in early-stage companies can yield extraordinary returns if the company succeeds. Early investors in companies like Facebook saw their investments grow significantly when the company went public.

However, it is important to remember that the potential for high returns comes with significant risk. Many alternative investments can be highly speculative, and there is a possibility of losing the entire investment. Therefore, thorough research and understanding of the investment are crucial.

Due Diligence: The Key to Success

Due diligence is essential when considering alternative investments. Investors must thoroughly research and understand the investment, its structure, market conditions, and associated risks. Unlike public companies, which are required to disclose financial information regularly, alternative investments often lack such transparency. This means investors must rely on their own research and the credibility of the investment managers or promoters.

Before committing to an alternative investment, it is crucial to understand the following:

The Nature of the Investment: What exactly are you investing in? Is it real estate, commodities, a private company, or something else?
The Investment Strategy: How does the investment generate returns? What are the underlying assets or business models?
The Risk Factors: What are the potential risks, and how can they impact your investment? Are there any mitigating factors?
The Liquidity: How easily can you exit the investment? What is the timeframe for potential returns?
The Management Team: Who is managing the investment? What is their track record and reputation in the industry?

By addressing these questions, investors can make more informed decisions and avoid potential pitfalls.

Conclusion: Weighing the Pros and Cons

Alternative investments offer a unique opportunity to diversify a portfolio and potentially achieve higher returns. However, they also come with higher risks, less liquidity, and require significant due diligence. They are not suitable for every investor, but for those who meet the criteria and are willing to invest the time and effort to understand them, alternatives can be a valuable addition to their investment strategy.

Next Steps

Are you looking to diversify your portfolio with alternative investments? At Bonfire Financial, we specialize in navigating the complexities of financial planning to help you achieve all your financial goals. Whether you’re seeking comprehensive financial advice or exploring alternative investment strategies, our team is here to support you every step of the way.

Let’s discuss your unique financial situation and create a tailored plan for your future. Schedule a call with us today! Book here now!

Decoding Bitcoin with Gerry Signorelli

Posted on March 20, 2024April 25, 2024 by Brian Colvert

iTunes | Spotify | iHeartRadio | Amazon Music | Castbox

Decoding Bitcoin with Gerry Signorelli

We often get asked what is Bitcoin all about by our clients, and for good reason. The landscape of cryptocurrency is riddled with terms like “blockchain,” “mining,” “nodes,” and “wallets,” which can be confusing and create a steep learning curve. The underlying technology, though revolutionary, is not always straightforward, leading to questions about how it operates, its value proposition, and its role in the financial ecosystem.

Gerry Signorelli has immersed himself into the world of Bitcoin, having built and operated a significant Bitcoin mine and integrated the digital currency into his daily life for various purposes, from savings to international transactions.

We were grateful to have Gerry on the most recent episode of The Field Guide Podcast to break down what is Bitcoin. He shares his extensive experience with the cryptocurrency, provides insights on its advantages over other cryptocurrencies, and discusses the essential role of nodes in maintaining the network’s decentralization. Gerry also addresses common concerns about Bitcoin’s security and its future potential, offering a comprehensive view of how Bitcoin operates.

A Journey from Stable Coins to Mining

Gerry’s foray into the financial world began with a quest for a saving mechanism, leading him from the realm of stablecoins to the discovery of Bitcoin. Despite experimenting with other cryptocurrencies, Gerry found his home with the currency, drawn by its fundamental differences, use cases, and the depth of its structure compared to the fleeting allure of ‘shitcoins.’

Why Bitcoin Stands Out

Bitcoin’s appeal lies in its foundational principles – scarcity, decentralization, and the prevention of censorship. Unlike other cryptocurrencies, Bitcoin’s limited supply, coupled with its robust and decentralized verification process, establishes it as a more stable and reliable digital asset. Gerry articulates the journey of money throughout human history, positioning Bitcoin as the latest evolution in this continuum, offering a digital solution to age-old problems of currency debasement and lack of control over personal wealth.

The Intricacies of Mining

Mining is not just a business for Gerry; it’s a crucial component of Bitcoin’s infrastructure. He delves into the complexities of Bitcoin mining, explaining how it serves as a mechanism for distribution and validation within the network. The process, while energy and capital-intensive, is vital for the creation of new Bitcoins and securing the network against potential attacks.

Understanding Bitcoin Transactions

Transactions in Bitcoin are more than mere financial exchanges; they signify the transfer of control over the digital asset. Gerry discusses how these transactions occur on the blockchain, ensuring transparency and security without the need for intermediary validation.

The Role of Nodes in Decentralization

Brian and Gerry dive into the importance of nodes in the ecosystem. These nodes, which any individual can run, are the backbone of Bitcoin’s decentralization, ensuring that the network remains secure and operates without centralized control. They allow for a democratic verification process that aligns with the ethos of Bitcoin – providing a system where everyone has a say in its operation.

Bitcoin’s Safety and Accessibility

Addressing concerns about Bitcoin’s safety, Gerry outlines the spectrum of ways one can own Bitcoin, from ETFs to cold wallets, each offering different levels of security and convenience. The decentralized nature of Bitcoin, coupled with the ability for individuals to run nodes, ensures that the system remains robust against potential threats.

The Future Outlook

Gerry envisions a bright future for Bitcoin, predicting a significant increase in its value as more people, institutions, and governments recognize its potential. He foresees a world where Bitcoin facilitates freedom of transaction, protects against inflation, and offers a new standard of financial autonomy.

In summary, Gerry Signorelli’s insights into Bitcoin present a compelling narrative of its potential to revolutionize our financial landscape. From its role in savings and transactions to its fundamental principles of scarcity and decentralization, it stands as a beacon of financial innovation in the digital age. As we navigate the complexities of our global economy, Bitcoin offers a promising alternative, challenging traditional financial systems and offering a new paradigm for money in our increasingly digital world.

We hope you enjoyed this episode! Have more questions about Bitcoin or digital currencies? Feel free to reach out to us with any questions! Be sure to like, review, and subscribe wherever you listen!

Retirement vs. Inflation

Posted on January 25, 2022April 30, 2024 by Brian Colvert

How to protect your retirement from inflation

It’s the ultimate battle of good vs evil. Retirement vs. Inflation. Inflation is the arch-enemy of your retirement savings and if you’re near retirement – or even thinking about it – now is a good time to pay particularly close attention to your money. According to the Bureau of Labor Statistics Press Release on January 12, 2022, it is clear that prices are rising and inflation is here. Overall, prices have climbed 7% year over year which is the greatest increase in over 40 years. Truly there is no other topic that seems to be getting more attention right now than inflation.

On top of that, the pandemic has most certainly shaken the sense of security that Americans felt when it comes to their finances and a lot of people feel more vulnerable than they did two or three years ago. Even if you have been diligent about saving for retirement inflation can eat into your nest egg quickly.

Why Inflation Happens

Inflation is, oddly, both incredibly simple to understand and absurdly complicated. It is worth taking a pause and understanding why inflation is happening in the first place.

In the simplest terms, inflation happens when prices broadly go up. In other words, the average price of everything is increasing (housing, food, gas, cars, etc.). Generally, it is not a bad thing, as wages also rise. Ideal inflation according to the U.S. Federal Reserve targets an annual inflation rate of 2%. Most policymakers believe it leads to a healthy economy. However, we are currently sitting at 7%. A bit off the mark is an understatement. Here is a visual to give you an idea of where we are in relation to just 10 years ago.

Source: US Inflation Calculator

Why is inflation so high right now?

Again, simply put…blame the pandemic. In response to the pandemic, the Fed started adding an unprecedented amount of money into the economy via emergency stimulus funds to quickly get the country out of the recession, plus they slashed interest rates. People started spending more and demand was up. Good, right?

Yet, months and months of this fueled inflation because supply wasn’t able to recover as fast. Take for example the automobile industry. Many auto-manufacturers shut down during the pandemic and were slow to get things moving again, some still are, mostly due to supply chain issues. It is a classic formula of high demand plus limited supply equals higher prices.

Further, inflation is hard to predict because it depends on what people expect of inflation in the future. For example, if businesses expect higher prices and wages next year, they’ll raise prices now. If workers expect higher prices and wages next year, they’ll ask for higher wages now. So Fed Chairman Jerome Powell has long been calling the recent inflation “transitory”, meaning in other words, only a temporary correction of the pandemic.

However, both Powell and Treasury Sectary Janet Yellen admitted last month (December 2021) that it is time to retire the term. So, prices will continue to go up and the government is finally admitting it. Now what?

How to protect your retirement from inflation

Maximize Social Security Benefits

With rising costs it may be hard to offset inflation with your traditional retirement benefits, such as social security. However, you can work to maximize your social security benefits by delaying them. Delayed Retirement Credits help you to increase your benefit by a certain percentage each month that you delay starting your benefits. If you can wait to start getting your social security checks until age 70 your monthly payments will be higher and will adjust to the annual cost of living when you do begin to take them.

It is important for everyone to maximize their social security benefits. This is a small step that could potentially hedge off some inflation and help your retirement savings go a little further.

Get aggressive with any Consumer Debt

The Feds have signaled it will aim to make some aggressive policy moves in response to the current situation. It is likely we may see as many as three rate hikes this year, two more next year, and another two in 2024. If you have any outstanding credit card debt now is the time to pay it down before interest rates go up. Any variable rate debt will get very pricey. If you cannot pay it off all at once, but you have good credit try and take advantage of some zero to low-interest balance transfers. Doing this will help insulate you from the coming higher interest rates.

Take advantage of lower mortgage interest rates now

While mortgage rates move based on long-term bond yields, a spike in consumer prices will certainly make a rise in mortgage rates more likely. Right now mortgage rates are still low. If you have considered refinancing to a lower rate (or buying a new home) this is your sign to look into it further depending on the term left on your mortgage. If rates do go up, you may wish you would have done it sooner. Also, as mentioned above, if you have an adjustable home equity line it could be at risk for an increase. Call a mortgage broker today to see what options you have.

Look at your portfolio and make adjustments as needed

As financial advisors, this is something we are watching closely. Here are some of the general recommendations we have, however, everyone’s financial situation is different so we recommend contacting us (or talking to CERTIFIED FINANCIAL PLANNER™) before making any changes. Also, keep in mind if rates don’t go up like crazy these recommendations may not be the best and may underperform your hopes.

First, at the very least, review your investment allocations. If you have bonds in your portfolio, we recommend short-term bond funds until interest rates go up. Ultimately these are going to be less risky with rising interest rates. While they may not have as much earning potential they can weather the inflation storm better.

Also, with rising prices, finding stocks with dividends can add value to a portfolio. Think consumer-based large-cap stocks. Likewise, financial stocks also commonly benefit from higher prices and inflation. These types of investments may help keep pace during an inflationary environment.

Finally, consider diversifying with Digital Assets, such as Bitcoin. Essentially, owning Bitcoin means you are betting against the world’s fiat currencies. Most major digital assets have a fixed number of coins or have capped the potential circulation growth. Interestingly, the infamous billionaire investor, Paul Tudor Jones, has even claimed that crypto protects better against inflation than gold. While there still may be limited evidence that crypto can hedge inflation and will cure all as it itself is often susceptible to market jitters, it certainly is worth looking into if it fits your risk tolerance and time horizons.

Again, we emphasize not making any dramatic changes to your investments until you’ve consulted with a professional. Our experience has taught us that unforeseen events can happen and do happen, so it is best to stay diversified, rebalance as needed, and always come back to your long-term goals. We are happy to talk with you about your specific situation anytime. Schedule a call here.

In conclusion

Inflation can impact your retirement in a variety of ways. If you’re not on the right path to protect yourself against inflation it will be increasingly difficult for you to live comfortably when you can are no longer working. Adjusting your investment strategy, spending habits, and expectations to account for inflation is extremely important for retirees and those close to retirement.

3 Questions to ask before making any financial decision

Posted on February 21, 2019April 26, 2024 by Brian Colvert

Whether it is hiring a financial advisor, picking a mutual fund, or refinancing your mortgage it is a good idea to ask a lot of questions when it comes to your money. However, if you only ask a few, here are our top 3 questions to ask before making any financial decision.

What is the investment philosophy?

Make sure to ask yourself if the investment makes sense to you. It may be great for 99% of the population but is it a fit for you and your current situation. Does it match up with your risk tolerance and timeline? Really take the time to contemplate this. Further, do you understand it? Or is it too complex? Understanding this will help move you forward in a meaningful way.

Do I trust the person giving the advice or offering the investment?

Simply put, what is your gut telling you about who is behind this. What is the person’s credibility and credentials? Was it your cousin Eddie spouting off a stock tip at the family reunion? Or a longtime friend and financial advisor who has been in the industry for years? It may seem like a no-brainer to ask this question, but it is sometimes easy to get caught up in the hype of the product and the potential returns.

A quick way to tell if an advisor truly has your best interest in mind is if they are CFP® (Certified Financial Planner)- learn more on that here, but in short, it means they are a true fiduciary and must have your best interest in mind regardless of commissions. Trust is so important, don’t take it lightly.

What is the downside risk, and can I afford it?

What can you stand to lose? Sure, look at what the potential of the investment is, but don’t ignore the risk. Make sure the amount you invest matches your risk tolerance. The old saying stands true here- “Don’t put all your eggs into one basket.” Before you make an investment decision know the risks.

Short and simple, those are the top 3 questions to ask before making any financial decision!

Are you considering an investment and aren’t sure if it is right for you? Asked these questions and are still unsure? We are here to help…just set up a call.