Our Blog

I’m long past athletic peak, but the playoff atmosphere, in which decisions and execution become palpably more consequential, still excites a resilient competitive ambition. I wonder if Jerome Powell, recently exposed to “World Series pressure” by the 40 year high inflation he personally created, feels confident or afraid right now. What is the financial backdrop, what are Powell’s policy options, and how will ‘the Fed’s’ decisions affect your investments?

The 10 Year Treasury yield, the most accurate economic forecaster in the world today and the most influential financial component, has recently sounded the alarm on both escalating inflation and coming economic contraction. Ordinarily, in this phase of the economic cycle, the Fed would raise interest rates until the economy ‘breaks’, and then quickly revert to lowering rates and printing money to restart the cycle. I’m not saying this is what ‘the Fed’ should do; I’m saying this is their program. Facing the two unique dynamics in this particular cycle of 1) 40 year high inflation, and 2) the greatest debt any government has ever amassed, what are Powell’s options, and what are the implications?  

Scenario 1: The 10 Year yield, now bumping up against a 30+ year downtrend line, rolls over and begins to decline with the economy and inflation rate. The yield curve inverts further, and ‘the Fed’ raises rates into recession and then reverses course. The stock market enters a bear market, bottoms, and then begins to climb the “wall of worry”, eventually beginning a new bull market. ‘The Fed’ and its Reserve Note live to inflate another financial bubble. 

Scenario 2: The 10 Year yield rises through the downtrend line due to high inflation and a lack of demand for U.S. government debt. The Fed aggressively raises rates to fight inflation, causing a deep economic contraction. Higher interest expense on outstanding debt, coupled with lower tax receipts from recession, mean the government will then have to a) stop paying interest on Treasury bonds, b) slash entitlement spending, or c) borrow the difference.¹ ‘The Fed’ comes to the rescue with additional quantitative easing to purchase the government debt no one else wants. America has a perpetual inflation problem and the demise of ‘the Fed’ and its Reserve Note hastens.

Our central bank’s highest priority is to monetize the U.S. government’s debt; if we can remember this, the financial world will make far more sense to us. It’s no coincidence both scenarios result in additional money printing, it’s just a matter of how fast we get there, and how much pain American workers and investors must endure in the process. Keep in mind the 10 year Treasury yield calls the shots, not the Fed; ultimately, it will declare the “Federal Reserve Note” the failed currency that it is. This means we generally need to be investing for inflation, yet always protected from the occasional deflationary collapse.

Think about it, Shaun.   

“He who earns wages does so to put them into a bag with holes. “Thus says the Lord of hosts: Consider your ways.” ~Haggai 1:6-7

1 Inside Tradesmith, by Justin Brill, “What the Fed and Inflation Could Mean for Your Investments, April 5, 2022

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Today numerous issues complicate and endanger the retirement plans of millions of working Americans. Many find it increasingly difficult to save and invest due to the high cost of living, while others throw their investable dollars out the window on high rents every month due to a lack of affordable homes. The present inflation rate reduces the purchasing power of bank savings by 53% every nine years! The stock market appears to be approaching an inflection point, which may subject recent and near-term retirees to the devastating “early retirement bear market”. Taxes are going up, and traditional retirement accounts are a focus of legislators. Social Security is likely to be “means-tested”, meaning delayed and reduced for many. Medicare benefits are being cut, increasing the cost of Medigap outlays, and longer life expectancies compound the problem. I could go on, but suffice to say future American retirees have it far more difficult than previous generations.

Challenges create opportunity for solutions, and only a carefully constructed, personal financial roadmap will identify the specific solutions, or principles, sufficiently powerful when consistently applied, to overcome such formidable obstacles. Most people put a retirement plan together months before retiring, astutely utilizing about 1% of the time they had to plan the portion of their financial life that will lack earned income. I suggest a consideration of the following facts, followed by a resolute commitment to build and follow your roadmap this year:

• Net positive monthly cash flow, or a take-home income exceeding gross spending, is THE indispensable condition for achieving your retirement goal. Many workers invest for retirement while accumulating more debt than assets, thinking progress is being made.

• A detailed household budget enables us to distinguish between fixed and voluntary spending, a figure wealth producers are eager to exploit, but which wealth consumers never address.

• An accurate assessment of your present financial position, the resources required to fund your well-defined retirement life, the difference between the two, the means and principles to be applied to close the gap, and a vigilant application of your plan, is the only solution to the dilemma. We call it, “Assess, Address, Apply”.

• General figures alone fall short of effective planning: “Aim small, miss small”! Important detailed considerations include: the percentage of income to designate towards retirement, the most beneficial tax-advantaged plans to employ, the age at which Social Security benefits should begin, and the income solutions to harness (which most benefit those who use time to their advantage).

Financial stewardship, and its rewards, is almost never about how much money you make, and almost always about what you do with the money you make. Think about it, Shaun.

“Live today like no one else, so that later you can live like no one else.” ~David Ramsay

“A good man leaves an inheritance to his children’s children.” ~Proverbs 13:22

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

How can it take 20 minutes for my tea water to boil when I stand and wait, and just 90 seconds when I walk away, ‘all other things being equal’? Perception drives many important facets of our economy; in fact, the indispensable component is a largely subjective phenomenon. How are changing financial conditions certain to eventually swing the pendulum of consumer sentiment, and, therefore, consumer spending, and, therefore, the state of the corporate credit market, and, therefore, the direction of the economy and financial markets? What should you do about it?

The U.S. government judges the growth rate of the domestic economy primarily by Gross Domestic Product, two-thirds of which is consumer spending.¹ One wouldn’t be far off saying, “Consumer spending IS the U.S. economy”. This is the real reason President George W. Bush, following the Trade Center bombing, pleaded with Americans to do their part by going shopping. What drives consumer spending, and how are those conditions changing?

Present drivers of consumer spending are:

• Following the massive handout by the Treasury Department during, and following the Covid 19 lockdown, consumers paid down debt, banked savings, and are today comparatively cash rich.

• The highest inflation in 40 years, coupled with supply constraints, is causing consumers to buy future necessities now, borrowing consumption from the future.

• There is a shortage of willing workers and an abundance of jobs.

• The “Illusion of Wealth” effect has consumers feeling wealthier than they are, and this is invigorating voluntary spending.

• Credit is artificially cheap, and loans are artificially easy to obtain.

Changing conditions which drive consumer spending include:

• The handouts have decreased, and rising costs from high inflation has begun to nibble at consumer savings.

• Loan costs are rising. By my count, the rate on a 30 year fixed mortgage has increased from 2.85% in late 2021, to 4.58% today, and increase of 61%!²

• Only so much consumption can be borrowed from the future before a spending lag ensues.

• Supply constraints will alleviate as new distribution channels are forged, and as domestic production increases for many products.

• The Fed just promised to increase a key interest rate at every meeting this year, a driver of most other rates.

The conditions are changing which drive consumer spending, the rudder on America’s economic ship. Take cover now for what follows by:

• Tightening your financial household via strict budgeting.

• Building cash savings, and carrying a higher cash position in your investment accounts.

• Diversifying income sources.

• Focusing on investments with a present income stream, and that possess pricing power.

• Becoming handy around the house. You Tube helps!

• Be part of a closely knit group of like-minded people who practically help each other. In short, secure your supply lines!

Think about it, be creative, and enjoy the process. Shaun.

“Everyone also to whom God has given wealth and possessions and power to enjoy them, and to accept his lot and rejoice in his toil-this is the gift of God.” ~Ecclesiastes 5:19

1 FRED, Economic Research, March 18, 2022

https://fred.stlouisfed.org/series/DPCERE1Q156NBEA

2 Nerdwallet, “Current Mortgage and Refi Rates”, March 18, 2022

https://www.nerdwallet.com/mortgages/mortgage-rates

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

One of the most critical survival items in the most accessible pocket of the winter mountaineer’s pack lies a pair of goggles. Experienced climbers understand once the goggles are put on, it’s a matter of time before they freeze, the point at which climbing becomes surviving blind. For this reason, goggles are never used prematurely, and are a harbinger of life-threatening conditions; they are the final, high alert warning, and the opening bell for a ticking clock. What single economic development most dependably warns attentive investors of extreme and imminent market danger? What might a prudent response look like?

A tightening credit market occurs when lending institutions perceive an economic slowdown, and respond by tightening loan requirements and demanding more interest from borrowers. Fewer, more expensive loans send heavily-indebted corporations into financial hardship, which causes layoffs, which reduces consumer spending, which craters the stock market and introduces economic contraction; for this reason, a tightening credit market is ‘the’ bellwether of a bear market recession. One strong indication to the mountaineer the goggles must ‘come out’ is getting pelted in the eyeball with flying ice particles. What two early indicators warn tighter credit looms, and what are these indicators saying today?

• Copper is used in the production of a wide array of products throughout the global economy, which is why its price and price trend accurately convey macro-economic conditions and sentiment, and therefore, the state and direction of the credit market. Copper is presently in a raging bull market with no indication of slowing down.

• An earlier indicator than copper of economic and credit market trouble is an inverted yield curve, which has preceded 6 of the last 7 recessions over 60 years with a single false positive.¹  The yield curve is flattening noticeably, but is inverted only between the 20 & 30 Year Treasury Bonds.   

These two credit market indicators suggest the economy is on solid ground, confirming other economic reports like unemployment, GDP growth, and corporate earnings. Keep in mind a war-driven supply shock in an existing 40 year high inflationary environment can swing the economic pendulum far faster than is ordinarily the case, so stay nimble and alert.

Prudent posturing might include:

• Buying capital-efficient, dividend aristocrats when attractively priced

• Owning a chaos hedge or two

• Carrying a stronger cash position than usual

• Concentrating on assets and businesses with a strong, established income stream, and the ability to pass higher costs on to the consumer

• Reducing ownership of assets and businesses with no present income stream, especially those without near-term profitability.

Think about it, Shaun.   

“Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” ~Ecclesiastes 11:2

“It’s far better to buy a great company at a fair price than a fair company at a great price.” ~Warren Buffet

 1 Union Bank, Market and Economic Outlook, “Understanding the Inverted Yield Curve: The Basics”, September 24, 2019

https://www.unionbank.com/private-banking/perspectives/market-economic-outlook/inverted-yield-curve-explained

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

On a winter mountaineering expedition, the time to prepare for a summit attempt is when you’re safe in your tent below. Venturing above in foul weather in the manner you would on a calm sunny day will immediately expose you to numerous life-threatening perils. Investors neglecting preparation for the approaching stagflationary storm may soon face similar hazards. What is stagflation, and what causes it? What are its associative conditions, and by what means may it be successfully traversed?

Stagflation is a portmanteau combining the words stagnation and inflation. It depicts an economy with little or no growth, high unemployment, and high inflation.¹ 

The causes of stagflation are more complex. The natural business cycle involves periods of expansion, peak, contraction, and trough. Economic contractions are critically important because a) they displace marginal workers, giving them sufficient incentive to sharpen skills and more valuably re-enter the work force, b) they accompany stock bear markets, which weed-out speculation, and c) they accompany tight credit markets, which justly punish over-indebtedness. These cleansing processes prepare both the economic and market systems for healthy and sustainable expansion. Climbers who don’t rest and heal are a danger to themselves and others, and so are financial systems not periodically cleansed! Central bankers don’t suffer the inconvenience of principles, however, and choose rather to ‘inflate’ the money supply in an attempt to eradicate these painful cleansing processes. Since bankers can’t stop the natural economic cycle, when their conjured money meets economic contraction, stagflation is the contorted result.

The associative conditions to stagflation are:

• A weak economy: less available credit, corporate bankruptcies, and layoffs.

• Rising prices: not on some things, but on almost everything.

• An Increase in the probability of policy error: policy responses by both President Nixon (tariffs, price controls, and scrapping the gold standard) and ‘the Fed’ (knee-jerk rate hikes and cuts) to the 1970’s stagflation are universally seen as monumental failures today, but no new solutions have emerged.

It’s challenging to know what financial posture to assume in battling a set of conditions, when you don’t know what policy errors will soon change those conditions. Like the winter mountaineer, pack every survival item, but pack light, and stay nimble and alert:

• Establish a stronger cash position.

• Reduce risk everywhere you find it.

• Tighten the budget.

• Diversify income sources, and keep your day job.

• Think, don’t panic: stick with high conviction holdings.

• Look for great opportunities, and they are coming.

• Help others in need, if you are so blessed.

Stagflation is not a foregone conclusion, but it strongly appears to be the developing scenario. We’re still below tree-line, so take time to think about it, and prepare accordingly, Shaun.   

“Stagflation can only occur if government policies disrupt normal market functioning.” ~Kimberly Amadeo

“The prudent sees danger and hides himself, but the simple go on and suffer for it”. ~Proverbs 22:3 

1 The Balance, “What is Stagflation?”, by Kimberly Amadeo, October 29, 2021

https://www.thebalance.com/what-is-stagflation-3305964

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

You’ll never hear this from a central planner or a Socialist, but every individual is a fully-operational micro-economy, each making decisions they believe will best advance their own cause. It’s also true, based on the management (or mismanagement) of their own economy, that every person is either a wealth producer or a wealth consumer. Financial advisors understand this, and in their pursuit of wealth producing clients, commonly include the term, “wealth management” in their business name. Which of these two are you, and if the latter, what can you do about it?

Wealth production is superior to wealth consumption in both practicality and virtue. In practicality, wealth producers endure relatively low financial stress, the enjoyment of life’s adventures, and the blessing of helping those in need, while wealth consumers generally go from crisis to crisis. In virtue, wealth production offers gratification for good stewardship, and the privilege to demonstrate such for the next generation, but wealth consumption robs a person of both.

Financial success is almost never about how much money a person earns, and almost always about what a person does with the money they earn. I know people who have amassed great wealth on a modest income, and others who went broke after earning (or being given) huge sums of money. Discard every excuse to fail, and embrace the principles that will cause you to succeed.

The primary difference between these two “monetary types” of people is the simple fact that wealth producers consistently practice sound financial principles, and wealth consumers don’t. If you practice the following concepts it is highly likely you will soon begin to methodically accumulate wealth, at least throughout your working years:

• Maximize ‘net positive monthly cash flow’ (net income exceeds gross expenses) with strict budgeting, careful debt management, and thoughtful tax planning (your thoughts, not just your CPA’s; you need to own this!).

• Plug financial leaks by eradicating monetary waste. Understand the difference between your ‘fixed expenses’ and your ‘gross expenses’, and minimize that difference.

• Allocate your investable resources wisely, beginning with a) adequate emergency savings (equivalent to 9 months of household expenses), b) the right amount, in the right duration, of the right type of life insurance, and c) a specific plan to become debt free.

I believe these powerful principles should be in place before a person begins investing, and the people who don’t do so generally withdraw invested funds sooner than expected, often with painful consequences, and for things other than what was intended.

Think about it, Shaun.

“He who trusts in his riches will fall, but the righteous will flourish like the green leaf.” ~Proverbs 11:28

“Owe no man anything, except to love one another” ~Romans 13:8

“God loves a cheerful giver.” ~2Corinthians 9:7

“A wise man leaves an inheritance to his children’s children.” ~Proverbs 13:22

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Seldom is the winter wind blowing under 50 mph, and weekly over 100 mph, at Edmund’s Col (‘the winter Col’), found in the White Mountains of New Hampshire. Sound counsel for climbers contriving a first-venture through ‘the winter Col’ is a preceding and critical adjustment in both attitude and posture. Investors navigating a rising interest rate environment may be confronted by similar headwinds; hence, comparable preparations are advisable. What are the financial implications of rising rates, and what adjustments should you consider making?

America’s central bank (‘the Fed’), in response to the 2020 Covid-19 lockdown, unleashed the greatest money-printing experiment in world history, pushing inflation to fresh 40 year highs (so far). Shocked that inflation didn’t prove “transient”, as it proudly insisted throughout last year, ‘the Fed’ is now panicking to bring the inflation it created back under control. One of the means available to ‘the Fed’ in accomplishing this task is to raise interest rates, which restricts loan growth, which dampens business and consumer spending, which slows the economy, which reduces inflation.

The following are potential implications of rising interest rates, and keep in mind some of these effects are delayed:

• Higher loan costs

• Less corporate and personal borrowing

• Decreased corporate and consumer spending

• Higher mortgage rates

• Decreased demand for real estate

• Declining home prices

• Increased interest rates on fixed income accounts

• Decreased demand for stocks

• Rising interest costs on government debt (a 2% increase in rates, forecast by 2023, will increase government interest expenses by $750 Billion annually!)¹

• Higher tax rates to fund government debt

Prudent re-posturing might include the following:

• Be attentive to re-positioning short-term and emergency savings to higher interest rate accounts.

• Convert variable rate debt to a fixed rate, and better still, pay it off!

• Own fewer speculative stocks, especially non-dividend paying stocks.

• Diversify income sources creatively by engaging the charter economy (December 17, 2021 blog).

• Creatively cut household expenses by engaging the alpha strategy

• Avoid over-reacting to the new rate environment. Stocks have historically risen during the early and mid-rate hike cycles. Don’t hide in bank accounts, as they are still losing purchasing power at an alarming rate. Carefully think through each financial issue.

• Avoid low quality debt and long-term bonds like the plague.

• Avoid deferred payment plans and unnecessary consumer debt.

Think about it, Shaun.

“Wealth gained hastily will dwindle, but he who gathers little by little will increase it” ~Proverbs 13:11

1 Dr. Eifrig’s Health & Wealth Bulletin, “What Higher Interest Rates Mean For You…If They Happen”, February 10, 2022

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

Jerome Powell’s abrupt re-posturing towards inflation sends a resounding message to listening investors: risk matters again. Effective risk management first requires thought and planning. If a pair of winter climbers doesn’t first think about how to survive a whiteout, the probability of separation and disaster escalates when the cloud of wind and snow joins their expedition. Applying sound principles to manage identifiable risks, like carrying a small 15 foot rope to quickly tie to your climbing buddy in a whiteout, can prove critical. What are today’s identifiable risks, and what principles aid in their mitigation?

Accepting the existence of risk enables risk identification. The “fight or flight” response mechanism won’t help you after falling through the ice of a mountain river, or when your tech stocks crash 50% in a week, only forethought will. I perceive the following risks are with us today:

• Powell could be behind the inflation curve, a nightmare scenario for stocks, since inflation and interest rates could rise together.

• Powell’s new inflation posture means the stock bubble suddenly has an enemy with a pin.

• Recent and near-term retirees appear to be facing the dreadful ‘early-retirement bear market’.

• Bonds appear to be in a bigger and more dangerous bubble than stocks.

• Present inflation is eroding the purchasing-power of bank savings at a rate of 50% every 9 years!

• The yield curve may be indicating concerns about the economy.

• Tax hikes are coming.

• Social Security is likely to be ‘means tested’ due to underfunding.

I would liken the present financial landscape to climbing Mount Denali in January, where life-threatening risks are literally everywhere. Consider whether the following strategies may help you navigate your course successfully:

• Increase your emergency savings, and the cash position in your investment accounts.

• Reduce debt, and convert variable rate debt to a fixed interest rate.

• Don’t relinquish earned income without serious consideration.

• Increase your fiscal discipline. Get aggressive and creative in reducing expenses.

• Buy capital-efficient, industry-dominating, dividend-paying, dividend-increasing businesses at a good price.

• Own a chaos hedge or two.

• Establish a long-term mindset towards high quality, high conviction holdings, and reinvest dividends throughout the market cycle.

• Have a clearly-defined exit plan on all ‘non-forever’ holdings and follow it.

• Stay away from the extremes of fear and greed. Don’t hide from inflation in the bank. Avoid making a big bet on a risky position, or doubling down on a losing position. Follow the position sizing rule of 3%-5%.

• Dollar cost average throughout the market cycle.

Think about it, Shaun

“Rule #1 is don’t lose money. Rule #2 is don’t forget Rule #1.” ~Warren Buffet

“He who had received the five talents came forward, bringing five talents more, saying, ‘Master, you delivered to me five talents; here, I have made five talents more’.” ~Matthew 25:20

“Through many dangers, toils and snares I have already come; ‘Tis grace hath brought me safe thus far, and will lead me home.” ~Lyrics from John Newton’s Amazing Grace

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial. The economic forecasts set forth in this commentary may not develop as predicted.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.

  Following an un-roped ascent of the final 400 feet on the Mountaineer’s Route of Mt. Whitney in 2010, a 60-degree pitch involving mixed, technical climbing, I became disturbed by the amount of risk I had just willingly assumed to my life. Months later I inquired of Rick Wilcox, a highly accomplished mountaineer from North Conway, NH, of his opinion of risking a fall on such treacherous terrain, to which he calmly replied, “that’s climbing; if you’re not willing to assume the risk of a fall, don’t climb”. Investing and planning your family’s financial future requires a degree of risk-taking; consider the following insurance principles to avoid allocating a counter-productive number of your investable dollars towards the insurance of unavoidable risks.

• Consider insuring catastrophic risks only. Why waste precious capital on negligible and improbable risks? That’s like setting a fixed rope to ascend a 30 degree hill. Interestingly, a bunch of climbers died on K2 in 2008 after making that very mistake, later lacking the ropes required on the much steeper terrain above. Your investable capital is like a climber’s rope in that you only have so much of it. If you have ample emergency savings, for example, and are willing to drive defensively, why not skip the collision coverage on your auto insurance policy, especially if your vehicle is older, and invest those dollars instead? Scrutinize every risk with these questions: what is the financial risk? What is the adverse probability? What is the opportunity cost to insure the risk? 

• Insure all catastrophic risks. Failing to insure a catastrophic risk is synonymous with playing roulette with your family’s financial future; don’t do it. I think of insurance as existing solely to cover catastrophic risks, just like my climbing rope, and I look to identify and insure those risks. Examples include: making sure dependent children are provided for in the case of your early death, protecting a spouse before your retirement is fully funded (especially when in debt), protecting against high costs of future care, protecting the family business from estate taxes, and covering liability risk in a wrongful car accident.

• Buy the right type of insurance. Of all the life insurance policies clients have asked me to review over 34 years, I’m guessing close to half were the wrong type of policy, given the nature of the risk. Buy temporary (term) life insurance to cover temporary risks, and permanent life insurance to cover permanent risks. Understand the risk, and the solution will emerge more clearly.

• Buy the right amount of insurance. Never trust an insurance company’s assessment of your financial risk; do your own assessment, or have a fiduciary assess it for you.

• Use an independent insurance agent, and shop around. Always consider multiple providers and policy solutions. Never pay more than you have to for insurance. Do this by making companies compete for your business through an independent agency or exchange.

• Watch your rates. My auto insurer low-balled the quote on my Jeep, but at renewal raised my premium by twice the inflation rate! When I confronted them, they brought the rate back down. Always play hard ball when dealing with insurance companies; that’s what they’re doing with you. Always be ready to replace a policy to save money.

I hope these principles are a blessing to you. Think about it, Shaun.  

“The prudent sees danger and hides himself, but the simple go on and suffer for it”. ~Proverbs 22:3

The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.

All investing involves risk including the possible loss of principle. No strategy insures success or protects against loss.

Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices. Guarantees are based on the claims-paying ability of the insurance company.

https://www.fivestarprofessional.com/spotlights/90982

Award based on 10 objective criteria associated with providing quality services to clients such as credentials, experience, and assets under management among other factors. Wealth managers do not pay a fee to be considered or placed on the final list of 2012/2022 Five Star Wealth Managers.