It’s that time of year again!
New Year resolutions as well as healthy reflections on what is working and not working in one’s life are rampant in the first quarter of the year. So are predictions, forecasts and cocktail talk about the economy or markets. Add to this social media flashing tailored information designed to attract our attention, and one is easily exposed to emotionally tainted commentary, even if normally handled with care and discretion.
There’s just one problem…a far majority of the comments are laced with triggers designed to jolt you into some new action, new direction that may not coincide with you, your goals, and circumstances or even the current reality (they often are based upon the fear of the unknown or a belief in some future event that may or may not occur). They sound like this:
“You’re missing out if you don’t look into the top 10 stocks in this emerging sector…”
“The market’s already hit the bottom, and it’s all up from here…”
“A recession is coming, interest rates and inflation will skyrocket, and we’re headed into a deep bear market like never before.”
“Four experts believe this company should be in your portfolio right now!”
Faced with this nonstop noise, even experienced investors may find themselves pulled in a dozen different directions. And whenever that happens, they’re more likely to make the wrong decisions with their money.
At the end of the day, so much of investing is psychological, which is why having the right frame of mind—as well as the right wealth and investment management systems and controls—can make all the difference.
Our advice? Don’t pay so much attention to the talking heads. If you want to better manage, protect, and especially grow your wealth in 2023 and beyond, learn to invest from a position of strength.
Here are 10 very important questions you should ask yourself to make sure you—and your wealth—are equipped to handle anything…namely the wide variety of dangers, threats and opportunities sure to pop up in the days, weeks and months ahead, in our volatile yet creative and resilient world.
Q1. What does my net worth look like?
While this might seem like the obvious question to start with, you’d be shocked at how easily smart, sophisticated, and wealthy people can lose sight of the fundamentals.
Just how “net” is your net worth, really?
A unique way to look at your balance sheet, pioneered by Janiczek Wealth Management, includes examining your balance sheet in these slightly more specific ways:
- Add up all of your liquid “cash equivalent” accounts in bank accounts, money market accounts, CDs, and treasury bills and subtract the amount of credit card debt (hopefully it’s zero) you have. This is the amount of your “Net-Liquid” assets. Very important to know for short-term financial security, as you will see below.
- Add up all of your Semi-liquid assets (e.g., stocks, bonds, mutual funds, ETFs) outside of your retirement accounts, then subtract any intermediate term debts or liabilities such as personal bank loans. This is the amount of your “Net Semi-Liquid” assets. Very important to know for intermediate term financial security, as you will see below.
- Now add up all of your retirement account assets (IRAs, 401ks, etc.) and then subtract any retirement plan loans (a rare but potential liability). This is the amount of your “Net-Retirement” assets. Very important to know for long-term financial security, as you will see below.
- Next, add up all of your personal assets, including your house, cars, personal property, and subtract the amount of mortgages and loans on such assets. This is the amount of your “Net-Personal assets. It’s very important to know this figure so you understand the amount of “working assets” in your balance sheet versus personal “standard of living assets.” Getting the ratio between working and standard of living assets right is important for short and long-term financial security purposes.
- Lastly, add up the amount of private business, investment real estate, and private limited partnership type assets you own and subtract any liabilities associated with these assets. This is the amount of “Net-Illiquid” assets you own. It is also important, for financial security purposes and estate planning purposes, the amount of illiquid assets you own.
Once you’ve tallied up all five “Net” amounts, tally them all up together to calculate your total net worth. With a little professional guidance, you can more easily see where your wealth is strong and stable, and where it might be more vulnerable to short-term, mid-term, long-term and even black swan (never before happened) events. This insight is much more valuable and actionable than whether or not something fairly normal (like recessions) will or will not happen in the next year. Don’t get us wrong, it’s great to be on top of economic trends to tweak strategies and tactics, etc. The issue is an obsession on such matters while overlooking bigger/broader items that, when handled properly, can ride out and be less vulnerable to shorter term noise type items and events. This is our priority and approach for clients at Janiczek Wealth Management.
At Janiczek®, we have specific standards (defined as a multiple of your average annual spending amount) for all five of these net asset categories to give our clients clarity and peace of mind.
For instance, for starters, 6-months’ worth of net liquid assets, 5-years’ worth of net semi-liquid assets and 15-years’ worth of net retirement assets is a milestone to reach for in order to have a basic level of financial security and independence. Then go for double these targets to truly reach the level of security that will pass stringent financial stress and stamina tests. We’ve got many more such insights and stamina type tests to help you, built into our patented Wealth Optimization Plan™ and Strength-Based Wealth Management™ system.
Q2. What non-liquid private assets do I own?
Because successful wealth management is so psychological, we’ve found that holding private assets is a great diversifier to augment liquid assets.
In fact, certain private asset types actually offer what is called an “illiquidity premium.”
Do you own a real estate portfolio that’s already working hard for you? Do you have any specialized alternative assets that aren’t correlated with stocks or bonds? Do you own a business or businesses that provide passive income and asset appreciation outside of stocks and bonds?
These are all types of private and aspirational asset classes that we also like to build into a top-notch wealth optimization plan. There are different ways to include these illiquid assets in your net worth, from more entrepreneurial driven strategies (if you are entrepreneurial) to passively investing in private funds that have such characteristics.
No matter how sophisticated you are as an investor, the markets can and will shake your confidence at times, so it is good to diversify across safety, market, private and aspirational assets.
Private assets can insulate you from the day-to-day stress of trying to read the markets right. And they can prevent you from making bad reflex decisions precisely because they’re pretty much unavailable to panic sell at any given moment of weakness. Plus, the illiquid nature of these types of assets is typically associated with an illiquidity premium that may be priced into the assets, boosting potential returns.
Q3. Am I missing anything in my current asset mix?
More importantly, your “mix” of liquid and illiquid assets matters. It shouldn’t just be based on your personal, business, or investing history.
Do you know if you have the proper mix of working assets? What’s correlated to the markets? What’s private and uncorrelated? What do you own that could be considered a safe haven investment? What about “aspirational” investments or assets?
For example, some pre-retirees and retirees—especially wealthy ones—tend to be over-invested (or at the very least, over-leveraged) in a private business or real estate asset class, which is arguably abusing this tactic. This is why and how we help such high and ultra-high net worth investors look at and build an ideal mix of each type of asset.
Ideally, you want to adjust your current asset mix until you have what we like to call an “all-weather” balance sheet.
Q4. What can I do to improve my cash flow?
By the way, what amount of your monthly expenses are being covered by cash flow from your “working” assets?
Does any of your monthly cash flow come from earned income, pensions, and non-portfolio assets? Or does nearly all of it come from dividends, interest and/or portfolio appreciation?
Here’s the thing. If you depend entirely on your portfolio for cash flow, the markets are more apt to rock you emotionally. But if you don’t have to depend on your portfolio for all of your needs, then you can be a lot more strategic, patient and confident. It becomes a lot easier to take the emotion out of investing and make good, smart, long-term decisions for your wealth with poise.
If you are more dependent on the liquid portfolio, which is not an insurmountable issue, then it’s that much more important that you proactively control and contain your risks, as well as control your spending to highly sustainable withdrawal/distribution rates. We have advanced analysis to help clients of Janiczek Wealth Management monitor and stay on top of these disciplines and standards.
Whatever you do, make sure you never find yourself in a position where you might run out of cash and be forced to sell at an inopportune “fire-sale” time. And avoid being highly leveraged with debt and/or margin loans that can trigger such needs at the most inopportune times. Such financing can put you in a position where you have no choice but to sell at the worst possible time. Ratios on debt use and call features need to be managed, and yes, we’ve got the systems and standards to help you.
Q5. What fixed-income strategies can I depend on?
Speaking of cash flow, let’s talk about a “boring” part of your portfolio: your fixed-income strategy.
A quality fixed-income portfolio is meant to be a strong and stable part of your asset mix that provides a dependable income and fairly stable (within reason) liquidity source for when you may really need it (an intermediate term harsh economic period, such as the 2008 Great Recession or the 2020 pandemic). In fact, our highest standard of excellence involves clients having a quality fixed income portfolio of high rated securities that can stand the test of time in such rather extreme situations. This is yet another advantage those who “invest from a position of strength” have over others.
So, how’s that looking for you right around now?
Do you own AA or AAA-rated corporate or municipal or treasury bonds? Do you have them laddered in different strategies with different durations? Do you own them outright where you do not need to sell them at a loss if/when interest rates go up, holding them until maturity or eventual decline in rates after a shorter-term blip?
Are you confident that you have a fixed-income strategy that can withstand economic turmoil, such as minor, moderate, or severe recessions yet not get crushed when interest rates rise or higher risk securities default?
If the answer is “No,” that means that if push comes to shove, the only way you may be able to cover all your needs at a time of great need is by selling assets you don’t really want to sell. Thinking about this and acting upon it ahead of time is the key to mitigating such risks in the first place. This is another way we can help you. It is another way to cushion yourself from expected and even less expected but possible extreme volatility.
Q6. Where can I improve my overall investment strategy?
Now that we’ve gotten a sound fixed income strategy for a portion of your asset mix out of the way, let’s talk about the rest of your portfolio. This is where many tactics and strategies can be taken to build a strong offense…the fun part! As the saying goes, a strong defense is a strong offense, so as much as the above portion of this post talked about healthy risk mitigation and containment, we only started there to set the stage for owning quality assets that can really grow and appreciate. How are you invested in the markets? Which broad stock market strategies have you executed?
As a starting point, we recommend essentially the same stock market strategy that Warren Buffet preaches for a nice chunk of your core “market” portfolio—a technique called direct indexing that also incorporates “factor tilts” (factor tilts like emphasizing (owning more of) companies in an index that have stronger balance sheets and/or stronger profitability ratios than the index group as a whole) that are good all-weather type holdings that limit the need for shorter-term tactical adjustments. A basket of such core quality holdings, monitored and managed in/out of the mix as circumstances require, is a solid tactic in a strong offense akin to a strong offensive line in football.
Here, the high and ultra-high net worth clients we serve can direct index with us versus buying an index mutual fund and/or ETF and enjoy additional more savvy direct indexing benefits because we hold each stock independently rather than just one packaged security. This allows for more tax, cash flow and even charitable giving flexibility. Call us (303-721-7000) to discuss this approach and how we augment it with satellite holdings.
Put another way, if your stock market strategies requires more radical constant fine tuning, how good are they and or how speculative a strategy is being pursued? Can such an approach make it through a bottom 10% scenario stress test?
You want a strong offense that doesn’t bet the farm on one “make or break” tactic. The talking heads mentioned early in this post almost always are referring to an approach that, if one executed in isolation, could be considered make or break. That’s why we want to layer in such standards and disciplines to help clients avoid entertaining such actions, or limit how much exposure one has to such gambles.
Q7. Am I overpaying for taxes?
What tax management strategies have you already implemented?
For example, if you proactively sell a holding that has experienced an unrealized loss, in a market correction, and buy a similar holding (same industry/sector) that doesn’t trigger the wash sale rule, it is possible to enjoy “tax alpha.”
This technique is called tax-loss harvesting and sophisticated direct indexing managers and methods we utilize have developed advanced ways of doing this, in an economical way, that can help you.
There’s also smart tax giving, smart Roth conversion timing, etc. The list really goes on and on if you know what tools are in the shed. It is our job to have such tools and techniques in our back pocket and get this done for you, based upon your specific circumstances and needs. This is yet another reason to work with a boutique wealth and portfolio manager like Janiczek Wealth Management.
Managing your taxes, the right way is such an extensive wealth management topic that we won’t do a deep dive here. But the point is that if you (via your trusted advisor) know all the tricks of the trade, you can manage your wealth far more tax efficiently and confidently—no matter what the markets are doing. Just know this, there is a big difference to saying you (or your advisor) can do this and actually having the system and process to implement it year after year. You want an advisor who can systemize this process for you.
Q8. How close am I to my financial goals?
The only reason you’re asking yourself all these questions is to find out how to get closer to your financial goals.
So, are you set up to succeed with all of these practical approaches and tactics?
What’s your ultimate financial goal going forward? How are you going to get there?
Over many decades, we’ve discovered that all of our wealth management clients, no matter how much wealth they’ve accumulated, fall into one of four discrete stages, each with their own challenges, opportunities, and potential pitfalls:
- Early growth stage
- Peak growth stage
- Transition stage (career to semi- or full retirement)
- Security stage (semi- or fully retired)
In each stage—and as stages change—there is a lot of stage-based considerations to incorporate in all of the above.
You can spend a lot of time in the early and peak growth stages, learning how to build and maintain your wealth creation so that your growth trajectory is steeper.
You can also transition and begin to live off your assets in the security stage and carefully control your wealth to support your standard of living. Each stage, each nuance requires diligent efforts to execute in a way that does not cause you heartache. This is a key aim of quality portfolio and wealth management.
Q9. Where are my blind spots?
Most of the biggest obstacles in the way to true financial independence and generational wealth are the ones you don’t notice and can’t see.
That’s because each and every one of us, no matter how smart or accomplished we are, have blind spots.
Where are your blind spots? And how do they influence your thinking and decision-making?
Are you someone who watches polarizing political news day after day? That’s probably going to leave you with some emotion-filled blind spots.
Do you ever feel like you know—with near-100% certainty—how things will play out? This might seem fine, but it also is a sign of a potentially huge blind spot.
After all, you may have achieved your current level of wealth and success because of your instincts, right? This may be so. But the circumstances of information/intelligence you had in place and helped you may not be in place at the same level today.
But unless you’ve discussed your investment and wealth management strategies with a trusted and neutral party, how sure are you that you’re making sound decisions and not just gambling?
And even if you have thought things through, in the markets, there are always reactions to every action you take. So, while you might make one solid decision that is right in the short-term, have you accounted for what happens next?
The point is, it is difficult (if not impossible) to be right all the time. We’d rather help our clients create and implement a solid plan to make money more consistently and predictably than be on the edge of being right about every minor and major turn in the economy and markets. This is what the Strength Based Wealth Management and Evidence Based Investing disciplines we seek to help client implement is all about.
Q10. Who can I lean on for help?
By the way, it’s impossible for you to know where your blind spots are. That’s why they’re called blind spots.
It takes someone from the outside looking in to help you properly evaluate how much bias may be impacting your investment and wealth management approach.
More importantly, once you know what your blind spots are, you still need an accountability partner—like a trusted wealth management advisor—to help you stay the course and make certain your surviving spouse or children have the same resource in place.
So, what specialists can you lean on to answer those really tough, complicated questions about the markets, taxes, estates, and your wealth as a whole?
When it comes to your wealth, who do you really have in your corner?
Are they a fiduciary (have to do what is in your best interest)? Are they fee-only (no sales, no commissions)?
Do they have the knowledge, systems, technology, and team in place to serve you and your family? Do they truly exhibit the poise, the care, the relationship, and the capability you need?
These are some of the most important questions to ponder.
True wealth enjoyment is all about having the peace of mind to know you have solid systems, structures and disciplines in place.
No matter your level of success, smart wealth management requires that you take the time to answer carefully and meticulously each of these 10 key questions about your wealth.
Because how you answer these questions could mean the difference between a narrow, anemic kind of portfolio management and a comprehensive, holistic form of wealth optimization that stands the test of time.
Besides, you have (or will have) worked too hard your whole life for your current wealth to lose sight of the bigger picture with short-term, knee-jerk reactions that leave you wrong-footed.
Is your money working hard for you or are you working hard for your money? Mastering money means you are truly liberated from such complexities and can flourish with and beyond wealth without it taking up all of your time.
When it comes to your wealth, do you feel like you have peace of mind? If not, we can certainly help you get there. If you are interested in speaking with an advisor at Janiczek Wealth Management, please contact Cathy Wegner, Director of New Client Engagements, at 303-339-4480 or cwegner@janiczek.com.
