Streetwise Blog

August 1, 2018

Why We Diversify!

Have you watched Facebook stock lately?  Facebooks (FB) shares got absolutely annihilated last Thursday, losing almost 20% of their value after the company released their earnings report.

The biggest single day loss of any public company, according to Thomson Reuters- vaporizing $119 billion dollars in market value.

To put it in perspective, it is as if:

  • Morgan Stanley   $97.7B
  • UPS                     $99.7B
  • Honeywell            $110.1B
  • Nike                      $110.3B
  • Siemens               $112.5B
  • GE                        $126.8B
  • McDonalds           $129.9B    (Statista 2018- Stock prices and values change constantly)

any of the above listed companies disappeared after one disappointing earnings release.  Poof, the whole company is gone.

This blog is not about if you should invest in Facebook, but how not putting all of your eggs in one basket is an old adage worth following.  Even great companies can stumble.

If you owned 10 stocks, allocated equally and 1 stock had a 20% decline like Facebook. Let’s look at what diversification did for you.  A 10% position loses 20% or a loss of only 2% on the whole portfolio. While no one wants a loss, that is manageable.

Remember diversifying can be your friend!

Enjoy the remainder of the summer!

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7/1/2018

What is Financial Planning?

 

The reason for people to have a financial plan is to organize themselves and to set definite goals for what they want to accomplish. You need the benchmarks to be sure you’re accomplishing your goals and to be sure your goals are reasonable. Most people do not have definite goals and they do it in very much a piecemeal fashion.

            There are six basic parts to financial planning. These involve first finding out what your current status is, then determining your needs for insurance, investments, taxes, retirement, and finally, passing on an inheritance.

            In more detail, here are the elements of a basic financial plan:

 

            Review current position.  Document your assets – or things you own –your liabilities – or money you owe – and budget to see where your money is actually going.

Your assets minus liabilities=net worth. Monitor this year to year.

            Pay yourself first.  Your goals are most important. We encourage people to save 10 percent of their gross income at a minimum while working.  As an example, a person earning $50/hour x 40 hours= $2,000 earnings per week.  Saving 10% equals $200.  Conversely, $1,800 went to pay bills.  Are you working for your future or someone else?  Pay yourself first!

 

            Protection planning.  Be sure that you have enough insurance coverage to meet you and your family’s needs in the event of death, illness or disability.  Make certain your cars have enough coverage as well.  I suggest saving money on insurance by raising deductibles. This amounts to a form of self-insurance. You, rather than the insurance company, are taking on a measure of the risk.  On average, raising deductibles from $500 to $1,000 on auto insurance yields a savings sufficient to cover an accident once every three years.  Not that I recommend having an accident every three years, of course.

 

            Investment planning. Look at your needs and determine the types of investments you must have to reach those goals.  Most investments are earmarked for specific goals.  You need to establish your goals and time horizons.  In general be aware that the larger the return an investment offers, the higher the risk.  How much risk is acceptable?  That largely depends on personal taste. Generally, a younger person can tolerate more risk simply because he or she has more time to recover from financial setbacks.  Someone nearing retirement would not want to put his life’s savings in a risky venture because if it fails, he has little working time left to recover the loss.

            A general rule of thumb is that if you subtract your age from 100, that number is the percentage of your savings you should put in riskier investments like stocks, precious metals or real estate. The rest should go into safer investments like certificates of deposit, municipal bonds or cash reserves.

            For example, a 31 year-old would want 69 percent (100-31) of his savings in riskier, higher-yielding investments while a 61 year-old would want only 39 percent (100-61) in those same instruments.  However, each client situation is unique and with the advent of tactical, strategic and dynamic portfolios, your risk tolerance should be evaluated closely.  Consider working with an advisor that does not simply put you in a pie chart and forget it.

 

            Income tax planning.  Be sure that you’re not paying any more than is absolutely necessary in taxes. Don’t just use your tax planner to fill out this year’s form. Ask what can be done now to save money next year.

 

            Retirement planning. Here you really need to determine when you want to retire and what kind of lifestyle you want to live. How much is enough? Most planners encourage you to have enough money set aside to produce income equivalent to 80 percent of what you currently earn. But don’t forget inflation. While the rise of prices is currently under control, inflation has topped 6 percent annually in recent memory. At a 6-percent rate, your expenses will double every 12 years.  I suggest using your next raise as the beginning of a retirement savings plan.  When you get that next raise, put it away. You won’t miss it. Once those dollars go into the spending stream, it’s hard to pull them back.

 

            Estate planning. Over 50 percent of people currently do not have a will.  That can complicate things on your death, sending your estate into probate court and leaving the distribution of your wealth to a judge who really has no idea of your intentions. If your estate is worth over 1 million, run, don’t walk to your estate planner.  Massachusetts Estate taxes start on estates of this size and rapidly rise.

            The most important thing to remember about financial planning is not to put it off.  Money invested early in life has tremendous earning power simply from the action of interest over time.  The typical reasons people delay saving for retirement are:

           

People in their 20s are just out of college. They want to splurge, buy a car and

travel.

            People in their 30s have just had kids and bought a house.

            People in their 40s are saving for their children’s college.

            People in their 50s just got the kids out of college and out of the house. Now they

want to travel and have a little fun.

           

Clients come in to see me in their 60’s and I say, “Where were you 30 years ago?”

 

Jeffrey A. Street, Certified Financial Planner, is the owner of Street Financial Services located at the Brookmeadow Office Park in North Andover, MA and specializes in comprehensive retirement planning, pension rollover, investment and estate planning.

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6/1/2018

Easy Financial Success Roadmap for High Schoolers

Have you ever wondered what the secret to avoiding poverty is? Many often seek simple solutions, well here it is:

The most common goal among Americans is to be financially secure and thankfully, there are three simple rules that ensure your chance to be in the middle class. In a study done by Ron Haskins for the Brookings Institution, he shares the three rules to success. Rule number one: graduate from high school. Rule number two: wait to get married and have children until after your twenty first birthday, and last but not least, rule number three: it is important to have at least one full time job. Of the “American adults who followed these rules, only two percent are in poverty while nearly seventy five percent have joined the middle class”.

As we saw in rule number one, it is obviously important to graduate from high school, but how important? In a 2015 study done by the Bureau of Labor Statistics, the average salary of someone who graduated high school was $35,256. On the flip side of that, someone who did not graduate from high school was making only $25,636 annually. That is a $10,620 difference all because you graduated high school. Not only do you begin to make more money as you increase your education level, but you also decrease your unemployment rate. For someone who did not graduate high school, their unemployment rate was eight percent while the person who did graduate only had a 5.4 percent unemployment rate. If you choose to further your education and go to college, you could earn more annual income with each degree that you complete and lower your potential unemployment rate. For example, someone with a Bachelor’s degree earned $59,124 annually on average with a 2.8 percent unemployment rate while someone with a Master’s degree averaged $69,732 annually with a 2.4 percent unemployment rate. A Doctorate or PHD will bring you to make $84,396 annually, with the smallest rate of unemployment throughout the education ladder at 1.7 percent unemployment rate. It is clear that the more education you receive, the more successful you will be in life which helps ensure your financial survival

Please share with your high school aged children or grandchildren and keep them focused on the three keys along with the importance of education. 

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