In the financial markets a Black Swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the widespread insistence they were obvious in hindsight.
On March 9th 2020, Americans were reacquainted with the term Black Swan when the Coronavirus wreaked havoc on the stock market sending the Dow Jones and S&P 500 markets down sharply at first and then down sharply again and again until we reached bear market territory which is a loss of 30% or more. Suddenly fear and panic was like blood in the water as investors emotions dominated almost every buying and selling decision. Sheer panic is a force not easy reckoned with and as Warren Buffet so famously said, “It’s not till the tide goes out until you see who swimming with no clothes”.
In my short lifetime there have been a few such market anomalies. The 73/74 market crash, the tech bubble burst, the 2008 financial crisis and now this, the 2020 CV pandemic. That’s four absolute market meltdowns in my 50 something years here on this planet. Since I plan to live another 40 years or so will I see more? I think so.
The next question is what many of us might be asking right now. Can I have a successful financial plan in the midst of stock market chaos and uncertainty. My answer, ABSOLUTELY. If, and I stress IF, you and I are willing to do some planning, some work, and effectively bargain away the chance to make a killing for the assurances that we won’t get killed.
How we do that is fairly simple and I will outline it in a few steps that many of you are already familiar with.
First, We must have a tax efficient Income Plan. This means for our clients that we seek to build a safety net under five years of income needs so that if a Black Swan comes along the year after or before you retire that you won’t have to go back to work. We must use a variety of tools and models that make sure you are invested properly for both your long and short term financial goals.
We like plans that are really spread out and I mean REALLY spread out. That means you might have a “Bucket Plan” that an assortment of investments for the first five years of retirement that strictly emphasis safety. In this “bucket” we might own cash and/or cash equivalents, fixed income, annuities, bond ladders and/or conservative model portfolios. We like to structure these plans asking two basic questions: 1) Does the investment help you reach your financial goals, 2) Are you comfortable with the investment. We might “vet” several different investment placeholders for your plan until we find what suits you and your planning needs and comfort level best.
Next we have a bucket that has a more balanced approach, and lastly we have your aggressive growth bucket which seeks to be more opportunistic, but is doing so in an account that you won’t have to touch for 10 years. Then we rely on what’s worked for investors for more than 100 years which is, asset allocation, rebalancing, diversification, tax planning, discipline, strategy, structure and coaching. It’s not sexy but it works, and history shows it will work for you and me.
We like plans that are spread out, I mean REALLY spread out. Different buckets, different stock to bond ratios and literally thousands of different holdings. We like to own large and small stocks, mid cap and international stocks. We own emerging market stocks as well as growth stocks and value stocks. We like fixed income and bonds, and we really like real estate, private placements, structured investments, and some annuities and life insurance. We like investments that are principal protected and some bond alternative and we really like things that don’t move and/or act like the stock market.
We like plans that focus on asset protection, estate planning, and tax efficiency. We like plans that address our clients biggest risks, which are, higher future taxes, stock market meltdowns and healthcare costs.
We like engineered retirement plans. Did you know that one can engineer a retirement plan and determine in advance a statistical likelihood of reaching all of their financial goals? Would it help you sleep better at night if you knew you had a 95-100 percent statistical probability of reaching all of your financial goals, with or without a Black Swan event?
Black Swan events set many things into motion, one of which is a very large wealth transfer event from fear stricken undisciplined and poorly coached investors to those who have discipline underpinned with strategy and structure. Those with this level of planning know what they are doing at all times and why. They enjoy more peace of mind and quality time with their families because they are not stressed out about unnecessary fears like financial scarcity or calamity. In my humble opinion, those who take the time to invest in quality planning enjoy a higher quality of life. I see it, day in and day out and trust me, it’s real, especially in times like these where everyone’s nerves are tested.