By Dennis Kagel, Investment Advisor Representative
Did you experience the pain of losing money during the 2000–2002 and 2008 stock market downturns? If you did, then you know the truth in the old saying, “the pain of loss far exceeds the good feeling associated with gains.”
Even if you are among the fortunate few who did not suffer any losses to their accounts during those years, you most likely are feeling uncertain about the future of the market. It’s true that the past one and a half years have seen the market recover much of the earlier losses, but what will the future bring? Will it correct downward as many are predicting? Will it flatten out or will it trend upward? These are the questions that you will ask yourself for the rest of your lifetime if a large percentage of your total portfolio remains in accounts and plans that are subject to the fluctuations of the market. If you’re tired of being on the “investment roller coaster” and especially if you are nearing retirement or in retirement, I would strongly encourage you to examine your portfolio and make some adjustments to emphasize safety and security.
As many of you know who’ve read my articles in the past, I believe it’s critical to everyone’s financial success that their investments reflect the transition from the “accumulation phase” of our financial lives to the “preservation phase” as we approach retirement. What this means is that during the accumulation phase, it’s appropriate to have a higher percentage invested in growth-oriented accounts. Growth accounts would involve risk and their performance is tied directly to the stock market. Perhaps as much as 70 to 80 percent of one’s total portfolio could be committed to growth during the “accumulation phase.” This phase typically runs from around the age we begin working full-time (early to mid-20’s) to around the age of 50–55. Once we reach the age of entering the “preservation phase” of our financial life, we should be transitioning from growth to safety and preservation. Now as much as 70 to 80 percent of one’s total portfolio should be committed to safety and guaranteed accounts.
For years we’ve used a financial model that creates three separate categories of money for our clients. These are labeled as yellow money, green money, and red money. Yellow money is money that we keep in banks, credit unions, money market accounts, etc. for immediate and short-term use. Typically the returns are very low in these types of accounts and there is a great degree of safety.
The green money refers to money invested that offers a very high probability of outpacing inflation. It also offers a great degree of safety, must provide some accessibility, and can be used to provide an income at some future time. The green money accounts cannot lose value due to stock market downturns.
The red money refers to money invested in plans that are directly tied to market performance. This would be things like mutual funds, stocks, bonds, and variable annuities. The red money is at risk and can lose value. Yes, the potential for higher returns is there, but along with that comes the possibility of losing principal and one can lose previous year’s gains, as well.
One of the most important things to do is list all of your financial assets. Then categorize them into the yellow, green and red money categories. Then ask yourself, “How much of your total money do you want in the red money accounts?”
Most of the time, people’s answer reflects less than what they actually have in the red money accounts. For example, people often reply that they want very little or even nothing in the red money accounts. These same people quite often actually have a very high percentage of their total money invested in the red money accounts. Obviously, this leads to a recommended adjustment by moving from the red money to the green money accounts. If you think in these terms regarding your money, you will increase your chances of having the proper balance and allocation when it comes to your hard-earned money and may sleep better, knowing you’ve taken steps to put a high degree of security and safety in your financial life!
You may call Dennis Kagel at 309-454-9171 to schedule a no-cost and no-obligation appointment. He will walk you through the analysis and give you his best recommendations for the valuable green money accounts.