By Dennis Kagel Chartered Financial Consultant
Experience tells me that some people operate under the erroneous assumption that a successful financial future requires numerous financial plans/strategies and that constant monitoring and adjustments need to be made. The longer I’m in the business, the more I realize that logic and simplicity may be what works best for my clients.
During 30+ years in the business, I’ve seen financial authors and advisors who evidently believe they need to convince the public that what they do is so complicated that no “ordinary” untrained individual could possibly do it without them. However, the best plans, in my professional opinion, are initially presented conceptually by the advisor and embraced by the client for their simplicity and ease of understanding. Of course, at some point before the end of the process all details must be covered and full disclosure is made and all questions are answered.
Yellow money — green money — red money
Look at your investable assets as falling into three separate categories: yellow, green, and red money. Investable assets = money that you have control over as to where it’s placed. This includes checking and savings accounts, money market accounts, stocks, bonds, mutual funds, brokerage accounts, IRA’s, 401(k)’s, retirement accounts of all types, annuities, life insurance cash values, etc. Something that is a financial asset but is not an “investable” asset would be the equity in our homes. This isn’t something that we are inclined to move to another type of financial asset.
Yellow money
Very simply, this is money in banks and credit unions. Money we’re going to use over the next six to 24 months. We may need new tires for our vehicle, or we may need to purchase a new appliance for our home, or home repairs, etc. This money is characterized by safety and liquidity. No worry about losing it in the market and we can get it anytime. We use an arbitrary five percent of one’s total investable assets as a measure for how much they should keep in yellow money.
Green money
Green money must have three characteristics. If it doesn’t have these three characteristics it cannot be a green money investment:
- Principal is guaranteed and not subject to market loss
- The strategy allows you to “retain your gains”
- It guarantees your future income
Retain your gains means that once you have interest credited to your account, you will never lose those gains in future years when the market goes down. The problem with many investments is they might make 15 percent one year and lose 15 percent the next year. A green money plan doesn’t work like that. The green money plan is used for that portion of one’s portfolio they wish to be secure, guaranteed, and protected from risk of loss, such as fixed annuity options.
Red money
Red money is money that involves risk of loss. Typical examples include stocks, bonds, mutual funds, variable annuities, REIT’s, gold and silver, etc. Any investment where there is the possibility of loss falls into red money. Some brokers sell bonds for safety and income, however there are two main risks with bonds: as interest rates rise, bond prices fall, and the credit worthiness of the issuing authority. There were individuals who owned Enron1 and Lehman Brothers2. bonds that were only worth pennies on the dollar after they each filed bankruptcy. Therefore, we include bonds in the risk category.
The “Rule of 100” is to subtract one’s age from 100 and the result is the maximum percentage that we’d recommend be placed in red money. For example, for someone age 65, we’d recommend they have no more than 35 percent at risk. Of course, our philosophy tends to be conservative, and as one gets older, they would gradually move out of risk and more to green money.
The model we’d begin with as a recommendation for our 65 year old example would be five percent in yellow money, 60 percent in green money and 35 percent in red money.
To get more information as to how this simple approach can possibly benefit you and your financial future give Dennis Kagel a call today at 309-454-9171 for a no-obligation and no-cost financial review.
1). Enron Source: “Enron Creditors Will Get Pennies” – AP story written by Melissa Cheung, July 11, 2003
2). Lehman Source: “Lehman emerges from 3.5-year bankruptcy” Reuters story written by Caroline Humer, March 6, 2012
Investment advisory services offered through Horter Investment Management, LLC, a SEC-Registered Investment Advisor. Horter Investment Management does not provide legal or tax advice. Investment Advisor Representatives of Horter Investment Management may only conduct business with residents of the states and jurisdictions in which they are properly registered or exempt from registration requirements. Insurance and annuity products are sold separately through Dennis Kagel Financial Services. Securities transactions for Horter Investment Management clients are placed through Trust Company of America, TD Ameritrade and Jefferson National Life Insurance Company.
Fixed annuities guarantee that your money will earn at least a minimum interest rate. Fixed annuities may earn interest at a rate higher than the minimum but only the minimum rate is guaranteed. The issuer of the annuity sets the rates.