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  • March 5, 2020

Life is full of risk. Markets rise and fall, unexpected emergencies arise, and businesses go under unexpectedly. If you want to ensure that your wealth is consistently available for your lifestyle, your legacy, your charitable giving, and anything else you want to prioritize, you need to be prepared for the unpredictable aspects of life.

You’re a savvy investor and you’ve done well for yourself so far, but humans are not wired for long-term thinking. You know all about diversifying your portfolio and buying life insurance in case something unexpected and terrible happens, but there’s more to think about. Here’s where to start.

Risk vs. Reward

The amount of risk you’re willing to accept will depend on your age and financial situation. If you’re young and still making money, it’ll be several decades before you’re retired — you can take on more risk in order to take advantage of better gains.

If you’re already retired and have all the assets set aside that you’ll need for the rest of your life, there’s no reason to take an extra risk with those holdings. Invest in low-risk, low-return options like bonds and certificates of deposit to ensure that your wealth doesn’t lose any value.

Of course, a comfortable retirement might not be the end game for you. Maybe you want to establish a legacy through the businesses you’ve worked with, or maybe you want to make sure your grandkids never have to worry about tuition. Everyone’s goals are different, and so is their tolerance for risk. Here are some options to talk about with your financial advisor:

  • Stocks: Expect a return of up to 10 percent year over year, but with the risk that you’ll lose more than two-thirds of the value of a given stock in a significant downturn.
  • ETFs and index funds: more stable than individual stocks, and they require a lot less micromanagement to be successful.
    Bonds: Essentially zero risk, since you know the return you’ll be getting before you buy in, but they come with much lower returns than individual stocks.
  • Commodities: usually more stable than an individual stock, since they’re anchored to real value and are less susceptible to artificial inflation by speculators. Commodities can also be a good way to hedge against stock market losses — for example, the price of gold tends to rise as the strength of the dollar falls.
  • Real estate: real estate values have consistently risen over a long enough period of time. Obviously, there have been serious exceptions to this rule, most recently the 2008 downturn. There’s also the fact that real estate isn’t a set-and-forget investment — buildings have to be maintained — but you have to live somewhere. Your home can be a significant source of long-term value in your portfolio.
  • Certificates of Deposit (CDs): one of the safest places to put your money. You won’t get rich investing in CDs, but they have their place in any financial plan.

There’s no shortage of places to invest your money, but the important thing is to balance risk with stability. That way, if one of your assets takes a significant hit to its value, you’ll be protected by the rest of them. You know what they say about eggs and baskets!

Hedge Against Problems With Your Business

If you built or bought a business during your life, you might have a significant chunk of your personal wealth tied into that business. If that business goes under, it could be a serious hit to your personal wealth and financial goals.

First things first: separate your business and personal expenses so that your personal wealth isn’t at risk in the event that your business goes under or creditors come calling. Set up separate bank accounts and credit cards. Establish an LLC, C Corp, or S Corp to limit your liability, and apply for an EIN to protect your personal wealth from the losses and liabilities of your company. Pay yourself a salary rather than spending business income on personal expenses.

If you’re counting on selling the business later in your life to help fund your retirement or other goals, there’s no way to completely divest yourself from its value. The best you can hope for is to protect yourself from risk and run the business the best way you know how to.

Don’t Panic at Market Downturns

If you have a lot invested in the stock market, a major market downturn can cause a significant hit to the value of your portfolio. In the 2008 downturn, some people’s portfolios lost as much as two-thirds of their value.

But keep in mind that common refrain: it’s not a loss until you sell. If you can hold onto your assets until the market recovers — and it always recovers sooner or later — you can weather the storm and come out the other side none the worse for wear.

In fact, astute investors can even use a market downturn as an opportunity. While the value of certain stocks or indexes is low, take a chance on a safer purchase! You don’t know what the market will do in a month or a year, but you do know that the ETF you’ve had your eye on is 9 percent cheaper than it was six months ago, so now’s a good time to buy.

One thing you can do to hedge against a major downturn is to invest in stocks that return dividends. If the price of the stock falls, you’ll still be able to offset some of your short term losses with the dividends you earn. Start with a group of stocks called the Dividend Aristocrats for the safest bet.

Estate Planning

Finally, it’s never too early to think about estate planning. As we tell our clients, Uncle Sam has already drawn up a plan for what happens to your money and your property when you die. If you want to have any control over that plan, you’ll have to come up with it yourself. Even so, more than half of American adults don’t have estate plans.

Whether your main priority is securing the legacy of your business, ensuring the financial security of your family, donating your wealth to the charities that you care about, or any combination of the above, we can help you find the best way to plan for the future of your wealth.

The Importance of Insurance

When most people think about insurance in their long-term plans, they’re thinking about the survivor benefits of life insurance. But there’s a lot more to consider when it comes to your insurance portfolio.

Insurance can help you minimize taxes, maximize your retirement income so you can travel in comfort and style, or prop up your business so that your company continues to bring in the best people possible.

At First Western Financial, we consider insurance to be a vital part of wealth management. We’ll take a quantitative and qualitative look at the policies you already have in place, looking for both gaps and redundancies.

We’ll also help you seek out the right products for your needs, especially if those needs have changed — there’s a good chance you haven’t re-assessed your insurance policies in a while, and you might not have the coverage you want any more.

A Holistic Approach to Wealth

At First Western, we know that increasing the number at the bottom of your balance sheet isn’t the end goal of acquiring wealth. What’s important is not the money you have, it’s what you choose to do with it. We break your wealth into financial, experiential, relational, and legacy wealth to help you decide exactly how your wealth can best serve your interests. Contact us today to get started!