With the financial markets at all-time highs, my guess is some of you might be thinking or even worrying about the next big market correction, or even worse, a financial meltdown similar to 2008. There are plenty of pundits to support the idea that the next correction could be as bad as, if not worse, than the last one. Then again, those people tend to want to sell you a subscription to their stock picking newsletter so I’m not sure I would lend a lot of credence to their fear mongering. That being said, stock market corrections big and small have and always been and will continue to be a part of our world; there’s just no getting around it.
The relevant question that should be taken seriously is: could a long, protracted correction in the stock or bond markets have a negative impact on your preferred lifestyle? If your answer to that question comes even close to a “yes,” then you need to learn about the concept of “Lifestyle Driven Investing™” which is the basis for my best-selling book: The Big Retirement Risk: Running out of Money Before You Run out of Time. Actually, the concept is not new; I developed it many, many years ago to help my own clients. It is just now getting national attention as a second school of thought for investing.
My personal opinion, based on twenty five years of experience, is that the traditional methods many people are using could be a recipe for disaster. The classic pie chart asset allocation models, using Modern Portfolio Theory (the theory that was created in the 1950’s), I believe, are so outdated and potentially dangerous it causes me deep concern. It is amazing to me that there are financial advisors still using these traditional models and justifying them with mathematical models. When an advisor comes back with a report that says something like: “Mrs. Retiree, if you continue to invest and spend as we have proposed, you have a 90% chance of never running out of money.” I’m thinking, “what?” I don’t really like those odds because it seems apparent to me that when I run out of money, I’ll be in my 90’s and who is going to hire me then? That news is not attractive to me at all! Hence the birth of Lifestyle Driven Investing,™ which is an investment philosophy that allows your lifestyle to determine your investment strategy, rather than allowing your investment ups and downs define your lifestyle.
It’s pretty simple: you begin by categorizing your lifestyle expenses into four different categories ranging from the most essential to the least essential: Needs, Wants, Likes and Wishes. Obviously, Needs expenses are your non-negotiable items, like expenses for housing, utilities, food, and health care. Wants are extras, like country club memberships and vacations. (hmmm….into what category would I put manicures and pedicures?)
Once you have all your expenses categorized, the next step is to fund them. You start by looking at all of your existing sources of income: social security, pensions, rental income, etc. If these sources of income are not enough to cover all of your living expenses, then the shortfall must be made up through investment income. Notice I underlined income. If there is one thing you should remember from reading this article is that your ability to enjoy your preferred lifestyle is dependent upon ONE thing: Cash Flow – regular, predictable, sustainable cash flow.
Lifestyle Driven Investing™ is a philosophy designed to help you identify appropriate investments to provide the cash flow you need for the expenses in each category. Since the Needs category contains your most essential expenses, this income is the most critical for sustaining your basic lifestyle; thus the investment criterion for this category is the most stringent. Needs should be funded with Lifestyle™ investments, which means the investment vehicle you choose to place your money in should:
• Produce an income, either now or in the future (when you need the income)
• The income these investments produce should be able to defend at least one of these words: safe or predictable or guaranteed
• Ideally, these investments should be held within some type of legal entity that provides asset protection in the event you were sued.
In a nutshell, for those critical items that are essential to your way of life, make sure the investments can pass the test above. Otherwise, you are potentially putting your retirement at risk when the next inevitable market correction happens.
The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy ensures success or protects against a loss.
Securities offered through LPL Financial, Member FINRA/SIPC. Financial Planning offered through Lifestyle Planning Solutions, A Registered Investment Advisor. Advisory Services offered through Stratos Wealth Partners, A Registered Investment Advisor. The Botsford group, Lifestyle Planning Solutions, and Stratos Wealth Partners are separate entities from LPL Financial.
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