Are you ahead of the game when it comes to achieving your financial independence? Has the unusually strong stock market boosted your wealth to the point where you think you could work less or stop working sooner than expected? Are you at a point where you are increasing your current or future lifestyle expectations? Maybe your experience is all of the above.
If so, that’s an exciting feeling. The possibility of reducing the stress of peak busyness, eliminating gas-pedal risk and making work optional conjures an image of personal and financial liberation that you can almost feel in your bones.
Before you sell your business or rush to resign, make sure this feeling of pending freedom is well founded and not based on false comfort. Knowing whether or not you are “ahead of the game” presupposes that you are clear about what the “game” is that you are playing. Have you defined your goals and the strategy to achieve them, instead of just dreaming or assuming? If your accelerated retirement timing or higher lifestyle adjustments are dependent upon the market remaining uninterrupted at current levels and continuing to rise to the same degree as the recent past, without market corrections, your assumptions may need tempering. Especially when you consider, according to the Stanford Center on Longevity, that you are likely to live longer than you think which means you may also underestimate the amount of retirement savings you need.
If you do not yet have an actual financial planning strategy to ensure you are correct in your assumptions about achieving your goals, now may offer a unique opportunity to start planning. Here’s why:
Anyone who has been a relatively aggressive, high stock-allocation investor, has been very fortunate in these ten years following the Global Financial Crisis. The stock market has seen one of the longest, strongest rises ever, and with very little volatility (except for the brief COVID dip and rapid recovery). Over the last ten years, the S&P 500 Index rose 360%, or 16.5% annualized, much higher than the long-term average return. It would be normal for there to be a market correction after such a meteoric rise. Whether it will be a minor or major pullback, or fall somewhere in between, is unknown. No one can consistently predict the market, and while a correction might not happen immediately, it is inevitable.
While the threat of a downturn may not have disturbed you last decade, you are now ten years closer to your portfolio spending years. This is more important if you are less than twenty years from retirement, and especially important if you’re just ten years away, or less. If during this big market rise you didn’t adjust your stock-bond mix and rebalance your portfolio to an appropriate risk level for your goals and life stage, your stock allocation grew in proportion to your bond allocation. This means your volatility risk exposure, even if that volatility hasn’t happened yet, is also higher. Consider yourself lucky, for now.
These decision dynamics are partly explained by neuroscience. There is a common pattern of risk complacency after markets have had extended rises, especially when accompanied by low volatility. From a behavioral finance standpoint, the psychological phenomenon is known as “recency bias.” The human brain unconsciously expects the future to be similar to recent past.
With strong stock markets, people expect them to stay that way, and this can lead to excess risk-taking. When markets have extended drops, the brain also expects that to continue, and this can lead to excess risk avoidance. Both scenarios can cause problems, but for people with dreams of early retirement on the horizon, there is less time to recover from emotional investing mistakes. In other words, the stakes of mistakes increase over time.
The problem for many people is that they don’t have a clear picture about the financial requirements for their goals or whether their current risk is appropriate for their goals. Without good financial coaching and planning, many investors lack a framework and support system to articulate and quantify their goals and avoid psychological tendencies that work against those goals. As a result, even most business owners, leaders and other financially successful people don’t know if they’re ahead of the game or if they are taking on too much risk or not with their personal money. They may unknowingly keep piling on stock market risk, even if that level of risk isn’t required to accomplish their objectives. Many business owners also have a material level of concentrated equity risk in their businesses, doubling down on this dynamic, rather than strategically offsetting their business risks.
Complicating matters and goal achievement, some people think they have financial coaching, but don’t. Some are under the false impression that their broker or investment manager has incorporated key planning analyses into their investment recommendations. However, unlike Wealth & Life advisors with in-house Certified Financial Planners who are fiduciaries, brokers are not obligated to act in a client’s best interest, and most brokers and investment-only firms do not provide any or true planning services. It not uncommon for people to start with a broker or investment manager and then upgrade during mid-life to a Wealth & Life strategy firm, once their wealth has grown and they understand the difference. An investment strategy should always be driven by the planning and goals. Otherwise, it is like a trip without a map, or an arrow without a target, and over-relying on luck is much more stressful than having a plan.
Without good planning support, many high-earning people in the mid-life stage start to realize that they are closer to their desired lifestyle shift or retirement date but don’t know how to determine if they are on track or how to get on track. A lot of avoidable mid-life stress can be attributed to this uncertainty. By ironic contrast, business owners and leaders often wisely hire experts internally and externally to help with strategic business goals, but often indefinitely defer or ignore doing that for their “make work optional” goals.
A good Wealth & Life Strategy process, including a financial planning analysis, helps people articulate their goals and structure a financial design to meet those objectives. That includes determining the degree to which an individual is ahead of the game, what stock/bond mix is most appropriate right now, and what adjustments make sense as one’s goals and circumstances change in the future.
If you’ve experienced the benefits of the rising stock market and live in a solid financial space right now, such a process might lead you to a lower stock asset allocation in your overall portfolio. Without overdoing the reduction, you can still meet your lifestyle and other goals. In other words, this might be a once-in-a-lifetime opportunity to harvest your luck, and lock-in (reduce the risk of not achieving) your goals to a greater degree.
Reducing equity exposure not the same as taking all your chips off the table at the casino. Most people, even those of significant wealth, will still need and/or want to maintain a certain level of stock market exposure, to ensure that a portfolio meets the growth needs and does not lose purchasing power. Recent inflation rises are a good reminder that inflation does actually exist. Gambling is very different than planning and strategic investing.
As they say, better lucky than smart, but don’t we don’t encourage relying on luck. It doesn’t have to be binary; it’s best to be lucky and smart. If you have been lucky, now is a great time to be extra smart. Define your goals (you can use this worksheet), get expert help to do the planning. Determine whether and how you should adjust your financial structure and reduce your risk, to increase the chance that you achieve your financial goals. Take these steps now for your peace of mind and for those that count on you. That way, you stay in the game, and ahead of your life goals.
Wondering if now is the time to make changes to your investments? Want help defining your financial goals? We invite you to take the first step and talk with Lisette Smith, CFP® our COO and Senior Financial Advisor. You can schedule time directly with Lisette here.