What will be Your Legacy?

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In the last few years, Elise and I have really gotten into our own family histories. Both sides of Elise’s family came from England, one in the 1830s and one at the turn of the century. My family tree is more diverse. I am 25% German, 25% Finnish, 25% Italian, and, I just recently found out, 25% Jewish. My German ancestors came to America in 1855 and the others came at the turn of the century.

As Elise and I looked back at not only the DNA of our forefathers and foremothers, but also the culture, traditions, stories and values passed on to us, we realize what wonderful legacies we have been given. In a way, we’re all standing on the shoulders of our ancestors.

In the past few years, there’s been a huge increase in people exploring their family history. Ancestry.com sold 1.5 million DNA kits a year ago on Black Friday. The DNA test uncovers your origins. And, Ancestry.com and others have huge online databases and have put together family trees that you can review and expand. This search has caused us to again look at our potential legacy and what it will be. Do you wonder what your legacy will be?

Legacy is defined as “something transmitted by or received from an ancestor or predecessor from the past.” In the simplest terms, it is everything you have worked for in your life. Certainly, that includes money and property, but it’s much more than that. It includes what you have achieved in your work life and your family life, as well as other social relationships and achievements that you ultimately leave behind.

Your estate, on the other hand, is the sum total of everything you own-all of your property (real, tangible and intangible). Your estate requires an “estate plan” to provide for your desired succession of assets, while minimizing taxes and administrative hassles.   If you desire to pass on more than just your assets and transfer your spiritual, intellectual, relational and social capital, you need a “legacy plan.”

The question is not “Will you leave a legacy,” but “What kind of legacy will you leave?” Why not be proactive and intentional in creating your legacy? Why not structure your life in a manner that helps you achieve your purpose and greatest success and safeguards those accomplishments for transfer to future generations? Why not develop and maintain your legacy plan?

If we think of our legacy as a gift, it places an emphasis on the thoughtful, meaningful, and intentional aspects of legacy, as the consequences of what we do will outlive us. What we leave behind is the summation of the choices and actions we make in this life and our spiritual and moral values.

What do you want to leave for your family, the community, your partner or the world? Your legacy can be huge; perhaps a world-changing cause. But it doesn’t need to be a grandiose concept. Instead of wanting to leave a legacy that inspires people to help starving children in the world, you, for example, may relate more with leaving a legacy with your family and friends of how you were kind, accepting and open to others, which might help inspire them to do the same.

A good place to start is to think about the ancestors, mentors and associates whose legacy you admire. What actions can you take to inspire others in the same way?

We encourage you to give some thought to your legacy plan. We’re all creating our legacy every day, whether we realize it or not. And, here at DWM, we’re focused on protecting and enhancing not only your net worth, but your legacy as well.

 

 

“The Two Most Powerful Warriors are Time and Patience”- Leo Tolstoy

 

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Good investing can be boring, yet effective! Specifically, investors with a long investing timeline should build a diversified, low-cost portfolio with an appropriate asset allocation and stick with it. Rebalance regularly to sell high and buy low. Don’t try to time the markets by getting in and out. Yes, this is boring, particularly with the volatility we are enduring, but it’s what it takes to generate solid returns over the long haul. Patience and time are powerful warriors and our friends.

Take a look at the average risk and returns for various asset styles over the last 20 years, which includes the 2008-09 financial crisis and 2018. The best performers, with higher returns and lower risk, are in the upper left hand corner:

 

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Bonds have relatively low risk and have produced decent returns over the period, particularly the first 15 years. Small cap and mid cap stocks have outpaced large cap stocks (e.g. Dow Jones and S&P 500) over time, with better returns and similar volatility (risk). Non-US stocks have trailed US stocks. Emerging markets stocks have produced very good returns, but with larger volatility swings. REITs have produced a 10% annual return with a risk factor about equal to U.S. stocks. The diversified composite “12 Index Portfolio” has produced a nice return of 6.8% annually (better than large cap stocks with 5.6%) with about 2/3 the risk of stocks.  Please note that during this 20 year period, the inflation rate was 3.2% per year. So, the 12 Index Portfolio produced an annual “real return” of 3.6% over the last 20 years.

Investors get in trouble when they lose faith in the markets and their allocation, react to the current market pain and go all cash or move to the “hot” asset classes for better returns. That approach generally ends badly for investors as the markets will correct themselves over time (as we have seen December 2018 losses recovered in January 2019) and hot asset classes go “cold” as the pendulum swings to the next “hot” asset style right after they jump in.

The 12 Index portfolio in this chart is composed of all the asset styles shown, equally weighted. Overall, this allocation is 50% equities, 33% fixed income and cash, and 17% alternatives; what we would term a “balanced asset allocation,’ appropriate for a “balanced risk profile.”

This balanced allocation will never be the top performer in any year. And, it won’t be the worst. It is designed to deliver middle-of-the-road, steady returns. Patience and time produce the results.

Investors need to also understand that time is their friend. “Time in the market beats timing the market.” Here’s another chart showing the growth of $1 since 1990, all invested in the S&P 500:

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The black line represents an investor who stayed in the market every day and turned her $1 into $14. The red line represents the investor who missed the 25 best days (roughly one a year) and turned her $1 into $4. The gray line represents the return an investor could have received by simply investing in five-year treasury notes, turning $1 into $4.

Getting out of the market is easy; getting back in at the right time is very difficult. In the last couple of months, for example, the equity markets (using the MSCI AC World Index) are about level from December 1, 2018 until last Friday, February 8th. However, if an investor got cold feet and got out in mid-December and waited to get back in until mid-January, they would have lost 3.5% on their equity returns. Timing the market is not a good idea- unless you own a crystal ball, can implement perfect end of day execution on buys and sells, have no transaction costs, and don’t mind paying taxes on realized gains.

Patience and Time are two powerful warriors-they are your friends. Let them do the heavy lifting.  Invest for the long-term. Yes, slow and steady wins the race. It may not make for great cocktail conversation, but boring investing can be very effective.

FIREd up about Early Retirement

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There is a recent trend among Millennials and younger Gen Xers that is generating a great deal of interest. The concept is defined by the acronym FIRE – financial independence/retire early. A WSJ article from November follows the rigid budget and sacrifices of Sylvia, who wants to retire in 2020 with $2 Million at age 40. The current rage to extreme early-retire by using frugality, intense saving and/or
investment strategies to achieve financial independence is becoming a popular notion. This purportedly comes from the 20 to 40 somethings who have a ‘burning’ desire to not be chained to a job, but rather want to freely choose how they spend their time. The FIRE followers want the freedom of financial independence to allow comfortable “retirement” at an earlier than usual age.

FIRE and the discussion around it has inspired many recent blogs, podcasts, articles, books and even a documentary coming out this year called “Playing with FIRE”. Playing with Fire follows a family as they “test their willingness to reject the standard narrative of adult life, which basically prescribes: go to college, take out tons of student loans, buy a new car, take on a mortgage, buy another car and lots more stuff you don’t need, then work for 40+ years to pay for it all. If you’re lucky, you might be able to retire at 65 and not have to eat cat food.” Now that is cynical!

On the surface, however, retiring early sounds like a reasonable goal… we are all striving for some level of financial independence, after all. At DWM and as financial advisors, we definitely believe that controlling spending and sticking to savings goals are the keys to reaching financial independence. Most of us would consider these good money habits to be a common sense approach to life – live below your means, save more, be less materialistic- but what does it take to actually achieve an extreme early retirement in your early 40s or even 30s and make sure you have enough money for the rest of your life? FIRE followers believe extreme saving and frugality is the path. As the Investment News article describes it “Followers of FIRE amass savings voraciously and live on bare-bones budgets. They aim to stockpile enough money to fund a retirement lasting roughly double that of the average American.” Apparently, the retirement savings number that they strive for is based on a future 3-4% percent withdrawal rate that might have to last 60 years!

FIRE followers advocate aggressive savings goals of 50-75% of earnings and following strict budgets to achieve this. They focus on cutting back or even cutting out all non-essential spending like going out to eat, vacations or bigger houses and newer cars. Or like Sylvia from theWSJ article reportedly does, search for the brown bananas and borrow Netflix passwords. This might be where we should talk about quality of life!

On top of that, the unknowns in this strategy could wreak havoc on the best-laid plans. Some in the FIRE movement live austere lives now and plan to continue the austerity into the future to maximize
their savings. All well and good as long as nothing unexpected happens. How about the often unforeseen or underestimated expenses that come from having kids or running into health problems? We can try to predict the impact on our portfolios from inflation, the economy, the markets, investments, but we really can’t say absolutely what will happen in the future. We know that healthcare costs are increasing and becoming a large spending item in normal retirement, especially before Medicare begins. We know that we can’t predict what will happen to Social Security. We certainly can’t predict our life spans – whether short or long – nor are we ever as ready as we would like for emergencies and crises like natural catastrophes, death of a loved one or chronic illness. We just don’t have a crystal ball!

There is also an underlying degree of cynicism in this mindset that our working life is focused solely on the goal of amassing “more stuff”. What about the satisfaction and connection that comes from building a career and a level of accomplishment and expertise in a field? Many of us have had several varying career paths and, had we jumped off after the first one, what would we have missed? What inventions or discoveries or achievements would humanity miss out on if the productivity and challenges that are gained from a lifelong career were cut short?

Successful financial independence does come from hard work, discipline and a measure of frugality and sacrifice – we can all agree on this. At DWM, our goal is to help guide you toward achieving your goal of financial independence, whether you keep “working” or spend your time in other ways – as you wish. We try to minimize some of the risks by planning for as many of the “What Ifs” as we can and hope that, by charting a course, we can help you breathe easier as you plan for the future. We want you to be “fired up” for your whole life and find satisfaction and quality of life during your saving and accumulating days, as well as your spending and legacy days. We think this is possible by following a balanced, moderate and careful financial plan. We can certainly get fired up about that!