Can you see them?
Bruce Schneier wrote an article in March of 2007 titled Why the Human Brain is a Poor Judge of Risk. Looking back, the timing is fine irony. Had more investors read his article, perhaps they would have lowered their overall risk in the markets prior to the Financial Crisis – which began in August of 2007. Schneier opened with, “The human brain is a fascinating organ, but it’s an absolute mess." Although extremely complex, the reason behind this is very simple. We let our emotions overtake logic. And, emotions…well…emotions are dangerous. Too often we can’t see risk when it is standing directly in front of us simply because our biases are so strong.
So, put on your readers and tell your emotions to sit tight…here are the five biggest risks to watch out for in 2020:
- You guessed it—The Financial Markets… Any money manager can do a great job when the market is going straight up. And if I asked you how your guy is doing, I bet I know your response. But this is at first glance. The question you should be focused on has nothing to do with returns right now. I could throw a dart while blind-folded at 2019 and most likely make double digits. The question you should be focused on is how is your guy managing risk? There is more risk in the market today than there has been in over a decade. Think about that. What is your guy doing to manage that risk, but not give up all the upside if the Trump Train continues?
- Tick Tock—The Tax Bomb…You can’t see it and you can’t hear it, but it is definitely there. Taxes are lower than they have been in decades. Most people are just enjoying the ride and keeping a few extra thou in their pockets. The problem is, Tax Reform is not permanent. If the pendulum swings in D.C., you can bet this ride is over and then, “kaboom.” The good news is Tax Reform has actually created a window to help you keep your taxes low. The question you should be asking is how to defuse this tax bomb before it is too late. Remember, “Opportunities are like sunrises. If you wait too long, you miss them.” -William Arthur Ward
- M&M—Mortality and Morbidity… It is true that since 2014, life expectancy has been on the decline, but only by a whopping 0.03%. And this was mostly due to drug abuse, alcohol abuse, and suicide. Since 1959 life expectancy has increased almost 9 years! Furthermore, it is estimated that more than 1 in 2 people turning 65 will need long-term healthcare services.1. The reality is that we are living longer, but not necessarily healthier. No one wants to outlive their money, but this risk is growing. You might simply live too long or deplete your assets to pay for a medical need. Either way, it is a risk you need to address before it’s too late.
- A New Will—That Includes Uncle Sam…The SECURE Act just tightened the rules regarding passing your retirement funds to the next generation without tax. I hope you are not successful and don’t live in Maryland. Your heirs might get to keep a little over 20% of your IRA in a worst-case scenario.2. Even an heir in a tax-friendly state may not even get to keep 24% of your IRA by these same standards. Your financial legacy may be in jeopardy and you may not be able to fix it in your final hour.
- Me, I, #1, Oh My Me My… As Benjamin Graham stated, “The investor’s chief problem—and even his worst enemy—is likely to be himself.” We spend countless hours studying Behavioral Finance. Why? Because you are the biggest risk to your future. We are human and not machines. Emotion is bound to get in the way of logic. Perhaps you think you need to hold onto something because it is has always done good or you knew it was the right thing to do, but it could actually be hurting your financial future. Perhaps you are confident this market is going to keep going up forever, so you don’t worry about getting your risk right - but nothing goes up forever. You might be in great fear of another market downturn, and have subsequently made decisions that could cost years in retirement. You need logic, experience, and discipline. These are the ingredients to successful financial planning. Without them, you have developed a recipe for emotional disaster.
We often talk about the fact that it is what you don’t know that you don’t know that can hurt you. Maybe you are near-sighted, far-sighted, or just need a pair of readers. No matter, if you can’t see clearly, you can’t see. If you truly desire that 20/20 Vision for your future, go to the financial optometrist as soon as you can.
- Assumes an estate in which the IRD is 60% and is subject to maximum federal and state estate tax, assumes heir is taxed in the county with the highest income tax in the state of Maryland. (Estate Tax Rates: FET-40%; SET-20%) (Income Tax Rates: FIT-37%, NIIT-3.8%, SIT-8.95%)