7 Financial Moves to Make in 2019
The stock market turbulence of Q4 shook up many of us. You should leverage recent events to reassess your personal financial plan. Market conditions change, but you can be ahead of the curve. I am not predicting that a bear market is imminent, just suggesting defensive measures in the event of a further market decline. Here are seven financial moves you can make early in 2019 to fuel your wealth goals.
Exchange Traded Funds
Rationale: lower expenses means more of your money stays invested in an efficient and diversified portfolio.
ETFs offer an opportunity to invest in a broad sector of the market at a low expense. Their expense ratios are sometimes as low as 4 bps (100 basis points or bps equals 1%). Compare this to the average equity mutual fund expense ratio which can range from 50 to 125 bps. They trade throughout the day like individual stocks and give investors more opportunities for portfolio management. There are also ETF’s for many unique situations. Some leveraged funds reflect 2X market movement or inverse positions for shorting the market.
Money is made in investments from the inefficient flow of information. Your research can set you apart from someone else that doesn’t have the intel. However, with the internet we all have information at about the same time. This makes it very difficult to pick a winning individual stock. Especially when you consider that other players, those who make a full time living as part of the financial industry, have more time to learn and act on intel than the average investor. ETFs enable average investors to participate in general market movements like the larger players.
Rationale: Dividends generate an income unrelated to stock price movement and stocks that have a strong dividend history also have a history of less decline during a bear market.
Dividends are the real purpose of investing; you are getting a share of the company’s profits. The idea gets somewhat lost from time to time as speculators try to buy a stock with the hope of selling it to someone else at a higher price and they forget about the income opportunity. A stock with a long history of dividend growth can prove to be an excellent defensive addition to your portfolio. In times of market decline or a sideways market, investors are paid while they wait.
Utility and financial companies have historically paid attractive dividends like Verizon (VZ) at 4.39% and Ares Capital (ARCC) at 10.51%. There are many packaged portfolios that focus on dividends, as well. Liberty All Star Fund yields 12.77% and First Trusts version of the Dogs of the Dow (FDL) pays out 5.26%. Of course, rising interest rates compete with dividends. Be aware that some investors may sell dividend stocks to chase interest rates.
Protect against inflation
Rationale: Inflation devalues current savings and raises the cost of future retirement years.
In its justification for December’s rate increase, the Fed’s policy-setting committee cited solid economic growth and job gains. A byproduct of such is often inflation. Rising prices raise the price of commodities like those represented in the Invesco DB Commodity Index Tracking Fund (DBC) or other ETFs like SLV (iShares Silver Trust) and CPER (copper) which have high industrial use or even CAFE (coffee), which some may argue has its own industrial use.
SLV shares are a representation of ownership of actual silver bullion while DBC, CPER and CAFE use futures contracts to track commodities prices.
Commodities can be highly volatile by themselves. According to Harry Markowitz and Modern Portfolio Theory, you can reduce volatility by mixing them in a portfolio of stocks and bonds. This method creates a natural balance due to the non-correlation to stocks and bonds.
In addition, start setting aside more money. The higher the inflation rate, the more money you will need to set aside now for a comfortable retirement. Don’t get caught off-guard with insufficient funds in later years.
Start a side gig, save the earnings
Rationale: Your current budget may not support saving more money. Additional income solves the problem.
I live in a very financially prosperous area. Almost everyone has a side gig. The cashier at the local discount store is a CPA by day. The evening barista at the national coffee house chain runs a medical group practice by day. Both save all the money they make at their side gigs. From monetizing a blog with affiliate marketing to setting up an Amazon store, there are hundreds of side gig opportunities in your local area. Generate additional income to save and meet your financial goals and offset inflation rates.
Create an emergency fund
Rationale: Protect yourself from the unfortunate situation of having to sell investments when the market is down or borrow money when rates are going up.
Emergencies happen, so be prepared. Seems like common sense, but you would be surprised how many people don’t set aside an emergency fund. I’ve seen situations where people had an emergency at a time when the stock market was down and they had to sell investments at a loss to cover the emergency.
Most financial planners recommend three to six months household expenses set aside in a liquid savings instrument. You never know when you may find yourself out of work, suffer a prolonged illness or have a natural disaster occur.
A money market account with check writing can serve as an excellent tool for an emergency fund. Be aware that financial institutions may require a certain minimum account balance before depositors are eligible for interest earnings. Overall, money markets pay more than other savings and checking alternatives.
Most importantly, do not rely on a home equity loan or credit cards as a substitute for a real emergency fund. Such reliance puts you further from being debt free and may lower your credit score as your utilization rate spikes.
Shop your insurance
Rationale: Use the money saved on insurance to fund your retirement goals, while offsetting inflation.
Insurance is a necessity and highly competitive. But don’t consider the lower cost until you are sure that the service will be adequate. Just a few days ago a friend called his cut rate insurance company who uses a call center rather than agents. It took 30 minutes to get what should have been a simple answer.
It’s difficult to access any media without seeing an advertisement about cutting your auto insurance. While shopping, consider potential savings from a higher deductible. Combine your home and auto policies at one carrier to save money as well.
Shop Around for the Best Insurance Policies
Shopping for life insurance can be confusing. You need to consider inputs like health, age, and the type of insurance you need. Term insurance usually gives the most proceeds to your beneficiaries for the lowest cost.
If you currently own a cash value or whole life policy, you will enjoy a lower cost per thousand of coverage with term insurance. Affordable term insurance rates ensure that you leave enough funds to your family if something happens to you. You can invest the savings from dropping the whole life policy to create more wealth for your beneficiaries in the future.
However, if you have an illiquid estate or need insurance coverage into your later years, term insurance may not be your best bet. When you find an insurance policy that better suits your needs, do not drop your existing coverage until the new policy has been issued and you have accepted it.
Live within your means
Rationale: The money spent on items that depreciate will only reduce your standard of living in retirement.
You’ve heard it hundreds of times, make a budget and list your savings first. But in an affluent nation, we think we should spend freely and own things we don’t really need. Keeping up with the Joneses can lead to struggles in retirement.
Make savings your top budget priority, not buying things that you don’t need. Pay down credit card debt as fast as you can. Secure a position of financial security that you will enjoy much more than depreciating items with short lifespans. Make 2019 the year you pay off you credit card debts and invest for a wealthy future.
By Jeffery Thomas Dec 23, 2018
Jeff is a financial author, money advisor and manager of the personal financial blog The Well Planned Wallet. His career has spanned three decades and can be contacted at [email protected]