Financial Resolutions for the New Year

by Noah Burns

Each January, I spend some time thinking about goals, resolutions, or other life changes.  For a number of years, I also tried to pick a new skill to learn during the year ahead.  I brewed beer (it was bad); I skateboarded (also bad); I took some golf lessons; and I taught myself to use power tools and fix stuff around the house (still have all my fingers).  The last few years have been devoted to learning about fatherhood and how to be a good dad to my two girls. 

The beginning of the year is indeed a great time to set goals, make plans, and consider what you might want to learn in the year ahead.  In our business, we do the same thing.  We look to how we can serve our clients better, and how can we help them to become better stewards of their wealth.  We discuss how much capacity we have for new clients; we consider changes to our service model; and we take a look at what worked and what didn’t.  By the way, we have capacity to take on more clients, so please feel free to send your friends our way.  In your financial life, the beginning of the year may also be a good time to think about goals, plans, and changes.  When you do, here are a couple themes we think are worthy of your consideration for 2024: 

How would you fund a long-term care event?
If you live in California, you are about to see a lot about long-term care insurance in 2024.  California is at the forefront at looking how the state can help citizens be more prepared should a need arise.  Confronting mortality can be scary, but one’s morbidity can be even scarier.  The statistics about needing long-term care are real, and we want to make sure that our clients have prerogatives if the need arises.  This can only happen with proper planning.  I hate scare tactics, though, so instead of sharing the frightening stats, let’s instead focus on some positives. In our experience, those with long-term care insurance tend to get better care, get the care earlier than others in similar situations, and are less of a physical burden on their spouse.

So much of personal wealth management is making a qualitative versus quantitative decision.  Qualitatively, our team believes in long-term care insurance being considered (NOTE:  My parents have had long-term care insurance for close to fifteen years).  In addition to those reasons above, I know several investors that are too frugal early in retirement because they are worried about possible long-term care needs much later in life.  They stress out and pinch pennies because of something that may not come to pass.  We always say our core value is that life is about experiences and relationships.  If having long-term care insurance is going to give you the comfort you need to actually enjoy retirement, then it will be well worth it qualitatively. 

Quantitatively, it’s simple.  If you never have a long-term care need, then the insurance isn’t going to be “worth it.”  However, if you’re creating your retirement plan, then you really should be thinking about how you would fund a potential long-term care need later in life.  Some of you may have enough assets that long-term care insurance isn’t necessary, but there are many others that would be in dire financial times should they find themselves with the need for long-term care.  This is especially true for married couples, because the care for one spouse can really impact the healthier spouse.  Let’s discuss this subject, so we can find a solution that is right for you.  We can get you quotes for long-term care insurance or stress test your retirement plan against a long-term care need.

Should you take a look at small and mid cap stocks?
One of the ultimate truisms of successful investing is “buy low, sell high.”  Well, right now, there is a dislocation between the valuation of small/mid cap stocks and large cap stocks.  (LEARNING NOTE:  The terms large cap and small/mid cap refers to the size of the company’s value of all its stock, or its market capitalization.  So, Microsoft and Amazon are large cap stocks.  The smaller companies, you may not even recognize their names.)  If you don’t know what valuations are in the stock market, think of it as stocks being either cheap or expensive.  In general, we use price-to-earnings ratio or the P/E.  A stock with a high valuation is expensive.  It’s like going grocery shopping at Whole Foods and only buying name-brand products.  A low valuation stock is like shopping at a discount grocer and buying generic brands.  In general, it may be a good long-term investment strategy to put more of your assets into “cheaper” areas of the market that have lower valuation.

For most of the last 20 years, small and mid cap valuations have been higher or more expensive than large caps.  We have seen a distinct change in that recently.  Small and mid cap stocks are by many measurements cheaper in comparison to large caps than they’ve been in many years.

This does not mean that we recommend going out and selling all of your large cap stocks and other assets to buy small and mid caps.  Good long-term investing is usually best done by many small decisions that tilt the odds in your favor.  Our term for this situation is “stealth opportunism.”  We believe that now is a good time to reevaluate your large cap positions with your financial advisor and ask them about your small and mid cap exposures.

Lastly, if you are somebody that believes that a recession is imminent, small caps have historically tended to perform well in the wake of recessions.  Just some extra food for thought.

Small company stocks are typically more volatile and carry additional risks, since smaller companies generally are not as well established as larger companies.  Past performance is no guarantee of future results. 

Educate the next generation on your estate plan. 
I was having a coffee with an estate attorney recently, and we were bonding about working with families and how family dynamics keep us on our toes.  He shared a case he was working on with a very big family and said that the kids all get along … for now.  It’s a sad truth that money and inheritance can corrupt family relationships.  It’s also important to know that if you don’t have an estate plan, the government has one for your family.  Not only may it not correspond with your wishes, but also it may be more time consuming and involve the differing parties hiring lawyers. How do we combat this?

Step one is to work with an estate attorney to properly create your estate plan.  But even if you have all the proper documents in place, there can still be complications after your passing due to degradation of family dynamics.  So how do you effectively limit this?  In our experience, communication is key. 

You don’t need to open up your statements and tell your kids about every dollar and cent you have.  However, having a guided conversation about how your estate and accounts are set up and why you have set them up in a certain way can be highly beneficial. Let us facilitate the process.  We have run what we call “family zoom calls” for some clients in which we introduce ourselves, as well as review the general structure of the estate plan to the next generation. If your family is interested, please reach out to us to ask about setting up a call. 

Stifel does not provide legal or tax advice.  You should consult with your legal and tax advisors regarding your particular situation.

Consider how to redeploy your cash positions into the market. 
Cash is an important part of your financial picture, whether it’s in your emergency fund or part of your overall asset allocation.  In 2023, cash and cash equivalents (money market funds, T-bills, or CDs) were the talk of our industry.  And for good reason:  You could invest for a six-month term and earn rates that haven’t been seen in several years if not decades. 

As stated earlier, long-term investing is largely about stacking the odds in your favor (probabilities versus possibilities – Robert has written about this concept several times).  In addition to this, it is said that timing the market is very unlikely to be fruitful for the long term.  So are large cash positions good for long-term wealth?  Not likely.  Plainly stated, stocks have tended to outperform bonds and cash equivalents if your time horizon is long enough and most investors underestimate their time horizon, in my opinion.  People are living longer, and even if you are retired, your time horizon could be 30+ years.  We had a client live to 110 years old!

So how much cash is too much cash?  This is largely a question of risk tolerance.  We welcome any conversation you’d like to have on this subject.  But let’s say you, along with your trusted advisor, have determined that there is too much cash in the overall financial picture.  How do you go about redeploying it?  Just think about our “Successful Investor Mindset” philosophy and its core tenet “structure over prediction.”

There are two structures I believe in and one that I adamantly preach against.  Structure one is the “all at once” method.  This, statistically, is often the best method, and it means you come up with the number of how much cash you are comfortable with putting in the market and put it in as soon as possible.  However, from a behavioral finance perspective, this strategy is unattractive.  The hindsight bias will be very tough to fight, meaning you’ll always look back at the one moment in time and question the timing.  Structure number two is dollar cost averaging (DCA), which means spreading out the redeployment over a time period as opposed to as fast as possible.  DCA is helpful from a behavioral standpoint, as it takes a binary decision (in or out) and spreads it out over several months, quarters, or even years.  The last structure isn’t a structure at all, and I call it the “when I feel like it” method.  Even professionals really, really struggle with timing and predicting the market.  This one is the most likely of the three to be a hindrance to your long-term finances.

If you’d like to have a discussion about redeploying your cash, please call us to set up an appointment. 

As you are thinking about your finances in 2024, our team stands ready to help out in whatever way possible.  Is there something above that you want to learn more about?  Is there something that you are working on and want us to be a part of the planning process?  Please call or e-mail us.  As always, we appreciate all of our clients and friends.  May the new year be filled with peace and prosperity for us all. 

Dollar-cost averaging does not assure a profit or protect against a loss.  Investors should consider their ability to continue investing during periods of falling prices.


Tax Time Is Near!

1099-Rs are mailed at the end of January, and 1099s are mailed in mid-February for some and mid-March for others.  Please use this to make an informed decision regarding when to meet with your tax professional.  If you meet in January or February, you may not have the complete picture to provide to them.  Need a referral to qualified tax professionals for your consideration?

E-mail me at [email protected].