Discover the 5-Step Formula for Lifelong Financial Security
In the world of investing, the fear of missing out (FOMO) often takes center stage. However, there’s another crucial concern that deserves our attention – the Fear Of Running Out, or FORO. This is a genuine worry for investors looking to secure their financial future and ensure their investments last as long as they do. In this comprehensive guide, we present a 5-step process to address FORO and build a portfolio that will withstand the test of time.
Step 1: Asset Need – Calculating Your Requirements
To ensure your investments will endure, the first step is to determine the returns you need and the level of risk you are willing to tolerate. Start by calculating your “Work Optional” (WO) number, which represents the amount needed to stop working for pay. If your portfolio exceeds this number, a conservative allocation should suffice, although it may reduce the inheritance for your heirs. If you’re below this target, you might need a more aggressive allocation. Consider optimizing expenses and taxes to lower your WO and strive for financial freedom.
Step 2: Asset Allocation – Choosing the Right Mix
The next step is to decide which asset classes will help you achieve your financial goals. This decision is a critical driver of portfolio performance. Stocks, bonds, cash, both U.S. and international securities, and various alternative investments are available. Assess the equity premium, balance between U.S. and international equities, and leverage the benefits of modern portfolio theory (MPT) to diversify and reduce risk. Remember, true diversification might require owning assets you don’t particularly favor.
Step 3: Asset Capture – Implementing Your Strategy
Once you’ve decided on your asset classes, the next step is to consider how best to capture them. Public and private markets, individual securities, exchange-traded funds (ETFs), mutual funds, and Separately Managed Accounts are all options. Choose your investments before selecting a fund manager, and consider the tax efficiency of your investments in taxable accounts.
Step 4: Asset Location – Tax-Efficient Planning
Minimizing taxes over time is crucial for ensuring your portfolio lasts a lifetime. Consider where to hold your investments – taxable, retirement, or ROTH accounts. In taxable accounts, focus on buy-and-hold, qualified dividend-paying equities. Retirement accounts are ideal for higher-yielding, ordinary income-producing investments. ROTH IRAs provide the benefit of tax-free compounding, especially for high-return investments.
Step 5: Asset Rebalancing – Adapt and Evolve
The final step is ongoing portfolio management. Rebalance your portfolio as your financial situation changes, triggered by alterations in your financial plan, comfort level, forecasts, or new investment opportunities. This step is vital for mitigating risk and ensuring that your investments align with your long-term goals.
The Tax Considerations
Consider the impact of taxes on your portfolio. Selling investments to reduce risk may improve compounding but could result in capital gains tax. Loss harvesting, gifting to charity, or transferring assets to lower-bracket family members can help mitigate this tax burden. Moreover, under current law, a step-up in basis at your passing allows heirs to use date of death values for tax purposes, potentially reducing their tax liability.
In conclusion, to overcome the Fear Of Running Out (FORO) and build a portfolio that will last a lifetime, follow these five essential steps:
- Calculate your asset needs and tolerance for risk.
- Choose the right asset allocation for your financial goals.
- Implement your investment strategy effectively.
- Optimize the tax-efficiency of your investments.
- Adapt your portfolio over time to ensure it remains aligned with your objectives.
Don’t let the Fear Of Running Out paralyze your financial future. By understanding and implementing these steps, your portfolio can be as unique as you are, standing the test of time and securing your financial well-being.
Consider consulting with a financial advisor or planner to tailor these strategies to your unique financial situation and ensure your investments are in line with your long-term goals.