The Noah Rule: Are you prepared for the unexpected?
Warren Buffet once described the “Noah Rule”:
“Predicting rain doesn’t count; building arks does.”
At Faith-Based Investor, we are a seasoned investment management firm that uses advanced asset allocation and financial strategies designed to work when the going gets tough. With that in mind, I wanted to share some of our keys to success.
Financial predictions are a dime a dozen. But how many of them are actually right? What happens when the unexpected actually occurs: the loss of a job, the death of a loved one, a stock market collapse? When the rain comes are you prepared for a flood?
We purposefully concentrate on financially and morally sound financial strategies. This not only involves selecting companies that meet your financial and moral criteria but planning your finances in such a way that you are prepared for both the good and bad times. By combining financial planning with asset management, we strive to offer our clients piece of mind knowing they are properly protected.
It doesn’t take a genius to figure out today’s environment is extremely challenging:
- The stock market is far less forgiving than the 1980s and 1990s
- The threat of hyper-inflation
- Interest rates at all-time lows do not favor fixed income investors
- Traditional asset allocation failed us during the 2008-2009 market collapse
Here are seven keys to being a more prepared investor:
1. Make your investments personal. Every investor has different needs, yet most investors are lumped in with other investors who may not share the same goals. When your investments are too conservative you may not earn enough to meet your goals. Yet when they are too aggressive, you may take on too much risk for your needs and risk missing your goals. This means your investments should match your personal financial goals.
Do you have specific industries or companies you would like to avoid investing in such as abortion, pornography, alcohol, tobacco, gambling or those identified by the Genocide Intervention Network? Bottom line, you should know what you’re investing in, have control over that investment, and tailor it to your faith and moral preferences. Your investments should match your faith and values.
At Faith-Based Investor we offer investors three services:
1) A monthly investment newsletter for $19.99 per month
2) Asset management (based on an asset management fee)
3) Financial planning and coaching (based on a hourly fee)
Let us know how we may help you!
2. Be flexible in your investment approach. This means you should have liquidity – the ability to withdraw money without fees or penalties. If your assets are illiquid or tied up in investment accounts with back end loads (sales charges), it can prove to be costly not only from a fee perspective, but also on investment performance.
3. Diversify globally. Diversification simply means spreading your money across multiple investments. Diversifying has the potential to lower your portfolio’s risk while also have the ability to increase your returns. For example, according to John Maginn’s “Managing Investment Portfolios”, a diversified group of 20 stocks eliminates 85% of company-specific risk from your portfolio, while 50 stocks reduce company-specific risk by 93%.
Make sure to be adaptive to changes in our global economy. The true economy rapidly moves and will continue to become more of a globally connected economy. Having investments in multiple asset classes (stocks, bonds, cash, and alternative investments) lowers your overall risk. Also make sure you are diversified within each class. For example in the stock category, look at large caps, mid caps, small caps, international, and emerging market stocks. Find bull markets wherever they may be (U.S. or international, stocks, bonds, or other investments).
I have also read studies that not properly diversifying can cost investors as much as 30% and 50% of total accumulated wealth over their working years. You can use mutual funds but here are some significant problems I have found with mutual funds:
- ·Expensive Fees. The average fund cost for ETFs and mutual funds (including management and trading) is 2.63% according to Morningstar and Rydex Investments.
- No ability for customization. They offer “one size fits all investing” with no ability to personalize your moral and financial criteria. In other words, you have no control over what companies your manager is buying.
- Tax inefficient. There is no ability to defer capital gains or harvest tax losses from the underlying securities. Worse yet, you may have to pay taxes even though you lost money on the investment.
- High minimums. Many funds have high minimums making it difficult to diversify.
- Poor performance. Most mutual funds fail to beat their respective index.
4. Keep costs low. Your investment fees can eat away at performance. See the hidden costs of mutual funds. Fees can add up to thousands of dollars over your lifetime as an investor. The lower your investment fees, the higher your returns.
5. Using a mix of defensive and offensive strategies. Defensive strategies aim to keep losses small and protect your downside. Offensive strategies look to capture as much upside as possible without taking more risk than you can afford to take. By combining the two strategies you can benefit from both good and bad markets. This can be accomplished through hedging, diversification, asset allocation, and active management strategies.
6. Invest consistently. Most investors cannot time the market. Want proof? Check out Fidelity’s report that found that there were record levels of investment from individuals in late 2000, just before the crash, and then record withdrawals in early 2003, just ahead of a substantial rally. Instead of trying to time the market, look to invest consistently and regularly. This doesn’t mean “buy and hold” or “set it and forget it” investing. Look to make regular investments (monthly or at least annually) and adjust your portfolio as your needs change. Also make sure you periodically review your portfolio and rebalance it annually.
7. Lastly, minimize taxes. One possible method for realizing greater tax efficiency is simply to minimize buying and selling to reduce capital gains taxes. The idea is to pursue long-term gains, instead of seeking short-term gains through a series of steady transactions.
You can also use tax-loss harvesting. This means selling certain securities at a loss to counterbalance capital gains. In this scenario, the capital losses you incur are applied against your capital gains to lower your personal tax liability. Basically, you’re making lemonade out of the lemons in your portfolio.
Additionally, you can assign investments selectively to tax-deferred and taxable accounts. Here’s a rather basic tactic intended to work over the long run: tax-efficient investments are placed in taxable accounts, and less tax-efficient investments are held in tax-advantaged accounts.