Boost retirement benefits with a cash balance plan

Business owners may not be able to set aside as much as they would like in tax-advantaged retirement plans. Typically, owners are older and more highly compensated than their employees, but restrictions on contributions to 401(k) and profit-sharing plans can hamper retirement-planning efforts. One solution may be a cash balance plan.

Defined benefits with a twist

The two most popular qualified retirement plans — 401(k) and profit-sharing plans — are defined contribution plans. These plans specify the amount that goes into an employee’s retirement account today, typically a percentage of compensation or a specific dollar amount.

In contrast, a cash balance plan is a defined benefit plan, which specifies the amount a participant will receive in retirement. But unlike traditional defined benefit plans, such as pensions, cash balance plans express those benefits in the form of a 401(k)-style account balance, rather than a formula tied to years of service and salary history. The plan allocates annual “pay credits” and “interest credits” to hypothetical employee accounts. This approach allows participants to earn benefits more uniformly over their careers, and provides a clearer picture of benefits than a traditional pension plan.

Benefits for business owners

Establishing a cash balance plan or adding one to coordinate with an existing 401(k) or profit sharing plan can provide significant advantages for business owners — particularly those who are behind on their retirement savings. In 2017, the IRS limits employer contributions and employee deferrals to defined contribution plans to $54,000 ($60,000 for employees age 50 or older). Nondiscrimination rules, which prevent a plan from unfairly favoring highly compensated employees (HCEs), can hamper an owner’s contributions even further.

Cash balance plans aren’t bound by these limits. Instead, as defined benefit plans, they’re subject to a cap on annual benefit payouts in retirement (currently, $215,000), and the nondiscrimination rules require that only benefits for HCEs and non-HCEs be comparable. Contributions may be as high as necessary to fund those benefits. Therefore, a company may make sizable contributions on behalf of owner/employees approaching retirement (often as much as three or four times defined contribution limits), and relatively smaller contributions on behalf of younger, lower-paid employees. These funding contributions are determined by an actuary on an annual basis and are considered independent of contributions to any existing defined contribution plans.

Of course, there are potential risks to cash balance plans as well. Unlike profit-sharing plans, you can’t reduce or suspend contributions to these defined benefit plans during financially difficult years. Similarly, investment performance within the plan may impact your ability or need to make funding contributions. So, if you do choose to implement one, it will be critical to ensure that your company’s cash flow will be steady enough to meet its funding obligations.

Be prepared

Although cash balance plans can be more expensive than defined contribution plans due to the additional administrative intricacies, they’re a great way to turbocharge your retirement savings. Work with your CPA and retirement advisors to determine if one may be right for you.

William Braddy earns prestigious CEPA designation from Exit Planning Institute

William Braddy, CFP®, a wealth manager with Kraft Asset Management, LLC, has earned the prestigious Certified Exit Planning Advisor (CEPA) designation after completing the Exit Planning Institute’s intensive program. William joins an elite group of business advisors worldwide who have received this designation. Dana Holmes, CEO of our affiliate, 2nd Generation Capital, LLC, also earned the CEPA designation earlier this year.

Vic Alexander, chief manager of KraftCPAs says, “We’re fortunate to now have two professionals on the Kraft team who have attained the CEPA designation. In close collaboration with our affiliates, we assist business owners in a variety of areas that are important in developing or implementing exit planning strategies, such as valuation, tax planning, wealth management, risk assessment and much more. Having professionals with this designation is a reflection of our commitment to help clients build, preserve and transfer business value and personal wealth.”

William adds, “Many of my clients over the years had significant wealth tied up in their businesses. Unfortunately, some did little planning to exit the business and monetize its value potential. By working together with KraftCPAs and our other affiliates, we’re confident we can provide services which will significantly change clients’ outcomes. As registered investment advisors, we at Kraft Asset Management help clients make prudent investment decisions which will position them to attain their personal goals and dreams. We understand that success means different things to different people. We’re committed to helping each client define, plan for and achieve the life they have envisioned for themselves and their families.”

William’s experience and expertise

William joined Kraft Asset Management in 2015. Prior to joining KAM, William was a senior vice president and private client advisor with U.S. Trust Bank of America in Nashville where he oversaw all private banking activities in Tennessee. With more than 20 years of experience in wealth management, he specializes in working with high-net-worth individuals and families. In addition to this most recent CEPA designation, William holds the CERTIFIED FINANCIAL PLANNER™ credential (CFP®) and holds Financial Industry Regulatory Authority (FINRA) Licenses 7 and 66.

About the CEPA program

The Certified Exit Planning Advisor program was designed for business advisors who work closely with owners of privately held companies. Using an executive MBA-style format, the program is designed around a central methodology, which is taught by the Exit Planning Institute’s dedicated faculty who are all sought-after subject matter experts and authors.

To receive the CEPA designation, professionals complete the rigorous four-day program that involves approximately 100 hours of pre-course study, 30 hours of classroom instruction and successful completion of a three-hour proctored examination.

About the Exit Planning Institute

Formed in 2005 to serve the educational and resource needs of M&A advisors, attorneys, wealth managers, financial planners, commercial lenders, management consultants, and other business advisors, the EPI is considered the trendsetter in the field of exit planning. It is the only organization that offers the CEPA program, which qualifies for continuing educational credits with 11 major professional associations, making it the most widely accepted and endorsed professional exit planning program in the world.

Do you have these critical legal documents?

I’m not afraid of death; I just don’t want to be there when it happens. – Woody Allen

Planning for your death is not the most enjoyable process. Unfortunately, bad things can happen if you don’t. One never knows when tragedy will strike; when it happens, it’s too late to start planning. Getting your affairs in order is advisable for everyone.

You may think that estate planning is only for the wealthy or for older people. Everyone can benefit from end-of-life planning, which entails more than writing a last will and testament. We are not providing legal advice, so you should consult with your financial advisor, CPA and an attorney who understands estate planning. A team approach should provide you with the best planning results.

Documents that everyone should have include:

1. Last will and testament. One of the most important estate planning documents that you can have, a last will and testament allows you to name the person you want to handle your affairs after you die and to explain how you want your assets distributed. You can name your estate’s executor (representative), name a trustee for any trusts created by the will and a guardian for any minor children you have. If you die without a will, it will be left up to a probate judge to decide how your assets are distributed and who will represent your estate. The judge may appoint someone you do not trust.

2. Living will. A living will (also known as an “advance directive”) articulates your end-of-life treatment wishes. It spells out what type of medical treatment you want at the end of your life if you are unable to speak for yourself. Some people do not want to be kept alive with machines and tubes hanging all over them. Others want to be kept alive at all costs.

3. Durable power of attorney. A durable power of attorney allows you to name someone to be in charge of making decisions for you if you become incapacitated for some reason, whether from an accidental injury, loss of mental capacity or some other reason. You may choose to name a separate healthcare power of attorney for medical decisions and a financial power of attorney for financial decisions. A healthcare power of attorney works hand-in-hand with a living will. The person you select for financial matters will not necessarily be the same person you want for health-related matters.

4. Living trust. A living trust allows you to bypass the potentially expensive and prolonged probate process and protects your privacy at the same time. A living trust provides for quicker distribution of your assets to your heirs since it can take effect immediately upon your death without probate. Generally speaking, it is most appropriate for people who have complicated financial or personal circumstances.

5. Final plan arrangements. Final arrangements can include organ donation and funeral arrangements, including how they are to be paid for.

6. Digital asset inventory. You should create and keep up-to-date a list of all online accounts, reward programs, passwords, financial and bill pay sites, social media, professional organization profiles, etc. to enable your family to manage your online presence when you are incapacitated or die.

If you have these documents in place, you should review them periodically. We recommend that you review them annually, perhaps on your birthday, to make sure they still reflect your intentions.

If you do not currently have an estate plan in place, you need a trusted financial advisor and an estate attorney who, working together, act in your best interest to help you develop a sound estate plan.

Let us help you and your attorney develop an investment plan to meet your financial goals and dreams.

The rules of prudent investing

The following rules can help investors build and adhere to a well-designed investment plan. These guidelines may be instrumental in giving investors the best chance of achieving their financial goals.

Constructing an investment plan

Recognize that the ability, willingness and need to take risk is different for everyone. Plans fail because investors take excessive risks. The risks unexpectedly show up and the plan is abandoned. When developing a plan, investors should consider their investment horizon, stability of income, ability to tolerate losses and the required rate of return.

Don’t invest in any security without fully understanding the nature of all of the risks. If investors cannot explain the risks to their friends, they should not invest. It’s critical to understand the nature of the risks being taken.

A well-designed investment plan has many elements. It should integrate portfolio management with tax planning, estate planning and risk management.

Don’t treat the highly improbable as impossible, nor the highly likely as certain. Investors assume that if their horizon is long enough, there is little or no risk. The result is they take too much risk. Stocks are risky no matter the horizon.

Only work with advisors who will provide a fiduciary standard of care. That is the only way to ensure that the advice provided is in the investors’ best interest. There is no reason not to insist on a fiduciary standard.

Prudent InvestingMaintaining an investment plan

The more complex the investment, the faster investors should run. Complex products are designed to be sold, not bought. Investors can be sure the complexity is designed to favor the issuer, not the investor. Investment firms do not simply give away higher returns.

The only thing worse than having to pay taxes is not having to pay them. The “too-many-eggs-in-one-basket” problem often results from holding a large amount of stock with a low cost basis. Fortunes have been lost because of the refusal to pay taxes.

The safest port in a sea of uncertainty is diversification. Portfolios should include allocations to the asset classes of large-cap and small-cap stocks, value and growth stocks, real estate, international developed markets, emerging markets, commodities and the appropriate amount of bonds.

Owning individual stocks and sector funds is more like speculating than investing. The market compensates investors for risks that cannot be diversified away, such as the risk of investing in stocks versus bonds. Investors should not expect compensation for diversifiable risk, such as the unique risk related to owning one stock or sector fund. Prudent investors only accept risk for which they are compensated with higher expected returns.

Take risk with equities. The role of bonds is to provide the anchor to the portfolio, reducing overall portfolio risk to the appropriate level.

Staying the course

The consequences of decisions should dominate the probability of outcomes. Investors should ask themselves if they can live with the outcome, regardless of how small of a chance there is of the outcome occurring.

The strategy to get rich is entirely different than the strategy to stay rich. One gets rich through inheritance or by taking risk. One stays rich by minimizing risk, diversifying and not spending too much.

The four most dangerous investment words are “This time, it’s different.” Getting caught up in the mania of the “new thing” is why the surest way to create a small fortune after starting out with a large one.

If it sounds too good to be true, it probably is. Investment decisions should be based on the evidence from peer-reviewed academic journals.

Keep a diary of market predictions. After a while, investors will likely conclude that they should not act on their “insights.”

Good advice does not have to be expensive, but bad advice always costs dearly no matter how little is paid for it. Smart people do not simply choose services based on cost (the cheapest doctor or CPA). Costs matter; but it is the value added relative to the cost of the advice that ultimately matters.

The material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Copyright © 2017, The BAM ALLIANCE.

What insights can we gain from our look back at 2016?

Every year brings its share of surprises. How many of us could have imagined that 2016 would see the Chicago Cubs win the World Series, Bob Dylan receive the Nobel Prize in Literature, Donald Trump elected president, the United Kingdom’s withdrawal from the European Union, and the Dow Jones Industrial Average close out the year just short of 20,000?

In 2016, the U.S. financial markets reached new highs, and stocks in a majority of developed and emerging market countries delivered positive returns. Yet, the year began with anxiety over China’s stock market and economy, falling oil prices, a potential U.S. recession, and the stock markets in France, Japan, and the U.K. registering losses of more than 20 percent from their previous peaks. U.S. equity markets were in steep decline and had the worst start of any year on record.

The markets began improving in mid-February through midyear; however, it was not always smooth sailing for the remainder of 2016. Investors faced uncertainty from the Brexit vote in June and the U.S. election in November. While both of these events created a significant amount of consternation, which played havoc with the global stock markets, the duration of the declines did not last long. Unfortunately, too many investors panicked and sold everything to cash.

“The reality is that no one has any idea what new and unforeseeable circumstances are in store for us in 2017 and beyond.”

Ultimately, many of these investors either stayed in cash or reentered the markets too late and missed out as the U.S. stock market had a strong year. The S&P 500 Index logged nearly a 12 percent return, and U.S. small cap stocks, as measured by the Russell 2000 Index, returned over 21 percent. As well as the U.S. markets performed last year, it was only the 17th best performing country out of 46 countries in the MSCI All Country World Index (ACWI). The S&P 500 index performance in 2016 was not even in the top half of the index’s historical annual returns.

So what insights can we gain from our look back at 2016? Hardly anyone predicted the Trump victory or the Brexit. The financial press of late is rife with some pundits foreseeing a higher stock market for the next year and beyond, while others are predicting a significant downturn later this year. The post-election rally is a speculative guessing game, as people are wagering on the effectiveness of the incoming administration’s economic policies before any have been implemented. The reality is that no one has any idea what new and unforeseeable circumstances are in store for us in 2017 and beyond, much less the direction or extent of the effects of those circumstances on the financial markets, and it would be foolish to base one’s long-term financial welfare on such pure conjecture.

So let us help you make sense of the media noise, sort through the clutter and weather the market’s uncertainties with peace of mind. That’s our recommendation for long-term investing success.

Take the opportunity to live well

Of the new year, celebrated Victorian poet Alfred Lord Tennyson said, “Ring out the false; ring in the true.” So in that spirit, we pose two questions:

  1. Do you feel wealthy?
  2. Do you feel “well-thy”?

In response to the first question, if you are like most people, your mind likely went to the size of your bank account. Change one small letter, and your perspective may have shifted dramatically. You may have found yourself thinking of your health, your family, your friends, your role in your community, your connection to a higher power, your career, your hobbies and more.

This begs the question, what really is “a rich life”? In his new book, “The Feel Rich Project,” Michael F. Kay says it’s about improving “our ability to live closer to our values … to build upon a foundation of appropriately aligned beliefs, behaviors, and habits.” He goes on to point out how, for so many of us, a nagging sense of dissatisfaction, of feeling that we are lacking, comes from a life in which our daily habits do not support our deepest values.

Another way to think about this is the common notion that we must first do the right things so we can have certain possessions or experiences in order to be truly happy. This way of thinking can be summarized as “DO, HAVE, BE.” Alternatively, focusing on who you want to be — from the standpoint of your character, your interactions with others, the legacy you wish to leave, what brings you joy — will lead you to do what is necessary to support those values, and you will end up with what you are meant to have. This way of thinking can be summarized as “BE, DO, HAVE.” The second philosophy not only takes the emphasis off external elements (which are much harder for us to control), but refocuses us on why we want to do or have something.

Manisha Thakor, director of wealth strategies for women for the BAM ALLIANCE, was recently interviewed for The New York Times article “How Much Is Enough?” The piece and subsequent reader comments about “enough” and its counterpoint “too much” underscore what a loaded question this is in modern life. It pertains to so many aspects of our experience — money, time, love and connection, to name a few. When our answers to “enough” or “too much” come from outside ourselves, they are difficult to control and can leave us feeling hollow.

So instead of making a list of New Year’s resolutions, why not consider a different project: Identify your core values and take whatever steps necessary to shift your daily actions in the direction of those beliefs. Looking at how you spend your time and your money will give you powerful clues about areas of your life that may be ripe for some tweaks. If family is a core value, what rituals can you put in place to ensure you are devoting the time you want to your loved ones? If financial independence is a core value, have you taken steps to fully finalize your estate, risk management and tax minimization plans? Is your spending aligned with your values?

As you begin 2017, we hope you see it as an opportunity to ensure you’re living a “well-thy” life. From all of us at Kraft Asset Management, we wish you a very Happy New Year!

Take steps to move toward your ideal life

thinkbigIf you suddenly received $10 million and the diagnosis that you had only 10 years to live, what would you start doing? What would you stop doing?

The specific dollar amount that triggers your personal feeling of financial release may be higher (or lower) than $10 million. But the power of these twin questions comes not from the specific number, but from conceptually removing one common restraint on living an authentic life (“I need more money before I …”), while highlighting the other restraint we all share: that our time on earth is limited.

Common answers to these questions are: “I would start spending more time with my family, traveling and volunteering,” and “I would quit worrying, working, and doing things or being around people that don’t bring me joy.”

This, of course, begs the obvious follow-up question: What’s stopping you from living that bigger life right now?

It seems that, increasingly, time is the constraint that keeps us from living bigger. For many of us, we feel we don’t have the time (or choose not to spend the time) to challenge ourselves to figure out what, exactly, it is that we really want. This is understandable. Self-reflection is hard work and can require us to acknowledge that we may have made some less-than-optimal choices in the past. However, like most difficult steps, there can be a big payoff at the end.

“What’s stopping you from living that bigger life right now?”

And it can be easier than you think. Neuroscientists have shown that once an intrinsic goal is identified, our “reticular activating system” starts working on the problem and, “seemingly miraculously,” solutions can start to appear. Behavioral experts have found that taking small, regular steps in pursuit of a seemingly large and impossible goal can help us achieve what once seemed inconceivable. Studies from multiple fields show that one of the most common traits of “successful” people is grit and a willingness to try, fail and try again. These findings show that the keys to having a bigger life are within us all.

This fall, take some time to ask yourself what things you would change in order to move from your current life to your ideal life. It can be helpful to have someone act as a sounding board in this exercise, and we would be happy to help. In addition, these questions make an excellent framework for reviewing your financial plan to make sure it is designed to support your personal life goals.

How will the presidential race affect the financial markets?

Whatever your political views may be, it’s fair to say that speculation about the upcoming presidential election has been running rampant in the press and among pundits from both sides of the aisle. So it’s really no surprise that the financial media are debating how the nominees, the race itself and its outcome will affect the markets. While there is some evidence that markets tend to be weaker during election years1 (perhaps because of the uncertainty that precedes the election), markets have also tended to bounce back following the election, regardless of the winning party. How the S&P 500 performs in election years versus non-election years, or in the final year of a presidential term, or even in election years when no incumbent is running — none of these should matter to your investment plan, which is based on your individual circumstances and customized to meet your financial goals.

This is not to say that there aren’t plenty of market “gurus” and other pundits out there, political and otherwise, making predictions about the effect that the November elections will have on the markets or the economy as a whole. Mark Cuban told CNN “with 100 percent certainty” there would be a “huge, huge correction” if Donald Trump is elected.2 Bill Maher predicted a Trump victory would “crash the stock market.”3 One writer charges that Hillary Clinton will be “bad for stocks and the economy.”4 Another headline promises that one of Clinton’s plans would “ruin the U.S. economy.”5


Over the next few months, we can expect plenty of headlines that are likely to affect the financial markets, but no one can accurately predict what those will be. What we do predict, however, is that markets will move up and down over longer periods of time, and the “headline du jour” is unlikely to have any long-term impact. We have experienced both up markets and down under both Democrat and Republican administrations. It is interesting to note that research6 has shown that people tend to feel more confident in the economy and the markets when the political party they favor is in power (and vice versa). Elections are important — but not as part of your investment strategy.

As November gets ever closer, just remember that when it comes to short-term market performance, no one (repeat: “no one”) knows what will happen. What’s more, you’re better off if you don’t let your politics interfere with your investing behavior. The headline to remember is: “I have a carefully crafted plan, tailor made to fit my unique circumstances, and I’m going to stick to it.” There is an overwhelming amount of objectively vetted academic evidence that substantiates this to be by far the superior, long-term approach.

So let us help you make sense of the media noise, sort through the clutter and weather the market’s uncertainties with peace of mind. That’s our recommendation for long-term investing success. Please contact us if you have any questions or concerns or to set up a consultation.

3 Washington Examiner
5 Investor’s Business Daily
6 Social Science Research Network

Brexit — Our Perspective

BrexitBritain’s decision to exit the European Union has brought with it all the expected trappings of a significant news event — projections of crazy market volatility, wild headlines and a fair dose of uncertainty about the long-term impact on the global economy and our individual financial lives here at home. Many questions immediately arise as we pay close attention to how the event will play out in the weeks and months to come. But our perspective is the same as it has always been in times like these. Your financial plan is built with diversification and your personal risk tolerance in mind — it’s designed to weather the ups and downs that inevitably follow significant world happenings.

Jared Kizer, chief investment officer for the BAM ALLIANCE, reminds us of this and offers an overview of the developments below:

1. What did British voters decide?

To the surprise of many — including stock and bond markets — Britain voted to leave the European Union (EU) by a margin of 52 percent in favor of leaving (i.e., “Brexit”) and 48 percent in favor of remaining. The general belief from the economic community is that this decision will weaken the British and European economies since Britain both imported and exported a significant amount of its economic consumption and production, respectively, to continental Europe.

2. How have markets reacted?

At the time of this writing, stock markets have fallen precipitously and bond interest rates have dropped as well. With the exception of precious metals, commodity markets are also generally down, and the British pound has dropped by about 8 percent against the U.S. dollar.

3. Why have markets reacted so violently?

Without question, the primary reason is that markets had incorporated a belief that Britain would remain in the EU. Stock markets had been up significantly over the last couple of weeks, and interest rates had started to move back up after being lower earlier in the month. These movements were generally believed to be an indication that the market expected Britain would remain in the EU.

Because the vote did not go as most expected, stock markets are giving back those gains and more, and interest rates are now falling instead of increasing. We emphasize, though, that while these market moves have been swift, this is normal market behavior when a significant event (like Britain leaving the EU) turns out differently than what the market had anticipated.

4. Why has the U.S. market reacted so strongly to Britain’s decision?

We truly live in an interconnected, global economy at this point. Any decision by an economy that is the size of Britain’s (fifth largest in the world) will impact markets elsewhere, including the U.S. market. The European market is a significant trading partner for many U.S. firms, so it’s not surprising to see U.S. stocks decline since Britain’s decision is thought to be a net negative for Europe from an economic perspective.

5. Will Britain’s decision precipitate a global recession?

It’s impossible to say whether we are headed toward a recession, but Britain’s decision likely increased the likelihood of a recession. However, the strong caveat here is that markets are forward looking and have already started to incorporate this likelihood, meaning you can’t use this information to your advantage. This increased likelihood of recession is no doubt one of the reasons that stock markets have moved down sharply while bond prices have moved up sharply.

6. How did markets get this wrong?

While outguessing markets is difficult, in hindsight markets will always appear to have been overly optimistic or pessimistic, which means it’s easy to critique them while looking in the rearview mirror. This particular vote was expected to be close, so markets weren’t certain but were tending toward a “remain” vote.

7. What will markets do from here?

While it’s very difficult to predict markets, it is highly likely markets will be volatile for some time to come. Stock market volatility has been relatively low over the last few years, but it can change quickly. The VIX, which is a measure of annualized stock market volatility, has gone from about 17 percent to 25 percent in reaction to the news, which is higher than the long-term average of about 20 percent per year. It is important to remember, however, that higher volatility can work in both directions. While we could certainly see more days when stocks fall significantly, it’s also possible we will have days when they rise significantly.

8. What should I do with my own portfolio?

Our guidance is the same that it has always been. If you have built a well-thought-out investment plan that incorporates your ability, willingness and need to take risk, you should not change your plan in reaction to market events. Doing so rarely leads to productive results.
Your plan incorporates the certainty that we will go through periods of negative market returns, and market reactions like this are also the primary reason we emphasize high quality bond funds and bond portfolios, which help buffer the risk of stocks. The early read on this bond approach is that it’s doing exactly what we expect it to since high quality bonds have appreciated significantly in reaction to the Brexit vote.

9. How will this impact Federal Reserve interest rate policy?

As we have previously noted, interest rates have dropped dramatically in reaction to the vote. In early trading, the 10-year yield is at about 1.5 percent after having been at about 1.75 percent one day earlier. These early movements in interest rates indicate the market does not expect the Fed to increase interest rates at any point during the rest of the year. The primary ways this would likely change are either an unexpected increase in the rate of inflation or unexpectedly positive developments in the U.S. and global economy.

10. Do international and emerging markets stocks still deserve a place in a well-diversified portfolio?

International and emerging markets stocks comprise about half of the world’s equity market value, so we continue to believe that a well-diversified stock portfolio should include a significant allocation to international and emerging markets stocks. While both have underperformed U.S. equities over the last five and 10 years, that does not mean they will continue to do so. We have seen periods in the past when international stocks have outperformed U.S. stocks for a long period of time only for that to reverse in the future. Further, international stocks are trading at significantly lower prices than U.S. stocks, indicating expected returns are higher for international stocks compared to U.S. stocks.

11. What role do currencies play in this situation and in my portfolio?

Initially, we are seeing the U.S. dollar and Japanese yen appreciate against most other currencies, while the British pound is falling precipitously. The international funds we use do not hedge foreign currency, so when the U.S. dollar appreciates relative to other currencies, this negatively impacts their returns. The long-run academic evidence, however, shows that hedging currency risk has minimal impact on an overall portfolio and that it can be beneficial to have exposure to currencies other than the U.S. dollar for a portion of an overall portfolio.

Every financial plan needs a check-up

Has your plan had one lately?

By Stephen High

If you want to see the greatest threat to your financial future, go home and take a look in the mirror.
–Jonathan Clements, Wall Street Journal, April 27, 1998

Developing the right investment plan is among the most important decisions a prudent investor faces. Just as a second opinion regarding important medical decisions can provide reassurance, a review of your existing or proposed investment plan can be a great benefit to you and your family.

Consider a typical family’s investment profile. Over the years the family has grown, careers have been established, and several investment advisors have been consulted. The result could be a hodgepodge of investment accounts with different financial advisors and confusion over which investments, if any, are appropriate to meet your short- and long-term financial needs. Using multiple advisors tends to create tremendous redundancy, often resulting in a lack of diversification and no clear direction for your overall portfolio.

One size does not fit all.

There is an appropriate investment plan for everyone. If your portfolio is too aggressive, you may be taking unnecessary and uncompensated risks that could adversely affect your family’s financial future. Conversely, if your portfolio is too conservative, you may be giving up potential wealth that could secure your family’s financial wellbeing. But you won’t know unless you have a sensible investment plan.

What is an investment plan and why do you need it in writing?

An investment plan establishes reasonable expectations, objectives and guidelines for the investment of your portfolio’s assets. It creates the framework for a well-diversified asset mix that can be expected to generate acceptable long-term returns commensurate with the level of risk suitable for you. The plan sets forth an investment structure detailing permitted asset classes and desired allocation among asset classes. It also encourages effective communication between you and your advisor as well as serves as a reference over time to provide long-term investment discipline for you.

A written plan allows you to clearly establish your investment time horizon and goals, your tolerance for risk, and the prudence and diversification standards that you want the investment process to maintain. It also helps identify your need to take risk in light of such factors as your financial objectives and income stability. Studies have shown that investors too often act on emotional responses, generally to their detriment. A written plan helps assure rational analysis is the primary basis for important investment decisions.

Periodic review is essential.

If you have a written plan in place, you should review it periodically to see if it still meets your financial objectives. We recommend that you review your plan and make appropriate changes when you experience significant life events, such as job changes, retirement, disability, divorce, death, or you become an “empty-nester”. You should never make changes in anticipation of “predicted” changes in the market.

If you do not currently have a plan in place, you need a trusted financial advisor, who acts in your best interest, to help you develop a sound plan. If you do have one in place, the trusted advisor should review it with you and make any modifications necessary to ensure that it will help you achieve your financial goals.

Your personalized plan should address several factors that are essential to achieving your objectives. Among them are your ability, willingness and need to take risk. Your ability to take risk is determined by three things: your investment time horizon, the amount and stability of your income, and your need for liquidity. The longer your time horizon, the more stable your income, and the less your need for liquidity, the greater the risk you are able to take by investing more in equities.

Your willingness to take risk is determined by your ability to withstand the stress of significant bear markets, such as the years 2000 to 2002 and 2007 to 2009. Your need to take risk is determined by the rate of return necessary to achieve your financial objectives. The greater the return needed, the greater the equity risk you ought to take.

Other factors should be considered as well. These include your investment objectives, life goals, other assets that you own, family needs, your age, marital status, and health, to name a few. A good trusted advisor can consider all of these factors and develop a personalized investment plan that includes a globally diversified portfolio allocation suited to meet your needs.

When placed under the microscope of expert analysis, some investment plans turn out to be in perfect health. Some need minor adjustments. Some are candidates for major surgery. Regardless, a periodic review of your investment plan is important to achieving your lifetime financial goals.

If you don’t have a financial plan in place, let our team at Kraft Asset Management help you develop an investment plan to meet your financial goals and dreams. If you already have a plan in place, we’d be happy to give you a second opinion at no charge.