As the saying goes, “Don’t put all your eggs in one basket”. The origin of the phrase is unclear, but it is most commonly attributed to the book Don Quixote written by Miguel Cervantes in the early 1600s. For those celebrating Easter, today may be the only day it’s a safe approach to go against this strategy. For various aspects of our lives and our finances, putting your eggs in one basket can create some signifcant risk with fewer options.
For most Americans, the vast majority of their wealth is tied up in qualified plans (e.g. 401ks, IRAs) and their primary residence. In qualified plans, dollars are primarly invested in stocks, bonds, and mutual funds which can be subject to extremely volatility at a time when owners need to access the funds. Couple that with the unknown future tax rates, and you have a recipe of uncertainty which can cause signifcant stress at a time you should be enjoying the fruits of your labor.
As it relates one’s primary residence, the equity that people are building in their homes can act as “dead money” since the equity in the home actually doesn’t earn a rate of return. The more equity you create, the more the banks benefit as their risk goes down, and they are able to deploy the additional cash flow for other investments. Additionally, houses are an illiquid asset and are subject to risk associated with a slumping economy.
This combination can prevent families from enjoying more of their wealth during their lifetimes given the lack certainty and flexibility in their personal economies.
In order to address this, there are two keys to consider: coordination and uncorrelation.
Coordination
Coordination relates to how the various aspects of our financial lives either work in concert or conflict. For instance, if one relies heavily on a qualified plan to create income during retirement, what happens when the market takes a turn for the worse? If you can time the markets correctly, you’d have a huge advantage. However, even the professionals are shown not to be able to do that. So what if you had another liquid account that was available to draw income from while your investment account was able to recoup some of it’s earning?
Without an account such as this, most would have to increase the losses from their qualified plans by withdrawing during a down year. That could have a massive long-term impact to whether your money will last through your lifetime. Having strategies in place so your assets can work even better together will offer you increased flexibilty and choices when things change.
Uncorrelation
Many financial experts suggest we are at or near the top of the latest economic cycle. What comes next may have a significant impact to the values of the equity markets as well as house prices across the country. What if you could allocate portions of your assets that would be completely immune to the stock market or economy and still earn competitive rates of return?
One example of a uncorrelated asset is a Life Settlement. You’ve likely not heard of this before as it’s typically limited to institutional investors and insurance companies, but they are becoming available to individual investors. Click here for a quick 90 second introductory video https://vimeo.com/256783330/2b4e9f5b39.
There are other uncorrelated assets which can shield you from the volatility we have been told we need to need to simply live through for the long-term. Learning more about them can give you options to maximize your wealth and income while limiting your risks of a downturn.
