The U.S. economic expansion that began in June 2009 is now the longest in U.S. history. Against that backdrop, we frequently get questions about whether it is better to make defensive shifts in one’s portfolio or to look for uncorrelated investment opportunities, which often have an asymmetric risk profile, like Bitcoin—which is back in the spotlight. While it is impossible to know the future of Bitcoin or accurately predict the timing of market cycles, it is possible to answer this question by explaining a fundamental financial planning framework that sorts assets and investment opportunities into three distinct and sequential categories: financial security, financial independence and generational wealth.
The goal of financial security planning, and any asset in this “safety bucket,” is to provide peace of mind, especially in the event of an unexpected loss of income, health or life. It typically includes cash equivalents, annuities, insurance policies and interest- or income-bearing products like bonds or high-dividend-paying equity holdings. Despite being the least exciting category, thorough security-centric planning, coupled with strategic asset selection, can have significant implications for the success of the other two categories and a client’s overall financial health. As an example, right-sizing an emergency fund to adequately account for fixed expenditures, the potential cushion of dual income, the degree of job security and any easily accessible assets (like a no-cost, low-rate HELOC or a whole-life policy with cash value that grows tax-deferred and can be borrowed against tax-free), can minimize the drag that excess cash has on total return.
The second bucket goes beyond security and targets financial independence. Longer-term goals, like funding retirement and children’s education, are typically considered in this category. Despite being subject to market volatility, an investment account with asset class, sector, style, geographic and manager diversification has the best chance for more robust long-term growth. A well-defined time horizon, thorough financial security planning and regular, strategic rebalancing help mitigate the risk associated with contribution, withdrawal and return timing. With proper planning, disciplined savers should never have to pay withdrawal penalties or liquidate assets for income during a down market.
Only after the prior two buckets have been planned and adequately funded should assets be allocated to the third, “home-run” bucket, which is where an investor with a higher risk tolerance would consider high-potential-return investment opportunities that also come with high, and often asymmetric, risk. Opportunities like biotech, stem cell advancements, cannabis and cryptocurrency are all examples of asymmetric risk opportunities that could potentially have a place in this category of assets, acquired for the purpose of building generational wealth. In this category, investments with low or no correlation to the stock market can also help reduce aggregate volatility.
The allocation of assets among these buckets should always align with a client’s timeline, values, financial obligations, financial goals and risk appetite and should be adjusted accordingly over time. As an answer to the original question, the systemic approach above allows some clients to do both: tilt defensively in their financial independence bucket while still having permission to invest a portion of their generational wealth bucket in opportunities like cryptocurrency…and to sleep well at night, even if the ride gets bumpy.
Saugatuck Financial is a marketing name for Justin Charise, Alfred Schor and Mitch Janoff and is not a broker-dealer,registered investment advisor, subsidiary or other corporate affiliate of the North-western Mutual Life Insurance Company, Milwaukee, Wisc. (NM). Northwestern Mutual is the marketing name for NM and its subsidiaries. Charise, Schor and Janoff are representatives of Northwestern Mutual Wealth Management Company®, NMWMC Milwaukee, Wisc., a subsidiary of NM and limited purpose federal savings bank, and registered representatives of Northwestern Mutual Investment Services, LLC (securities), a subsidiary of NM, registered investment advisor, broker-dealer and member FINRA and SIPC.
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