Broker Check

Meritage Periodical April 2023

Advisor Perspective

Prompting critical thinking and conversations around issues in our industry. Not intended as personal financial advice.

Don't Lose Sight of Your True Financial Goal

Today we are constantly bombarded by information; we have a never-ending news cycle, and an excess of opinions and experts on every topic. It’s easy to become emotionally wrapped up in the current stress of the world and make financial decisions that are motivated by outside factors rather than what aligns with your true financial goal.

What do we mean by “true financial goal”? We would define your true financial goal as the ultimate problem you are trying to solve.

For the purpose of this conversation, let's assume you are nearing retirement and your true financial goal is to replace your salary. By definition, you are trying to find sources of inflation adjusted income. In the process of looking for income replacement strategies, there are many products you could use. We would argue there are very few bad financial products or strategies, but often there is a bad application of those products to one’s unique circumstances. This bad application tends to happen in one of two ways. One is getting advice from someone who doesn’t have all the facts and a thorough understanding of your situation. Two is when you yourself have lost focus of your true financial goal and instead make choices for the wrong reasons.

When retirement is quickly approaching, it is natural to be dealing with the anxiety of knowing you will no longer be earning and saving money. It is normal to become more protective of the funds you already have. Current market volatility, combined with higher interest rates, may make buying a certificate of deposit (CD) seem like a good solution. It does protect one's principal, and CD rates are higher than we've seen in years, which is exciting. So, what's the problem? Maybe nothing. If the goal is to earn a good interest rate on short term money, a CD is a logical fit. However, this could be a problem if long term money is invested in CDs when the true financial goal is a strategy that provides inflation adjusted income. The CD will come to maturity, and the same income gap will still exist.

One strategy for producing inflation adjusted income is buying a diversified portfolio of high dividend rate stocks. Many pre-retirees are choosing not to do this right now because they find the associated market volatility objectionable. It is normal to feel this way; however, it may not be serving your best interests. The focus on price volatility is a distraction from the purchase of dividends, which tend to be consistent and reliable sources of income. Unfortunately, the stock market gives us an appraisal of prices every second, and this constant data stream can serve as a distraction from the purpose of the investment, which in this case is buying dividend income. Alternatively, if you owned a commercial building and the tenants were all paying rent, you would not think about the daily change in the value of the building. Furthermore, it is unlikely you would ask a real estate professional for an appraisal unless you were ready to sell.

Many people will be more comfortable buying dividend paying stocks later, when the market is less volatile. The problem is, this usually also means higher prices, so the same amount of money will buy you less income.

We always ask our clients what they are trying to accomplish to make sure that the product or service being selected is a good fit for the true financial goal. We have found that this approach provides better outcomes and helps ensure our clients are not distracted by emotion or the issues of the day.

If you need help defining your true financial goal or staying focused on how to achieve it, we are always here for you.

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