January 2021 – Family Finance Ideas to Kick Off 2021

Full Episode Transcript

Naj Srinivas:

Hello and welcome to the Fisher Investments Market Insights Podcast, where we discuss our firm’s latest thinking on global capital markets and current events.

My name is Naj Srinivas. I’m the senior vice president of corporate communications here at the firm.

The new year offers a natural time to look back at the previous 12 months—evaluate what worked for you and what didn’t. And it’s a time to look forward—how to apply lessons from 2020 into your life in the coming year. On today’s episode, we’ll explore some family finance ideas that you might be able to incorporate in the new year. To guide us through those ideas, we’ll talk with Carrianne Coffey. Carrianne is the Senior Executive Vice President for Fisher’s International Private Client Group. And in that role, she oversees our entire international business in the United Kingdom, Europe and Canada. 

Before we get to our interview, I’d like to ask a favor. If you like what you hear, recommend our podcast to a friend. Just tell someone you know about the podcast. Or if you’re listening through a podcast app, you can share the podcast and help us improve the investing world one investor at a time. Thanks so much in advance!

And remember to check out the Market Insights podcast page for more detail and a list of old episodes. You’ll find a link to the page in our episode description.

With that—that’s all of our housekeeping, so let’s get to our interview with Carrianne Coffey about some family finance tips you can use in 2021. Enjoy!

[TRANSITION MUSIC]

Naj Srinvas:

So Carrianne, asset allocation is a question that comes up for a lot of investors. Let's talk about what asset allocation is first, just for those who aren't familiar with the topic.

Carrianne Coffey:

Sure. Asset allocation is just simply the mix that you choose for your investment portfolio. So cash bonds, stocks, and the percentage to each of those.

Naj Srinivas:

And why is that so important and what should drive an investors ‘asset allocation decision that mix of stocks, bonds, or cash in their portfolio?

Carrianne Coffey:

The thing that is often underestimated is that decision essentially determines your performance over time. When I talk about asset allocation—it’s often sort of glossed over and I really want to encourage investors to spend a lot of time with that decision. And it's essentially a function of your investment time horizon and how long you need those assets working for you, and what you need the money to be doing for you over time for how long. And, of course, with that is your comfort level and, and things along those lines. But it's pivotal.

Naj Srinivas:

In a lot of ways, people often approach asset allocation based on what their comfort level is here and now, but really what they should be doing is working backwards from what their goals and investment time horizon is to understand what their asset allocation needs to be in order to get there?

Carrianne Coffey:

That's right. So, when you're thinking this through, your biggest determinant is time horizon. And most people think about their time horizon in a way that misses the larger picture. For example, I have so many people who come to me and say, “Hey, I'm nearing retirement. Now's the time to go to, to bonds. I'm going to need income in retirement. And therefore I'm going to shift to you know, X percentage in bonds.” While that may be the right course of action I really encourage people to step back and think through life expectancy and what actually you need those monies to do for you over time.

And when you factor in inflation and the cost of long-term health care, which by the way, seven out of 10 adults need over time, and can be extremely expensive. You really need to think through not so much how the here-and-now feels for your monthly income needs when you retire, but over time.

Naj Srinivas:

So that's the real risk there. And something that's very common is people underestimating how much money they're really going to need and for how long they're going to need it. You mentioned life expectancies. I suppose the real risk there is underestimating how long you're going to live and how long you need those retirement assets to provide for you. But then on top of that factoring in things like inflation and cost of healthcare going up, cost of education going up and all of those things. That really is a driving factor of asset allocation. So what makes year-end a good time to think about asset allocation?

Carrianne Coffey:

Anytime a year is important to think it through. At the end of the year, people are thinking through rebalancing their portfolios. Maybe the concern levels are higher because of the volatility. And you just want to take stock of your personal situation. A lot of people make moves in their asset allocation. And we should talk about that: when does it make sense to, to change your asset allocation? And, and usually it's around big, life events. and maybe it's not so much changing it, but just checking in and making sure what you have makes sense.

Naj Srinivas:

What are some examples of those big life events that may cause you to want to rethink asset allocation or make changes to what you currently have in place?

Carrianne Coffey:

A lot of people mentioned things like a new job, or the loss of a job or retirement. Things like my, my kid is getting married or we might be thinking about paying for college for two or three kids at one time. A very common one is, health care issues, a surprise unexpected medical situation or medical expense. Big events like, losing a spouse. Things like that. So those are some of the times—doesn't mean there needs to be a change.

Naj Srinivas:

So Carrianne, you mentioned a lot of different life events that may make people reevaluate what their asset allocation decision is. And of course, a good financial advisor should be helping their clients make those decisions and consider them. Maybe a different way to look at this is what are some examples of things that happened that should not make people reconsider what their asset allocation is?

Carrianne Coffey:

You know, assuming that you've got that big decision, right. I there’s a tendency for people to think it needs to shift much more often than an actually needs to. And I see the desire to shift come very consistently with market volatility. People get spooked, they get worried. They're not sleeping as well as they want to at night. And they start to think through whether it makes sense to shift based on a rocky market.

In this news cycle we live in where it's—it's constant and negativity sells. And so there's this constant barrage of fearful headlines. That's when I see people thinking about it, and that's when I really want people to try to step back and think, wow, have my goals and objectives actually changed ? Because over time we know that markets go up and down. And the good news is they go up more often than they go down.

The biggest question to ask yourself is, is now one of those times that just feels natural to want to question it or is it a real important life shift? A lot of people assume that needing income—and there's a tendency to think, okay, now I need to make a shift. And perhaps that is the case, but that's a good example of something you really want to talk through with your financial advisor.

Naj Srinvas:

So you were talking about market volatility, really being one of those times where people start to think about, well, should I have less money in stocks and maybe more money in bonds because bonds are so much safer. At least they are in the short term. So that really speaks to fear and greed. And a lot of times I think we focus on the fear part of the equation, but I've also seen many investors think about the greed side too, where they want to shift their asset allocation to more stocks when stocks are doing really well, because they think, well, everything's going up—why don't I have more exposure to stocks, for example. So that can also be an example where if you're focusing too much on fear, but then also on greed, it can derail you from that long-term asset allocation that you're on to meet your long-term goals and objectives over your investment time horizon.

Carrianne Coffey:

Yeah. I think that's a great point. Fear and greed drives the market and you know, there's no shortcuts to long-term market-like performance. And so that's why it's so important to stay, to get the right asset allocation in the first place and then stay super disciplined.

And it's that discipline and that consistency, that, that is what allows you to maximize the likelihood that you achieve your long-term goals and objectives. And while we're talking about long-term goals and objectives—the industry talks so much about, what's your goal, what are your objectives? And they give you like a couple of words to describe that: growth, or growth and income, or income.

And what I want investors to do is to think about what that actually means. Does income mean bonds? Not necessarily. I think the important part to remember with stocks versus bonds versus cash over time is over long periods of time—for example, 25 year rolling periods—stocks have higher return with lower volatility than bonds, and many people don't know that. And, and while past doesn't necessarily predict the future, when you're talking about that many data points over that much time, it's really important to note.

Naj Srinivas:

So one financial tool that proved handy for a lot of people in a chaotic year like 2020 was an emergency fund. Can you tell our listeners how they should think about an emergency fund in the bigger picture of their finances?

Carrianne Coffey:

The importance of an emergency fund really boils down to having something as a buffer between what you're building in terms of your retirement and what you might need for something I would refer to as unexpected, urgent, unavoidable. An emergency fund can help you not tap into your investments that you're trying to build over time.

We have unexpected events, we have unavoidable events. We have urgent expenses and things that we didn't plan for. So I would urge our listeners to have roughly three to six months of cash set aside. And if you're retired, maybe even 12 months of life of monthly expenses set aside. I would recommend that maybe you put it in a different account that’s away from your normal day-to-day expenses and cash flow, so that you’re not tempted to just pull from there for things that are not urgent or unexpected or unavoidable. A lot of us have depleted our emergency funds over the course of 2020, so now’s a great time to rebuild that. If you don’t have that, that’s step one.

Naj Srinivas:

So what were the three things you said again, urgent, unexpected and unavoidable?

Carrianne Coffey:

Yeah. Yeah.

Naj Srinivas:

So that would be a good framework for people to remember when you're thinking about, can I, or should I tap into my emergency fund to pay for this? So, let's switch gears and talk a little bit about family finance conversations.

What is your advice for approaching these family finance conversations? I know that in many families or in many relationships, there's often one person who is the person responsible for making sure the checkbook is balanced—if people even do that anymore. But how do you approach those conversations and start those with your family when maybe one person is always in charge of that, and there are other responsibilities delegated to others?

Carrianne Coffey:

Well, I would start with the premise that one person taking control of the finances for the family is—I can't say this in any fewer words—a total disaster. One person being in charge leads to total disasters. The more informed both spouses are, the more knowledgeable both spouses are. In this day and age, I find that it's almost no different than…than two decades ago when I started in this business where you'll inevitably have a couple and one spouse is either less interested or has delegated it. There will come a time in the future when likely that spouse will have to assume control for one reason or the other. And so, how do you start these conversations? You start them in that you say, “This must be a team approach. This cannot be a me or you. This is an us thing.” And we talk about our goals together and our objectives together. And we think through whether we're on the same page of what we need our money to be doing for us and our family over time. You work together on that strategy and you stay consistent together and you stay informed together over time.

Naj Srinivas:

Carrianne, I think everyone might acknowledge that being aware of finances are important, but oftentimes people just don't make the time for it, or they rationalize not being engaged with it because their spouse is the expert. Or well, they handle that stuff and I handle this stuff and our strengths play to each of these things. So, how do you address those gaps where people don't want to engage with the finances for one reason or another?

Carrianne Coffey:

People sort of accept in theory that this makes sense. But because life gets you busy in a lot and throws you in a lot of different directions. You know, in my family, I've been in finance for, for 20-plus years. And so it's very easy for me to say, “Okay, this is easy and quick and I'll handle this and you handle that.” And so you fall into these traps of what's easiest. And what I would encourage you is to have regular dialogue and not let you, or your spouse off the hook in terms of the responsibility of knowing what's going on.

Or, what you can do—and hopefully you have a great advisor out there who tells you what you need to hear, not what you want to hear, because I think most advisors go, okay, that's cool, you do this and they do that. Well, we'll leave it there. But I would really encourage you to challenge yourself, to look at the disconnect there.

The goal is actually, you're trying to do a service for your family. And the disservice comes in when the basic foundation of financial concepts aren't really learned over time. And it becomes really intimidating to engage later on when perhaps it's the most important time and decision-making points, like we were talking about earlier on asset allocation and when changes might occur. Perhaps it's going to be the most important time for the family’s long-term financial goals and objectives to be met for that person who wasn't in or involved or engaged. And there'll be thrown in and, and ready to ready or not ready to make those decisions. And perhaps to make decisions that are completely counter to what the prior two, three, four decades were all about.

Naj Srinivas:

Carrianne, it strikes me that many people may not have heeded this advice. And you may have some people that all of a sudden find themselves in a position where they're forced to make financial decisions. where maybe before they relied on a spouse who has since passed, or where they're now divorced, or in a completely different scenario you have someone who inherits a good deal of money and is all of a sudden responsible for investing that money prudently. How do you recommend, in those situations, people deal with their new found financial responsibility where they haven't been prepared or educated about decision-making in that regard before?

Carrianne Coffey:

Great question. And that's, that's in fact what happens a lot, which is really a passion of mine to make sure that we do our best to get people not to be in this position. But sure, it happens every day. And I would say, don't act quickly out of fear. No knee-jerk reactions.

So it kind of stay as is for, for a bit and, and understand, you know, all the outgoings and incomings of, you know, what your expenses are, what all the income streams are and understand what your current financial situation looks like. And that'll take a little bit of time, depending how out-of-the-loop you may have been. And then, you know, essentially it's all that we discussed before. And it's understanding, do you have the right asset allocation or not? And that, again comes back down to what you need those assets to be doing for you.

And what we didn't talk about earlier is lost opportunity cost, which is a really important risk that very few people talk about. And so I'd understand your bearings and then interview, interview financial advisors and ask good questions about what is it like to be a client? How often do you call me? How often do we talk? What, what our conversations look like? And what you're really looking for is somebody who teaches you along the way.

Naj Srinivas:

So what are some of the key indicators that you look for in a trusted financial advisor? Or what are some simple verifications that people can make when they're put in this position of making financial decisions to ensure that they have financial help that's acting with their best interests in mind and that they're aligned in their decision-making with the person?

Carrianne Coffey:

Yeah. I mean, the first thing you want to look for is a fiduciary. And what that means is hiring a firm that literally has to put your interests above theirs. And, and so when you go about interviewing financial services firms, you want to make sure that they spend ample time with you getting to know your goals and objectives. You're an individual, right, who has you know, fears and worries and concerns and hopes and dreams, and really understanding what those are and working with you to build a plan that is the most likely to get you there over time.

And I see a lot of clients that like to work with people who tell them what they want to hear. And a lot of these conversations are not easy. They're an actual dialogue about fears. And how are you going to feel when the market is down 20 percent. Is that going go cause you to derail.

And so you want somebody that will be patient with you and who you'll listen to when sometimes the dialogue is, is challenging. People don't naturally make the right decisions when you're investing. when it's easy to sell the investments is when it feels good to get rid of it, which means it's usually down and that's the exact opposite of what you want to be doing.  So all of the emotions that come along with investing, having somebody to sort of hold your hand through that can be very helpful for most people I meet.

Naj Srinivas:

Well, Carrianne, that's all the time we have for today. Thank you so much for being here with us.

Carrianne Coffey:

Thanks so much, Naj.

[TRANSITION MUSIC]

Naj Srinivas:

That was my conversation with Carrianne Coffey about some things your family can be thinking about as we enter 2021.  A big thanks again to Carrianne for joining us.

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Also, check out the Fisher Investments channel on YouTube, and for our latest capital markets insights, go to the MarketMinder section of our website: fisherinvestments.com. 

And as a last word, I just want to thank Eric Foll and Hayley Thornton for producing all of last year’s episodes and the tremendous hard work they’ve put into this podcast every single year. Big thanks to them. This wouldn’t be possible without them.

We hope you’ll continue to join us in 2021, as we continue to share the latest thinking on global capital markets and current events from the team at Fisher Investments.

Until then, I’m Naj Srinivas. Be well. Thanks for joining.

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Disclosure:

Investing in securities involves the risk of loss. Past performance is no guarantee of future returns. The content of this podcast represents the opinions and viewpoints of Fisher investments and should not be regarded as personal investment advice. No assurances are made we will continue to hold these views, which may change at any time based on new information analysis or reconsideration. Copyright Fisher Investments, 2021.