Situational Investing – The Concept

School of Saving and Investing

family packing boxes

Note: This article contains some examples of common situations we encounter. If you are looking for an in depth explanation of the Situational Investing process, please click here to read our overview of the process.

Every individual’s situation is unique, with different incomes, net worth, liquidity needs, cash flow needs, goals,family circumstances, family history, health, education and so on. It doesn’t really hit you until you start to list the differences, but each one of these differences should be an important factor in how an investment portfolio should be managed. To illustrate, let’s view this discussion through three different family scenarios:

Situational Investing Examples

Family 1 is in their late 30’s and raising a family. They are of a modest net worth with modest income and have 30 years before they are planning to retire.  They are solidly considered in the accumulation phase. They both work, have no health issues and live an ordinary life on two modest salaries with minimal consumption debt and a home mortgage. They have retirement plans with matching contributions available through their employer. They personally manage their retirement plans and a small after-tax account with an internet brokerage service.

Family 2 is in their late 50’s, and has a much higher income and net worth. They are not quite to a point where they can be totally relaxed with the very long term nature of retirement. Their kids are educated and financially independent and their mortgage is almost paid off. Their concerns are how to generate necessary income and pay health care costs as they approach retirement. Most of their net worth is accumulated through hard work and saving both with before and after tax dollars. They have used bits and pieces of recommendations from various advisors, but they lack a comprehensive, coordinated plan to address their needs.

Family 3 is in their mid 60’s and currently run the family business their parents started. They are now in the process of turning over the business to their children. Their net worth is well in excess of their projected needs.  They are very conscientious about spending and the amount of liquid investment assets available to generate their required income is more than adequate to last them through retirement. They are working to make sure their wills and estate plan complement their estate needs. They currently use the same firm to manage their tax planning and investment advisory services, but have involved a number of individuals over the years.

For most investors, as long as the markets are performing well overall, there are fewer worries with market fluctuations and temporary negative returns. So in this scenario, we’ll assume the financial news regarding the markets has not been good. All major indexes are down for the year and there is little to make these families think things are going to improve.

With that, let’s take a look at the impact this assumed market could have on each of the three families and the investment approach in each situation:

Family reading a book

Family 1 has an estimated 30 year time horizon before they will require use of their investment assets, which is a long time. This is certainly enough time for someone in the accumulation phase with additional opportunity existing for regular investments of new money into the market. Timing the ups and downs of the markets has no real academic support. However, one thing is very clear, this family needs to be saving regularly and utilizing equity markets for their intended purpose – growing money.  They should also have an adequate emergency fund set aside, equal to 3 – 6 months fixed expenses. Changes in their situation with their kids, health, mortgages, jobs, income, net worth, and so on could require changes in their overall risk profile. Right now, their optimum “situational investment” allows them to invest in equities and endure the market fluctuations.

Family 2 seems very well situated through their hard work, regular savings and approaching life with discipline. Their situation is quickly changing from an accumulation phase to an income producing phase. It is essential that they evaluate their retirement income needs and the amount of assets available to produce this required income; a detailed financial plan would be advantageous. A plan would assist in determining whether they are close to having adequate assets to meet their income needs, with an adequate inflation protection to meet future health care costs and potential long-term care needs.  If so, their “situational investment” allows for a more conservative investment approach focused on income producing investments. Targeting a retirement date for this family will also help determine how much equity exposure may be needed for continued portfolio growth.

Family 3 is focused on conservation and preservation of their assets, rather than the need to generate retirement income. You rarely hear of situations like this having a bad financial outcome. However, their assets still include risks that need to be managed properly. Most of the people in this position have organized their portfolios where their assets can be invested with a specific purpose, such as generating income for the family, income to be used for charitable purposes, gifts to family members and so on.   This family’s optimum “situational investment” has greater flexibility and allows for a variety of investment strategies based upon specifically desired objectives for their assets.

Now let’s go one step further and also assume we are unknowingly headed into another market like 2008. Without “situational investing”, what could happen to these families?

Family 1 has opportunities through additional investing that could give them a boost in growing their net worth. Dollar cost averaging into the equity market is a huge opportunity and could benefit them tremendously, while attempts to market time could add unnecessary risks and create lost opportunity. Through the diligent management of their expenses and regular savings of both pre and post-tax dollars, they should be able to comfortably achieve their long-term retirement objectives. Over time, as their situation changes, continued monitoring and appropriate action will be critical to the growth of their net worth.

Family 2 represents the vast majority of middle income America. They have done almost everything right, but inappropriately aggressive investments could cause irreversible harm to their retirement savings and may cause them to have to re-think their retirement plans and work longer than originally planned. A 40% loss on their savings at this time in their life could be disastrous.

Family 3 represents higher net worth families. Many of these families aren’t crazy about taking money they have and watching it evaporate in an overly speculative investment mix. As you would guess, they have a number of options. They can be extremely conservative and preserve assets for future heirs or place some portion of assets in long term, higher risk type investments for future growth purposes. In the end, either one might make sense, given the flexibility of their personal situation and goals.

The Situational Investing Concept – Summary

“Situational Investing” – the concept is simple at first glance; people know they should invest according to their specific situation. However, we are bombarded every day with news about the current economic ups and downs, the fluctuations in the stock and bond markets, hot stock tips, sales-oriented stock-brokers, and our own emotional reactions to changes in our investment accounts.

Meld Financial can help you make sense of it all. We approach each individual’s situation with thorough planning as an integral part of our investment management process. Through this process, every investment dollar is assigned to a specific objective and invested appropriately for that objective. Knowledgeable allocation of your portfolio based on your individual goals and objectives forms the basis of “Situational Investing.”

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