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By Steve Lowrie, CFA
Special to Financial Independence Hub
Now that we’re well into 2024, it’s time to turn the page on last year’s “Play It Again, Steve – Timeless Financial Tips”.
To shift gears, I recently polled my blog post readers, asking them what was on their mind and, although specific topics were varied, the underlying question resounded:
Timeless financial tips are well and good – but how do they apply to my investment decisions in real life?
To address that question, I’m launching Lowrie Financial’s “Real Life Investment Strategies.” Each post in this new series will use case studies to illustrate the choices real people are making, as they contemplate money management concerns in real time.
Active Concerns around Geopolitical Events and their Impact on your Financial Future
In our blog post readers survey, there were several responses with a clear theme:
- worrying thoughts about current events,
- what the geopolitical climate may mean to your money, and
- what investment strategies to avert setbacks for your financial future
So, let’s address some of the more worrisome flash points looming large at this time: the world, its politics, and its politicians.
Of course, it’s natural, and advisable, to want your investments to weather the market storms wrought by geopolitical forces. The catch is there’s always a crisis going on somewhere and we never know for sure how it’s going to play out, until it has. That’s true whether it is history repeating itself, a new and unexpected upset, or (usually) a blend of both.
The other reality is that the most significant risks, with the greatest negative financial impact, are those you don’t see coming.
For example, in the last 25 years, we have had to deal with these three and unexpected and significant events:
- COVID-19
- The bankruptcy of Lehman Brothers on Sept 10, 2008 (ironically considered one of the world’s safest banks three days earlier), which was considered one of the main catalysts of the 2008/09 Global Financial Crisis.
- The terrorist attacks of 9/11 in September 2001.
If there is any good news in these events, which I realize is a stretch, they only come around every ten years or so.
That’s why I’ve long advised the best way to protect your wealth during each crisis du jour is to avoid getting tossed around in its waves. We seek to accomplish this by building — and maintaining — a steadfast, globally diversified portfolio designed to skim across the rough surfaces toward more dependable destinations.
Let’s use a couple of case studies to illustrate how we manage real-life portfolios in the face of ever-evolving, often unnerving current events. Although my stories will be drawn from real conversations and actual investor experiences, they will be fictionalized to protect individual privacy. In particular, names are not real.
The Accumulators: Suzie and Trevor Hall
Meet the Halls
Suzie and Trevor are hard-working professionals in their late 40s, with two teenage children. They own a home, which is almost fully paid off. While they intend to stay in their home long-term, the place could definitely use some renovations.
Current Lifestyle: The Halls have been good about living within their means, while also sustaining a satisfying lifestyle. They take occasional vacations, but they’ve also diligently saved excess cash flow over time.
Financial Goals: The Halls hope to retire within 15–20 years. They also want to fully fund their children’s education, as well as complete those home renovations before they retire.
Investment Profile: Suzie and Trevor consider themselves to be conservative investors. They would like their portfolio to continue to grow. But they also worry: what if today’s global crises really do a number on their nest egg? They think they should avoid experiencing much more than a 30% hit during any given market downturn.
Suzie and Trevor’s Financial Planning Action Items
Here’s how I might advise the Halls moving forward:
- Start with planning, not investing.
“How will the 2024 U.S. presidential elections impact our investments?”
Except in hindsight, the only correct answer is, “Who knows?”
As we’ve covered before in the 2020 blog, Should I Change My Investments During an Election?, leading with these kinds of queries steer the Halls’ conversation toward the market’s concerns, instead of their own.
They are better off considering geopolitical volatility in a more manageable context:
- What is your expected retirement date?
- Other lifetime goals?
- Personal investment style? and so on.
True, personal goals may shift over time. But defining manageable targets helps us define desired saving targets, rate of return expectations, and asset allocations for meeting them. As the Halls’ own circumstances and larger world events evolve, we can review and update their progress annually.
- Establish a spending plan.
Next, I’d advise the Halls to use their available cash flow to support their three key mandates: saving for their kids’ education costs, completing their home renovations, and investing toward retirement. Three goals, calling for three different investment amounts, return expectations, and timeframes.
- Invest systematically.
Next, we can invest systematically across future unknowns. For example, whether Russia and Ukraine remain at war indefinitely or eventually reach an accord, global markets are expected to trend upward over time; we just don’t know when or where the growth spurts will occur. For the Halls, I may recommend adding assets monthly, so they can dollar-cost average across varied market conditions. If (or more likely, when) another crisis occurs and prices decrease, they may even want to increase their saving and investing during these “buy low” windows of opportunity.
- Do a lifeboat drill.
Suzie and Trevor had said they wouldn’t want their portfolio to ever drop by more than 30% as they pursue expected market returns. But would they really be ok with that much of a drop? I like to replace vague percentages with real dollar declines. We would look at past market downturns and corrections, how long they lasted from start to finish, and how long the Halls’ target portfolio would have taken to recover from each. This “life-boat drill” helps them use realistic numbers for withstanding real future declines.
- Remember, it’s priced in.
How will today’s heightened Middle East tensions play out for Suzie and Trevor’s investments? Once again, we don’t know; we can’t know. But I do know, whatever happens next, “by the time you’ve heard the news, the collective market has too, and has already priced it in” (as we wrote in our first timeless tip, Play It Again, Steve – Timeless Financial Tips #1: Repeat After Me: “It’s Already Priced In”). Besides, since the Halls are still in their wealth accumulation years, a price decline could even come as welcome news. Lower prices today give future market prices more room to grow over time.
In our next case study, let’s look at how today’s geopolitical pressure points may impact a couple closer to retirement.
Almost Ready to Retire: Jim and Carol Oates
Meet the Oates’
Jim and Carol are in their early 60s. Jim owns a business and Carol manages the household. They became empty nesters when the youngest of their three children recently moved to British Columbia. They own their principal home outright and are considering purchasing a winter property in warmer climes.
Current Lifestyle: To pursue a satisfying retirement, the Oates were careful to avoid lifestyle creep during their career years. Now, Jim is making moves to sell his business, and their retirement days are fast approaching. They expect to support their retirement lifestyle with the proceeds of Jim’s business sale, along with their investments. Will they be ready to loosen up a bit? Yes … and no. Maybe? They wonder whether they will have enough to do so.
Financial Goals: The Oates would like to make significant travel plans, after many years of shorter getaways, closer to home. (A business owner is never fully “off duty.”) Plus, if the sale goes well, they’d like to help their children buy into today’s housing market.
Investment Profile: Jim and Carol’s planning ambivalence is partly due to their investment approach. They’ve been great about saving and investing over time, and their portfolio has grown accordingly. But they’d like to have a more cohesive strategy to shape and define their personal “enough.” They think they’ll be okay. But what if their plans are derailed by the polarizing political climate in the U.S. and Canada, or the wars in Ukraine and the Middle East?
Jim and Carol’s Financial Planning Action Items
Here’s how I might advise the Oates:
- Again, start with planning, not investing.
Once they’re retired, the Oates know they will be particularly vulnerable to market declines. No wonder they’re keeping a close eye on the world around them. But again, while we cannot control what happens in China, we can plan for how the Jim and Carol will proceed, guided by their own goals. For that, we’ll first establish their financial plan. Then we’ll tend to their investments. A well-structured portfolio won’t eliminate the world’s troubles, but it should help the Oates better endure the market’s bumpy ride. As our friends at Dimensional Fund Advisors have observed, “Understanding the range of potential outcomes can help you stick with a plan and ride out the inevitable ups and downs.” Especially, I might add, the downs!
- Create a non-discretionary spending lifestyle reserve.
With plans in place, we would advise the Oates on how to budget for their non-discretionary spending in retirement. It can be immensely comforting to know, no matter what happens in the Middle East, you’ve got a sturdy lifestyle reserve to cover at least 3–5 years of your essential spending needs. Jim and Carol may want an even larger reserve, to calm their nerves during times of global stress. The trade-off for having a larger safety net is lower total expected returns from their investments. But if the Oates have already reached their “enough,” having peace of mind moving forward may be worth more than stretching for extra returns.
- Create a discretionary budget.
Once Jim and Carol’s essential spending needs are secured, they can relax and get excited about how much they can spend on their wants vs. needs. It’s a lot easier to enjoy your discretionary spending once a plan is in place to fund it. How many trips will they budget for? Which ones might they pull back on if needed? What else might they be able to accomplish if markets soar?
- Prepare for gifting.
Jim and Carol’s “enough” goals also include gifting some of their discretionary income to their children over the next few years. We’ll help them plan for that too. As I’ve written before in Play It Again, Steve – Timeless Financial Tip #10: Making Legacy Planning More Meaningful, it ultimately goes to you, your favourite causes (including your kids), or the government. It can be gratifying, and sometimes tax-efficient, to share excess wealth with loved ones today, rather than giving them a distant, potentially more taxable inheritance.
- Do that lifeboat drill.
The lifeboat drill described above for the Halls is every bit as important for the Oates, maybe even more so. First, the Oates have less time to recover if their portfolio does take a hit as they enter retirement. Plus, once Jim sells his business, they’ll have fewer opportunities to pursue new sources of income. We’ll focus in on their realistic risk tolerances by examining what they stand to lose in dollar amounts (versus percentages) if substantial geopolitical risks are realized.
- Invest for the happy medium.
The Oates’ lifeboat drill, along with additional planning should help clarify how to allocate their portfolio—including the proceeds from Jim’s business sale. Once their lifestyle reserve is in place, what about the rest? Should they go all in on stocks, or leave it sitting in cash? Even with their investable assets, the Oates may be tempted to avoid a scary stock market. But by focusing on preserving their principal against market downturns, the Oates risk losing substantial purchasing power to inflation. To give them the best chance to achieve their goals as described, we’ll want to find a happy medium among stock, bond, and cash reserves—adjusting as needed over time.
Real Life Investing for the Long Run
Bottom line, the world never stops spinning; the global crises never seem to end. But at least historically, we know two things:
- The market has always delivered positive returns to patient investors over time. For example, from 1923–2023, the S&P 500 Index (large U.S. stocks) delivered an average annual 10%**.
- However, this same market is usually well more than 2% above or below its long-term average in any given year**. It takes grit to stick with such a bumpy ride to an average ideal.
**The Bumpy Road to the Market’s Long-Term Average, Dimensional Fund Advisors
Our patient approach is tailored accordingly. When there is a crisis, stock prices go down for companies impacted by the news. When current prices decrease, future expected returns increase. They do so often enough that we advise riding out the immediate declines, if not buying into even more while prices are low.
And yet, gut feel tries its darndest to steer us off-course. Unlike Black Friday or Boxing Day sales, where people line up for hours to buy the deals, we tend to want to panic-sell when financial markets go down. Having bought when prices were higher, too many investors end up illogically selling when prices are lower.
I’m here to help you avoid this plight. As an independent financial advisor, I work with my clients to create — and keep — the right investment portfolio for their specific needs. Especially if you’re worrying about how the geopolitical news of the day might impact your investment success, let’s talk. As I’ve done for others, I can show you how to lead with personal planning, conduct your own lifeboat drill, and invest for the long run.
Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on Feb. 9, 2024 and is republished here with permission.
