Hurricanes in the Financial World

On August 9, 2004 Floridians cringed when they heard that a new hurricane had formed in the Atlantic Ocean. Unbeknownst to all them was the fact that Hurricane Charley would be the first of four hurricanes that year. At its peak, Charley had winds of 150 mph and brought buckets and buckets of rain. Soon after Charley, Frances, Ivan, and Jeanne barreled through and left a lasting impact on the sunshine state. Many homes and businesses were ultimately destroyed because of those 4 hurricanes and lives changed forever. In our book “Have you ever been bitten by an Elephant”, we outline the structure of different investments and use the building of a house to illustrate how those investments fit together. After 11 years in the financial industry, I have come to find there are three major “hurricanes” that can ultimately destroy your financial house along with many tornadoes and thunderstorms. What I want to focus on are the three hurricanes: Taxes, Long Term Care, & Stock Market Downturns.

1.      Taxes

Taxes are something that we can never get rid of. I like to joke and say I don’t look good in stripes or orange, so I’m not going to mess around with the IRS. Tax evasion is illegal and should be prosecuted as such. Tax avoidance is something totally different. When it comes to your finances, paying taxes is a way of life, but that doesn’t mean there aren’t ways to protect against paying too much. Congress will continue to change tax laws between today and Kingdom come, but how we respond with our finances will determine whether the change is a hurricane or a small drizzle. Every year, when you meet with your CPA or tax advisor and complete your tax returns, those returns should be forwarded to our office for review and implementation within your personal financial plan. Just like every good doctor makes decision based on blood work, EKG’s, Cat Scans, etc., we at Blackston Financial Advisory Group make financial decisions based on your tax return. Recently, I had the opportunity to show a client that by making changes to their charitable donations using their required minimum distribution, they would actually save about $1,600 in taxes over the next 12 months. That’s huge! With the national debt topping 21 trillion, and US spending up 138%, the likelihood of taxes going lower than the Trump Tax cuts is probably slim to none. Tax hurricanes are on the horizon every year, but here at Blackston Financial, we have barred the door and gassed up the generator. We are ready.

2.      Long Term Care

Hurricanes on average take about 48 hours to form and get moving in the direction of the current wind stream. Once formed, landfall could be a few days later or even sooner depending on how fast the storm is moving. What most people don’t know, is that the fundamentals of hurricanes start long before the winds and rain. Warm ocean water, atmosphere instability, and winds all begin the brewing process long before a hurricane is named and begins moving towards land. Long Term Care is a lot like that. What starts as small health issues or abnormal blood work, can lead to full blown home health care or long term care in the future. How long from one to another? Could be weeks, months, years, or even decades. Just like buying water or gassing up the generator before hurricane season begins is just as important to have a plan for long term care. In our book, Have you ever been bitten by an Elephant, we use the example of a mosquito bite and how it can become infected and grow into a larger problem if not dealt with early. The same is true with a hurricane of long term care. What is the plan now? It doesn’t need to be an insurance policy, those are expensive, but what is the plan now. Many times, clients will use a life insurance policy or a certain account that is segregated mentally as their long term care protection.  The aim is to start planning now, just in case the hurricane comes.

3.      Stock Market Downturns

“I know not all that may be coming, but be it what it will, I’ll go to it laughing” –Herman Melville, Moby-Dick

Every morning before the sun rises, one of the first things I do is check the stock market futures and breaking economic news. After 11 years now it’s more out of habit than necessity. What those 11 years have taught me is that the stock market is going to go up and it is going to do down (See quote at top of paragraph)!. I know it sounds philosophical, but hang in there with me. Every decade the stock market goes through an economic cycle. That cycle begins with expansion, which is the beginning of a bull market. The middle of the cycle is growth that moves to plateau.  Many economist call this the over exuberance phase. Last is the downturn phase of the cycle. This is where the market finally runs out of steam and needs a cooling off period. In 2008 when the S&P 500 was down over 50% and in 2015 when the S&P 500 was down 2% both fall into this category. Humorous right? When you lost 50% and when you lost 2%, economist and market pundits call it the same thing (See quote at top of paragraph)! That is why it is so important that you understand exactly the amount of risk you are taking and how you feel about that risk. If you were working in 2008 and adding money to your 401(k), you didn’t like losing money, but it didn’t hurt as bad as if you were retired. Many individuals who had retired in 2006 or 2007 had to go back to work because they lost so much of their life savings. To me, that is a big hurricane. Insurance will help rebuild your house, Medicare will help pay for your health payments, but how does your money grow if the market is down? Where is your income produced if your accounts are down 20%, 30%, or even 50%? This is why clients need to have a firm foundation in their retirement accounts. If you question this, call our office and let us run a risk analysis on your current portfolio. Let’s see what some heavy winds and rain will do to your investments and ask ourselves, how do we feel about this?

Hurricane Irma in 2017 was the last hurricane that hit Central Florida. I remember watching the news the entire week listening to meteorologist explain how devastating Irma was going to be. The path of Irma was going to rock Miami and then head straight up the state of Florida leaving every town in shambles. As Irma approached Florida, the path drastically changed to the west coast and up through central Florida as a category 3 storm. While Irma was still very devastating in the Caribbean and the United States, many of the meteorologist and pundits got wrong where the storm would eventually land and how much damage it would cause. Financial hurricanes work the same way. We don’t know when or exactly where they are going to strike, but when they do we need to be prepared.