TRUST & ESTATE PLANNING

3 Planning Traps to Avoid When Markets Are Rising

02.07.2020 - Bryan Kirk

Strong market performance in 2019 was great news for investors, many of whom enjoyed significant growth in their portfolios and a boost in confidence. But positive returns can also put long-term financial goals in jeopardy if you’re not mindful of these three common planning missteps.

Distractions, Complacency and Overconfidence

When the markets are booming and portfolios are growing, new goals and expenses have a tendency to find their way into our financial lives. In addition, asset allocations can drift from their targets and withdrawal rates can gradually rise to levels that are unsustainable. Here’s how these common hazards typically take shape and our best suggestions on how to avoid them.

1. Getting distracted from long-term goals

If your portfolio was up 30% last year, maybe you started to think about buying that second home—possibly even a third or fourth home with such impressive returns. The question to ask yourself in these situations is: Do I really want or need this new house (or whatever you are thinking of spending money on) or am I simply feeling flush with cash because my portfolio performed so well?  Other pre-established goals are probably higher priorities.

In a rising market, you want your financial decisions to be deliberate, especially if your long-term goals are much more meaningful than the goals that crept in more recently. Those long-term goals could include making positive changes in your community, leaving a legacy for future generations, or simply the peace of mind that comes with knowing you have a stronger and more secure balance sheet.

How to avoid distractions

Always be deliberate about your financial plan. Spend time revisiting your goals, not just when the markets are shaky or you encounter a financial setback, but when times are good as well.

2. Allowing allocations to drift out of alignment

Once you have your goals prioritized, make sure your asset allocation strategy is properly targeted for the best results. Our portfolio managers actively rebalance investment accounts to keep your allocations in their target ranges, but it's easy for other accounts and investments to knock you off course when market returns are unusually high. An equity allocation of 60% can easily jump to 80% of your portfolio’s value over the course of a few years, or even a single year, causing your allocations to become misaligned with your long-term goals.

How to prevent allocation drift

The most successful asset allocation strategies don’t just view a single account in isolation—they coordinate all your accounts across all your goals. Have you readjusted the allocations in your 401(k) account recently? Have you looked at your real estate and other private investments to see how they are performing and how those returns are affecting your balance sheet?  If not, now might be a good time to work with your Fiduciary Trust wealth advisors to bring your entire financial life into focus.

3. Withdrawing funds at an unsustainable rate

Because the stock market has been rising consistently for over a decade, many investors have been able to take significant withdrawals from their accounts on a regular basis without seeing their balances go down. In fact, it has been fairly common to see portfolio balances rise even as individuals increase their withdrawals.

Of course, that is a very good thing—but it’s not normal. The market’s performance in 2019 is not in line with historical averages or with the broader, long-term capital market expectations that should be used to build your investment strategy. In fact, the average return expectation for a diversified portfolio of stocks and bonds is roughly 5% to 7% a year. So, over the long term, the probability of successfully reaching your goals will rapidly diminish if your withdrawal rate exceeds those numbers. And even if your withdrawal rate is below 5% to 7%, you still need to account for the effect of taxes and fees on your portfolio’s growth.

How to avoid overspending

Ask yourself: Where will the funds I’ve been withdrawing from my investment account come from in the future? When your liquidity needs increase, it can be tempting to chase returns and take on more investment risk. But if you really want to achieve your long-term goals, you should actually be taking risk off the table instead.

Fiduciary Trust Can Help You Avoid Mistakes

Our wealth planning experts can help you remain disciplined, keep your allocations aligned with your goals, and find a tax-effective way to meet your liquidity needs. Contact your Fiduciary Trust representative or call us today at (877) 384-1111.




This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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