Investing your wealth seems to be as confusing as ever. The new U.S. tax law adds perhaps the most significant changes to business and personal taxation since the 1980s. Worldwide, stock markets trended upward in 2017 with minimal volatility. It appears capitalist “animal spirits” that drive investment in equipment and allow for payroll increases have been released. Still, we worry about inflation. Will the aging population drag down growth? What is this Bitcoin thing? What do the populations of a growing China and India portend for the rest of the world? Will trade patterns be disrupted by self-serving national policy choices and protectionism? Politics—ugh!
To keep from being overwhelmed, following a simple outline will help.
- Focus on the most important factors that define the world’s economies, e.g., gross domestic product (GDP), Consumer Price Index inflation, unemployment and disposable income.
- Understand how to use tools that work in good times and bad.
- Clarify what is important for you and prepare for uncomfortable uncertainty.
The modern economies of developed and developing countries have evolved to solve basic needs. They will continue to evolve, and investment markets offer the means to participate. Competition and open, free markets are necessary conditions for economic health. Good public policy and legal protections for property rights will also promote this health. Countries that do not properly address these issues will likely add just enough uncertainty to be avoided by investors.
Amid uncertainty, is there a way forward? The answer is yes. We do have the equivalent of a free lunch, and it’s called diversification. The range of financial products is vast and often very consumer-friendly to obtain with low entry amounts, low fees or commissions, and are freely tradeable. In fact, building a portfolio has never been easier. Nonetheless, it is a challenge to understand all the characteristics of the many asset categories which may include large and small stocks, domestic and international stocks, corporate and government bonds, real estate and commodities, among others.
Behavioral studies in the area of wealth management have yielded a bounty of cautionary tales for modern investors. Influenced by factors like emotion, impulsivity, overconfidence or overreacting, it turns out we humans are poorly adapted for modern investment decision-making. Attempting to understand normal human biases may help us act as better investors.
Ultimately wealth management is all about the investor. Money exists to serve certain needs, and an important part of the process is defining those needs. Whether or not you work with an investment advisor, developing an investment strategy that addresses your investment time horizon and goals, risk tolerance, liquidity and income needs, along with income tax consequences, is a good place to start on your path to successful wealth management. Regular review of your strategy, along with taking a long-term view, can help you be better equipped to deal with market volatility.
Torrance Memorial Medical Center’s Professional Advisory Council (PAC) is a volunteer group of estate planning attorneys, accountants, financial planners, fiduciaries and life care professionals dedicated to supporting Torrance Memorial Medical Center and educating the community on the benefits of charitable tax and estate planning.
For additional financial health information, please attend Torrance Memorial’s Financial Health Seminars. For details on upcoming events, visit torrancememorial.org/FinancialHealth.
Written by The Torrance Memorial Professional Advisory Council