In May, I wrote about a misplaced sense of entitlement being our family’s greatest source of loss.
There are two components implicit in the article’s discussion of loss.
#1 – permanent loss of capital
#2 – loss of purchasing power over time
A wise advisor will keep these two factors front and center when discussing the risks associated with your assets, income and spending.
Unfortunately, wise counsel runs counter to human nature which likes to discuss…
Prediction of the future – we love stories about how our decisions will do better than other people’s decisions.
Fear of price volatility – nearly all price movements represent noise that can be ignored.
Two phrases for you to repeat daily….
No one can predict the future.
Volatility is not loss.
Turn your electronics off (ideally, for a week) and consider…
#1 – Where is the family exposed to permanent loss of capital?
#2 – Does our life situation protect us from the loss of purchasing power over time?
#3 – Where are our uninsured catastrophic risks – health, life, fire, earthquake, flood, asset concentration, counter party, addiction, fraud, abuse…
#4 – What is our ratio of net assets to core cost of living – how many years, months or weeks do we have?
#5 – What is the ratio of net assets to actual annual spending – most families have significant discretionary spending that can be cut in crisis. If necessary, do we have the ability to change and extend the years, months and weeks of cushion?
#6 – What percentage of our cost of living is covered by passive income (rental income, dividend income, interest income)? How does this income change over time?
a – rental income // an indexed source of income based on local economic growth, there’s also a potential capital gain associated with the land value, However, there is the potential for vacant periods as well as the need for occasional large investments with the building
b – dividend income // in a low-cost index fund, this source will be indexed based on national/international economic growth. There’s no potential for capital calls and you will have the ability to sell in small increments
c – interest income // this is fixed source of income, where the best you can do is get your money back at the end of the loan period.
If you put a number beside each of a/b/c and lay out your other sources of income (employment, pension, social security, partnership) then you will see how you are funding your annual spending.
Most families will have concentration in income, as well as assets. Concentration is a source of risk.
Are we acting on the right things?