By William Jordan

I had an interesting discussion with a client the other day. After hearing him share his concerns about the stock market, it occurred to me to ask the following question: “If I could design a plan for you to accomplish all of your financial goals with no concern for running out of money, without investing anything in the stock market, would that appeal to you?”

What a question.

His response was quick and to the point: “Of course!” he replied. So I did. The end result will presumably be that he leaves a little smaller inheritance to his heirs, but the benefit is he can stop watching the stock market for good.

How often do you check the stock market? If the market has a bad day, do you feel slightly ill? Do you often worry about what the stock market will do to your future financial goals? If you could be free from the stock market and knew you were set financially, would you get out?

Can everyone get out of stocks?

This is certainly one of those areas which must be carefully evaluated by a professional. Taking less risk by exiting the stock market may or may not be appropriate depending on your situation. However my question is not if everyone can get out of stocks, but rather, why few financial planners take the time to evaluate the option.

The reason for stocks in a portfolio is for the long-term appreciation. It is true that stocks have historically provided greater inflation protection and greater effective returns than any other investment generally available. However. they have also experienced decades, much like the last 10 years, where they completely failed to even keep up with inflation.

This is the heart of the problem. On one hand, we have seen stocks provide the best returns, while on the other, we have seen them provide the worst – even over a meaningful period of time. So what happens if you rely on the stock market to take care of your portfolio growth for the next ten years and stocks actually go down? Well, in that case, you may have a real problem.

So we’re stuck. If stocks could be either the best or the worst option for the next ten years, it sounds like a crap shoot. Who wants to gamble with their income over the next decade? The answer then, either in part or in total, is to get out of the stock market.

WHAT TO DO INSTEAD

Let’s get to the real question. What is your family index? I’m sure you are wondering: What’s a family index? Essentially the family index is the rate of return you actually need to achieve in order to accomplish your lifetime financial goals with no concern for running out of money. This number will be different for every client.

After you or your financial advisor establish your family index, then ask: How can I meet or exceed my family index with the least amount of risk possible?

Most financial advisors perform risk assessments or evaluations trying to determine how much risk you can take. Then they create an investment plan to make sure you will experience the maximum risk they think you can handle. Ouch! Instead, what if a financial advisor actually suggested a plan designed to accomplish your financial goals with less risk? Wouldn’t that make more sense?

WHERE TO GO FROM HERE

First, make sure you talk with your financial advisor about your family index. If they aren’t familiar with or comfortable with a lower risk approach – find someone who is.

Second, consider a few different investment plans which would exceed the necessary rate of return in your family index. Look for safety, guarantees and security.

Third, you could consider adding higher risk investments (such as stocks) only if you have more investments than are needed to exceed your family index.

Basically you should let your extra money, what I call your legacy money, be the funds you consider for stock market investments. In this way, you could know you have a plan that works regardless of what the stock market does.

William Jordan is a nationally recognized wealth manager and well-known speaker on financial and investment topics. To ask a question or request a meeting for a financial second opinion, contact his office at (949) 380-8600 or online at www.WilliamJordanAssociates.com.