Gas or Brakes?
The wrong choice at the wrong time could be costly...
Good Wednesday morning!
Holy cow, that was fun!
And while I’ve driven a lot of vehicles over the years, including learning how to drive a stick on a tractor and motorbike in my early teens, every set of wheels handles a little bit differently.
For karting last week, it was a simple setup:
And when you’re zipping around a road track and getting up to 55 miles per hour while sitting just a few inches off the ground, you quickly learn when to use the gas and when to use the brakes.
Otherwise, you might find yourself stalled, run off the track, or spun out.
A question I was asked just a couple of weeks ago by a client, and one I’ve understandably been asked many times over my career is,
“As we get closer to retirement, should we ‘dial back’ our exposure to diversified stocks in our portfolio to lower our investment risk?”
After going karting last week, the question above strikes me as another way of asking whether or not it’s time to hit the brakes and slow down with the portfolio.
And with all things in personal finance, that’s more of a personal question than a financial question…
While it will depend on your specific situation, here’s what I told my client and what I would tell you…
If you’re retiring at 65, or even 70, years old odds are good you still have another 15-20+ years ahead to plan for.
Clearly, if you’re retiring earlier you have a longer time horizon ahead of you.
Sure, if you can afford - in the context of your financial plan and your life - to reduce your risk, you should do that right now irrespective of your planned retirement date or current age.
That is - and always will be - my advice.
But if your plan is based on a certain mix of investments in your portfolio and your plan is also based on giving you a comfortable and confident lifestyle (spending) for the rest of your years, “hitting the brakes” and reducing your portfolio risk won’t work unless you’re willing to make some adjustments elsewhere.
Just like hitting the brakes in a kart or your car will slow you down, this means it will also take you just a bit longer to get to your destination.
And if you can afford to slow down and take a little more time then no worries, it’s all good!
But if you’re trying to arrive somewhere at a certain time, braking might just prevent you from being where you want or need to be. When you need to be there.
Similarly, reducing investment risk in isolation and not in the context of your financial life plan could be problematic as it will likely impact how much you can afford to spend in retirement.
Including how often you can travel with your family and friends.
Or how much you can contribute to your favorite organizations.
Or how much you can leave behind to your kids and grandkids.
Or anything else that’s personally important to you.
But it’s not just about hitting the brakes.
I often encounter people who want to hit the gas, financially speaking.
Maybe they’ve waited until their 40s, 50s, or later to really take a good look at the financial future they’ve created for themselves.
It’s only natural to consider how you might “make up for lost time” by taking more risk, saving aggressively, sacrificing your current lifestyle, or other decisions you hope will put you on better financial footing.
But this can be problematic too.
Of course it’s good to save, but I believe you can save too much.
And there’s a level of risk where you might start to experience diminishing returns - literally and figuratively.
And what if, in your quest to make up for lost time, you wind up taking 3 steps backward and now have even more ground to make up?
While karting last week, they must have told us a dozen times that you NEVER stomp on the gas or the brake pedals. You ease onto them and ease off of them.
And I think there’s a financial lesson there too.
Rarely, if ever, is it smart financially to make a sudden, emotional, BIG money decision.
Better to ease into decisions and understand the pros and cons. The costs and benefits.
And regardless of your age, your proximity to retirement or another big life transition, or the influence of events around you and around the world, I think the best way to get where you want to go is to have a balanced, holistic plan that accounts for as much as possible.
And regularly update and review that plan so it gets better - and smarter - over time.
Plus, by stress testing your plan and running “what if” scenarios, you can get immediate feedback on the impact hitting the gas or the brakes - financially - will have.
Just like you get immediate feedback when you use the brakes or the gas in a kart on a road circuit.
What say you?
Any thoughts on if/when to hit the gas or use the brakes in your financial life?
Links & things
Not Just Expenses
I was given the opportunity to share my thoughts in this recent Wealth of Geeks article on how to prevent overspending on rent. Click and scroll to the bottom where I encourage folks to not just focus on reducing expenses but to also consider how they might increase their income:
The Happiness Paradox
Ben Carlson writes about how elusive our pursuit of happiness can sometimes be. The punchline: often what we “think” will make us happy… doesn’t:
All Together Now
In this recent Morgan Housel article, he writes about how the flames of our fears are often fanned by the emotions of others. Or as the closing quote in his article states, “You never know what the American public is going to do, but you know that they will do it all at once.” Read the whole thing here:
I’m grateful to have you as a reader.
If you have any questions or an idea for a future newsletter, blog post, or YouTube video, I'd love your input.
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Until next Wednesday,