Core Asset Conservation
According to the White House Budget submitted to Congress earlier this year, the net worth of U.S. households between late 2007 and the early part of last year
-- including home values, retirement funds and savings accounts -- shrunk 26.5 percent or $17.5 Trillion. Here are the most recent figures from the Federal Reserve: U.S. household net worth drops
These numbers reach well beyond the typically complicated discussions surrounding our economic state of affairs to make one point clear: what we are experiencing is not some ordinary type of short-term cyclical phase; we have entered an entirely new economic era that going forward will require a fundamental change in perspective from the grass roots level on up.
What is the most important lesson learned? Having reliable safeguards in place at all times that will prevent future, unnecessary compound loss of both time and life savings (see below).
Core Financial Assets
We define core financial assets as life-accumulated assets that first and foremost are considered to be irreplaceable from the standpoint of time.
Families rely on these assets to support and maintain lifestyle, provide for any planned changes in lifestyle as well as the cash funding that will be necessary to supplement date-certain events in life such as college tuition and guaranteed retirement income that you cannot outlive.
The requirements of core financial assets are not static and will change according to age, financial, family and life circumstances as they evolve.
Liquidity
Lack of liquidity is one major factor that continues to contribute to many of our current economic problems.
Should there be a short-term interruption in regular income and available cash reserves are insufficient to see things through, core financial assets are what the family would look to for the liquidity (cash) necessary to maintain and preserve the equity in a fixed or illiquid asset such as a home or business -- not to mention other responsibilities that will not wait.
Legacy Assets
In addition to fixed assets, legacy assets would include the amount of guaranteed cash funding that would be immediately available in your absence to secure and provide for the lifestyle needs of family members or any heirs.
Establishing a Family Security Plan that is structured properly will help to eliminate unnecessary tax consumption of family assets and multiply the financial benefits you are able to provide for your heirs. In an environment where the rules are changing, having a comprehensive financial plan in place will reduce the stress levels that come with the natural transitions of life.
Surfing Market Wave Patterns & The Dynamics of Compound Loss
No coin has only one side. Like up cycles, down cycles are an inevitable part of the financial markets and the economies they are supposed to reflect. The Financial Crisis was in large part brought on by a head-rattling, mind-numbing lack of forward-thinking and priority given to providing reliable safeguards that would automatically kick in and protect core financial assets when the market coin flipped heavily to the negative side.
When, not if. It has never been nor will it ever be a question of if the down cycles will arrive, only a question of when. And, as we have learned the hard way, the timing is unknown until it happens. Once a down cycle starts, and losses are being incurred, how do you put the toothpaste back in the tube? You can't, it's too late.
Surf's up!
Riding the waves. Take another look at the S&P 500 Chart over a 50 year period. You can see how the market moves in a fluctuating wave pattern. Bearing in mind that legs are strongest in the first phase of a foot race (to mix metaphors), if you have experienced any losses in a down cycle, the first and strongest phase of a subsequent market recovery or up cycle, by definition, is not devoted to real asset growth, but to the recovery from "negative growth" or retracement of those previous losses.
The math and the trend are not your friends. When recovering from market drops, the simple math of compound loss is not working in your favor. For example, just to get back to breakeven from a loss of say 50% would require a recovery gain of 100%. That's a tall order under the best of circumstances.
Locked-in losses. Keep in mind that when financial or psychological pressure builds up during a down cycle -- which is particularly true when it comes to core financial assets that are on the line -- and the order to sell goes through, any losses incurred become permanent and the producing asset or a portion thereof is gone forever.
Stability for fixed and non-core assets. Knowing that your core financial assets are safe and have liquidity, puts you in a far stronger position -- again, financially and psychologically -- to ride out any market volatility or difficult financial times that could negatively impact your fixed or non-core asset investments. You have a margin of financial flexibility and safety that will act as a buffer against being forced into the position of having to liquidate assets and lock-in losses -- at the wrong time.
The only timing that matters: Will it be there when you need it? We have learned how recovering from market losses that have impacted core financial assets can be a deceptively long process that can seriously disrupt important life plans. Once in this position, you have absolutely no control -- repeat, absolutely no control -- over the timing of market recovery that will determine whether or not your asset value has been restored -- if ever -- by the time it is needed. And to eventually recover in financial terms is one thing, but how do you ever recover the time it took to build these assets? There is no recovery of time lost.
The old refrain, "Don't worry, the market will come back" just doesn't cut it anymore.
Step Structure of Financial Conservation
The Steps are key points in establishing a reliable financial structure to maintain the sustainable growth and preservation of core and legacy assets. With guaranteed safety of principal and locked-in gains providing an automatic defense system against the dynamics of market loss, the time value of your most productive years is protected, and you have the financial security necessary to keep important life plans and responsibilities on track.
True Asset Allocation
Does anyone you know with a personal computer not have a virus protection, "firewall of safety" or some kind of backup program to safeguard their important informational assets that would be difficult if not impossible to replace?
True asset allocation begins by first distinguishing and then separating -- with a firewall of safety -- your core financial assets from other non-core assets.
From the perspective of Financial Conservation, diversification of risks utilizing the well known asset allocation models has its place with non-core asset investments.
However, risk is risk no matter how you slice, package or present it. Allocating risks or spreading your bets is not a legitimate substitute for actual up front guarantees of safety that will protect the core financial assets necessary to keep you in step with the unalterable stages of the life cycle.
To see where you currently stand, you can start here:
Draw The Line Exercise Worksheet
Please note that this is a printable, non-recordable form that is provided for your secure and private use only. When filling out the form it is only necessary to fill in shorthand names that will help keep track of things.
Email: Michael E. Douroux, Founder
CA Insurance Lic. No. 0D78620
