By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
We spend a lot of time reading and listening to others talk about a wide variety of personal financial planning trends that could affect you. Here are five trends – both good and bad – that we think might be important for you to think about. After each trend we’ve made a suggestion about what we think are smart ways to manage this trend.
1. Your cash and bank savings accounts will continue to earn next to nothing.
The combination of too much global debt, aging demographics and low energy prices has forced many countries in the developed world to be proactive and lower the interest rates they pay on short-term notes. Recently, 41% of the countries in the European Union were paying negative interest rates to short-term lenders. Global economic growth may be muted for the foreseeable future and there doesn’t appear to be much reason for the U.S. Federal Reserve to raise interest rates all that significantly over the next five years. This means that savers and investors will likely continue to earn very low returns on their savings and fixed income portfolios.
To do: To earn higher returns you will have to modestly increase your allocation to global stocks and consider if it makes sense to use part of your investments to purchase real property. These changes come with a distinct downside – they will increase the overall riskiness of your investment portfolios and create the possibility of making them more volatile.
2. Too much information for personal financial decisions will be the norm.
The increasing use of online videos, blogs, Twitter, Facebook, and emails to promote a financial product or service will allow smart marketers to better target messages to you and more quickly follow-up with you if you show interest. There is a growing abundance of information but a scarcity of actual insight about how appropriate any product or service is for your personal situation. With so many investment options and relatively easy access to information and competitive products, analysis paralysis is a risk that could cloud decision making about your personal finances.
To do: Turn off the “cookies” feature in your computer’s browser to reduce the likelihood of being bombarded with web ads for a product or service that you have recently researched on a web site.
3. Lower investment expenses won’t lead to higher goal achievement.
The growth of assets in exchange-traded funds and low-cost mutual fund companies like Vanguard suggest that investors are working to lower the fees associated with investing. In the world of investing where so many factors are out of your personal control, this step to control your expenses is important. We expect the costs of investing to continue to come down as more investors avoid high-cost funds.
To do: While lower costs will help you keep more of your returns, we don’t think it’s the most important part of a financial plan and investment strategy. The highest priority for anyone should be self-reflection: “given my situation, what should my personal financial goals be?”
The pursuit of a desired lifestyle and long-term financial security has to start with defining the target. Only then can the appropriate investment strategy be designed and implemented to align with your goals.
4. Life insurance is going to get more expensive.
As a result of the low interest rates and investment returns outlined in item #1 above, insurance companies are likely to continue to earn very low returns on their portfolios. This has forced their actuaries to be more conservative with the growth assumptions for their investments and will likely lead to premium increases for whole and term life policies.
To do: To overcome this issue, we suggest that you consider buying term insurance with the longest fixed term that makes sense for you. If you require permanent life insurance, then consider buying a variable permanent policy from a lower cost yet financially stable provider. This will allow you to take modest investment risk over long periods of time and increase the likelihood of growth in the policy’s investment account.
5. Your personal information is more likely to be stolen.
Unfortunately, you can’t fully control access to your information via new technologies (like Apple Pay or your Starbucks app). And you can’t control the data security regimen of the companies that you do business with – including your health care providers. Any company or entity can potentially be hacked and your financial information could end up in the wrong hands. Because of this, the likelihood that your financial or health care information is stolen will go up every year until consumers realize that no electronic transaction is completely safe.
To do: Be careful with your online practices. Do not open unexpected attachments. Turn off your computer when you are not using it. Use different passwords (and update those passwords often). Use only one credit card for online purchases and have a separate email address for online purchases. Also, while society is becoming more and more cashless, paying cash is your best defense.
~ BHJ Wealth Advisors — Gig Harbor, Washington — 253-534-8888