The Best Defenses Against a Stock Market Crash – Review, Rebalance, Reconsider and Relax

When I look at charts for the US stock market, it reminds me of some of the Mt. Tam trails that I hike. It seems as if the uphill will never end. And then, it does end, just as I turn a bend. The walking sticks come out of the daypacks of my hiking friends, and we catch our breath and become conscious of how much more treacherous the trail becomes as gravel scatters under our boots and rocks we use as stepping stones teeter. I wish all investors had their own investment walking stick equivalent. They don’t. They are, however, not without tools and a process to avoid market risk.

Review Your ENTIRE Portfolio – If you’re like my clients you have 401(k) accounts in multiple locations, possibly a brokerage account, and you may be working with more than one bank or credit union. My first step with new investment clients is to determine their current level of risk for volatility. I use advisor-based Morningstar software to aggregate all the individual mutual funds, stocks, bonds, cash (savings and money market accounts) to determine the asset allocation, including the mix of stocks and bonds. And, based on past performance, something that offers no guarantees, I identify the range a portfolio might fluctuate at the best of times and the worst of times. Then I review the results of my risk tolerance questionnaire, to see how closely the clients’ risk and the portfolio’s risk match. Does my clients’ stated willingness to ride out a market downturn match what a portfolio with a similar asset allocation has done in the past?

Rebalance the Existing Portfolio – Often my clients come to me with neglected portfolios that resemble their portfolio model about as well as some of my out of date trail maps match the local scenery. In that case, I design a portfolio model. And, if they are existing clients, I only have to determine how much of each holding to buy or sell to bring the portfolio in line with the existing model. This should be done once or twice a year, ideally.

If all is well in the stock market most of my clients are satisfied. I am only satisfied if we’ve identified how much cash they need each year from their portfolio, or for an emergency fund, and have at least enough cash to prevent them from having to sell mutual funds and exchange traded funds for six, twelve or 24 months. I want them to have the cash they need to comfortably wait out a market downturn. The added bonus is that if the market is turbulent, they sleep better. Sometimes taking the appropriate precautions is not enough to soothe their nerves.

Reconsider or Change the Existing Portfolio – That doesn’t mean we sell everything and put it in cash. It means we reduce the volatility of the portfolio by changing the asset allocation. And, since we have done a retirement projection I can show them the impact on their retirement savings by reducing the return on investment. And, by changing the asset allocation, I make the appropriate changes to the portfolio model.

And then, it’s time for my clients to relax knowing that while the road may get rocky, they’ve taken important steps to protect their savings and investments. If you would like help with this process, I recommend you talk to an hourly financial planner. No names of course.

Before, During and After a Disaster

I am not a disaster expert. However, as a financial planner I do know something about protecting your assets and what to look for in insurance coverage. So the focus of this ezine will be on how to prepare for and how to recover from a natural disaster. I’m also including some resource links and suggestions for those recovering from the recent fires.

Recovery
Immediate – While those affected by recent fires are now beyond the initial steps I will repeat them: getting to safety; communicating your safety to friends and family; securing lodging, transportation and cash. Some fire victims left without their wallets. Think about how you could access your bank accounts if you did not have identification or debit cards. Here are some precautions to consider:
Upload personal identification papers to a secure online service like ShareFile.
    Place some personal identification papers, i.e. birth certificate, marriage license, etc. in a safety deposit box. But if you leave in a hurry, would you have that key? Do you really want that key on your key ring?
    Consider giving the second key to your safety deposit box to someone you trust in a separate household.
    Consider keeping cash on hand and gas in the car.
Call your insurance company. Homeowners and renters policies that cover living expenses may offer an advance against the insurance claim. If you do not have an insurance policy, there may be some aid available from FEMA, other governmental agencies or non-profits. Depending upon the severity of the incident, loans and grants up to as much as $34,000 may be offered for expenses not covered by insurance. The Small Business Administration has a loan program with a rate of 1.75% for up $200,000.
Be careful to not settle the insurance claim immediately.
    Start retaining receipts immediately.
    Document all communication with the insurance company.
    Start a mileage log for the additional distances to work and school.
Call your creditors as well. Some creditors will allow you to defer payments for up to 90 days. That relief may be extended to 12 or 24 months. With property taxes due so soon, you will probably see counties allowing a deferral for property tax payments. (These deferrals require a claim with your county assessor’s office within 12 months from the date of damage. Sonoma County is already in process of revaluing properties and, in turn, lowering property tax liabilities.
     If you are a renter, consider cancelling your utilities.
    If you’re an employee who has lost your job, call your employer and leave your contact information. Many employers lost their employee records and do not know where to send the last paycheck. Then get online and file your unemployment claim. Hopefully the claims are deposited directly into your checking account. Otherwise, you’re probably going to need to file a forwarding address order with the Post Office.
    What if you own your own business? Most likely you have a business interruption policy that will reimburse for overhead while your business is closed. Consider whether you are eligible for a FEMA grant or loan.

Rebuilding
Negotiating with the insurance company – You will need to decide if you want to hire a public adjustor to negotiate on your behalf. They can be, and most likely are, compensated as a percentage of your insurance claim. That means a smaller settlement to you unless they negotiate a larger claim than you would have on your own.

Replacing personal property – I have always been interested in how a value is determined for lost personal property. The amount of coverage always seemed to be high in comparison to the dwelling insurance amount. It’s very difficult to pin down the standards for providing proof of loss. One source said that you could be asked to provide the title of every book lost. That got my attention. I went to the Department of Insurance and they provide some helpful advice. It appears that the date of purchase and the purchase price is required.
    Consider scanning and saving in the cloud receipts for major assets.
Did you know that the amount of your claim depends upon whether or not you replace personal property? Chose not to replace the property and you only receive the actual cash value, which is the price you paid less the depreciation of the value due to use or obsolesce. Don’t worry. You should have several months to replace your personal property.

Rebuilding your home – Indemnity versus reimbursement coverage, what does that mean for the policyholder owner? It’s the difference in saying, “My house burned down. Please pay me the policy limits” and walking away after you pay off the mortgage, versus being required to rebuild and needing your mortgage company to endorse any insurance check you receive. In addition, benefits are paid out in relation to the completion of the rebuild project. If costs rise significantly due to excessive demand for building contractors, you may find that you have to incur additional debt to rebuild your home to collect the insurance.

Be especially cautious during this time when hiring people to help you. One specific caution given by one contractor is beware of a company that says it will clean up the property for free. In one case such a contractor asks you to subrogate your rights on your insurance policy for the cost of demolition. And, they use a questionable method that could jeopardize the foundation make the rebuilding more expensive and take longer to complete.

Many policies have a clause or rider that increases the dwelling coverage by a percentage, i.e. if you have dwelling coverage of $500,000 with a provision to increase the coverage by 20%, you would effectively have dwelling coverage of $600,000. This increase of coverage is generally not tied to any additional requirements to qualify. Rather, these provisions are meant to help the insured deal with construction costs driven up by a common disaster like the Northern California fires. Ideally, your agent did not include this coverage when he considered your base amount of coverage needed. This is not an uncommon practice when competing on premium for the insurance business. And, hopefully your policy limits meet the coinsurance requirements, or your benefits will be reduced by the percentage to which you’re underinsured. Let’s say it was reasonable to assume that you could rebuild for $1 million, but you only had $700,000 of dwelling coverage, and your policy requires that you have at least 80% protection. You would receive only 7/8ths of the claim.

Some bestpractices to consider adopting are as follows:
    Review your coverage annually considering the square footage of your home, the standard of building and the local cost to rebuild.
    Make sure your basic dwelling coverage includes coverage to bring the home up to current building codes.
    Include a rider that will increase the amount of dwelling coverage if available.
Need help with your comprehensive financial plan, then call an independent hourly Certified Finacial Planner (R). No names, of course.

Link to my website

Resources:
https://www.fema.gov/siaster4344
DisasterAssistance.gov or call (800)621-3362
http://www.marinij.com/article/NO/20171014/NEWS/171019854
http://www.sfgate.com/business/networth/article/Six-things-fire-disaster-victims-should-do-now-12270904.php
https://www.insurance.ca.gov/01-consumers/140-catastrophes/WildfireResources.cfm

Equifax Did a Bad, Bad Thing and What Will You Do About It?

By now, most Americans know that a data breach at Equifax exposed personal security information for some 143 million individuals. What is much harder to learn is whether your personal information was involved.

While the breach itself is bad news, what is particularly upsetting is that there was a significant delay in making the breach public knowledge. Further, Equifax could likely have prevented the breach by installing a patch when it was made available. This was not the first cyber security attack on antiquated software, or software based on open source code, nor the first time a major corporation and government agency failed to take action promptly.

What’s a consumer to do? I suggest to my clients that they accept the things they can’t control and that they do the things they can to protect their personal information., Here are a few options:

Fraud Alert – When notified that your credit information has been leaked, you can call one of three credit agencies and request that a “Fraud Alert” be put on your credit account. What this means is that a business must verify your identity before it issues credit. In other words, you may be contacted by the business establishing the credit. The downside of a fraud alert is that this alert expires after 90 days, but it may be renewed. https://www.consumer.ftc.gov/articles/0275-place-fraud-alert

Security Freeze – When you place a freeze on your credit accounts, you will be unable to obtain any new credit until you unlock the account. This may take days. You need to protect and remember the pin number you set up in order to unlock the account. It does not expire. If you lose the PIN that was issued to you when you added the Security Freeze to your credit file, you may request a new one in writing. You will need to provide proof of identification, such as a copy of your driver’s license, passport, birth certificate or other proper identification. A fee may be required for residents of some states for a replacement PIN. This is the most common recommendation among my financial planning associates.

Credit Card Monitoring Services – For a price, companies like Life Lock® will monitor your credit and notify you of any suspicious activity. You can choose whether you want a text, phone call or email. Their price range is $9.99 to $29.99 monthly depending on the type of accounts they monitor, e.g. credit cards, checking and saving accounts, and investments accounts, and the amount they will reimburse for losses related to identity theft. The limits are $25,000 – $1,000,000. I’ve read mixed reviews about the effectiveness of these services.

For free, if you will endure advertising, there are organizations such as Credit Karma that will monitor your credit and notify you of changes to your credit rating. While it may sometimes come after the problem has occurred, I do like the information that it provides, such as the number of hard inquiries about your credit rating. It also provides useful education about topics such as what influences your credit rating most.

Early in the Equifax incident, Equifax made an offer of a free credit reporting service to the 143 million consumers. Hidden in the fine print was a provision, effective with consumer acceptance of the offer that precluded participation in any class action lawsuit. After blowback the limitation was removed.

DIY Credit Card Monitoring – Every consumer is allowed one free credit report a year from each of the three credit agencies. This means you could request a credit report every four months to monitor your own credit rating at no cost and without advertising. annualcreditreport.com

In addition to taking one or more of the above steps, I suggest the following:

  • Encrypt your computer so that if your laptop or desktop is stolen, a second password on steroids must be hacked:
  • Consider using a password vault like Last Pass, and/or use two method verification for banking and investment accounts.

Here is a link that provides the addresses of the three credit agencies and the Federal Trade Commission’s recommendations: consumer.ftc.gov/blog/2017/09/equifax-data-breach-what-do.  And when considering whom to consult to secure your financial future, I suggest you seek the advice of an independent, hourly financial planner. No names, of course.

SURF, RIP TIDES AND PERSONAL FINANCE – WHAT DO THEY HAVE IN COMMON?

It was a beautiful sunny day at Stinson Beach. The temperature was perfect, and the water was inviting. Unfortunately, you ignored the rip tide warning signs. It was not until you were being swiftly pulled away from shore that you realized that you were in danger. Lucky for you there was a lifeguard on duty.

That beach experience reminds me of what my budget clients’ experiences before they find me, their financial lifeguard. It has all the same components: denial, fear, a sense of a loss of control, and helplessness. READ MORE

Moon Doggie, Get Your Board ‘cause the Home Equity Amortization Wave is Coming

Amortization sounds like a nerdy, financial term. It’s really a simple way to describe the process of paying off of debt in regular installments over a period of time according to Investopedia. Home equity lines of credit are debt. So, how and when are they paid off, other than when a home sells? Unfortunately that’s a question to which too many homeowners have given too little consideration. READ MORE

Are Your Investments Working As Hard As You Are?

How do you want your portfolio to work? If the first words that come to mind are “More, harder, faster!” then you may need a portfolio review.

Let me tell you about a new client of mine who came to me for a portfolio review. She’d done enough reading online to know that excessive fees could significantly reduce her returns and her ability to retire. READ MORE