Wall Street Steward Blog

The 12 Days of Christmas

“On the first day of Christmas, my true love sent to meeeee….”

Your true love may be sending you a partridge in a pear tree this holiday season, but this financial advisor is instead writing you a list of 12 things that every investor should have.

“On the first day of Christmas, my advisor said to meeeee…….have an emergency fund.” Professionals can argue back and forth about whether we prefer 6 months or 12 months of living expenses, but we all agree that you need to have this slush fund. It does not necessarily have to be in a bank, but it should offer daily liquidity, be very safe, and pay a decent interest rate. Having this kind of account prevents investors from having to sell investments to cover life’s expenses. Now that I mention selling investments…

“On the second day of Christmas, my advisor said to meeeee…….keep a budget.” Nobody likes budgeting every penny each month, but without a budget, people often end up living above their means. This leads to having to tap into their investments at inopportune times, which fouls up their entire financial plan. Speaking of financial plans…

“On the third day of Christmas, my advisor said to meeeee…….have a written financial plan.” If you fail to plan, you plan to fail. Each person should set specific goals about retirement, education planning, etc. and then hire a trusted advisor to create a written financial plan. This acts as both a roadmap to get the investor to where he wants to go, and as a quasi-contract to keep the investor calm during market downturns. Stick to the plan. 

“On the fourth day of Christmas, my advisor said to meeeee…….have an asset allocation.” We all know not to put all of your eggs in one basket, but how many baskets? 4? 10? Every investor should have an asset allocation that is specifically designed to pursue their individual goals according to their risk tolerance.*

“On the fifth day of Christmas, my advisor said to meeeee…….buy adequate insurance.” Many people have enough life insurance coverage, probably due to the quality salesmanship displayed by most insurance brokers. However, insurance is all about managing risk, and in order to do that, investors need to have disability insurance, umbrella policies, etc. You have worked too hard for your money, so protect it accordingly.

“On the sixth day of Christmas, my advisor said to meeeee…….hire a CPA.” Although you can save money by preparing your own taxes, I believe in hiring a professional to take care of your 1040. They will likely find things (read: loopholes) that you will not see, and in the rare event that you get audited, the CPA will act as your defense attorney while meeting with the IRS. You do not want to be sitting at that table alone. 

“On the seventh day of Christmas, my advisor said to meeeee…….prepare a last will and testament.” If you do not specify who gets the money, a court will. The larger the estate, the more advanced the planning needs to be to maximize the amount of money your heirs will receive. However, I believe that everyone needs the “big 4” documents: last will and testament, power of attorney, healthcare power of attorney, and living will. Ask your financial advisor to refer you to an attorney if you do not already have one.  

“On the eighth day of Christmas, my advisor said to meeeee…….name your beneficiaries.” All retirement accounts should have primary and contingent beneficiaries named. Do not name your estate. Do not name a trust. Name individual people and specify the percentages. This allows them more flexibility upon your death and also helps the asset avoid probate court. This is easier to manage if the accounts are in one location. Such as…

“On the ninth day of Christmas, my advisor said to meeeee…….consolidate your accounts.” There is no need to have random pools of money sprinkled all over creation. You can avoid maintenance fees, and become a larger fish to your advisor by choosing one person and giving them all of the business. This DOES NOT mean you are not diversified, just as having 23 accounts at 18 different institutions doesn’t mean you ARE diversified. Rollover those old 401(k)s. Simplify. The fewer professionals you have working for you, the more fee clarity you get, which transitions into…

“On the tenth day of Christmas, my advisor said to meeeee…….know what fees you’re paying.” Many fees in the investment world are hidden inside the investment vehicle itself, and I would read the prospectus before buying any product. Furthermore, ask the broker what commission he/she will earn if you buy the product they recommend. It is your right to know this information, and if they balk, walk away. Also, there are sometimes annoying maintenance fees for IRAs that can be avoided by consolidating your accounts. 

“On the eleventh day of Christmas, my advisor said to meeeee…….have a home equity line of credit.” Interest rates are at historic lows. Interest on a HELOC is tax deductible. I recommend that every family maintains a home equity line of credit. It may never get used, but in an emergency can provide a lifeline. 

“On the twelfth day of Christmas, my advisor said to meeeee…….give money to a charity.” I feel as though wealthy people are blessed so that they can be a blessing to someone else. Many times, gifting money is more rewarding for the person that gives than for those who receive. It warms the heart, and also provides a valuable tax benefit. Be a blessing this Christmas season.

*Asset allocation does not ensure a profit or protect against a loss.