By: Aaron Peck, Managing Principal, 1847Financal Dallas | Fort Worth

It was 6:30 am on a Friday morning. I was talking to my teenage daughter about money, what I do for a living, and economic classes at school. It got me thinking about advice and what knowledge I can leave her with. I told her that I think the most important thing an investor can do is diversify.

There are so many places money can be invested and as far as categories go they all work well at some point in time, for some people. Life, markets, and the world economies are so unpredictable. I recommend being prepared for anything at all times.

Be prepared for the worst. Invest in insurance to make sure you and your family are prepared if something happens to derail your plan. Insure your income, assets, retirement, and legacy. Take a look at disability insurance. If your income stops, so does the progress toward college planning and retirement plans.

My personal favorite is the savings account! I usually recommend six months of a family’s gross income sitting in a savings account. This is the rainy day/emergency fund but it is way more powerful than that. Imagine a family earning $200,000 a year with $100,000 in a savings account at the bank, earning less than a percent. They are covered from short term job loss or disability and the unforeseen emergency. But, they are also able to choose much higher deductibles on their home and automobile policies, freeing up hundreds of dollars a month! Only a $200 savings invested at 8 percent over 20 years provides a whopping $118,000 (before tax and fees). Now how much is $100,000 in a savings account at the bank really earning you? Having cash on hand is always a good idea when a good investment comes along you want to invest in quickly. Sufficient cash reserves can also position clients to take advantage of opportunities without having borrow money, finance it, or sell off investments that are performing well.

Many (most) of my clients reach retirement and state that the retirement accounts are for the kids and grandkids. They tend to live a very simple life and forgo many of the travel plans they dreamed about. An alternative would be to have your legacy set up for pennies on the dollar through life insurance, allowing one to spend freely during retirement. A second use for stable cash value life insurance would be to guard against market volatility and withdraw timing issues. The most vulnerable time for your retirement nest egg are the first through the fifth years of retirement. Withdrawing money to pay for normal living expenses, thus shrinking your retirement nest egg, in a down market can be catastrophic because your investment can not recover and running out of money after 10 or 12 years becomes a harsh reality. Consider pulling from the stable non-market correlated assets in those bad years for income purposes.

Tax diversification can be equally as important as asset allocation. Some assets are taxed as they grow while others are taxed as they go in or as they come out. This becomes very important when deciding which buckets to pull from in retirement for income. Some come out taxable and some come out free from federal tax, if handled properly.

It is important to consider risk tolerance, time horizons, and withdraw need during the planning process. Analyzing their stocks, bonds, cash, real-estate, CDs, fixed assets, personal business assets, and other retirement accounts diversification is a must. Diversification and asset allocation are strategies designed to help manage investment risk. It does not guarantee a profit or protect against investment loss in declining markets.

I heard a statistic once that said something along the lines of ... people are spending more time planning just one vacation than they are planning for their financial future over their lifetime. Consider working with a financial professional who will test the recommendations before implemented, by using tools like LEAP and Riskalyze.

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