Sometimes, catastrophes are called “black Swan events”. We hear a lot of people worrying these days about such possible flying-off-the-financial-cliff moments: the U.S. government defaulting on its debt, the end of Social Security — AI causing the collapse of the economy. This kind of tragedy is rarer than a raven-colored Swan.
ChatGPT and Bard are not my concern. The AI brains cannot even tell the time. You can try it. The other aspects are also a concern.
Add in the possibility of a recession or widespread banking crises, and it becomes almost as if we are swimming in a deep pool of black Swans.
Black Swan Events: Not worth the worry
It is easy to get lost in worry and angst about the next calamity.
Social Security will lose its funding. This is a serious issue and must be resolved. However, we have been at the edge of a depleted Social Security trust funds before in the 1970s, the 1980s, and the 1990s. The trust fund’s long-term projected balance has been insecure since then.
The looming default on the national debt is a similar situation. Recent events have shown that the U.S. was at the brink of collapse in 2013, 2013 and again 2021.
This doesn’t mean that financial mishaps will not happen or that we won’t experience a calamity not on our radar. Black swan events are by definition impossible to predict. Instead of worrying about black swans and worrying about problems that are beyond your control, these strategies can help you improve your long-term financial position.
Save your retirement savings
According to a U.S. Bureau of Labor Statistics 2021 study of baby boomers in their late stages, you’ll probably have more than a dozen jobs during your lifetime. However, each career change can jeopardize your savings for life after work.
It can be difficult to transfer a company-sponsored 401(k or other plan from your former employer to your new one due to the complex retirement savings system. Some people simply cash out their old plan.
The Sauder School of Business, University of British Columbia published a study in November 2022 that found that 41% of workers withdraw money from their 401(k) accounts at job separation. Nearly 90% of these people drain the entire account.
They take every penny out. Professor Yanwen Wang, UBC Sauder Associate, stated that roughly two-thirds of them take everything out at once and the rest make multiple withdrawals. They take it all in an average of eight months. ”
Research shows that the reason for withdrawals is not financial hardship due to an unanticipated job loss.
Only 27% of those who withdrew funds had been laid off, or terminated. It’s highly unlikely that they all needed emergency funds. To make matters worse, many of these withdrawals were likely to have triggered a 10% IRS penalty if the funds were taken before 59 1/2.
An rollover into an IRA (or — if you can — to a new retirement plan by your employer) is a good idea.
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You can also rollover your tax refund
Another rollover opportunity is available. The refund you receive from the IRS is your money. It’s not a gift, nor “found money”. Most likely, you paid too many taxes by over-withholding or making larger than required quarterly deposits. It’s been kept without interest by the government in any way.
Instead of spending the entire amount, consider it a rollover. This is how you put your money to work. You can treat yourself to a little bit of it, but you should resolve to use the majority of your tax refund to “cash stuffing” long-term goals.
Do not try to be lucky with your serious cash
How did your March Madness bracket turn out? You could even make it to the Final Four. You know how those locks blew up your parlay? It’s a good thing that you didn’t bet serious money. (You weren’t, right? )
When investing, it’s easy for investors to fall prey to a betting mentality. Perhaps you are trying to gain an edge, beat market conditions and catch up on your savings after a slow start. This is when you might be tempted take a large share in one investment, such as the stock of your company or the latest “can-not fail” startup or crypto derivative.
A loss in your long-term investments account is more serious than losing your beer money. Savings for your life after work keep you in the game of living. You are investing to make your life what it can be.
There is a way to increase the return on your investment. This brings us to…
A core and satellite strategy
Asset allocation basics recommend that low-cost investments be spread across all markets. A strategy that includes a “core” and a satellite strategy is a tactical addition to a portfolio.
Index investments that are not managed achieve broad diversification at minimal expense. This would be your core strategy.
Satellite investments may be small purchases of funds that are actively managed, stocks within specific sectors, or an alternative investment. A satellite investment in cryptocurrency is possible.
This allows for concentrated exposure to the market through small purchases. Your core investments, which are allocated to cash, bonds, and equities might account for 90% of your portfolio. Satellite holdings, however, could make up the remainder of 10%.
Talk to a fiduciary advisor to discuss the best investment options and allocations for your particular situation.