Our Financial Planning & Investment Principles
Smooth Sailing requires Thorough Planning
Experienced sailors like our President David Edwards know that you can only make a successful trip when you plan in advance. Making sure you have enough food and water on board and accounting for weather patterns are just two examples.
Our approach to wealth management works in the same way. Before we make investment recommendations to our clients, we create a thorough financial plan to make sure the investments we choose are suited to our clients' specific financial requirements.
Do you need most of your funds for your retirement? Are you thinking of buying a home in the next couple of years? Do you have an emergency fund of cash available to you?
Knowing your exact situation means that we can allocate one of our team members to deal with your specific requirements. Our technology platform allows us to provide alternative scenario’s within seconds which allows us a better chance of steering clear of bad weather.
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The Glidepath to Retirement
Q: What do retirement planning and landing an airplane have in common? A: If you get it wrong, the results could be disastrous.
When it comes to retirement, there was a time that many Americans had the option of operating on auto-pilot. At age 65, you would receive a defined benefit from a company or government sponsored pension plan, Social Security, maybe even company health insurance. Checks arrived reliably once a month and you did not have to worry about asset allocation, longevity risk or Medicare Part C.
Today however, most prospective retirees will receive a lump sum distribution from a 401(k) plan at 60, 65 or 70 years of age and are expected to ‘wing it’. Yet most Americans are no more qualified to manage their retirement investments than to land a plane. In order to ensure a safe landing, pilots meticulously follow a detailed checklist. Nothing is left to chance. At Heron Wealth we believe that you should approach your retirement in the same way.
Asset Class Risk Thermometer
Risk and reward go hand in hand. Cash in your pocket carries relatively little risk but it does not give you much of an investment return. Investing in a private business may be rewarding financially but has liquidity risk (you may not be able to get your money out when you need it).
At Heron Wealth we invest our clients in a range of asset classes to optimize the trade-off between return and risk. We only invest our clients in assets that are liquid (meaning that you can get your money out in 24-72 hours) and transparent (the current price is available from numerous sources).
Examples of such investments are stocks, bonds, mutual funds and ETF’s.
We will not invest our clients in real estate, private businesses, limited partnerships, private equity, hedge funds or bitcoin. While such investments may offer the promise of high returns, they violate our rules about liquidity and transparency.
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Purpose Based Asset Allocation
Purpose-based asset allocation means that our clients’ funds are invested for short term, medium term and long term goals. The aim of this strategy is to ensure that our clients have funds available for short-term needs while receiving the benefit of higher returns in riskier assets.
For example, if the purpose of a client’s investment is retirement, and they are more than 5 years away from retirement, we can allocate those assets to more risky (volatile) securities like stocks and commodities.
If our client also has short-term requirements, for example a down-payment on a home, we will invest a percentage of their assets in securities like money markets and treasury bills that have relatively little principal risk (i.e. the risk that your investment will decline in value to below the amount you invested, the ‘principal’).
Three Bucket Retirement Income Strategy
For our retired clients, who depend entirely on their portfolio, we aim to prevent them from having to experience a reduction in their monthly draw at any time.
We aim to accomplish this through our 3-bucket retirement income strategy. In this strategy we invest 60-70% of our client's portfolio in high-risk, high return assets such as stocks and commodities. We refer to this as the 'risk' bucket.
We re-balance our clients' portfolio once or twice a year, as needed. Excess balances from the 'risk' bucket flow to the 'fixed income' bucket: bonds and preferred stocks. This means lower returns but also lower risk.
Excess funds in the 'fixed income' bucket flow into the 'cash' bucket, which is invested in low return, low risk assets (money market securities). We aim for our clients to receive the exact same draw every month.
In general, we recommend keeping a year's worth of retirement income in the 'cash' bucket and four years in the 'fixed income' bucket. This means that it's more likely that our clients can survive a five year drought in their 'risk' bucket. An example of a drought would be the 2007-2010 period of financial turmoil.