The military example has a higher percentage of equities with their inherently greater risk and greater potential for return. Risk can be reduced by increasing bonds with some degradation of potential return or by holding cash that only carries the risk of under-performing inflation. Having determined the cost of your goals (Family Financial Plan), you can now allocate your monthly savings into the mix of bonds and equities, which gives you a good chance of meeting your goals. This is asset allocation or risk management, and long term has as much impact on total return as individual stock or mutual fund selections.
Your other major tool for reducing risk is diversity, where you select a variety of different investments within each part of your allocation. “Give portions to seven, yes to eight, for you do not know what disaster may come upon the land” (Eccles. 11:2). This is your classic “don’t put all your eggs in one basket” situation. This is a very common problem with many military investors and a serious problem with those who have been clients of one of the organizations selling contracts and load funds selected by the salesman. I have seen lieutenant colonels with 225K in investments and over 200k in one high load mutual fund. No matter how good the fund, the officer was taking undue risk. “But the fruit of the spirit is . . . peace . . .” (Gal 5:22). (Sound Mind Investing links these two scriptures and it makes sense.)
Most sources will tell you that you need three to five different mutual funds from two or three different fund categories. Even if you have three growth funds you probably do not have much diversity because within any category, the different mutual funds have many common holdings which will react similarly to market changes.
Finally, your strategy during this phase should be designed to meet several broad and changing objectives. You should be investing separately to meet (if these are your objectives) college costs, long-term family security, retirement, mission work and any other personal priority. Experts consistently tell us to have separate funds and not to draw down retirement funds to pay for college, but the American middle class continues to do just that. Ideally you start early and save for both, but retirement is a much greater expense and “should not” (financially speaking) be sacrificed for an intermediate objective such as college. Money taken from civilian retirement savings at this critical point results in people working longer, retiring at a lower standard of living, or working jobs into their late 60’s and 70’s. With military retirement/SBP we have more flexibility.
Mutual funds, both equity and bond, are the choice for most of these needs. Stock and individual bonds (treasury, municipal, or corporate) can also be appropriate, but require more study and management, and traditionally are more volatile (read risky). The wide spectrum of mutual funds gives us the opportunity to select type funds appropriate to each goal and their individual holdings give us excellent diversity with reasonable cost and ease of management. They do have some cost and tax disadvantages, but they are ideal for most of us. See “Investing & Markets” for more mutual fund and stock discussion.
Protecting and Transitioning Phase
Protecting and Transitioning Phase is only a desired phase. Not everyone gets there or gets there with the level of blessings that require special planning and offer fabulous opportunities. Again, you are more likely to transition into this phase than wake up and say, “Dear, we are in phase three.” It is characterized by having the option to retire, having family security largely anchored with assets/pensions and having sufficient assets to cover major expenses (aging parents, retirement, long-term health care, etc.) You have a reduced need for growth in lieu of dependable income. During the latter years of this phase you minimize risk-taking while giving your excess to heirs and the Lord’s work.
Back before inflation was a big issue the “standard” pie chart for retirees was ninety percent bonds. The whole stereotype of a widow’s portfolio comes from the need for dependable income, great security and no need for growth. If you had reached goals and had security, why take any risk? Inflation has modified our perspective. The real value of fixed income drops dramatically during periods of high inflation like the early eighties. Now, nearly everyone needs a portion of their allocation in growth investments which can be expected to keep up with inflation. The percentage depends on monthly needs. Keep enough in income investments to secure your lifestyle. Many advisors suggest thirty to fifty percent.
In each phase, take only the risk you need and know what you need. You only need be about right: even twenty-five percent off an ideal allocation is better than most people do without a plan. This is more art than science, but your decisions improve remarkably if you understand the financial/economic environment. Your part is to study and make ready, then pray for guidance and establish godly priorities for His resources. Then you manage. Like the successful manager said, “The harder I work the luckier I get.” “Every prudent man acts out of knowledge, but a fool exposes his folly” (Prov. 13:16).
Financial advisors have different names and divisions for the phases of a financial life and one of the very best is that advocated by Austin Pryor, the Christian founder of Sound Mind Investing (The Financial Newsletter for Today’s Christian Family) and author of Sound Mind Investing. He doesn’t just describe four levels, he writes about them every month, including analysis of specific investment for each level. While the subscription is a good investment, much of the general educational information is available on the web site. His levels (phases) are Getting Debt Free, Saving for Future Needs, Investing Your Surplus and Diversifying for Safety. (My system includes diversifying within the earlier stages.)
Most personal financial models associate the phases of life with appropriate investments. The start point remains with the goals of your family financial plan and the budget, which segregates assets you have to invest. Next we will look at what is appropriate for various goals. “Commit to the Lord whatever you do, and your plans will succeed” (Prov. 16:3).