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Looking ahead, in your financial future

In the financial planning world - and truly most industries impacted by this economic downturn -- 2010 can't come soon enough. The past few years of financial losses have put the break on risk and challenged the financial habits of many once-brazen investors. Many endured the turmoil by trying hard to ignore it. How many decided it was simply safer not to open your quarterly financial statement? And since when did owning real estate become a liability rather than an appreciating asset? For those of you who've taken more than the lion's share of the pain from 2007 onward, take heart. As the economy will right itself in due time, and 2010 promises the beginnings of an economic comeback, it's time to take a look forward. Because when we look back at the last two years, it's the right time to take what we've learned and apply it in ways that will lead us into a more secure financial future.


The first lesson learned from the downturn concerns investment risk. During good times, many were lulled into thinking risk simply involved predicting how fast an investment would appreciate. We saw this in the late '90s when investing in anything with a ".com" meant rapid wealthy. Some did. Many didn't. The nature of recent investments may have changed, but that pervasive attitude of invincibility reared its head once more. Speculation and risky investments permeated the real estate market, the commodities market and, of course, the stock market. As we've all seen in this most recent downturn, not everything goes up in value all of the time. All markets are cyclical in one way or another. This pulls us back into the tried and true investment philosophy of diversifying assets over different markets.


Cash, as they say, truly is king. Many people are led to believe idle cash is a wasted opportunity. Not so. If you had all of your assets invested these last few years, it's highly likely you missed great buying opportunities. This became magnified in the real estate markets. As homeowners tried to get out of their holdings -- usually due to lack of cash -- the banks tightened their lending standards. Banks also demanded more cash down to purchase. Remember that buying opportunities exist in every market. You can't buy something at rock-bottom prices if you don't have the cash to pay for it.


The refinancing landscape for 2010 looks very interesting. Interest rates remain at historic lows. If feasible, there is great value in refinancing your existing mortgages. Free up additional monthly cash flow or reduce the length of your mortgage. In both situations, it's creating a stronger financial position. Low interest rates also are a powerful tool for small businesses. Reducing borrowing costs and debt repayments can often increase profit margins and allow you to expand the business. 


Sometimes a short-term setback can become a long-term advantage. If you've been reluctant to sell off an investment due to a large capital gain, today's economy presents you with an opportunity. Compare the investment's current value to its cost-basis. By selling, you could put yourself in a better position with little or no tax impact. This is always a valuable strategy when your portfolio is over-weighted by one position, such as company stock or an inherited asset.


January 2010 will usher in a major change to Roth IRA rules. Funds can be put into a Roth IRA in a variety of ways, with the two most prevalent being either by contribution or conversion. The ability to convert has historically been hampered by an income limit.  In 2010, the income limit has been eliminated. This has opened the door for many people to create tax-free income for use later in life. But before you run out and start converting or selling assets, consult with a qualified financial professional to ensure you're creating an investment strategy that best meets your needs now and in the future.

Financially speaking, we are coming to the end of some historically tough times. And we have learned some solid financial lessons from this downturn that should be applied to our investment strategies moving forward. If we stick to the basics and take advantage of the opportunities in front of us, 2010 may be the beginning of strong economic times.

Ed Taylor, CFP (TM), President of Taylor Financial an independent Fee-Only financial advisory practice.