Insights into financial management - Uncertain times call for diverse portfolios
Grant Boyd
May 1, 2008
Recession. Economic downturn. Slow growth. Volatile markets. These terms are ones we've heard
frequently in recent weeks whether watching the news, reading the paper or conversing with
colleagues.
While turbulent times are a natural, predictable part of our economic cycle, it's hard to
avoid feeling unsteady and nervous when they occur. Many investors are tempted to pull up roots,
pull out of investments and generally shake things up in their portfolios. But is this the best
approach? Is what you do part of a long-term financial strategy? Is your portfolio well diversified
and made up of different asset classes?
Now more than ever, it's a good time to check in with your wealth adviser and evaluate your
investment plan. So what should you look for from an adviser in this economic climate?
Engagement, trust and communication are the cornerstones of what I call the "golden triangle"
of any client-adviser relationship, and applicable principles for all key advisers in the client's
life. Results are best when all key counselors – for example, wealth adviser, accountant and
attorney – are working together on the client's behalf.
Your relationship should center on a holistic approach to financial and, where applicable,
charitable giving, objectives. Look at your total financial picture, not just the funds available
for investment. Analyze the performance of each asset in the context of your long-term goals.
Consider creative solutions available to turn an underperforming, highly appreciated asset into a
performing one while realizing tax benefits and supporting your philanthropic goals.
For example, let's say you own a second home used primarily for rental income, and you're
looking for ways to support a charity near and dear to your heart. Let's choose for this scenario
my favorite organization, the Juvenile Diabetes Research Foundation (JDRF). Originally worth
$200,000, your rental property's value has appreciated to $2 million. But you're not earning the
rental income you'd like for that value and capital gains taxes make selling the property less than
attractive.
So consider setting up a charitable remainder trust (CRT), which would allow the rental
property to be sold and monies put into a diverse asset allocation. In turn, you – or a designated
party – would receive income from the trust during your lifetime. Upon death, the value of the
trust would go to a designated charity, JDRF in this case. A CRT can be a valuable tool to convert
underperforming assets in a variety of scenarios.
On the other hand, if your priority is to leave a financial legacy for your heirs but you
want to support a favorite charity and receive the tax benefit now, a tool available in reverse
fashion is the charitable lead trust (CLT). Using the situation above, a CLT allows the same
conversion of your rental property value into a trust but would pay income to JDRF. Upon death, the
value of the trust is transferred to your beneficiary instead of to the charity.
No matter your financial situation or individual long-term goals, a recession or downturn is
an opportune time to start dollar cost averaging in the market. Be strategic, stay in touch with
your investment adviser and be sure to discuss the benefits of a fully diversified portfolio.
Grant Boyd is senior VP regional director, Wachovia Wealth Management