Risk tolerance: 10 lessons learned

By Jake Jacklich, CFP^®

What you need to know about increasing your ability to weather the next storm

One of the best ways to increase your investment risk tolerance is to minimize the chance that you will need to sell your investments in a down market.

Account balances rise and fall. Remember, paper losses become real only when you sell. Therefore, it is important to consider your ability to weather the economy’s next financial storm. Ask yourself, how likely are you to be a motivated seller?

Focus your energy on these 10 aspects of your financial life:

1. Liquid savings: Keep an emergency fund of three to six months of your personal expenses. You may need more cash if you are your family’s sole provider, or if your spouse works in your practice with you.

2. Line of credit: Establish a business, personal, and home equity line of credit. Banks are happy to lend to their customers who don’t need money. You may never need to use the line of credit, but you may be unable to get a line-of-credit after you need it.

3. Business income and extra expense insurance: If your dental clinic were destroyed, how long do you think your practice would survive before you had to liquidate your other investments? As a business owner, you might consider more than just property and casualty insurance for your clinic.

4. Flood insurance: You may need flood insurance even if your home mortgage lender doesn’t require it. Just because coverage isn’t required doesn’t mean that water damage can’t happen. You may have to cash out your other investments just to rebuild.

5. Pay estimated income taxes: Get ahead. Avoid getting trapped by using this quarter’s revenue to pay last quarter’s taxes. Any interruption in your revenue stream could send you into a downward tax-debt spiral.

6. Restructure debt: Focus on getting a low minimum payment for your business debt. Think cash flow — you can always make extra payments but you may have trouble lowering your minimum payments if your situation changes.

7. Fix your balance sheet: As the economy improves, focus on repaying your credit card and car debt.

8. Avoid cosigning: Be careful about guaranteeing the debts of adult children or family. If their situation takes a turn for the worse, you’ll be on the hook.

9. Reinvest in your practice: Dentistry is a capital-intensive business. Failure to keep up to date will likely lower the resale value of your practice and make it harder for the business to get credit.

10. Carefully consider future side business opportunities: When the next recession hits, your side business may be less resilient than your dental practice. If your revenue from dentistry is down, you may find it very difficult to keep your other endeavors afloat.

Bottom line — It is important that you are prepared to ride out the tough times without selling at the bottom of the market.

Author bio
Jake Jacklich is a Certified Financial Planner™ practitioner and financial advisor with Waddell & Reed in Virginia Beach, Va. He works primarily with self-employed dentists to help them better understand their money. His core competencies include financial planning, analysis of the doctor’s current financial position, dental practice valuation, tax-sensitive wealth accumulation, distribution strategy, risk management, investment strategies, practice transition, and retirement planning. Jake is securities licensed in Arkansas, Virginia, and Wisconsin, and can be reached at (757) 374-6979, [email protected], or www.JakeJacklich.wrfa.com.

Waddell & Reed, Inc. Member FINRA and SIPC.
Waddell & Reed does not provide tax advice; please consult your tax advisor prior to making financial-related decisions.
© July 2011