“Don’t Let the Immediate Take Precedent Over the Important” – This quote sits on my desk and is a helpful reminder to take a step back and look at the big picture  We live in a world that is encumbered by choice.  Everywhere we look, we are given more and more options which ultimately make it more difficult to arrive at a decision (ever tried finding something to watch on Netflix?). Decision-making has also become more complicated – ridden with endless permutations in the quest for the absolute best solution that frequently distorts our ability to choose.

We face the same challenges when making financial decisions.  Whether it’s investing, taxes, debt payments or insurance, it is easy to get lost in the numbers – price per unit, insurance per dollar spent or other paralyzing metrics that can leave you cross-eyed. So how do you keep focused on the prize?

With any financial decision, one prevailing consideration can confidently lead you to the right choice:

What solution provides the highest rate of return commensurate with the lowest amount of risk?

Posing this question can help clarify many financial planning decisions.  Here are some examples:

Should I invest $100,000 or pay off the mortgage?

If you have a mortgage with a 3% interest rate and a portfolio that produces a 6% annual return (and is expected to stay the same moving forward) – it is clear-cut where your dollars would be more productive. Your portfolio earns more than the cost of your mortgage. However, what if your mortgage and portfolio both have a 6% rate? If we consider the risk in tandem with the return, paying down your mortgage will likely be a better choice because it has a lower risk. Your mortgage costs a regular 6% of your money, whereas financial markets can be volatile, and the return generated in this scenario can be less certain than the interest saved on the mortgage. So, paying off your $100,000 mortgage would likely be a better choice since it contains less risk, even with matching 6% rates.

For my kid’s 529 College Education Account should I invest in stocks or bonds?

If you’re saving for college in a 529 plan, the highest rate of return and lowest risk is likely determined by your time horizon—when you’ll need the money to pay for your child’s schooling. Suppose your child is in a 5th grade elementary school class, then paying for college is nearly a decade away. Allocating more of the 529 assets to stocks, though riskier, have historically returned higher growth prospects over time. On the other hand, if you have a high school junior who is heading to college in only a year, you’ll want the assurance of having the 529 plan money when you need it and take on less risk. In this case, investing in safer assets (more bonds/cash and less stocks) will provide a higher return given the cash is needed right now, and leans harder on liquidity and stability versus growth and volatility.

In both instances, considering the highest rate of return commensurate with the lowest amount of risk, measured by how far or close your kid is from college helps make the right financial decision.

Should I purchase life insurance?

When it’s time to purchase life insurance, the risk/reward rule is reversed, and emphasizes risk before returns: What life insurance solution protects the highest risk commensurate with the lowest cost?

When most people purchase life insurance, the purpose is to protect from catastrophic loss of income to the survivors – the highest risk.  From there, determining the policy with the lowest cost should be evaluated next.  However, there are multiple solutions (term, whole life, etc.) with different features and costs that can skew the decision-making process.  For example, some policies come with an investment element (often referred to as cash value) that can be tapped into during your lifetime.  However, these policies often may not earn the highest return (versus investing in the financial markets) and are usually not the lowest cost solution.  Therefore, it is important to think about why you are buying life insurance when selecting a policy.  See my previous blog for additional details on how to stay straight with this decision.

It is natural to be overwhelmed by financial decisions considering the options, assumptions and consequences on making such choices. However, if we remember to take a break, look up, and keep our eye on the horizon, these considerations will ultimately help us get to where we need to be going.

At BCM, we focus on clarifying financial planning decisions (such as these listed above) in alignment with your financial objectives.  By doing so, not only will you be able to see through the dust, you will have data-driven understanding and confidence to make the right financial decisions.

If you are (or unfortunately already have) pulled your hair out trying to crunch the financial numbers, please email me at montgomery@billeaudcapital.com.

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About the Author

Montgomery Gossen joined Billeaud Capital Management in 2016 as an Investment Adviser Representative. Montgomery previously worked for Advent Software, a financial reporting software firm based in Jacksonville, FL where he served several roles assisting financial advisory firms across the country. Montgomery earned a B.S. in Agricultural Business from Louisiana State University and is a Certified Financial Planner™…. Read more.