Midwestern Financial Group I Fiduciary Advisors I Wealth Management


Three Primary Determinants For Optimal Asset Allocation

This is the first of a four-part series discussing the three primary determinants required in order to arrive at allocating assets and to provide planning outcomes and opportunities. Admittedly for some, this write-up may seem overly simplistic, but for others, it is our hope that the simplicity serves a greater understanding concerning how practitioners and MFG in particular, arrive at allocating your hard-earned monies.  

We work diligently to slow the process down to first get to know our clients, to listen to your financial concerns and needs, and to provide an opportunity to introduce our firm, guiding principles, and members. After all, our hope is that our relationships with clients will span decades and generations.  

Financial planning is inherently personal and requires a great deal of trust by both parties. We work with our clients to understand three primary drivers that ultimately determine the success of their financial future.  

  1. Financial Resources – today and tomorrow 

  2. Risk Tolerance – capacity and willingness 

  3. Financial Goals – determines time horizon 

Financial Resources 

At the very core of financial resources are your personal assets, liabilities, income, expenditures, and savings rate(s). It is critically important to capture a sense of what your current financial affairs look like in order to determine not only the amount of risk required to generate an adequate return to meet your financial goals – be it near- or long-term – but also assist us in understanding sensitive inputs to arrive at financial outcomes given your current financial position. It also assists us in determining level of financial sophistication.  

The following list includes various data points we capture, but is far from a comprehensive list: 

  • Net worth statement (assets and liabilities) 

  • Income from various sources  

  • Expenditures  

  • Taxation  

  • Debt schedules 

  • Human capital – earnings growth and risk  

  • Insurance policies 

Risk Tolerance 

We recognize that a person's true measure for risk is likely best measured during the most challenging of market environments. However, your tolerance for risk is a key input computing return expectations by way of the overall allocation of your portfolio that, in part, is anchored to your risk tolerance. The less risk one is willing to take, the lower the return expectation. 

At MFG we invest an incredible amount of time understanding our client’s tolerance for risk – both their willingness and capacity to take risk. This is accomplished through discussions and qualitative and quantitative assessments. We do this for a couple reasons: 

  1. It is not unreasonable to believe there may be conflict between one’s willingness to take risk and their capacity to take risk. 

  2. Should the conflict go unacknowledged, the net result may be impaired realized investment returns due to inability to stay the course during a drawdown or marginalized long-term returns due to an allocation that is lite on risky assets 

We firmly believe the greatest value we provide to our clients is by way of managing behaviors. At the center of this is risk assessment. The study and practice of behavioral finance is core to what we do for our clients at MFG.  

Financial Goals 

The last and certainly not the least of the inputs are your financial goals. Proper asset allocation should be fastened to your financial goals as it is those that often determine the timing of withdrawals. We often say internally that our first priority is to preserve what you have earned and then enhance it; meaning that when it comes to funding a liability, such as education or retirement, we want to be certain near-term withdrawals are not subject to unnecessary volatility. Long-term assets, or assets needed to fund your goal in the intermediate or long-term, can then assume greater risk and volatility to allow for growth.  

Simply put, your financial goals determine your time horizon and timing of funding that particular liability. For much of what we have discussed today, there are general guidelines. As it relates to financial goals and retirement, it is common for some to believe it is prudent your allocation follows the glidepath of your age and therefore reduces equity (risk) exposure as you age. As a generalization, this may be true for the average investor. However, we caution its applicability as it relates to optimizing financial outcomes.  We firmly believe the allocation of your assets should replicate your financial resources, tolerance for risk, and financial goals.

Your overall asset allocation should be representative of your time horizon, risk tolerance and financial resources. 

In closing, significant investment and time is required to determine your appropriate allocation of assets. Absent of this, there’s a chance you're not optimizing your financial outcomes. MFG remains consistent in our fiduciary capacity – offering objective financial advice on the premise of optimizing your financial outcomes, not the interests of corporate profits.  

Midwestern Financial
Millennials - Your Financial New Year's Resolution

It’s February 1st, which means 75% of all New Year’s resolutions are now forgotten. By year end, only 8% will be accomplished.


Which side of the statistic coin do you fall on? Are you still on track or are your goals long forgotten? For the millennials who set a financial New Year’s resolution, we have some direction.

First, what is the financial profile of a millennial?

Last summer, TD Ameritrade surveyed 1,519 Americans between ages 21 and 37 -millennials- about their attitudes toward money, retirement, and life.

Here are the troubling results:

·       The average respondent expects to start saving for retirement at age 36.

·       56 is the desired retirement age for the average surveyed millennial.

·       53% of millennials anticipate becoming a millionaire at some stage of their lives.

·       Only 50% invest in the stock market, either through an employer retirement plan or brokerage account.

Why are these results troubling?

The goal of becoming a millionaire over 20 years of savings is a tough hurdle to jump. The annual savings needed for a 36-year-old to accumulate $1,000,000 by age 56 is $36,536.35. That is extremely unrealistic for most Americans. In addition, this assumes a 7% return and millennials are not fans of the stock market, a necessary condition for returns close to 7%.

In order for a $1,000,000 portfolio to last for 30 years, it must be invested in a balanced portfolio (60% stocks) and withdrawals should not exceed 4% of the portfolio balance. Thus, the income the 56-year-old can expect from the portfolio is $40,000 per year before-taxes. If the savings is in a tax-deferred account, such as a 401(k), there are taxes on the withdrawal.

$40,000 may sound doable, but that amount is not in today’s dollars. The $40,000 withdrawal is 20 years from now. Assuming 3% inflation, the $40,000 in portfolio income is equivalent to $21,500 today. Or $1,792 per month.

MFG’s recommendations

Millennials face the reality of working longer, saving earlier, and reducing their income expectations in retirement. These are the real constraints our clients face as they mold their economic reality around their financial goals.

But, it’s achievable for young savers. If $1,000,000 saved is the goal, $18,200 annual savings is needed between 30 and 65, assuming a 7% return. That is much lower than the $36,000 savings rate from above.

For today, to get started, we suggest beginning investors start small. Building retirement monies is similar to losing weight in the sense that small increments accumulate, and quick solutions do not work.

Not-so-fun fact: Humans that use eating restrictions to lose weight actually gain weight over time. The reason: calorie restriction is difficult to consistently maintain.

If you’re starting from $0.00 saved each month, let’s start small and gradually increase monthly savings until meeting goals is on track. In Switch, co-authors Chip and Dan Heath describe our reluctant selves as elephants: “If you want a reluctant elephant to get moving, you need to shrink the change.” They continue:

Think about it: Does picking up an undershirt off the floor and tossing it in the hamper inspire dread? Nope. Nor does rinsing out a glass and putting it in the dishwasher, or putting a single folder in the filing cabinet, or spraying glass cleaner on the bathroom mirror. So why does dread emerge from a combination of individual actions that seem pretty dread-free? Partly it’s because we fear that, in order to “clean house” properly, our work must (by definition) end with a house that’s clean. And when we envision our way to that end state, picturing all that we will have to conquer to get there – the closets and dishes and carpets and toilets and floors – we simply can’t bear opening that door. It feels like too much.

A strategy to overcome the elephant and clean: “5-minute Room Rescue.” Set a timer for 5 minutes and go to the worst part of the house and clean until the timer goes off.

To get the elephant off its duff, you need to reassure it that the task won’t be so bad. Look, it’s just 5 minutes. How bad can it be?

It’s time to overcome the elephant and begin your path to financial success. We understand the hurdles millennials face today and offer a Beginning Investor Program aimed at influencing small incremental change in your finances. We welcome the opportunity to serve your financial needs today and well into the future. Contact us to learn more.

Midwestern Financial
Americans Aren't Financially Responsible - Let's Look

Americans are not good at maximizing their financial outcomes by minimizing financial errors. This is not likely a surprise. 

Below are excerpts and charts from the Federal Reserve's annual 'Report on the Economic Well-Being of U.S. Households in 2017' that we found interesting. 


Take a look

Midwestern Financial