BELIEFS AND VALUES | Hoffman Wealth Advisors Dallas

Beliefs and Values

The content on this page is for informational and educational purposes only and reflects the views and opinions of Hoffman Wealth Advisors LLC. It is not intended as investment advice, and no content should be construed as a recommendation to buy, sell, or hold any specific security or investment strategy. All investing involves risk, including the potential loss of principal. Please consult directly with us or another qualified professional before making any financial decisions. Registration with the State of Texas does not imply a certain level of skill or training.

Wealth Creation: Wealth takes a tremendous amount of time to create. Many use millionaire as a benchmark for wealth, and the average millionaire reaches their first million around age 42. The path to fast wealth is typically through high-risk strategies with an even higher risk of failure. The lottery is an easy illustration of this concept. A person could invest in one lotto ticket and, within a short amount of time, become a millionaire. However, this is obviously a poor strategy because the expected value of each ticket is negative. The true methods of building wealth take time and consistency.

On the Purpose of Wealth: While wealth enables you to do many things, know that it will not lead to ultimate fulfillment. We view wealth as a tool to accomplish the goals that you have in mind. Ultimately, we will pass away, and whatever we built in our lifetimes will also pass away. In the words of Solomon, “Who knows if the person after you who takes it over is wise?” In that respect, there is a certain vanity or chasing after the wind in building wealth. We want you to focus on wealth building without it becoming an obsession. As you have surely seen, many well-off people live miserable lives. Conversely, you know those who live modest lives who have an abundance of joy. Properly framing wealth as a tool helps avoid the trap of thinking that once you reach a certain level or retirement, you will be happy.

Stocks: Stocks remain one of the best ways to build wealth and optimize your finances. When you own stocks, you are participating in the growth (or decline) of a company and are entitled to the rewards. The best way to view stocks is to imagine you own 100% of a company. If you owned that company, you would enjoy the profits of that enterprise. In the short term, stock prices are determined by investors’ views on the future performance of the stock. One of the main drivers of price fluctuation is the disagreement on future outcomes. If new information comes out about a company that is beneficial, you’ll likely see the price rise. Conversely, if information that is harmful to a company emerges, stock prices will decline. There are many other factors that affect stock prices, but for those reasons, you should expect a certain amount of price fluctuation. Those who are not comfortable with short- to mid-term price fluctuations should be cautious about holding a majority stock portfolio.

Bonds: There are many different types of bonds such as corporate, treasury, and municipal. Each type has its own benefits and drawbacks. Bond investing can be complex, as there are many factors that affect bond prices, such as the duration of the bond, interest rate movements, credit ratings, and more. Still, bonds tend to offer greater diversification to your stock portfolio and will be considered in your plan. Bonds also have more consistent returns. Treasury bills are considered the “risk-free” rate of return due to the fact that the government has the authority and power to create more money. However, there are still risks involved in holding only T-bills—largely inflation risk. How much of your portfolio is comprised of stocks, bonds, real estate, and more depends on your risk capacity, tolerance, and general view on investing.

Real Estate: Real estate offers competitive returns, often challenging the historical returns of stock markets. There are many ways to invest in real estate. Direct ownership is the most common, typically by borrowing money from the bank and leveraging that into rental property. There are also Real Estate Investment Trusts (REITs), which are investment vehicles that trade like stocks and can be bought or sold on the stock exchange. There are upsides and downsides to both, and which is more suitable for you depends on your goals, time horizon, and liquidity needs.

Tax Strategies: Tax strategies remain one of the most essential roles in financial planning. In addition to asset allocation, where your assets are held is equally important. For example, REITs are required to pay out 90% of their profits to shareholders. This income is taxed as ordinary income. Assets that generate higher income should generally be held in tax-deferred accounts. Account structures such as HSAs, 401(k)s (traditional/roth), IRAs, and others can help maximize value. Which account structure is right for you will depend on your specific situation, goals, and needs.

Volatility: Volatility refers to the rate of change in a given asset class. Different asset classes have different historical volatilities. As mentioned before, stocks generally have higher volatility than bonds. However, there are stock sectors that can have less volatility than some types of bonds. For example, a utility stock that has been operating for 40+ years with steady cash flows may have less volatility than a low-rated junk bond. This pattern holds across all asset classes: while general trends apply, individual cases vary greatly. In any investment, expect price fluctuation. Our plan is to maximize long-term value, not short-term wins.

Efficient Markets [Stock Prices]: There is ongoing debate about whether stocks are “correctly” priced given all available information. Some argue prices are perfectly priced, others that they are only somewhat accurate, and still others claim markets often misprice assets. We believe that while discrepancies exist, stocks are generally priced fairly. Often, the least attractive segments of the market offer the greatest opportunity—though there are usually good reasons a stock or segment is out of favor. If those reasons turn out to be overstated or invalid, there is potential upside.

Risk Tolerance: Risk tolerance refers to how much loss you can endure before wanting to exit your investments. For example, in a 100% stock portfolio, you must be comfortable with potential downturns as large as 30%-50% in a single year (rare, but not impossible). All portfolios are subject to risk. Even “risk-free” portfolios like those composed of T-bills face risks—interest rate sensitivity and inflation risk, for example. Risk questionnaires are helpful for both investors and advisors in determining acceptable levels of risk.

Asset Allocation: Allocation refers to the ratio of asset classes in a portfolio. Generally, the longer your time horizon, the more aggressive (higher volatility and expected return) you can afford to be. Conversely, the more immediate your needs, the more conservative your allocation should be. Constructing an allocation suitable for your goals, behavior, and risk capacity is essential for long-term success. For example, while a 90/10 stock/bond portfolio may be optimal at age 25, if the investor panics and sells during a downturn, that portfolio becomes suboptimal. Knowing your risk tolerance is critical to building a plan you can stick with.

Single Stocks: The greatest gains often come from concentrated portfolios, and so do the greatest losses. Each year, certain stocks will outperform. By investing in the overall market, you’ll miss those individual highs. However, investing heavily in single stocks carries significant risk—especially when your portfolio is concentrated in just a few names. While there are winners, identifying them ahead of time is extremely difficult. Many studies show that even professional investors struggle with this. If you feel compelled to invest in individual stocks, we recommend limiting those positions to a small portion of your overall portfolio.

Crypto-Currency: Cryptocurrency should generally be approached with caution. This space is filled with speculative behavior and frequent pump-and-dump schemes. The risks often outweigh the rewards. Ultimately, the only reason you would earn a positive return in crypto is if someone pays more than you did. Unlike stocks, bonds, or real estate, crypto has no inherent cash flows and is considered a speculative asset. While some promote crypto as a store of value like gold, it lacks gold’s long historical precedent. If you choose to invest in crypto, limit your exposure to a small percentage of your portfolio.

Cash: “Cash is king,” some say—others say “Cash is trash.” There are strong opinions. How much cash you should hold depends on your financial situation. If your income would be difficult to replace quickly, you should maintain a larger cash reserve. Conversely, if you could find equivalent employment soon, you may keep less. Having cash on hand provides peace of mind and prevents unnecessary debt. Cash also offers strategic opportunity—when markets are down, having liquidity can allow you to capitalize on rare buying opportunities.

Insurance: Name a risk, and there's probably an insurance policy to cover it. From life insurance to disability, auto, or even pet insurance—there’s no shortage of coverage options. Which policies you need depends on your personal risk exposure. Our general recommendation is: let insurance serve its core purpose—protection. Complicated insurance schemes that mix investing and coverage should usually be avoided.

Your Money: Ultimately, it’s your money. While our role is to advise you in your best interest, how you spend or allocate your resources is always your decision. We hope to be a long-term, trusted partner on your financial journey and that our advice enhances your financial peace and life goals.