The Secret To Investment Success

The most negative action to reaching your goals in investing your retirement assets is emotion. Markets, by their very nature, expand and contract in every cycle. Why is it important to state the obvious? When humans invest, two emotions play a part. For example, when the market indexes are setting new records for growth, investors tend to become greedy. As soon as the expansion has cycled down and contraction in the economy is prevalent, fear becomes the emotion of the day.

To control your emotions while investing for your future, it is critical that you understand three factors about the process. First, if you are investing for your retirement, you must acknowledge the process is a long-term perspective. The assets you accumulate in life must sustain for at least thirty to forty years in retirement. With this mindset, you establish a personal investment policy that helps you capture market gains with a minimal amount of risk that you are willing to accept.

By focusing on the term of your income needs in retirement, you can weather the, somewhat volatile, market cycles without excess worry. Let’s face it, everybody worries about something, right? When you initiate your savings plan during your career, the accumulation phase consists of thirty to forty years as well. What this means is that the same approach to investing for your retirement will serve you well in retirement!

The second negative to reaching investment success is continually changing your investments based on returns. There have been many occasions in which an investor has irreparably harmed their success for retirement by simply trading their account excessively. For example, we developed a plan for accumulating a client’s retirement assets. Based on the age of the person, his risk tolerance and projected cash flow needs in retirement, he only had to follow through on the plan. However, he allowed emotion to overtake him when a colleague appeared in his office one day and remarked about the excessively high returns, he was experiencing in his employer’s retirement plan. 

Our client decided the well-planned approach founded in logic was not meeting his needs because the markets would yield a much higher return. This is the emotion of greed taking control of the investment process. Within a year, the market cycle collapsed, and his portfolio had fallen by 50%. Imagine the next meeting we held with him and provided a comparison of his current allocation and results to that of the original allocation for his future. He was devastated and an emotional wreck!

The story does have a silver lining. We worked with him to formulate a plan that would place him back on track but required he work three years longer than he originally planned. Allowing your mind to host greed and fear has consequences. The probability of his lifetime plan for retirement being a success is very good.

Of the three negatives that can cause significant harm to your investment success is a concentration of investments. Diversification of risks within a portfolio helps you weather the market cycles by eliminating, or attempting to reduce, the impact of significant market volatility. In recent years, daily market swings have become the rule not the exception. Early in my career, I recall substantial swings in the S&P 500 Index would only be 10 or 15 points. In our current economic conditions, it is not uncommon to see fluctuations of 30 to 40 points in the index.

To allow yourself the highest probability of success in your investments, it is critical that you avoid emotions serving as guiding force, stick with your plan for saving and consistency will help you achieve your goals and diversify your portfolio to capture opportunities for reasonable returns in the long-term. A few small errors in investing can give rise to very large costs in your future savings. Seek the assistance of a CERTIFIED FINANCIAL PLANNER™ professional to help you establish a long-term plan that will give you confidence and clarity about your future. Until then, I’ll see you on the jogging trail!

Related Podcasts

The Cost of Cash

One of the most important areas of planning for a secure future is to be able to weather the storms of life without invading your long-term investments. When working with a new client, we always ask questions regarding their current monthly living needs. By monitoring and managing your basic living needs such as food, shelter, clothing, entertainment, gifts, etc., you can determine your cash needs on a monthly basis.

This is the first step to developing a cash management plan that will serve you well in life. Once you know the cash flow need for a typical month, it is critical that you expand the thought process to cover a period of 90 – 120 days. Should a catastrophic event affect your family you will be confident that you can sustain your lifestyle without negatively impacting your future by withdrawing retirement assets prematurely.

The process of cash management is a delicate one. There is such a state of having too much cash. Yes, you read the sentence correctly! When a portion of your overall net worth is in cash you are experiencing something negative in your overall financial picture – loss of purchasing power. One of the most critical costs of retaining cash is that you lose the opportunity for the investment (cash) to maintain or exceed inflation with growth. A prime example is a recent client who came to meet with us for retirement planning. When we spoke about his overall wealth, he was rather proud of the fact that he had accumulated what he thought would be sufficient assets to live the life he desired.

However, when we applied inflation and taxes to the overall asset structure he maintained currently, he was not so happy. When your investments are stressed with the actual costs of living, and we all know that inflation and taxation may be present during our lives, the overall balance of assets for your lifestyle is less than the amount you currently see in your bank account.

The key to creating and maintaining a successful cash management program is in the process you utilize for your total investment portfolio. Cash is important and should be maintained in your financial plan. To arrive at the appropriate amount of cash needs it is critical you analyze your spending for a period of a month that is typical of your life. Do not measure a month like November when you are buying more food for Thanksgiving or gifts for Christmas. Rather, choose a month without these extraordinary expenses and evaluate what you are truly using the cash to provide you.

Once you understand where your money is being utilized, you may wish to make some adjustments. Now multiply the amount of cash flow needed in the month you analyzed it and multiply it by 3 or 4. The result of this calculation is the amount of cash you should maintain in a checking or savings account. If it sounds like you are losing money on these funds by not investing them in something that will meet or exceed inflation, you are correct. However, the real purpose of these funds is to provide you confidence and security if, or should I say “when”, a disaster was to strike your family.

Review your cash balance account every month and make certain you return it to your target amount. This is your security blanket. It is a good practice to analyze your spending at least one month per month to determine if you need to adjust your cash balance account for possible changes in life such as added prescriptions, increases in insurance needs, etc.

It is critical you plan properly for the future while sustaining your lifestyle today. If you don’t feel secure about your future, it is time to seek help. Contact a CERTIFIED FINANCIAL PLANNER™ professional to assist you in creating and maintaining a plan for your future. I’ll see you on the golf course!

Related Podcasts

Why Did I Do That?

Humans are a curious bunch, aren’t we? Our brains work in one mode – survival. The programming of our brain is based on the strategies of fight, flight or freeze. Perhaps you have noticed these strategies at work when you find yourself in a dark alley, alone and facing a group of suspicious characters. Or, more often than not, you find yourself facing these strategies when investing your hard-earned money for the future.

Let’s examine one scenario that I have witnessed far too often when people are planning for their future. Having no particular knowledge of markets, money supply, economics or fiscal policy, and armed with only a social media account full of other lemmings (pardon the characterization) that are in the same situation as you, jumping out of the markets because of a perceived correction coming. Misery truly loves company! 

The better approach would be to apply a method of managing your assets in a proven strategy that considers risk and the role it plays in our overall economy. Rebalancing your account to manage the level of risk to that you are glad to accept knowing that return on investment can only occur when risk is accepted. For example, you may have heard we are holding a presidential election in the United States in a few weeks. Many people are hypothesizing the end of the economy due to this quadrennial event. What if you approached this event with a calm mind and an eye for a long-term approach to your investments? Great! You would be one of those investors who believe a short-term market decline does not derail decades of savings.

What I am referring to in the above scenarios is called behavioral finance or, in laymen’s terms, why smart people make dumb investment decisions. I am not calling you names again but wanted to be very honest in how this has been applied by individuals who ultimately regret their short-term poor judgment. One of my favorite quotes describing the secret behind the success of the famed investor, Warren Buffett, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Many investors are much smarter in their approach to lifetime income and savings by understanding the function of the markets in our country. If others are fearful and selling their investments, the wise investor may wish to buy during the downturn of the economy knowing that the prices will possibly be lower due to the oversupply of sellers.

If you are not retiring within a few months of the election, or even if you are, think about rebalancing your portfolio to an acceptable level of risk. Understanding that bond markets function inversely to equity markets, the strategically allocated portfolio will possibly suffer less volatility than a portfolio consisting of positions to chase returns. The person who utilizes a long-term approach to investing for her future with a sound strategy of diversified investments will be served better than those attempting to time markets and reap larger returns than that provided by the efficient movement of the economy.

Don’t make mistakes using short-term thinking when dealing with your lifetime income assets. Consider a consultation with a Certified Financial Planner professional to obtain a second opinion of the risk and strategic allocation of your assets. You may live with a little less stress about your future. Be confident. Be opportunistic when others are fearful. Look to the future. Live your life by your own design not the same mindset as the lemmings running for the cliff. See you on the golf course!

Related Podcasts

How Do You Define Risk?

Danger! Danger! Red flashing lights! Sirens breaking through the still night awakening you from a deep sleep! These are simple, yet effective, methods of alerting you to risks that arise in life. Don’t you wish investment risk were that simple to alert you when you are about to face an inanimate action that has the power to destroy your life savings?

We accept certain risks in life everyday. Once you leave the safety of your bed, you may be subject to risk. Let’s focus on one type of risk – financial risk. You can control the level of risk in your financial life by taking prudent steps to minimize risk when possible. For example, if you are 80 years of age, it may be too risky to invest in a new tech startup with 50% of your retirement portfolio. If you were 24 years of age, this may be viewed more as an opportunity.

As specialists in retirement planning, we believe it is critical to properly measure and mitigate risk when possible. Many of our clients come to us with portfolios that are highly illiquid or invested in a manner that is not in their best interest. When we ask questions pertaining to their acceptable level of risk, the client will generally be moderate or conservative in their approach to investing their hard-earned money.

However, after a careful analytical analysis of their portfolio we inform them of their current investment risk level and their eyes pop open like they are watching a scene from a horror movie. To mitigate the risk, we believe several factors must be considered in their portfolio design:

  1. Consider liquidity needs
  2. Research suitable and appropriate types of investment positions
  3. Determine the tax-effect of the proposed investments
  4. Properly diversify the portfolio to control the level of risk acceptable by the client.

Simply investing the portfolio in its initial allocation does not resolve the client’s risk issues. Proper monitoring of the performance and appropriate rebalancing of the asset allocation to its original target are critical to maintaining the client’s risk level in the portfolio. The financial planning required for an advisor to fully understand the client’s long- and short-term needs and goals entails significant education, experience and knowledge of the economy.

Certified Financial Planner practitioners are professionals that maintain one of the highest credentials as a witness to their competency and ethics. Don’t risk your lifetime savings to risk. What you don’t know could truly ruin your future. Ask for a second opinion regarding your retirement portfolio. Better to find out early if there is a problem in your future.

Diversification and asset allocation strategies do not assure profit or protect against loss. Past performance is no guarantee or future results. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loass, including total loss of principal

Related Podcasts