An End … and a Beginning
As 2016 comes to a close and we look forward to 2017, it’s a good time to review those basic investing decisions that all investors must make to increase the likelihood of achieving their financial goals and objectives. The basics of investing are just that—basic tenets to follow that may result in accumulating assets that can help investors successfully attain whatever goal they have established, such as paying for a college education, taking the family on a vacation to celebrate a significant event, buying a first or second home, or funding a rewarding retirement.
The first step is to START. Begin saving as soon as possible, even if you haven’t established a specific goal. You may have heard the phrase, “It is not timing the market that is important, but time in the market.” The power of time in the market and compounding are amazing. Here is an example: Jane and Joan are 22 years old. Jane begins saving $2,000 a year for 16 years and then stops. Joan waits awhile to start investing, beginning at age 31 to save $2,000 a year and continuing until she is age 65. Both Jane and Joan achieve the same annual rate of return of 7% from age 22 to age 65. Jane invested a total of $32,000, less than half of what Joan invested, which totaled $70,000. Who had the larger balance at age 65? Jane managed to accumulate $396,805 while Joan accumulated $295,826—a difference of more than $100,000! I can think of lots of things to do with that amount of money.
Here is another example of the power of compounding: If someone asked if you would take a $1,000,000 today or wait and receive the result of a penny doubling every day for 30 days, what would your answer be? If you think this is a trick question, you’re right. Starting on day one with one penny and doubling the result every day, on the 31st day the result would be $10,737,418.24.
Set a Goal
Establish a goal for those dollars you are saving. If you are excited about the goal, about what you are saving for, saving then becomes something you want to do. Several people I know who worked for a living and ultimately achieved their financial goal have told me, “I saved because achieving my financial goal was important to me.” Once you have established a goal, you should occasionally revisit that goal, as goals can change due to life circumstances. Make sure the goal you have set remains important to you.
Repeat the Routine
Once you have begun saving and have established a goal, make it part of your routine to save regularly and consistently. Find a way to automate your savings schedule so you don’t have to think about it. Many people have dollars withheld from their paycheck and deposited into a savings or investment account so they never see those dollars. Revisiting your goal and working toward it should become a regular part of your financial life and can contribute to the success of achieving your goal.
Live on Less
This is a corollary to the idea above. If you don’t see the dollars you are saving, chances are you won’t be tempted to spend those dollars. If you get a raise, consider paying yourself first by increasing your savings. Then take a portion of the raise and reward yourself on a job well done by treating yourself to something special to you. But keep in mind that many successful investors don’t drive new cars every three years, buy a larger house or take expensive vacations, but intentionally live on less now so that they can enjoy the benefits of achieving their financial goal in the future.
Know Your Risk Tolerance
Be honest and recognize that risk comes in many forms: credit risk, market risk, interest rate risk, inflation risk, loss of principal, risk that can be reduced by diversifying your portfolio, and risk that exists in any portfolio. Work to understand what level of risk you can tolerate and invest accordingly. Once you establish your risk level and are ready to invest your portfolio according to that risk level, take the next step which is to:
Work with Someone You Trust
Now that you have come this far in working toward your financial goal, acknowledge your limitations and get some help in managing your money. Most of us work full-time and have families or friends we want to spend time with after work. We’d rather enjoy life than take the time to educate ourselves about investments. So find an advisor you trust who is also a fiduciary. A fiduciary is someone who has an obligation to act in the best interest of another party. In the investing world, it is a person, an advisor, who puts the interests of their clients above their own financial interests. Find an advisor who listens to you and is dedicated to helping you achieve your financial goals. If you are part of a couple, both of you should have confidence in your advisor and the advisor should be respectful of each of you. Get to know the advisor and their firm and ask lots of questions. Spend as much time finding an advisor you know and like as many people do in planning their vacations. A trusted advisor is an asset that can pay off in benefits now and in the future and act as a valuable resource for you and your family.
Ignore the Noise
Once you have selected an advisor, determined your risk level, invested your portfolio according to your risk tolerance, and understand how your portfolio fits into your financial goals and objectives, ignore the financial press. The market will go up and down, and much of what you read and hear about the markets is outside of your control. If there is nothing you can do about it, how much time and energy should you spend worrying about those things you cannot control? By keeping your focus on long-term goals and objectives, you can concentrate on and enjoy those things that bring joy to your life.
The details are important, so even if you work with an advisor, keep your eye on your goals and objectives and the progress you’re making toward those. Meet with your advisor on a regular basis and ask questions. Make sure you and the important people on your life understand your financial situation so that in the event of an emergency, financial matters can be addressed. Keep all financial information in a central location so that it is easily accessible in the event of an emergency. Make sure all your legal documents are up to date and that beneficiary designations are accurate. A good practice is to review all financial matters annually and make changes when necessary.
Achieving your financial goals and objectives is something that you can control, so, in the words of Nike, JUST DO IT.
© Charles Barsotti
Copyright 2017 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.