If your goal is saving to buy a house next year, putting your down-payment in the stock market could be a disaster.
Sure, you could gain 10-20% in a year, but you could also lose that much.
On the other hand, never investing in the stock market could mean you fall far short of what you need for retirement.
How do you make sense of investing?
This post is here to help.
Never invest emergency savings in the stock market. Suze Orman
1 – Match risks to your time horizon
When you put part of your pay into a 401(k) plan at your company, you are investing. And when you save money to buy a house, you are investing.
Different investments have different risks. If your goal is saving to buy a house next year, putting your down-payment in the stock market could be a disaster.
The risk does not match the horizon. If the stock market is volatile, it goes upand down. If you can stay invested long enough, the ups outweigh the downs.
So, when you have a short-term horizon, less than three years, you need investments that have little or no risk to principle.
On the other hand, if your goal is saving for retirement, leaving your money in a savings account will be a disaster. Sure, your principle is safe. But, you took no risk, so the funds did not grow much.
When you can wait at least 5 to ten years, theninvesting in the stock market is preferable because well-diversified investments tend to go up over time.
2 – Diversify investment types
Buying one stock could give you huge returns, or lead to a complete loss.
Diversifying means allocating your investments to different categories: stocks, bonds, real estate, raw materials, etc. These categories respond differently to economic events, so an investment that goes down can be offset by one that goesup. You allocate portions of your investment among investment categories to reduce your overall risk. That helps protect your against a major losson any single investment.
You will also want to diversify within categories. For stocks, you look at value and growth investment styles, large, mid and small-cap companies, and US stocks and international stocks.
Okay, now we are making it sound complex. You may want to get advice, either from a financial planner, broker or good robo-planner who can help create and asset allocation suitable for your goals.
3 – Allocate and then re-balance periodically
Once you diversify, you need to review the allocation among investments at least annually. Otherwise, the allocation could get way off track.
Check to make your mix of investment by category still fits your goal. If your allocation is off, re-balance it by selling the excess ofinvestments that performed well and buying the investments that have beenunderperforming. Good investments may lag at times, so re-balancing helps you to maintain the proper allocation to stay on track.
4 – Dollar-cost average – sometimes
Worried that the market is too high, that stocks could tumble? Emotions such as fear, as well as excitement or greed can lead to bad investment decisions.
One way to address fear ofa correction is to dollar-cost average. This means adding new funds to your investment allocation by investing the same amount of money on a regular basis, e.g. once a month for six months.
5 – Keep costs down
What about costs? You generally want to avoid loads and other forms of broker commissions whenever possible. And you want to select investments that have low fees.
· Make your investments at a discount broker, on line or via an app, and
· Use exchange-traded funds (“ETFs”).
Have any questions? Let us know, we’d love to help you stay woke about investing.
“It simply isn’t acceptable for the likes of Google, Facebook, Amazon and others, which amass data by the terabyte, to say, ‘Don’t worry, your information’s safe with us, as all sorts of rules protect you’ – when all evidence suggests otherwise. “
– Maelle Gavet
Protect your data and devices
There are now more tools available than ever to help you organize, access and protect your sensitive data and documents.
The amount of information we store on our mobile devices is staggering: emails, personal contacts, client contacts, banking information, music, and pictures represent only a fraction. You can easily protect this data by enabling the password service, or, in the case of the newer iPhones and iPads, by enabling the fingerprint recognition software.
We have become heavily dependent on these devices that, if we lose them or they malfunction, we could spend days trying restore or replace the data on the device. To protect against this potential headache, you should back up the device regularly. You can also shift more application content to cloud services such as iCloud or G Cloud.
If you know the sickening feeling of losing an important file that you saved on our computer, then you know you do not want to risk losing all the data on your laptop. That’s why we recommend backing up your important files to an external hard drive, remote server, cloud storage or online back-up program. Some of you may want to make the backup occur automatically, so that all files are stored on a regular basis. Others may prefer to do so manually. If so, be sure to set a reminder that works for you so that you frequently safeguard as much of your important data as possible.
In addition to backing up your files regularly to an external location, we recommend you install anti-virus and malware software. When you buy a computer, an anti-virus program is often included. Make sure the virus definitions are updated constantly. Also, you can add more projection for free, such as Malwarebytes.
There are certain documents that deserve an extra level of security, like original copies of your estate plan (link to planning) for the inevitable. For these documents that hold significant legal and personal importance, place them in Ziplock bags to prevent water damage and store them in either a fireproof safe or a safety deposit box.
Taking these small steps each of you can take now to protect your tax and financial information will prove invaluable if the unexpected occurs.
There is always risk involved. You can’t be a capitalist only when there are investment profits but then a socialist when you experience losses.
Only focusing on being “debt free” and having an “emergency fund” is like claiming that your favorite team won on defense alone, not needing any offense.
(we are not talking about that kind of risk!)
Comprehensive financial planning uses cash management, debt, tax-planning, investing and insurance so you use all resources in the best way over time.
In terms of a holistic plan, amassing cash is incomplete planning. It deals very well with market risk, the volatility of the stock market (or any other capital market). But it gets a zero in terms of dealing with the inflation rate risk (see notes risks below). The after-tax return on cash is lower than the rate of inflation.
What if you take a bit more risk and put money in bonds. Now you added volatility risk and interest rate risk, but did dampen your inflation risk. Next, you could add stocks. Now you really addressed inflation well, but you also ramped up your volatility and increased your liquidity risk. You will need to diversify the stocks and the bonds, – you can’t just buy Apple stock or a short-term bond fund. Yes, there is so much planning to do.
A good plan will design your cash management, debt and investment strategies based on your goals. If you can fund all your goals, you need less return and can take less risk. If you are far from your goals, you need to judiciously take on more risk.
Okay, then, what if you need an enormous risk to reach your goals? You can’t fully amp your investments without going so far beyond your risk tolerance so that you can’t sleep at night. It would be better to take the goals down a notch.
You need to cost out all your goals, then compare those costs to your resources to use them in the best way to achieve those goals. And at the end of any plan, this caution should be added:
The single most important risk to planning is a poorly defined or constantly changing strategy. You must have a long-term approach to which you adhere over time regardless of the current favor of the particular strategy. That will work, while chasing constantly changing tactics will not.
P.S. – adhering includes monitoring and managing, as forgetting about it may not work well.
So, evaluate the risks that match your goals so you can plan well!
…. and let us know if we can help!
Notes on risk:
1. Specific and Non-specific market risk – buying a single stock versus buying the entire market is specific market risk; non-specific is the risk of a particular market. You address these with diversification (cross-correlations among major asset types reduces volatility over the long-term without reducing returns) and asset allocation.
2. Interest Rate Risk – is the inverse relation between the direction of interest rates and the value of a fixed-income asset as set by the market.
3. Inflationary Risk – is the erosion of returns in terms of purchasing power due to inflation.
4. Opportunity Cost Risk – is the failure to invest in assets producing the necessary returns because one chose instead to remain in cash.
5. Liquidity Risk – is the risk that the investment chosen is one that cannot be liquidated easily before some event, such as the ultimate sale.
Southwest Airlines is successful because the company understands it’s a customer service company. It also happens to be an airline.
Afraid to make a call to customer service?
Years ago, I read a compelling account of success in handling customer service issues and was transformed from the angry guy making threats to the customer rep’s new best friend. My new attitude brought great results, like the time I dialed up Verizon Wireless about a malfunctioning cell phone (one I accidentally put through the wash cycle), they effectively paid me (via a dollar refund and free headsets) to replace it.
Want to use this same magic? Here is how:
1. Be Respectful: Make them feel important and validated. Ask them their name, if they did not give it, and use that in the conversation.
2. Show Gratitude: Thank them for what they’re doing. If they feel you appreciate their efforts, they’ll work harder for you.
3. Recruit Them: Use terms like “we” and clearly state your objective so you can turn the call into a mission, with the representative committed to helping you accomplish it.
4. Remain Calm: Avoid trigger words, anger and any swearing. Otherwise you risk losing the bond you created. Maintain the position of being empowered to get what you, as the customer, deserve.
5. Communicate Your Determination: Be clear that you are not going anywhere until your mission is accomplished. Be clear that you are not taking any brush off.
6. Escalate: If you are not making progress, then escalate: ask to speak to a manager. Many representatives are judged by the number of calls referred to managers or supervisors, so asking may prompt them to be more helpful.
This approach takes practice (and patience).
However, it is quite effective, so you are likely to see good results. Good luck!
All the seven deadly sins are man’s true nature. To be greedy. To be hateful. To have lust. Of course, you have to control them, but if you’re made to feel guilty for being human, then you’re going to be trapped in a never-ending sin-and-repent cycle that you can’t escape from.
The single most important risk to a portfolio of investments is a poorly defined or constantly changing strategy. You must have a long-term approach to which you adhere over time regardless of the current favor of the particular strategy. You will need to resist the psychological pressures of investing.
(I said resist, not sleep through it!)
Avoid These :
Gluttony – hoarding cash when you should invest or evaluating by only one category when you should look at the big picture;
Greed – looking for big winnings when time and patience pay off;
Pride – not selling your losers or those old, familiar holdings when a new idea is better;
Lust – listening to the information barrage and adjusting your portfolio constantly rather than filtering it out to stick with a plan;
Envy – chasing fads or looking at a friend who has “winners”, making investing look more like gambling, when actually you should sell your best and buy trailing but good positions (as in the “Dogs of the Dow” technique);
Anger – not forgiving yourself for mistakes and moving on; and
Sloth (not our friend up above) – changing beliefs to fit your decisions or portfolio rather than reviewing a portfolio intellectually and objectively to decide if you would still buy the holdings today.
You should review your portfolio about once a year. Any more than that and you’re falling victim to one of the aforementioned sins. When reviewing you should re-balance – taking from investments that did well and adding to investments that did not perform as well since the last re-balancing. This reallocating may seem wrong, especially when bond yields are low and CD rates are low. Nonetheless, history tells us to override the psychological urge to keep investing in a “winner.”
Individual investors are a “negative indicator” because they buy when an investment is near its peak and sell when it is near its bottom, exactly the opposite of buy low, sell high. So you want to take “profits” from those currently doing well, and re-deploy them with assets that are more likely to provide future returns.
Adhering to a sensible investment strategy is how money is made over time.
You may feel that you missed out compared to someone who is all in the right stocks now. However, you will also be glad to miss out when that person’s holdings go down faster than the market.
“will be good for business for those advisers
who provide real value and are smart marketers.
The Robo’s will probably kill off the bottom-feeders in the business,
together with those who have no genuine advice-based value proposition. Perhaps that is an unfortunate consequence,
but then, maybe it isn’t.”
stock jockeys of the 1970s-1990s that refused to embrace financial
planning? Many call them dinosaurs that
died with a change in the way our industry did business. There will always be new competitors in our
industry. People want faster, cheaper,
better, improved, more powerful and a so-called better mousetrap.”
Here is another, where the title
of the article by Craig Iskowitz sounds as if he thinks
robo-advisors are a passing fad: Dead
Robo Walking: Why Wealthfront is Doomed. However, he
provides real analysis of the new technology and differentiates the growing
field of robo-advisors, calling out Wealthfront as an advisor he
believes failed to prepare and execute well.
Wealthfront may not do well, but Mr. Iskowitz sees it as losing out to
other investment firms, both robo or traditional. (Also see Robo-Advisors may be just what we need!)
As I said in What
is a financial plan?, that those who insist that robo-advisors will not replace
planners comprise the “There’s no app for that” group.
Hold on, Steven. This is Siri.
What about me? Where do I fit in?
Well Siri, you are
a robo-voice, not an advisor.
But you ask me
questions all the time!
Yes, I do. But I don’t count on you for life-changing
Enough! As promised, back to Sara Grillo. In the end, she thinks robo-advisors:
“are a good
way to get financial advice for those who have no emotion attached to their
money, a long time horizon, and simple requirements.” However, if you
need more attention, then she expects you to pay a human for advice, despite
the $500,000 portfolio minimum threshold barrier.
Should that be the cutoff? You have to already be wealthy to get good
advice? We think it shouldn’t.
Imagine that, as a financial planner, CFP or other advisor,
robo-advisor technology frees up more of your time. You could use that time to provide more
advice to clients or to advise more clients. Just like the introduction of word processing and
desktop computers in offices decades ago, technology brought efficiencies and
created a massive shift in how we use time.
Or Imagine that we can create a robo-advisor website that will provide
the sort of advice that a human would, even encompassing the issues Ms. Grillo
suggests: “complicated trust and estate issues, a need for cash flow planning.” This is my hope for the website we are
building, that we can make the essence of human financial planner advice
accessible to those who made need it most, who have not amassed great wealth –
Technological change comes in many forms and constantly evolves
Change is a constant in our lives. Those
who resist are often buried in the process – Neil’s dinosaurs. Those who would adopt and adapt fare far
I love the Roth IRA. Tax-free income in retirement is a truly great deal.
As more employers provide the option of a Roth 401(k), you may be faced with this question: Do I contribute to a Roth 401(k) or a traditional 401(k)? The answer depends on your income tax rate now and what it might be at retirement. Before offering any explanation, here is some background:
How These Retirement Plans Work
If you need to think: what is taxed now, what is taxed later, and what grows in between, what are we talking about?
Tax deferred growth – Earnings on both the traditional 401(k) and the Roth 401(k) are not taxed. Not paying taxes on investments in your retirement account means more grows and compounds tax-free – that is why contributing to a retirement plan is so important.
Contributions – Contributions to a traditional 401(k) are made “pre-tax,” meaning that the amount contributed is excluded from your taxable income for the year.
Contributions to a Roth 401(k) are made after tax – they are not excluded from taxable income.
Withdrawals – Withdrawals from a traditional 401(k) are taxed in the year of withdrawal.
Withdrawals from the Roth plans are not taxed.
Other rules – There are penalties for withdrawal before reaching age 59½, unless certain exceptions are met, and you must begin withdrawing when you reach age 70½ under the IRS Required Minimum Distribution or “RMD” rules. For more on RMD rules, see https://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Required-Minimum-Distributions-(RMDs).
How you decide into which plan you should contribute
If you have a high tax rate now, and expect a low tax rate later, pick the traditional 401(k)
The traditional plan is better because get the current tax deduction, reducing taxes now at the higher tax rate. This may be true for people in middle or later years of employment.
Note: this is only financially better if you invest the amount of taxes saved.
If you have a low tax rate now, and expect a high tax rate later, pick the Roth 401(k)
The Roth plan is better because you avoid higher taxes later. This may be true for most people starting work now.
If expect your tax rate later will be the same as it is now, pick the Roth 401(k)
The Roth plan has other benefits described below.
Hedging your bets
If you are not sure of your tax rates, or if you just want more options because you cannot predict, then you can opt to combine plans. For example, you can contribute to your traditional 401(k) up to the employer match and then put the rest in a Roth IRA, if the contribution limits allow.
When you change jobs, you can convert a 401(k) to a Roth IRA, but doing so is a taxable event. If you expect your tax rate to be higher in the future, this is a good move. However, you will want to pay taxes due from other sources. If you have to take funds from the IRA to pay the taxes, you reduce the amount going into the Roth IRA which dramatically reduces the future benefit.
If you convert after-tax contributions made to a traditional 401(k) or non-deductible IRA, you have less on which taxes are due because the after-tax portion is not taxed in converting to a Roth IRA.
While a Roth 401(k) is subject to RMD, a Roth IRA is not. If you can re-characterize the Roth 401(k) to a Roth IRA, you avoid the RMD. This may mean that you pass more on to your heirs. Also, you may gain investment flexibility compared to a company plan.
If you use a Roth plan, then your taxable income at retirement will be less than if you were withdrawing from a traditional plan where withdrawals are taxed. This could lessen tax due on social security benefits.
On the other hand, if you expect to use funds in your retirement plan to donate to a charity, you are better off getting the tax savings for yourself now. The charity is not subject to much if any income tax.
Also, if you expect your heirs to receive your retirement plan assets and know that those heirs will be in a lower income tax bracket, you should use a traditional plan now to get the tax benefit for yourself. How can you possibly determine that heirs will get more of your retirement than you and also be in a lower tax bracket? I cannot imagine – well, maybe I can, but none of the ideas sound good. Anyway, it seemed like a good idea to mention (they teach you to think this way in law school).
Deciding can be tricky!
We became quite technical in this post, so let me know if you have questions as you decide.
Results from online different financial calculators do
not match. Why do the results
differ? Usually, it is because different
assumptions were used. That is, the
calculators control the variables in different ways.
Performing complete and accurate calculations well is
difficult, and thus designing a web-based calculator can be expensive. The variables a retirement calculator must
address include rate of inflation, rate of return on investment, life
expectancy, how much of current salary you need to support yourself at
retirement, and social security benefits.
Some calculators offer Monte Carlo simulations
to help you predict your retirement funding.
On this, my vote is to ignore the Monte Carlo simulation for the same
reason many websites will tell you not to count on past returns as to predict
your future investment results.
Some calculators allow you to alter their
assumptions. However, none of them is
able to accommodate either decreasing spending in later years, which is typical
of most people during retirement, or the cost burden of major health
problems. Any attempt to address these
issues would be quite costly.
Others take an easy out by limiting variables, e.g.,
keeping your contributions flat. This
facile solution provides little insight into what your retirement savings will
actually look like because it ignores your ability to save more as your income
increases. Also, by assuming flat
contributions, your need to act will look more urgent due to the big shortfall
in saving to meet your retirement goal.
The company using this assumption may hope you contact them to help you
solve the retirement problem that their formula, in part, has created. A calculator that assumes annually increasing
savings makes more sense.
In the end, using any of these calculators gives you a
sense of where you stand //vis a vis// your retirement goal. If you are far off, it gives you impetus to
act so you get on track; and if you are on track, then you it gives you a sense
of security. For me, the most important
result from using any calculator should be assessing and sticking to a good
strategy for saving and investing with a long-term perspective.
Here are links to the most popular retirement
calculators, which will come up in a web search:
“The biggest profit center for investment banks is the hefty fees they charge[…]”
Remember in college when your parents would pop in to see you, inviting you out to lunch? Free food! Yay!
And yet, you have to listen to them talk about how they just discovered streaming videos. They ask you a million questions about what you’re doing, and who you’re doing it with. So was lunch free? Really?
Hidden fees are everywhere
The point is to recognize that every service, almost every good, has some price, some way in which you pay for it – except maybe the air you breathe. It is important to know when and how you pay so you’re the one deciding how to spend your money. Something that sounds too good to be true usually isn’t true.
Compare a bank offering free checking, but their savings accounts have a low interest rate, to a bank
charges for checks, but offers much higher interest on savings. If you had an emergency fund that earned
interest, paying for checking but earning more interest might be worth more
Being savvy, comparing all the fees, really helps you manage your finances like: paying closing costs for a mortgage versus a “no closing cost” mortgage, buying a car one place for an all-inclusive price or going to a dealer that charges separately for delivery, registration, and such, investing with a broker who also provides “free” financial planning or using a discount broker and having to pay separately for the planning advice.
Compare costs and keep more for you
Start paying attention to all the charges that go into your purchases. If you know the total charges before you decide, then you can be sure you’ve used your time and money wisely.
We did not really touch on taxes. Just like “free delivery,” government services are not free. Even a volunteer fire department depends on town funds for its building and equipment, and those funds come from taxing town residents. So you need to know when you owe taxes and for what.
“At base, financial literacy is inextricably connected to control over one’s future”
– Ann Cotton
Wake Up to a Happier You
When you go to college you learn about your chosen profession along with many other topics. Often, you learn the history of your profession so you understand why your profession is where it is today and how you can advance it.
What if your money could go to money college? Your dollars would learn how to keep credit card balances low, maintain a good credit score, prioritize spending, set aside money for emergencies, take advantage of tax deductions, afford the things you care about, pay off debt efficiently and so much more.
If your money paid attention in class, it would know how much you need to save now to afford a house in 5 years, or how to save and invest well so you can retire comfortably at age 60. If your money had good instruction on history, it would know how to avoid mistakes that your friends or even your parents may have made trying to manage their finances.
Imagine what your money could do if it got a PhD! Maybe your money would know how to start a new business, raise capital from investors and help you to be even more successful. Or your money would know how to form a partnership to bring opportunities to communities that are suffering.
We created Woke Money so you can improve your financial literacy, so you can fill in the gaps that school, family, and friends didn’t or couldn’t teach you.
We want you to get to know every dollar you have, understand how those dollars can do more work for you. We want you to overcome any fear or anxiety you may have about paying taxes, starting investments or comparing insurance. We want to encourage you to stay informed so you can identify a good opportunity and manage risk. We want you to be able to enjoy today because you know you are on track for a good future! Use the power you gain from this knowledge for good, adjust your habits to create a better life!
Try out this first step:
Identify what you care about most, whether it’s buying a home, not living paycheck to paycheck or paying off your growing student loan or perhaps credit card debt.
Then make a pledge to yourself to take action: I am going to conquer my fear of investing and save for the vacation I always wanted!
You can’t afford to wait!
There is no spare time … you get 86,400 seconds each day of your life, to use or waste, so make a good plan for each one!