Much of what passes for investing advice is offered in a vacuum, with no consideration of the individual circumstances of the recipient. It definitely can be exciting to own a stock that zooms higher and it’s nice to see those profits, even on paper.
However, it’s important to ask yourself: What purpose do those trades serve? Of course, it’s good to make money. But picking stocks and making market bets almost always puts you at tremendous risk. That’s because there is typically no relationship between opinion-driven trading and one’s future financial concerns, such as living expenses, taxes, health care and many others.
Today’s retirees should expect to live longer than their parents did. As recently as two decades ago, financial planning was not considered essential. There were some good reasons for that. More Americans had corporate pensions, which guaranteed a portion of retirement income. Earlier generations were, in general, more cognizant of saving money during their working years. Life expectancies were less than today, meaning retirees had fewer years without a paycheck.
In addition, the number-crunching software wasn’t widely available. Today, a financial planner can show a client various scenarios, to show how different actions would affect outcomes.
For today’s pre-retirees, guesswork won’t cut it. Personal finance is more complicated than it was in the past. The tax landscape has changed and will likely change again. Longevity means the need to have available assets for several decades, often more than in previous generations.
A comprehensive plan is the starting point for your financially well future. A plan is not the same as a budget, nor is it a list of stocks to buy or simply a spreadsheet with some market projections.
Items that determine a thorough plan include:
— Personalized analysis. A financial map designed for your specific situation and concerns.
— Investment positioning. Making sure your portfolio is tailored for you, and that your risk levels and fees are in line with your desired outcome.
— Investment management. How is your portfolio being rebalanced to correspond with changing market conditions, or with your own life situation? Do you understand your performance reporting?
— Cash flow management. How are you structuring income from your investments? Do you have a plan for withdrawals and are you minimizing risks associated with sequence of returns?
— Insurance review. Are you under- or over-insured? Are you exposing yourself to unnecessary risks that could be insured against? Or are you still paying premiums on policies you no longer need?
— Tax considerations. Many retirees don’t realize that taxes will be one of their largest retirement expenses. Do you understand how capital gains, as well as income from sources including required minimum distributions and Social Security will affect your taxes?
It’s unwise to limit financial planning to only the investments. In fact, that myopia can lead to unpleasant consequences.
Peter Lynch, former manager of the Fidelity Magellan Fund, has pointed out that investors are at risk of missing out on market returns if they shuffle around portfolio holdings too much. In a 1995 magazine interview, he said, “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
For the past several years, investors, market writers and stock-picking personalities have fretted about an upcoming crash, or at least a sharp correction. Some stock-trading methodologies suggest selling out and parking one’s money in cash if markets flash certain technical signals, such as heavy-volume selling. Those methodologies then recommend re-investing when the market goes up in heavy volume.
If those seemingly easy methodologies worked consistently, then everyone would be using them and market risk-and-return equations would be dramatically different.
The bottom line is: A narrow focus on investing, rather than a broad approach to financial planning, almost always results in reliance on rumors, hearsay and opinion; and emotion-based decisions cloaked in logic. Wouldn’t you rather have a regularly updated roadmap of your financial life, as opposed to making guesses driven by fear?
You can start down the road to financial wellness by listing your top concerns. Are you worried about running out of money in retirement? Are you more concerned about the impact of taxes? Do you want to formulate a charitable giving strategy? Start by being honest with yourself about those concerns, and then write down your expenses, resources and other financial (and non-financial) considerations.
By getting a handle on how you envision your life and how your money fits in — and by working with a fiduciary financial planner and investment manager to help you get things in order — the investment pieces will fall into place.
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