Ah, Wall Street. Playground of billionaires and the only place in the world where 1+1 can equal 3 or -47. Sometimes on the same day.
Is it any wonder that one of the most nerve-wracking tasks of financial planning can be understanding how to invest your 401k, IRA or other account? In fact, I think sometimes financial people want you to feel nervous, want you to make rookie investing mistakes, because then you start to think that making investment decisions is too hard for a layperson like you. (In other words, if you’re scared, you’ll need them more!) But what I have found is that if you can just keep a few things in mind, you’ll avoid the rookie investing mistakes and do just fine on your own.
Avoid Making Yourself Crazy
Deciding how to invest your money is an area that can become VERY complicated if you let it. But most of the time, you’re better off making the choice to stay uncomplicated. Here are the six most common ways that I see people messing up their investments and making rookie investing mistakes (in other words, what NOT to do):
- Sticking to the sidelines. Did you know that people who left all of their money invested after the market crashed recovered the original value of their portfolios within two years? And yet I see lots of people still sitting in cash, missing out on great returns. My clients who took a long-term view, took no action, and simply let their investments ride out the volatility are extremely happy they did. On that point…
- Getting emotional. I have been alive for three market crashes (not working, alive… sheesh, how old do you think I am?!?). So, I am extremely familiar with the Chicken Little, sky-is-falling rhetoric. Market correction is just basic economics. It will happen again. Just be sure that the money you need now, or five years from now, isn’t invested in the stock market and you should be fine.
- Expecting double-digit returns. When I perform analyses for clients, I NEVER assume the stock market will return double-digit growth. This is where people get emotional again—just because it WAS returning high growth doesn’t mean it will all of the time. Market return is only part of what will help you reach any given goal; saving consistently is a more important—and controllable—factor. Keep your focus where it counts.
- Overcomplicating investments. I have said this before: if you can’t explain to another person what investments you have in your account, maybe you shouldn’t be using them. Most people do just fine with stock-based mutual funds. If you can’t explain mutual funds, that is a great first step to take in becoming a more knowledgeable investor! (None of us reading this need to invest in those funds that make 1+1= -47, OK?)
- Not knowing what you’re paying for. This is along the same lines as over-complicating your investments, but one of my pet peeves is seeing people pay loads of wrap fees or commissions and have absolutely no idea that they paid them. Keep in mind that everyone gets compensated when you choose an investment—and everyone SHOULD be compensated if they are helping you—but you need to know how it plays out to ensure you’re getting good value for your money.
- Not accepting who you are. A long time ago, I had to accept that I would never be like other financial planners. I don’t enjoy financial news or talk on TV. I can’t spend hours poring over fundamental and technical analysis. But what I found is, my way performs just as well as the people knocking themselves out. So, call it lazy or simple, but I am okay with it. You should be okay with yourself too, because you can be “lazy” and your investments don’t need to suffer.
How To Invest Simply
If you want to avoid the crazy-making style of investments, then focus on keeping things SIMPLE.
There are two ways to look at simple. One way is to keep things simple so that you can do it all yourself. This is totally doable—and not at all scary—in our digital world, and I’ve made some suggestions for you below. The other way to keep things simple is to hire someone you trust to give you advice and then make the transactions for you. Remember that you will pay for this service, but you may also be paying for a bit of peace of mind, which many people are happy to do.
More ways for you to make everything as simple for you as possible:
- Make the location simple. For people getting started with investing, my top three places to invest are Vanguard, Fidelity and Charles Schwab. (You can also try robo investors like Betterment or Wealthfront, but I tend to not like how they allocate investments–but that’s me). Super easy online interfaces and plenty of no-load and transaction-free options. Plus, if you decide you need more help or support, each of these options can connect you with an investment manager.
- Make the investments simple. For diversification, you need a little of every asset class (which could be a whole separate post). To keep things simple, use a Target Fund, which is a mutual fund with a date in its name. You simply pick the date closest to when you want to use the money, and the fund company is in charge of managing the fund, diversifying across asset classes and rebalancing the money. Now, to be clear, I would recommend investments that DON’T use a Target Fund, because I think they tend to underperform a bit…but no one would be HURT by getting started there.
- Consider your timeframe. The amount you invest in each asset class category depends on how soon you need the money. Soon? You shouldn’t be in the stock market. Ten plus years? Throw a little of your money into each category and you’ll be fine. You can go to anywhere you’re currently investing and find some good funds. I could make it more complicated, obviously, but this is a perfect starting point. Think of this like experimenting with a recipe…there is no “perfect,” it’s just a work in progress.
- Keep the maintenance simple. If you chose to use a Target Fund, you don’t even need to check up on it—the company rebalances the fund for you. If you choose individual mutual funds, balances will go up and down over time, and to lock in gains, you have to sell when the fund value is high and buy when other fund values are low. This is called rebalancing. Some fund companies allow you to do this automatically. Otherwise, just make an appointment to move the balances back to their original positions every 12 months.
It helps to look at investing as you would look at ANY new thing you try: get in, experiment, and be okay with feeling out of your element for a while, until you start to see progress.
And if you’d like a little help, this is exactly the sort of thing I help you work out with financial planning.
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