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 think that making investment decisions is too hard for a layperson you. (In other words, if you’re scared, you’ll need them more!)
But what I have found is if you can just keep a few things in mind, you can do just fine on your own. It might not be exactly how I would invest it if you were a client (I tend to tweak most of my client portfolios in one way or another), so if this is an area that really freezes you up or you just don’t want to think about it, we’re always here to help – you can get started with us here.
Investing Mistakes
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 (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 LAST 2008 market crashed recovered the original value of their portfolios within 2 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. Share on X Just be sure that the money you need now or 5 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 mutual funds. If you can’t explain mutual funds, that is a great first step to take in becoming a more knowledgeable investor!
Not Knowing What You’re Paying For. This is along the same lines as overcomplicating your investments, but one of my pet peeves is seeing people pay loads of 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 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, because you can be “lazy” and your investments don’t need to suffer.
Getting Started
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.
Either way, remember that the professional is not vital to this transaction. It’s about what you want to make everything as simple for you as possible.
Make The Location Simple. For people getting started with investing, my top 3 places to invest are Vanguard, Fidelity and Charles Schwab. 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 Investment Simple. For diversification, you need a little of every asset class (which could be a whole separate post) – the big ones that you can search by is Large Cap, Mid Cap, Small Cap and International. Some people might suggest what is called a Target Fund (which is a mutual fund that has a future “target” date in the name), but I have found these tend to underperform. Instead, start with one mutual fund.
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,” just a work in progress.
Keep the Maintenance Simple. If you chose a few 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 6–12 months (I do mine every June and December).
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 awhile, until you start to see progress. I promise, you can do this!
But if you feel like you need some help with this, making an investment plan is exactly what we help people with, in the context of a financial plan. You can click here to get on our calendar and have a chat.
