Subscribe To our E-Newsletter
When You Really Can't Bank on ... Banks
Chicken soup for the investor?
My years as a financial advisor have given me insight into the complex relationships between investors and the ever-changing financial markets.
While I do not present the following principles as immutable laws, I want to share them with you as you savor a cup of coffee this morning (or maybe down a bowl of chicken soup) over what you hear on the news -- up, down -- about the current financial markets that resemble roller coasters.
They have guided me well.
· People don't invest to become rich. They invest so they don't become poor. Individuals invest in stocks to keep up with the rate of inflation. Bonds and cash will not allow you to keep up.
· People won't fault a financial advisor who gets them 1 percent less on their investments. However, they will fault an advisor if he or she loses their money. A portfolio manager told me that years ago. The sound and passion in her voice has always stayed with me.
· High fees and expenses will eat into your returns and, thus, your nest egg. Most people are not aware of all the fees associated with investing. Pay attention to the fees and make sure they are in line with the averages.
· Having to pay taxes should not prevent you from selling a stock. Let's assume that you bought a stock for $50, and 14 months later it was worth $100, but you decide to hold it and forgo the $50 profit (minus $10 in capital gains tax.)
If the stock then drops by 10 percent, to $90, and the capital gains rate is 20 percent, you'll now make only $32 profit. How many people wish they had paid the taxes in the first place?
· Most people underestimate how long they will live after retiring and how much money they will need. Increased longevity has had a major impact on retirement planning. I've often defined a failed retirement as running out of money before running out of time.
· Emotions -- not logic -- often influence investment decisions. Fear leads to panic, and panic leads to the inability to distinguish between a temporary and a permanent decline in portfolio value. Voices of reason, such as "Stay the course" and "I'm in it for the long term," often yield to impulsiveness to sell.
· Don't constantly look up your account balance. You wouldn't pull up your plants every day to check on the roots, now, would you?
· Your investment decisions should be based on careful analysis of your time horizon, risk tolerance, expected return and asset allocation preference. If a salesman starts fishing around and talks about investments before addressing these issues with you, it is important that you remember: Don't take the bait.
It is never too late to start saving and planning for retirement. The key is to get started and have a plan.
These principles may not revolutionize the financial world (or even make the best-seller list). However, they have withstood the test of time.
Michael L. Schwartz, RFC, CFS, CSA, is an investment advisory representative of First Allied Securities, Inc., and president of a Jenkintown-based wealth-management firm.