There’s a tremendous amount of information available now about the best way to deal with your investments. I’ve worked in many regions of the financial services industry in my profession and would like to familiarize you with a few general truths. I would also like to disclose that I have in the past, and today, manage resources for a fee for clients.
Let me say from the start here that there is no one “best” way to handle your assets. You will find some “best” ways.
The amount of risk you are prepared to take, the amount of money you are saving, and your long-term goals all play in the equation. I strongly advise you to work with a financial adviser, preferably a Certified Financial Planner® professional, who has been trained to look at your entire financial picture, not just your investments.
You have to understand what you are trying to do with your cash before you set out to invest it whatsoever. For example, is the money for your retirement? Or to help get your kinds through college? Or to fund a career change on your own? What’s the objective? What time frame are you looking at?
If you’re investing in the stock market to attempt and create a killing at the next two years so that you can quit your job and start a business, you are taking a very big risk. The stock market isn’t, in my opinion, for short-term or bettors traders.
Diversification is essential. Have you ever heard the saying “do not put your eggs all in 1 basket” Betting everything you’ve got on a single stock, or even a few stocks, can be very risky. Possessing just small business stocks, or stocks of only US businesses, or just large business domestic stocks can also be a risk.
The secret to bettering your investments is to slit the investment world just like you would slice a pie up, with each bit of pie symbolizing something different. For instance, 1 bit could be international stocks, 1 piece could be national (US) small business stocks, and remember mid size and large dimensions US stocks, real estate, commodities corporate bonds, government bonds or municipal bonds (if you are in a high-income tax bracket), and cash-type investments such as CDs or money market funds.
Your investment allocation is essential. According to all the pros, how you allocate your investments (how much can be in stocks, how much can be in bonds, and how much is in cash) accounts for the huge majority of your overall investment return every year.
As you can see, there are a great deal of items to think about when it comes to investing our cash, which leads us into another topic that I believe is paramount that you consider.
Rebalance Your Portfolio
Another critical element to your overall investment achievement is rebalancing your allocations on your portfolio. By this I mean that if, if working with your financial planner, you agreed that your allocation ought to be 65% stocks, 30% bonds and 5% cash, and a year later, through market movement, your portfolio includes 75% stocks, 20% bonds and 5% cash, then you own more stocks than your original allocation known as and are taking on greater risk than you agreed you would be familiar with.
Conversely, if a year after that your portfolio includes 55% stocks, 40% bonds and 5% cash, you are now invested more conservatively than you may want to be to meet your investment objectives.
The markets go all the time, occasionally moving up or down fast in very short periods of time. It’s vital that you maintain your portfolio invested to your original allocation in order to increase your probability of investment success.
How frequently should a portfolio be rebalanced? There’s no hard and fast rule on this subject, however from all the research I’ve read over the decades (and the professors look at this question in thickness), I recommend to clients that we exaggerate any asset class in the portfolio, i.e., international, small business, large company, real estate, bonds, etc., that’s more that 25% below or above its own target.
Setting up a parameter such as this will help to take the emotion out of investing. We, as human beings, have a hard time letting go of our champions. It’s easy to become greedy, or just hopeful that we’ll make even more money than we have. It’s also challenging to buy something when it is losing value.
But keep in mind, the one simple fact about earning money in the stock market is to buy low and sell high. Since our human character makes this hard, setting a parameter of a 25 percent change on your allocation makes rebalancing easier to perform.
Just how much is it costing you invest your money? There’s absolutely no free lunch out there, even though sometimes it seems that there’s. Every sort of investment includes some form of price attached to it. When you buy a stock, you are charged a commission. When you buy a bond, then the agent buys the bond at the same cost, marks that cost up, then sells to you at the higher cost (sort of like buying at wholesale and selling at retail cost.)
All mutual funds, index funds, and exchange traded funds have fees called “expense ratios.” Additionally, while buying exchange traded funds you also pay a commission. Some mutual funds carry sales charges along with their cost ratios. Investment advisers and investment managers charge fees to handle your portfolios for you personally.
To make things even more complicated, there’s absolutely no one best way of investing for everybody. Stocks may be the proper choice for some investors, while index funds can make more sense for others.
Irrespective of which type of investment is ideal for you, in my estimation, it’s critical that you KNOW what your investments are costing you. I’ve seen investment portfolios at which the price of investing is at the 3% per year range. If you could lower the cost by even 1 percentage each year, you might be saving yourself hundreds of thousands of real investment dollars over a long time period.
Whoever you are working with to deal with your investments ought to be able to tell you precisely how much it’s costing you to invest. If they will not disclose this info to you, you may be better served by someone else. Reducing the costs of investing can mean far more cash in your pocket, and that is what counts!
Do not Forget Taxes
I tell clients, it is not what you make on your money that is important it’s what you keep. We have already discussed prices and how they can erode your yields. Well, taxes can also have a large effect on your overall investment success. The money that you invest in taxes on your investment earnings is cash you’ll never return.
In taxable accounts where you save dollars, every year you are taxed on any profits that you’ve had to report. For instance, if you sell a mutual fund that had a gain in it (a profit), the gain is taxed in the year of this sale. You may qualify for capital gains treatment where the amount of tax may be lower than your ordinary income rate, but it is still tax that has to be paid.
A good investment adviser or financial planner will do everything he can to offset taxes for you each and every year. Of course, you can never totally eliminate taxes, and decreasing taxes shouldn’t be your number one priority if it means you would have to change your asset allocation to either take on greater risk or lower the amount of growth your portfolio is very likely to achieve. But taxes are important.
Should you have to sell something that has had a gain that would be taxable, often times you can sell something else in your portfolio that has had a reduction to offset this gain.
Of course, it’s critical that you work with your tax adviser
when seeking to perform this. I mention tax reduction as being important as I have observed many, many agents and advisors over the years completely ignore the tax ramifications of earning changes to a client’s portfolio. Again, it is not what you make that’s important, it is what you keep. Plus, you should always look at yields after all taxes and fees are deducted. That tells you how your money is actually growing.
Being diligent in this area can potentially mean thousands and tens of thousands more dollars in your pocket. Make sure your investment adviser effectively tax manages your cash.
I believe most important of all is designing an investment plan that’s congruent with who you are and what you appreciate. I’ve been assisting people accumulate wealth for over 25 decades, and I will tell you from first hand experience that amassing money just for the sake of amassing money doesn’t increase the fulfillment or happiness quotient at a individual’s life.
What exactly is truly, truly important to you? For instance, I know a large number of people who believe that it is a parent’s obligation, or expectation, that they ought to pay for their kids ‘ college education. Somehow in this country we have gotten the message that “good” parents do so. Yet, all the studies show that children do better in school, and in life, if they cover at least a part of their schooling themselves. They have skin in the game, so to speak. They take their education seriously. Yet many parents sacrifice their own retirement to be certain their children get a free ride during school.
If putting your children through college is really, really important to you, then that is a worthy aim. But if you are paying for their education from a feeling of obligation, maybe you want to revisit this issue, especially if it may impact your retirement. Your children can get student loans, but if you do not’ have sufficient funds for retirement, you risk being a burden to them on your later years.
To be able to find a better grip on what is truly important to you, ask yourself this: if money wasn’t an issue, what would you do differently in your life?