Articles about investing in the markets are always interesting to read, yet I sometimes wonder how many readers fail to comprehend their frequent desired end result: someone â€“ possibly the writer — will profit when readers react to recommendations and put their life savings at risk. This is an end game with a set of goals that many investors ignore while chasing quick profits or â€œthe perfect stockâ€ that could be the huge winner we all dream about.
I sometimes wonder if this short-sighted chasing of performance is largely responsible for the miserable track record many investors experience in all market cycles, up or down. Do they forget the primary objectives of investing? Why do they ignore the other proven ways to protect their income and savings?
If you have ever worked with a financial planner, you undoubtedly know where I am headed with these questions. Yes, we all want to retire early with enough money to maintain our desired standard of living. In the meantime, we may still need to accumulate college tuition for our children, pay off a mortgage or finally buy the sleek new car that has, so far, proven unaffordable. Whatever our goals, investing in risky assets is often touted as the best way to achieve them.
However, most financial planners demonstrate that, for most of us, small average annual gains will get the job done. A steady 7 to 8% annual gain is the stuff of investor dreams for achieving our most common goals. For many of us, though, the urge is strong to search for something more than that, and thatâ€™s where we can falter and miss out on what is most important.
Steady gains are not enough; we must plan for the situations that disrupt them, as well. Letâ€™s say your stock market portfolio is humming along, beating the market year after year, but suddenly you get sick or hurt in an accident and canâ€™t work? Those finding themselves in such situations realize too late that they did not protect their income with a disability insurance policy; they can see their hard-won gains eaten away in short order as they dip into savings to pay current living expenses.
Also, many investors have bought into the idea that tax-deferred investing is a smart idea. (Personally, I have exactly zero dollars invested in tax-deferred accounts!) Yet they will see diminution of their holdings after paying Uncle Sam his portion of required withdrawals, and most had not anticipated replenishing these tax bites.
So building a source of funds in taxable accounts makes sense, since during retirement, taxable accounts provide a source of income not subject to income taxation. This becomes a great way to control the retirement tax burden, which anyone experiencing required distributions at age 71 may describe as a â€œhelpless feeling of savings depletion.â€
In addition, investors who earn impressive average annual gains in their investment accounts could still see a large portion of those gains swept away by our spendthrift government. With a shocking $2 trillion deficit this fiscal year, the Federal Government will probably consider raising tax rates on those with substantial savings.
And what about the growing number of workers faced with a sudden job loss? What shocks me is hearing about the 50-year-old worker who loses his job of 25 years, having saved only enough to last a few months. What happened to all that discretionary income he made along the way?
What has happened to our nation of savers? A recent poll by Discover shows that fully half of us calculates the ability to pay expenses after losing our job — and before financial insecurity sets in â€“ at one month! One month? That high-flying mutual fund in a laid-off workerâ€™s 401(k) account will probably offer little solace then, right?
But maybe the worst and most commonly made investing mistake happens with younger investors, though it, no doubt, affects older investors, as well. While chasing past performance might be the most commonly made investing error, investing even one dollar in stocks without first assessing the need for life insurance is likely the most frequent and damaging mistake made today.
Too few seem to appreciate that life insurance insures your future income as much as it insures your life. If you were to meet your fate tomorrow, perhaps finding yourself in the proverbial wrong place at the wrong time, what good would your rocking IRA account do for your family? Is it large enough to spin out a monthly check — for about what you take home now?
Before checking Morningstar to see if your mutual fund still sports a five-star rating, calculate instead what your family would have in the event of your sudden death. Would your spouse be able to replace your current earnings by taking a job? Could the mortgage be paid regularly without your income? Would college still be affordable with what you leave behind? Without holding a large insurance policy on your lifeâ€™s future income, you have no business investing in stocks!
Lastly, letâ€™s look at the hugely successful investor who amasses a small fortune over a lifetime of solid investing — and dies without a written estate plan. This person has left surviving family members with not only a multi-year debacle known as the probate process but also with a potentially large share of his hard-won gains at the mercy of state and local governments — as they demonstrate their â€œefficientâ€ ability to settle his affairs. Does that sound likely to you?
You can anticipate all these potential financial pitfalls with a carefully crafted financial plan. By avoiding the most common mistakes and consequences of poor planning, investors can tailor their investing methods with the true end goal in mind. Financial planning is not just about beating the market every year, making more in the stock market than your best friend, or hitting winning-stock home runs in short order.
Financial success has little to do with the steady stream of nonsense we hear daily in the financial media with programs that promise â€˜â€™mad moneyâ€™â€™ or â€˜â€™fast moneyâ€™â€™ or primers on option strategies. It has to do with what really matters, and thatâ€™s achieving our financial goals with the highest degree of certainty!
One important caveat to remember about your shiny new financial plan is this: as initially written, it is likely about as good as having someone read tarot cards to perceive your future. And I speak as someone who has written award-winning financial plans — only to realize later that they were now just short of worthless!
The problem with a financial plan, even a very good one, lies in the set of assumptions used to calculate future investment returns, inflation and tax rates. Plans I wrote a decade ago assumed my clients would earn an average annual stock market return of about 8%, which to many seemed to conservative. Just how well does that fit with todayâ€™s reality? Yeah, not very good!
Do your most important investing now. Sit down with a financial planner and get yourself a good plan. But have your planner review, if not re-write it every year to account for what is current about investment performance, changes in employer benefits or new family members, which could increase your future financial obligations. Only in this way will your plan provide a useful map for where you want to go and how best to get there.
This planning will cost money, of course, but the cost is much less than â€œwinging itâ€ in the stock market!