Investing truths and fallacies are all around us. When investing, there’s a lot of buzz from people online trying to push products or get you to invest in ways that may not produce the best returns or be in your personal best interest.
A financial advisor is an expert in investing and can help you navigate the complex investment landscape. However, you must know a few fundamental investing truths to feel confident in your financial future.
5 Investing Truths You Must Follow at Any Age
1. Fail to Plan, Plan to Fail
If you fail to plan your investments, you can plan to fail. Did you know that waiting to save for retirement for a single year can cost you $23,000? Even worse, many people go into investments with very little direction or planning.
Perhaps you put:
- Some money in an IRA
- Purchase Amazon stock
- Dabble in cryptocurrencies
You may have interest in these investment vehicles, but just throwing money into them is a recipe for disaster. Flying by the seat of your pants and making uncalculated investments is one of the worst choices you can make.
If there’s one truth in investing, it’s that you need a plan.
The following points can help you devise a plan for investment success. However, when you sit down with a financial advisor, they will have experience and wisdom to share with you to ensure that you’re making smart investments.
Advisors can guide your plan, but it’s up to you to heed their advice.
If you’re willing to follow an advisor’s recommendations, you may be able to avoid many costly investment hiccups along the way.
2. All Investments Have Risks! Find Your Comfort Zone
Risks are an integral part of investing. An advisor will work on risk management with you, but there’s a lot to learn. You may read that the S&P 500 has an average return of over 10%, so you decide to invest 100% of your assets in the index.
However, you wouldn’t be taking into account that the figure is a cumulative average dating back to the 50s.
If you retire and the market falls 30%, it can take years to return to your current balance. Risks need to be calculated on a personal level to really understand how you can invest. For example, let’s assume that at retirement, you’ll have the following:
- $2,000 in Social Security
- $2,000 in pension
- $2,000 in annuity income every month
- House paid off
- No debt
If you maintain a low-cost lifestyle, you can have an excellent retirement without even investing with the above factors. You might invest your money with greater risk in this case because you can live on the money you make without relying on your investment income.
However, many people won’t have a pension or even pay off their home before retirement. Further, a lot of people desire more than the $6,000 a month income shown above at retirement.
The more you need to rely on your investments for retirement, the less risk you can take. Typically, younger workers will take on more risk and then slowly reduce their risks as they age.
One question to ask is if you’re comfortable losing 10%, 20% or even 30% of your investments? If you say yes, consider that with $1 million in investments, the respective losses would be $100,000, $200,000 and $300,000.
A financial advisor will work through your personal risk appetite with you to ensure that your money is in less- or more risky investments that align with your future goals.
3. Life is Uncertain. Create an Emergency Fund
Before investing in your future, you must ensure that the present is also secure. One way to do that is to ensure that you have an emergency fund. Did you know that 56% of Americans cannot afford a $1,000 emergency?
You should strive to put some of your money into an emergency fund that is easy to access.
For example, you wouldn’t consider investing in stocks as an emergency fund because you need to sell the stocks to access the funds. Instead, you’ll want to stash your funds in something with liquidity, such as a savings account.
How much should you save?
You should rely on your advisor for a concrete savings figure, but you’ll want to consider something in the following:
- 3 months
- 6 months
- Maybe 12 months
An emergency can be something like a hot water heater breaking or losing your job. Your emergency fund should have enough money to cover your entire expenses for three to six months while looking for new employment.
4. Lifestyle Dictates Investing
What lifestyle do you want? This is a fun task to work on because you get to sit down and plan out what you want in life. If you don’t like traveling and plan to live in the home you’ve paid off already, you have a simple lifestyle and might not need as many investments as someone who plans to travel the world. Or, maybe you want to spend your time on hobbies. Planning is part of the fun!
Consider the following:
- What will your monthly expenses look like?
- Do you plan on traveling?
- Do you want to help grandkids with college, buy them a car, etc.?
- Do you want to upgrade or downgrade your home?
- Will you buy a holiday home?
Also, remember that things change, so it’s important to revisit your plan often.
5. Revisiting Your Plan is a Necessity
Everything changes in life. Even tax changes or strategies change that can help you reallocate some of your investments to save on interest income or fees. Annually or any time that you have a major life change, it’s time to revisit your investment plan.
Major changes that require revisiting your plan include:
- Income increases/decreases
If you consider all of the points above before making investment decisions, you’ll be on the right path to your financial goals.
Your financial advisor is there to help guide you through investing truths, weed out fallacies, avoid bad investment vehicles, and consider your lifestyle. The right advisor will guide you to your financial goals.
To learn more about how KPN Enterprises can help you with investing the right way or to schedule a call, contact us here.