As we go through the thick of sports seasons and continue to find ourselves in a world that changes at an ever-increasingly fast rate, I wanted to wrap up the Investment Series by recapping what we have covered, and share how each piece will help you navigate the crazy game of life.
Commonly in sports, we see teams competing for the best players, coaches, and seeking the newest tactics to win more games in hopes of winning a championship.
Investing is no different. The problem is, we commonly are not playing the same game as the others we may hear or see participating in the market.
Most of us hard-working professionals, especially those who are busy honing their craft and navigating their way through a career track or making a career change, don’t have the bandwidth to monitor and make adjustments all the time.
For most investor personalities, this is what they do for a living. They also usually have more money to put to work and can stomach some of their individual investment choices going all the way to zero.
While some of you reading this may be in that position, chances are more of you aren’t. Understanding you need to play your own game (or have a coach who will help you execute a game plan) will put you one step closer to actually achieving your goals.
This blog is not intended to be investment advice, and should not be considered a recommendation towards your financial situation. Please contact your financial advisor or financial professional before implementing any investment choices.
One of my favorite things about having a career in Personal Finance is being able to dive deep into the new spaces being created in the world of finance.
Whether it is cutting-edge technology I use with my clients, research on new investment tools and technology such as blockchain and cryptocurrencies (a whole series coming on this soon!) , or digging deeper into the growing field of behavioral finance, I love learning.
I love it so much, some nights you could find me on the couch eating a bowl of cereal for dessert and watching a lecture series on some finance topic.
While you may not be as excited about finance, having a plan and not worrying about your money can allow you to dive deep into the areas of interest you enjoy instead.
I’d love to hear what you would watch for “fun”, or what topics you think are so interesting you would grab some dessert and listen to while unwinding for the night! Answer below!
My goal with this week’s post is to recap and distill what was covered over the past month and a half. Of course, if you want to read each full post instead, click the link at the beginning of each section and read away to your heart’s content.
Step 1: Know your purpose
You can read the original blog post by clicking here: Why do we Invest?
This is, in my opinion, the most important thing you need to consider before you start. If you don’t know your destination, you will have no clue what to expect along the way.
There may be many reasons you want to invest, too. This could be for your eventual retirement, it could be to save up for a house, pay for your children’s (or future children’s) education, or maybe to take that dream vacation.
When asking this question, it is also important to be as clear as you can when answering “why”.
“I want to save for a vacation” isn’t as clear as “I want to save for a trip to Hawaii with my husband that we will take 5 years from now”.
This allows for your investments to be aligned with the goal, determine how much you will need to save each month, and get towards tackling your goal.
We will talk more about why goals are really hard to set and stick to in a future blog post. Be sure to get subscribed so you don’t miss it!
Essentially, when you have found your “why”, start to put the “where, when, who, what” pieces into the puzzle, and when you finally have all of them on paper, you should have a better idea of “how”.
If you’re still puzzled as to how to accomplish it, grab 30-minutes on my calendar and I’ll do my best to help you out, or find someone who can.
Step 2: Know your choices
You can read the original blog post by clicking here: 4 Common Investment Choices
This is definitely getting into the “how” piece of investing but isn’t the full picture since the different accounts we can use to hold our investments is important in optimizing how we get to our end destination.
The main things we need to know about our investment choices are how they work together, and what each piece of the investment puzzle does on its own.
Knowing what a stock, bond, mutual fund, or ETF is can help you understand the basic mechanics of what investments do, and why they play an important role in investment choice.
A few questions you will want to ask yourself before making your choice are:
- Am I comfortable with the money I am investing having large swings up or down? (Most of us are ok with the ups, not so much with the downs)
- Do I want to spend a great deal of time researching the investments I am going to hold? (If not, you’ll probably be better off in a Mutual Fund than individual stocks and bonds)
- When do I need the money for use, and will I need it all at once?
- Is it a strict deadline, or could the goal be delayed?
The investment world has thousands of choices when it comes to investments. While answering those four questions won’t tell you exactly what to invest in, it will help you narrow down your choices quite a bit.
From there, you can investigate to make sure you aren’t paying too high of investment fees to purchase or hold the investments and do some additional research on what asset classes may work for your goals.
Step 3: Don’t Lose Sleep While Investing
You can read the original blog post by clicking here: Risk Tolerance and Investing
This is a REALLY important step if you are going to DIY your investments, and arguably is one of the biggest reasons why it makes sense to work with a financial planner such as myself.
If you are the one making the decisions or have the ability to sell out when things get a bit uneasy in your portfolio, you may end up shooting yourself in the foot and putting yourself even further from your goal.
The worst part is, you won’t know if you are right or wrong until days, weeks, or months after you make your decision.
Taking a risk tolerance survey is a really great place to start, but having a well-rounded financial plan and aligning your portfolio in a way where each goal is uniquely supported is even better.
You can take a survey here: Vanguard Risk Survey
Just remember, your account will take on a new identity if you don’t manage it over time.
We talked about this throughout the series, but if you want the TL:DR version, as some of your investments grow, they may eventually make your portfolio riskier than you originally wanted it to be. It can also take form when we see one portion of our portfolio doing really well, and think it will continue to do the same going forward.
This graphic shows the degree of movement in different allocations of stocks to bonds. As you can see, the more concentrated a portfolio is in stocks, the higher degree of fluctuation it usually has.
As I mentioned, the strategy of sticking with the recent winners can be equally dangerous. This isn’t to say you need to track this on a daily or a weekly basis, but this chart below illustrates how asset class winners rotate over time.
Commonly referred to as the “hot hand fallacy”, don’t let a recent win bait you into just riding it out and thinking it will happen again. It sure could, but it could just as easily go the other way too. If it isn’t aligned with the gameplan, you’re setting yourself up for potential heartbreak.
Step 4: Rebalancing Act
You can read the original blog post by clicking here: Investment Rebalancing, Made Simple
Avoiding the problems we outlined in the previous step are answered with one tool from the investment management toolbox, rebalancing.
This concept is best explained using visual aids, but simply put this is just a fancy word for selling off the winners when we have too much value in that category, and moving it to the other that didn’t grow as much, or as fast.
It’s kind of like cooking. If there isn’t enough salt or spice in a dish, we need to add a bit more to balance out the dish. We need to do this while making sure the dish isn’t undercooked, overcooked, and hopefully not burnt.
If you would rather have a dining experience than being the one in the kitchen, looking for a fee-only financial planner is a great place to start your research of finding a chef who can prepare it for you.
Here is what it looks like in a visual example when it comes to our investments.
This can be much more drastic throughout the course of a single year and can be a compounding problem if left unmonitored and maintenance isn’t taken care of.
Some asset classes that have a higher expected rate of return or risk of decline can quickly pull a portfolio out of alignment. Be sure to know what you are signing up for when you pick a selection of investments and be sure to check in on them on a routine basis.
Step 5: Taxes > Investment Plan?
You can read the original blog post by clicking here: Tax Impact on Investment Choice
Taxes run through everything we do. While we all don’t enjoy writing a check or handing our hard-earned money over to Uncle Sam, running our investments solely to reduce taxes will more than likely be in conflict with our “why” when it comes to what our investments are trying to accomplish.
We certainly don’t want to pay more than our fair share or leave easy tax savings on the table, but at the same time, taxes aren’t going to be the biggest needle mover in helping us achieve our goals.
There is a clever saying in the financial planning world I love using… “Don’t let the tax tail wag the dog”.
Taxes and tax savings are some of those things we don’t usually realize until the end of the investment process. We also aren’t investing to save taxes, but rather to grow our money.
Another reason we don’t want to overfocus on tax is that these laws and strategies can change, and sometimes the changes can make our initial thoughts useless.
This is especially true in the world we live in today, where everything seems to change the second after we figure it all out. It isn’t that all of the work before goes to waste, but being able to understand how the changes impact your taxes can help guide (not lead!) the other areas of your investment plan.
Step 6: Crowd Noise. Don’t get distracted!
You can read the original blog post by clicking here: Mad Media. Avoid Investment Distraction.
Even if we have a wise plan after going through the first 5 steps, if we forget to stick to the plan, it can become worthless when we see that shiny new thing or hot tip on the news.
As I mentioned in the full blog for this topic, all media isn’t inherently bad. It serves a purpose, it has a time and place, and it can help us quickly identify important information that pertains to our life.
The problem lies with the fact the media is a business that is paid to keep you tuned in.
Even if they were genuinely there to only help you, how would they be able to know enough about you to give you just the information you need? When you are providing information to millions of people on a given day, it simply isn’t possible to cover every possible angle.
This is present in the hot stock tips, blanket statements about how much you should save in your 401(k) at work, or what the latest and greatest trends are in the world.
Whether it is stock market millionaires, or a select few making millions of dollars on Cryptocurrencies or NFTs, there will never be a shortage of stories covering one in a million situations that are simply there to get you to tune in.
Understanding how tools like Cryptocurrencies or individual stocks fit into your financial picture is far different than buying them on a whim hoping to get rich quickly. The tools aren’t necessarily bad when used properly in accordance with your investment plan.
This really is the sticking point with all of the choices you will make. Have a game plan, execute it.
Realizing your game is changing, or your gameplan isn’t working is just a fact of life, we all have to adapt and refocus as the pieces in our life change.
So with that, after closing in on two months of writing this blog, I want to close with three points of my own game plan as it pertains to this blog.
- I want this blog to embody the name of the firm, Harmony.
Harmony will mean something different to everyone reading this, and that is ok! I have learned I am at my best when I can see both sides of the story, and give the tools to those I work with to help formulate what their State of Harmony looks like.
I like to live in the middle and find the right mix of both sides for those I help. This blog will continue to present information from that viewpoint.
This will also mean sticking to the tried and true principles of Personal Finance while exploring the new and uncharted territory of up-and-coming tools.
The blog series on Cryptocurrencies and Blockchain kicking off in November will be a great example of the “new”. I have been fascinated by what is being developed in these spaces, and while I am still learning, I want to share what I have been learning with all of you.
- My goal is to continue providing information through this blog that will help you formulate your own game plan.
This will mean sharing topics I am well-versed in, along with topics I am just learning about on my own time. Investing is something I am very familiar with, whereas something like crypto is very new to everyone in the grand scheme of things.
I will continue to plug my firm but also want there to be useful information that can help you know where to at least start the process of DIY if that is what you want to do. Just remember, nothing on this blog is investment advice and does not constitute a recommendation.
- I hope to continue writing these on a weekly basis, but do realize the length at which I want to write is tough to do on a weekly basis, every week.
It may not always be financial education or a contained topic of finance, but I want to authentically share what is on my mind, and what I am thinking about. Next week will be a little different, stay tuned!
And to cap it all off, I have settled on sticking with the “play your own game” sign-off. Much of my career has been built in a very messy way.
From starting out in a job I didn’t even know was going to be a life insurance sales job, to working virtually with 4 different financial planning firms as a contractor, and a crazy 18-month vacation to Dallas, TX, my path is unique to me.
There is a lot more to that story, but what I love the most about working with my clients is hearing their stories, and how they got to where they are, along with all the mess that comes with life.
Life’s a lot easier when you can look back at the crazy journey you just went on, laugh about it, and get excited for how you are going to try and shape the next day, week, month, or decade of your life.
Until next week, play your own game!