Save yourself from a lump of coal: review your mutual funds and access whether they make the nice or naughty list.Read More
Twist and turns… Up and down… The investment markets are going through another wild year—fortunately, this time, the volatility is generally in a positive direction. But the dramatic swing in stock returns after three bear years, along with dramatic swings in some other types of assets, raises a few questions for all investors. Is my portfolio balanced?
Rebalancing a portfolio must be done at least once a year. It involves periodically readjusting your mix of assets. Smart Savvy Ladies start by establishing an initial asset allocation, assigning percentages of the portfolio to assets such as stocks, bonds and cash, and perhaps other types of investments such as real estate and commodities. The allocations are further broken down by subcategories, such as different types of stocks and bonds.
The target allocations should be appropriate for that Savvy Lady’s investment goals and financial circumstances, as well as comfort level with certain types of investments. A Savvy Lady with no children and nearing retirement, will likely have a different asset mix than a Savvy Lady right out of college in her early accumulation years.
Why rebalance just because a portfolio no longer matches its original allocation? Why not just let it ride—especially if the market’s going up? Because if you don’t, you increase the risk that you won’t achieve your investment goals! Say you had 55 percent in stocks and 45 percent in bonds in the early 1990s. Unless you rebalanced along the way, by the end of 1999, that mix might have become “unbalanced”—say, 80 percent in stocks and only 20 percent in bonds.
You know what happened next. This stock-heavy portfolio, (especially if it was loaded of tech stocks) suffered more when the stock market declined drastically over the next three years than it would have had it maintained its original 60/40 balance through periodic rebalancing.
How much to allow a specific asset category to shift before readjusting it is up to you, but a common guideline is five percent. To rebalance, consider directing future investment funds into those underrepresented categories until it’s back in balance. You also can readjust by selling off some of the overrepresented assets (the winners) and buying the underrepresented (the losers)—selling high and buying low. Savvy Ladies always sell high and buy low!
by Shurnette Henry
Nike has perhaps its greatest campaign ever running right now. It’s the one where several women are embarking on their individual fitness journeys for the first time, and they’re each experiencing that beginning stage of getting started – the dreaded “climb”. What is the climb you ask? It’s that first step you take on the treadmill, the wobbly tree pose you do in your first yoga class, or the first mile you complete in the marathon that looks and feels so overwhelming, it makes you want to quit before you even really begin. Everybody hates the “climb” because, let’s face it, it’s hard. It’s unfamiliar ground and your body’s just not used to toning those specific muscles yet. But the more you stay dedicated to your goal, the easier the exercises get, and you will begin to feel better.
The same is true about personal finance. I encounter essentially two kinds of people when I introduce myself as a financial professional. The first is the person who leans in, perks up and is ready to talk “finance” with me without becoming intimidated. They’ve already started their own financial fitness journey, or they’re at least thinking about it.
Then there is the other person. The one whose eyes immediately become downcast, or they step away and grow oddly uncomfortable because they know that, like the gym, they need to be doing more regular workouts with their financial portfolios. They know that they need to become more financially fit, but they’re terrified of the “climb”.
Like most fitness routines, there truly isn’t anything to fear. We hate the pain, or that “burn” we may feel when we know our muscles are being exercised in new ways, but ultimately we always feel much better when we are able to fit into that little black dress, or do everyday tasks without feeling run down too quickly; or, we basically feel whatever health benefit we were targeting when we started. In the end, we are ultimately better for having gotten started and staying the course.
So why not take a similar approach with your personal finances? As opposed to wishing we had emergency cash when a crisis hits or disposable funds to take a vacation, let’s consider viewing our journey to financial wealth like starting a new fitness routine, with our own specific wealth goals in mind. We need to ask ourselves what tools, routines and support we need to put in place in order to achieve financial success.
Financial success involves setting clear goals, identifying the routines that you will need to implement to help you accomplish your goals, enlisting the right support and staying the course during the climb and through the burn, while staying focused on the end goal.
First and foremost, it’s about mindset. You have to make a conscious decision to begin. For many, those first few stages can be challenging because you don’t know what to expect or if it will even work. It is new territory for you when you start changing your habits and implementing new disciplines. But what most people don’t realize is that moving at a moderate pace, facing your transition in phases and staying the course, will eventually get you to your end goal. You’ll feel so good in the end because, ultimately, not having to worry about money, only adds to your peace of mind and your mental health overall. In fact, for those who are unsure about where and how to start when getting their financial portfolios and routines together, begin with the simplest adjustments that don’t insight massive change to your current routine and, therefore, your sense of comfort. Establish your goal, break it down into manageable steps, implement them in a way and at a pace that’s comfortable for you, and stay committed to your plan. This will prove rewarding in the end. If you still need support in understanding what that should look like, seek the help of a professional, but no matter what – the first step is to get started.
When we hear financial advisors and other financial professionals talk about retirement, it can be daunting. You may feel like you’re not in a position to save or that you’re not knowledgeable when it comes to the market. If you’re just out of college, getting the right job and finding your own apartment are usually top of mind. So while planning for retirement should absolutely be something you keep on your short list, think about planning for your one, three or five year goal.
When beginning your financial “workout”, you must first identify what you want to accomplish specifically, so that even though the bigger picture means you will attain overall security, you can begin with a short term goal, such as saving for an upcoming event like a wedding or a trip, or planning to make your first big purchase like your own home, or maybe you want to take a vacation on a whim or go on a really fun shopping spree.
If you identify your purpose, which truly reflects who you are, your wants, needs, habits and other lifestyle choices, then you’re on the right track.
Look at your daily spending, which are the things you do with your money every day to meet your daily and weekly needs. Start paying attention to what you’re doing with your money on a daily basis. Many financial professionals recommend keeping a spending journal, which is an excellent idea. When you see exactly what you’re doing written down on paper, you become more conscientious about it, and it often causes you to implement more strategic thinking before you make that next purchase.
Above all else, I strongly believe that even with note pad in hand, a critical next step toward financial fitness is to create a working budget. A budget will help you map out exactly what you’re bringing in on a monthly basis and match it against what’s going out. You’d be surprised when you actually see where the bulk of your money is going, and how much easier it becomes to re-direct it and save.
Working with people one on one, and listening to their fears has definitely shown me that many people see the process of getting their finances in order as a life transforming event they can’t begin to wrap their heads around, and only the strong survive.
Well, I’m happy to reassure you this doesn’t have to be the case at all. Altering your financial routine is in fact life changing, but the process of going through that change is very manageable. The first step is to open several accounts that will serve different purposes. Of these accounts, have a main checking to pay your monthly bills, and where it’s possible, set up automatic bill payments. In addition, establish a separate savings account and have a portion of your income from your monthly or bi-weekly check, sweep automatically to your savings. This way, you’re relieved of the responsibility of doing it yourself. Likewise, brokerage accounts can often be set up to receive funds automatically from outside accounts. Moving comfortable amounts of cash into a brokerage account each month is a productive way to start investing and building wealth, as opposed to waiting until you come into a hefty lump sum of money. Let’s face it – the latter can be just as productive as waiting for your numbers to hit in the lottery.
This will also help you avoid that frustrating conversation you have with yourself when you know that you should be putting more money away into your savings or investments, as opposed making that unnecessary purchase on Gilt.com. Your money is being allocated automatically, and you don’t even think about it after awhile. The net deposit is what you actually learn to live off of, and you’d be so surprised to learn what you realistically need to live off of most times. I often encourage a lot of my clients to open a “recreational” account. This way, when they’re ready to do something fun, they can see what’s in there and not worry about deducting funds from money that’s meant to be used for other purposes.
This brings us to investing. By far, the most fear I witness on people’s faces comes when the conversation pivots to the market and investing. We know the market can be a volatile environment, but it has also served to be very beneficial for those who have participated in investment vehicles that match their risk tolerance and investment objectives. The bottom line is that your money has a better opportunity to benefit from the power of compounding when it’s appropriately invested, as opposed to sitting as cash in your bank account. There are, in fact, a host of benefits the right investment strategy can potentially reward you with, including tax advantages, but you have to do your due diligence and seek the right sources of guidance.
Much like having a personal trainer, having a financial professional such as an advisor, to educate and guide you on the investment products that best suite your personal risk tolerance, as well as short and long-term goals, will be highly beneficial. A good advisor should be coaching and equipping you with the appropriate tools to manage your risk in order to improve your prospects for success.
In the end, the objective is to start sooner than later, set a goal, and stay as consistently engaged in your investment strategy as you can possibly be. There are also many online resources and tools that create good platforms for learning about investing. Ultimately, find an advisor to work with, who will provide consistent guidance about the market and the products that they recommend for you, in order to avoid the knee jerk tendency to pull out should things become a little unsteady.
Stay the Course
No person on a workout regime reaps the benefits of their work by quitting too soon. Likewise, with your finances, I encourage you to stay the course. These initial life-altering habits will eventually start to reveal their positive future benefits. For example, automating your bill payments can reduce your debt and positively impact your credit score as well as your purchasing power. Continue to reduce stress by putting a little more toward those outstanding balances if you can, and pay the smaller balances off completely, sooner than later.
Start investing and seek the right support in order to make the most strategic decisions that best reflect your goals and risk tolerance. Contribute regularly into your investment accounts and ensure that you’re well diversified. Above all else, seek professional guidance from an advisor you feel comfortable with and trust. They should be designing strategies and making recommendations based on your life objectives and what they know you can tolerate in order to help you manage risk.
For many people, it often feels overwhelming to get started with their personal financial strategies. That beginning stage can feel very similar to the initial climb that we all find so hard when starting a fitness routine. However, like a great fitness plan, the potential life changing benefits are just too great to not get started at all. And if I may share in the words of Nike’s campaign – you will most definitely be much better for it in the end!
To register for the next PEAK Climbers Club, starting on June 20, 2015 please visit www.papillonfinancial.com and click on “Join The Climb”. Only 25 can climb at a time. Secure your spot now!
Securities Offered through TFS Securities, Inc. Member FINRA / SIPC A full service Broker Dealer located at 437 Newman Springs Road, Lincroft, NJ 07738 Phone: (732) 758-9300 Fax: 732.758.9418 Investment Advisory Services offered through TFS Advisory Services a Division of TFS Securities, Inc. www.tfsweb.com
by Stacy Francis, CFP®, CDFA
A recent study found that Americans put a smaller portion of their savings in stock market investments than people from some other countries.
We think we're playing it safe by keeping the bulk of our money in cash instruments like low-interest earning CDs, Treasury bills and money market funds. But with interest rates ranging from 0.5% percent- 2.5 percent you can end up losing money. Inflation can eat away at those precious dollars and leave you living on less money than you started with.
Inflation can be a confusing concept but it doesn’t have to be. Inflation is the overall general upward price movement of goods and services in an economy. As the cost of goods and services increase, the value of a dollar is going to fall because you won't be able to purchase as much with that dollar as you previously could.
The annual rate of inflation has fluctuated greatly over the last half century, ranging from nearly zero inflation to 23 percent inflation, the Fed actively tries to maintain a specific rate of inflation, which is usually 2-3 percent but can vary depending on circumstances.
The lesson here is that you will earn more with a little more adventure in your soul. Sock away 3-6 months of living expenses in CDs, Treasury bills and money market funds. Invest the rest in the stock market. Too much cash in reserve can represent wasted opportunity for you and your family
by Stacy Francis, CFP®, CDFA
If you're a novice investor -- or you're looking to brush up on a specific investing concept -- this is the article for you. Savvy investing requires knowledge of several key financial concepts as well as an understanding of your personal investment profile.
The Difference Between Saving and Investing
Even though the words "saving" and "investing" are often used interchangeably, there are differences between the two.
Saving provides funds for emergencies and for making specific purchases in the relatively near future (usually three years or less). Ease of converting to cash is an important aspect of savings. Dollars used for savings generally have a low rate of return and do not maintain purchasing power.
Investing, on the other hand, focuses on increasing net worth and achieving long-term financial goals. Investing involves risk.
Total return is the profit (or loss) on an investment. It is a combination of current income (cash received from interest, dividends, etc.) and capital gains or losses (the change in value of the investment between the time you bought and sold it).
ALL investments involve some risk because the future value of an investment is never certain. Risk, simply stated, is the possibility that the ACTUAL return on an investment will vary from the EXPECTED return or that the initial principal will decline in value. Risk implies the possibility of loss on your investment.
The Risk / Rate-Of-Return Relationship
Generally speaking, risk and rate of return are directly related. As the risk level of an investment increases, the potential return usually increases as well.
You can do several things to offset the impact of some types of risk. Diversifying your investment portfolio by selecting a variety of securities is one frequently used strategy. If you put all of your money in one place, your return will depend solely on the performance of that one investment. Alternatively, if you invest in several assets, your return will depend on an average of your various investment returns. Here are three basic ways to diversify your investments:
Variety of Assets - By choosing securities from a variety of asset classes, e.g. a mix of stock, bonds, cash and real estate
Variety of Securities - By choosing a variety of securities or funds within one asset class, e.g. stocks from large, medium, small and international companies in different industries
Variety of Maturity Dates - By choosing a variety of maturity dates for fixed-income (bond) investments.
Another technique to help soften the impact of fluctuations in the investment market is dollar-cost averaging. You invest a set amount of money on a regular basis over a long period of time, regardless of the price per share of the investment. In doing so, you purchase more shares when the price per share is down and fewer shares when the market is high. As a result, you will acquire most of the shares at a below-average cost per share.
As most investors know, market timing . . . always buying low and selling high . . . is very hard to accomplish. Dollar-cost averaging takes much of the emotion and guesswork out of investing. Profits will accelerate when investment market prices rise. At the same time, losses will be limited during times of declining prices.
The Time Value of Money
Now that you understand the concepts of risk and return, let’s turn to an element that is at the heart and soul of building wealth and financial security...TIME. The essence of the concept time value of money is that money is worth more now than in the future.
Compounding also applies to dividends and capital gains on investments when they are reinvested.
by Stacy Francis, CFP®, CDFA
A survey of those who own mutual funds found about 40 per cent didn't know the names of the funds they bought. Even if you are a pro when it comes to rattling off the latest mutual fund you purchased, you still may not have a clue about the mix of stocks, bonds and other investments. Sadly, mutual fund names don't always tell the entire story. You have to dig deeper in the prospectus to figure out where fund assets are invested.
Your goal should be to create a balanced asset allocation with the mutual funds you won. Asset allocation is an investment portfolio technique that aims to balance risk and create diversification by dividing assets among major categories such as cash, bonds, stocks, real estate and derivatives. Each asset class has different levels of return and risk, so each will behave differently over time. For instance, while one asset category increases in value, another may be decreasing or not increasing as much. For most investors it's the best protection against major loss should things ever go amiss in one investment class or sub-class.
There is no simple formula that can find the right asset allocation for every individual. You will need to assess your goals and risk tolerance to find out which asset allocation is best for you.
by Stacy Francis, CFP®, CDFA
Going back to the early 2000s, our friends at Dalbar have been conducting a study to determine whether investors’ investment decisions impacts their investment performance. Unfortunately, it does. In a BIG way. As with every year’s study so far, the results illustrate a big difference in what the S&P 500 gained versus the average equity mutual fund investor. The results of the twenty year numbers ending 12/31/10:
S&P 500 – 9.14%
Average Equity Mutual Fund Investor – 3.27%
Greed and fear often lead investors to bad decisions. In the tech bubble of the late 1990s, investors poured their money into technology stocks for easily gotten gains and took risks they should have avoided. We all know what happened soon after. The tech bubble burst and fear clouded the judgment of tech investors as they dumped these stocks like hot potatoes and a few even avoided owning stocks at all. Many individuals are still trying to recoup the losses they sustained and have the majority of their money in savings accounts and the like.
Fear and greed are natural human emotions. However, when it comes to investments these emotions often cause us to make decisions that are not in our best interests over the long-term. Investment decisions should be made with clarity and conviction. The best way to do this is to create an investment plan. You need to decide upfront what percentage of your money should be in stocks versus bonds, and within stocks, how much in large companies versus small companies and how much in growth stocks versus value stocks. You should also be sure to invest in international and domestic stocks.
Once you decide on how to divvy up your money, you should never change your plan unless your objectives change and you are going to need the money in the next three years. Examples of a shift in objective could be a home purchase or you are nearing retirement.
Many investors are burned because they make an investment and forget about it. Be sure to rebalance your portfolio every year. Why do you need to do this? If you are hoping to have a break up of 40% bonds and 60% stocks in your portfolio you need to check that you have the same percentages. It is natural that stocks will grow faster than bonds over the long-term. Most likely you will be over weighted in stocks in several years if you do nothing.
We all should be disturbed and moved to action by Dalbar's findings! Start an investment plan and stick with it. Monitor your investments on an ongoing basis and don’t be scared to get help if you need it.
by Stacy Francis, CFP®, CDFA
Paris, London and Rome, here we come!
Care to own a little of London or un petite peu de Paris? The relationship between international stocks and retirement savings is along the same lines at brie and French baguettes - you shouldn’t have one without the other.
There is no practical limit to how much of a retirement account can be invested internationally; although, like anything, you don’t want too much of a good thing. Usually 10 percent to 35 percent of international exposure in your portfolio is sufficient.
Mutual funds are by far the easiest way to invest internationally. Your options include international funds (which invest in countries outside of the U.S.), global funds (which invest all over the world, including the U.S.), regional funds (which specialize in one region, such as Europe or Latin America), and country funds (which invest in just one country). There are also emerging markets funds, which invest in countries with younger, less well-developed economies.
The United States stock market is the largest in the world, but it still only represents about half of the global stock market. So get out there and see the world and invest in international stocks through mutual funds.
Savvy Ladies’ Tip: Look at all the things you normally would when choosing a fund, like the fund management, costs, past performance and overall fit with you portfolio. Pay special attention to fees, which tend to be higher in foreign funds than domestic funds, and the experience of the fund manager in that particular part of the world. Visit http://www.Morningstar.com to get this important information.
by Stacy Francis, CFP®, CDFA
If you are developing a nervous twitch lately it may be a sign that you are a market over-reactor. While there will always be an economist that preaches doom and gloom, be assured that while the economy may have slowed, it hasn't fallen off the cliff.
Let’s look at a few bright spots! The housing market is booming. Record numbers of people are buying and selling homes. Look at house construction. Yes, it's higher too.
Consumers like you and I are also spending in droves. We are helping this country actually buy itself out of this recession. And overall job growth is slowly increasing.
Fact is, while many people overreact to bad news, it pays to keep your cool.
by Stacy Francis, CFP®, CDFA
When the market is in transition, it's tough to decide whether to be in the game or on the sidelines. In order to know the answer to this question what we really need is a crystal ball. Since neither you nor I have access to a crystal ball we need to look at alternatives.
The best way to accurately predict the future is to invest in it. Certainly it's better to have money working. Worried money sitting in a checking account never makes money.
The best bet for the future involves investing in a diversified portfolio of stocks and bonds. By spreading out your investment portfolio, you usually can reduce risk, minimize losses, and take advantage of the next "surprise" winners.
Savvy Ladies’ Tip: Throw your crystal ball away and start getting in the game.
by Stacy Francis, CFP®, CDFA
There are so many different kinds of mutual funds, does your head hurt? How do you pick one that's going to make you a ton of money? There are now funds that specialize in so many different parts of the world and so many industry sectors. What do you do? The answer is not to invest in the latest “hot” mutual fund profiled in the likes of Smart Money, Money or Kiplinger’s. You need to look at less flashy funds.
If you don't yet own any funds, ignore the specialized ones at first. You need a foundation to build on. Start with a solid, well established equity or balanced fund to deliver growth while limiting the up and down volatility. Be sure to check out its fees as well as manager track record and tenure.
Savvy Ladies’ Tip: Check out the latest board game called Mutual Mania. Mutual Mania combines the entertainment of a board game with mutual fund education. If you enjoy Monopoly, you will love this game and you will gain so much more from playing it.
You can purchase Mutual Mania on Amazon and a portion of your purchase will help support Savvy Ladies.
by Stacy Francis, CFP®, CDFA
Achieving a secure financial future has less to do with picking the right stock or mutual fund and more to do with the method in which you divide or diversify your investments. Studies show that asset allocation will account for about 90% of your return. The selection of individual securities and market timing will account for the remaining 10% or so.
As you know an investor’s group of investments, frequently called an investment portfolio, can be divided in numerous ways among stocks, bonds and cash management options. But what should you invest in? To answer this question you will first need to determine your investment profile. What investment profile you chose is based on three main factors – your investment goals, your appetite for risk, and your time horizon.
Your Investment Goals Goals are specific things (e.g., buy a house) that people want to do with their money. Your selection of investments should relate closely to your financial goals; each goal will define the amount and liquidity of the money needed as well as the number of years available for the investment to grow. Liquidity refers to how quickly an asset can be converted into cash. Your house is not a liquid asset because it could take months to sell it. However, your savings account is extremely liquid and can provide cash fast with no penalties.
Your Risk Tolerance Risk tolerance is a person’s emotional and financial capacity to ride out the ups and downs of the investment market without panicking when the value of investments goes down. As you can imagine, risk tolerances vary widely. If thoughts about your mutual funds latest negative returns are keeping you up at night, this is a big clue that you should select saving and investment options with lower risk. On the other hand, it’s important to realize that not taking enough risk has its own set of risks. Conservative investments may not grow as quickly and could stop you from reaching your long-term goals such as retiring early.
Your Time Horizon Time is money. Time is one of the most important resources for investors. A youngish investors with a long time horizon may choose investments that have wide price swings, knowing that time is available for fluctuations to average out. Families investing for a specific mid-life goal (e.g., funding a child’s education or purchasing a home) may choose a more moderate course which has opportunity for growth, but guarantees more safety for the principal. Individuals nearing retirement and those with the need to depend on investment income to cover daily expenses, may wish to select investments that lock in gains and provide a guaranteed income stream.
by Stacy Francis, CFP®, CDFA
Here's something that happens all the time to me: somebody will mention they're thinking of buying a certain “hot” stock. The next question is if I think that's a good idea? I always give them the same answer - I don't know.
Whether or not you should purchase a stock depends on quite a few factors. Is it the only stock somebody will own? Or only one of ten stocks? How diversified is their portfolio? How much money do they have invested? What are their life goals? No matter how good the market is some years, often the majority of stocks can go down. Let’s take the late 1990s.
The S&P 500 was up quite a bit if you remember, but this was because of a handful of good performers. Over 400 stocks were actually down. More recently, we all painfully remember 2008. Enough said about that.
The great advantage of a mutual fund is that it can invest in a lot of stocks. Some will go down. But the mutual fund can hold so many more stocks than you could possibly own yourself that it makes sense to leave the stock picking to the professionals.
Savvy Ladies’ Tip: Get savvy about mutual funds and be sure to read “Find The Right Mutual Funds” by Morningstar.
by Stacy Francis, CFP®, CDFA
As in any crowd, the noisy guys get most of the attention. In the money world, large capitalization (cap) stocks are always on investors' minds because they're so darn big.
But a bunch of little stocks, known as the small caps, have been working away diligently in the background. In today's investment climate, small caps can have something to offer and should be part of any diversified portfolio. Many of these smaller companies have put peddle to the metal and cut costs, boosted earnings, and benefited from lower interest rates
The addition of small cap stocks to a portfolio can help increase return over the long-term. However, you should probably keep the small-cap portion of your holdings to 10 percent to 15 percent of your overall portfolio. Over the past eight decades or so, small stocks have been roughly 60 percent more volatile on average than large stocks, according to data compiled by Ibbotson Associates. On the other hand, over very long periods of time, small-fry stocks tend to outperform the big boys by an annualized one-and-a-half to two percentage points. As with anything in investing, don’t get too greedy at the expense of taking on too much risk.
by Ann Wilson
It’s not the pot, it’s the ingredients that stink!
“I don’t want to invest in the stock market. I’ve got an ISA/ Pension/ Superannuation/ Retirement Annuity/ 401K and it is doing terribly”.
I get emails like this almost everyday and it makes me mad. Not at the emails but at the misunderstanding of tax deferred or tax free investment vehicles and what’s in them.
You see it’s not the pot - (read ISA/ RA/ 401k/ superannuation/ pension) - that’s the problem, it’s what you’ve got in it.
It’s Just A Pot
The horde is coming over to play and you need to feed them. What better than a tasty lasagna, you can cook it in advance, it freezes well, goes far, it’s tasty and everyone loves a good lasagna - right?
For that you need a seriously good slow-cooked Bolognese sauce, full of flavor. So what do you do?
Take out your trusty heavy based pot and throw in a store bought packet of ready made bolognese - one of those dehydrated ones where you just add water - stir this up for 5 minutes and voila - it’s done?
Take out your trusty heavy based pot and add your quality ingredients one by one. Sauteing your onions until they are golden, adding your meats and browning them gently to release their flavor, pouring in your chopped tomatoes and quality paste, adding a grating of nutmeg, seasoning and a bay leaf and finally filling it up with a hearty robust red wine before putting it gently into the oven to slowly cook for a few hours brining out the flavors until your whole home is filled with mouth watering scents?
When you taste the first option- and have to run to the sink to spit it out very quickly - do you blame the pot? Of course not!
So why do we do exactly this with our investments?
Understand this - your ISA/ Pension/ RA/ 401k/ Superannuation or whatever tax efficient investment wrapper you use is just the pot.
So many people think their pot is the investment. NO - it is just the pot in which you put the investments to benefit from tax deductions and savings.
If your pot is producing S#*t then you need to look at what’s in your pot, not blame the pot.
What’s In Your Pot
You want it all! The zesty palette tingling starter, a sumptuous rich main, the crisp salad, a selection of the finest cheeses, and a decadent desert to die for - all accompanied by the finest champagne and wines to complement each course. Cool.
You get all of the above, and throw them into a blender, whiz them together and savor the brown sludge you’ve just created!! Oh dear - here comes the dash to the sink again.
Yet again this is what so many people do with their investments.
You must know what is in your pot and what is meant to be in your pot.
Many people get talked into buying these hideous “everything in one” investment products. These are the investing equivalent of the brown sludge!
You must keep your investments separate from your insurances or suffer the consequences. An investment is an investment and insurance is insurance. They do not mix well and if you buy an “investment” product pretending to be all things, an investment with any sort of insurance be it, life, critical illness, disability and so forth, then know you have just put brown sludge in your pot, making who ever sold you the product rich and you poor.
Keep It Clean
If you are offered tax deferred or tax free mechanisms within which to invest, use them for exactly that - invest. There is no point using up your allowances on things that wouldn’t attract tax anyway, like cash holdings (if it doesn’t grow or pay an income you can’t get taxed on it) or insurances.
Select investments within your pot that have the lowest cost (you get to keep more of the money) and have the greatest growth potential thereby maximizing the tax benefit.
In almost every country you can choose what goes into your tax efficient pot. You do not have to buy ready made “TV dinner” type investment products - never a good choice. Instead, select clean, simple, low cost investments such as a selection of low cost Index Tracker Funds or ETF’s (Exchange Traded Funds) which you buy regularly through an automatic investment plan and reinvest your investment return. Leave these to bubble away in your wealth oven and grow into a sumptuous tasty treat for you and those you love to feast on in time to come. You will discover what to put into your pot in 7 Weeks to Financial Freedom.
What is in your wealth pot?
Do you need to re-look at your ingredients and throw out some of the stinky bits?
I’d love to hear your comments!
by Manisha Thakor
As a financial advisor I’m frequently asked: “Why should I pay someone to manage my investments?”
You may think an advisor should find “the next hot investment.” Increasingly, though, I’ve come to believe the real value is in helping clients avoid painful, crippling, ‘WHAT-was-I-thinking?’ mistakes. One of my mentors says it best: “Sometimes you need to save yourself from yourself.”
Investors are human. Our short-term emotions can influence decisions that are not in the best long-run interest of our portfolios. A good financial advisor will help you detect and manage that emotional component – and potentially avoid actions that cost both heartache and money over the long haul. Here are five of the most common mistakes I’ve seen investors make:
(1) Not gauging the proper level of risk for your stage in life. The classic example is an investor who ‘makes it’ - accumulates enough assets for a comfortable retirement - yet sticks with unnecessarily risky investments that could create a game-changing decline in portfolio values. Conversely, younger folks, who should be aggressive fighting inflation and preparing for longevity, often are too conservative with their asset allocation. In this case, even if they save plenty, they will lack the purchasing power growth to show for it.
(2) Failure to analyze risk. This mistake occurs when you don’t consider the full range of factors that determine your risk tolerance. My colleague, Larry Swedroe, at the BAM Alliance has developed an excellent framework to think about a person’s ability, willingness, and need to take on risk. Ability is based on time horizon; willingness measures how much volatility you can stomach; need refers to the level of return required to meet spending goals. Ideally, a portfolio incorporates all three factors while seeking the least amount of risk necessary for sufficient growth.
(3) Ignoring the math of losing money. Quick test. You have an investment that drops 50%. How much must it then gain? The answer may surprise you: it’s 100%, just to break even. Now imagine an investment drops 80%; you’ll need a whopping 400% gain just to get back to where you started. Daydreaming about cashing in on the next hot IPO is fun, but before you commit hard-earned money, do your homework and determine if you have the resources (and stomach) to endure the worst-case scenario.
(4) Over-investing (yep, like over-eating). It is possible to get financial indigestion! This happens when you invest money needed for maintaining your base standard of living in the near term. Your physical health depends on a diet with the right mix of proteins, fats and carbs. Your financial health relies on the proper balance of stocks, bonds, and cash. If you’re overcommitted to stocks and bonds in a volatile market, you could find yourself cash strapped and financially undernourished in your day-to-day life.
(5) Relying on polysyllabic advice. You probably have a neighbor, colleague, friend or relative who is fluent in Fancy-Money-Speak. Their extreme eloquence indicates good financial sense, right? Not necessarily. Familiarity with knotty investment jargon isn’t the same thing as understanding how to construct a logical portfolio. If an investment idea can’t be explained to you in plain English, be skeptical. Truly solid investment advice should be comprehensible to a sixth grader.
To answer the original question - succumbing to any one of these five pitfalls can cost you far more than the one 1% per year many financial advisors charge for their work. Whether you invest on your own or with professional, help keep these five common mistakes in mind to increase your financial well-being.
by Ann Wilson
Investing in the Stock Market isn’t difficult or complicated, but like so many things in life we can make it so. I have found that the most successful strategies are usually the simplest. Why? Because:
They are easy to implement;
They are easy to keep going;
They are easy to automate;
They require minimal effort and time to maintain;
They are easy to understand and monitor;
They let me get on with my life.
Damn - my secret is out. I am fundamentally lazy! I like easy. Perhaps it’s because there are so many other things I want to be doing with my time and energy. What ever the reason - it works.
After years of believing complex must mean higher returns and trying countless different strategies and methods I have realised that the most successful stock market investing strategy I have ever implemented is in fact the simplest and I now use it for 80% of my stock market investing.
Here it is:
Step 1 Invest a fixed amount of money every month into a stock market index tracking fund via an online investment platform. To do this, simply set up an Automatic Investment Plan (AIP) where money is withdrawn automatically and regularly from your bank account and invested in a stock market-based fund on your behalf.
Step 2 Reinvest any investment returns by selecting an accumulation fund option which means any dividends are automatically reinvested.
Step 3 Leave it alone to grow.
Step 4 Once a year, increase your monthly contribution, either in the same index tracking fund or in a new index tracking fund, in order to build up a portfolio of funds.
Step 5 Leave it alone to grow.
That’s it. I told you it was easy!
So, what should you buy? I recommend you start you invest in a unit trust or Exchange Traded Fund (ETF) Index tracker. The objective of your AIP is to keep it simple: low investment costs, very little management required from you, and risk kept at a minimum.
When you buy a unit trust or an Exchange Traded Fund, you're actually buying a piece of a whole basket of shares. You don’t have to select the individual shares, and your investment is spread across all the shares in the fund you buy, which automatically diversifies your investment. In other words, the risk of your investment going down due to one individual share going down, is diluted significantly.
I also recommend that you invest in an Index Tracker fund. Why an Index Tracker? Back to my investing hero, Mr Buffett: the best advice Buffett has for small investors is to put their money into an Index Tracker Fund because of its broad diversification and low costs. To quote: “A very low-cost index is going to beat a majority of the amateur-managed money and professionally-managed money funds.”
The Index Tracker As investors, there are only two things which we can control: the fees we pay, and the assets we invest in.
An index tracker is a low-cost, simple investment fund that mimics the performance of the stock market. In order to understand how it works, it's useful to know a little about stock market indexes: an index is a method of tracking how well a stock market, or a particular sector of it, is performing. It enables investors to assess how well they're doing, by comparing their own performance against it. They can see if they're out-performing (doing better than the index) or under-performing (doing worse).
Each index is made up of many different companies. When you hear on the news that "The Dow Jones is down 100 points” or the "Footsie has risen 50 points today", the news anchor is referring to the stock market indexes of the New York Stock Exchange and the London Stock Exchange, respectively. But what does a rise of 50 points actually mean?
Say the index rises by 50 points from 5,000 to 5,050, or 1%. This means that the value that the stock market is placing on all of the companies within that exchange index, has gone up by 1%.
The price of each company is determined by the buying and selling of its shares on that specific day. There are literally hundreds of different indexes across the world. As well as tracking the markets of whole countries, there are also indexes which track individual industries or sectors, such as retail, industrial or property or large geographical regions such as Europe, Africa or the Far East.
In the US, the main indexes are the Dow Jones Industrial Average (the Dow), the Standard & Poor’s and the Nasdaq (where most technology shares are listed). In the UK, it’s the FTSE which tracks the performance of the largest companies listed on the London Stock Exchange, and in Australia the main index is the ASX: the Australian Stock Exchange. Others indexes you'll come across include the Nikkei (Japan), the Hang Seng (Hong Kong), the Dax (Germany), the CAC (France) and, the JSE (South Africa).
An index tracker is a fund that holds shares in the same proportion as a specific index. So, a FTSE 100 tracker, for instance, attempts to mimic the performance of the 100 largest companies listed on the London Stock Exchange. When the components of an index change, the index tracker will adjust its holdings accordingly. An index tracker, therefore, differs from most other funds - collectively referred to as 'Managed Funds' - where it's the fund manager who decides when and which companies are bought and sold.
There are three simple choices to make in selecting your index tracking investment.
Which index it tracks.
What type of fund it is: Unit trust or ETF.
Which Index? I suggest that you start with the primary index for the country you live in. From there, you can add trackers for other geographic regions and sectors. Your target will be to have four or five different trackers in your whole portfolio.
What Type of Fund? Most index trackers are either unit trusts or ETFs - Exchange Traded Funds. Unit trusts are priced daily and can be bought directly from a fund manager, via an online discount broker or financial advisor. Experts have found that two factors, cost and asset class, determine the bulk of our investing returns. This is the reason I’m a big fan of Exchange Traded Funds (ETFs), which are ultra-low-cost index funds that trade on the share market, just like other shares. ETFs are traded on the stock market, and therefore, their prices change continuously throughout the trading day.
What are the costs? When selecting your specific index tracker, look carefully at all the costs involved. Look at the total expense ratio (TER) of the fund you're considering. You should be selecting a fund with a TER of 0.5% or less. Also look at your trading costs. This means the cost of buying the fund. Keep your average trading cost as low as you can by selecting an online trading/ investing platform with competitive costs and by buying your investment in big enough lumps to keep the percentage cost of each trade less than 1%.
There you have it! It really is that simple to get your money working hard for you.
Ann Wilson publishes her monthly Wealth Feast newsletter for people committed to creating their own financial freedom. If you want to make, keep and grow more of what you earn, then get your free tips now at www.thewealthchef.com