5 Obvious Strategies (That Apparently Aren’t So Obvious)
Most people, on paper, would agree with these strategies. But a much smaller percentage of the population actually use them to when making financial decisions…
1. Buy low and sell high.
You won’t find a single person who disagrees with the theory behind this investing concept, but many people behave differently in practice.
We are all emotional beings. And sometimes we allow our emotions to dictate our actions and unfortunately that can be detrimental to our finances. We know we are supposed to buy when markets are low and sell when they are high. But we don’t always do that. Last year about this time the big news was Brexit. According to the media, this was going to be an event that would have lasting ramifications to world economies and the stock market. And the Dow Jones Industrial Average did fall 600 points in one day. If you allowed your emotions to rule you may have sold some or all of your portfolio out of fear. Yet, the Dow had a 52 week high within 30 days of Brexit and look at where the market is today! We all need to have a long term investment strategy that is not short sited. We need to understand what we are invested in and why. Owning companies or being in the market has historically been the greatest wealth generator known to mankind. But markets don’t move in a linear fashion as we would like. We can’t afford to have our emotions dictate our actions when we experience market downturns.
- Don’t pay more in taxes than you have to.
Nobody voluntarily signs up to pay extra taxes because they feel strongly about the federal government as a beacon of efficiency and virtue. But many people do pay more taxes than they have to.
Unfortunately people tend to focus more on tax preparation instead of tax planning. April is too late to start thinking how to save money on your prior year’s tax return! Our tax code is about 74,000 pages long. It is no wonder that many of us pay more than we should. There are many so opportunities for savings that we just aren’t aware of.
I am extremely concerned about future tax rates and how they are likely to affect our retirement. Believe it or not, historically we are in a very low tax rate environment. The top marginal bracket is only 39.6% in comparison to that of the 1970s when the top marginal bracket was 70% or worse in 1945 it was 94%. I realize that most of us aren’t in the highest marginal bracket. However if rates go up, I promise it will be across the board and not just for the wealthiest Americans. Why am I so convinced rates are going to go up? Think about all our underfunded government programs! Think about the deficit! Think about all the baby boomers leaving the workforce and starting Social Security. Frankly it’s scary. The money to pay for all of this has got to come from somewhere.
We have been taught over the years to throw all our retirement savings into tax deferred vehicles like traditional IRA and 401Ks. Thinking we would defer the payment of taxes because our rates would likely be lower in retirement. What if that is not the case?
There are steps that can be taken now that can dramatically affect the amount of taxes you pay in retirement. That is why tax planning versus tax preparing is so important!
- Don’t put all of your eggs in one basket.
Most people understand the importance of diversification, but most people still don’t do a good job of having a truly diversified portfolio.
The fact is that most people have no idea what they are invested in and why. They think because their portfolio owns multiple funds that they are properly diversified. Most of the time when I am analyzing a client’s portfolio, I find that many of their funds are buying the same companies. Instead of diversity, I see a lot of redundancy.
A truly diversified portfolio can own up to 30 different asset classes, not just the large US companies we are familiar with. But the proportions of those asset classes need to be specific to the individual or couple based on their particular goals and their particular situation.
- Market timing is virtually impossible.
Everyone nods along as we say this, but often their behavior doesn’t line up.
We let our emotions dictate our behavior – even when we know our actions not to be prudent. We need to have a specific investment stategy in place and stick with it when markets are volatile – especially when markets are volatile. Study after study show us that the average investor under preforms the market as a whole. This is largely because many of us are jumping in and out of the markets because somehow we think we know what is going to happen in the future.
The truth is nobody truly knows what is going to happen. I always like to remind clients that if news is unpredictable and news effects markets then you’d have to agree markets are unpredictable. So unless you know tomorrow’s news – don’t bother trying to time the market.
- Keep costs low.
It’s no secret that lower costs within your investments will let your money grow faster. But people still end up in investments with high fees.
Most people have no idea what the internal cost of their investments are. They may know what their advisor is charging them but have no concept of the cost of their individual funds. The internal cost of some mutual funds can be very high which can dramatically decrease the earnings of your portfolio over time. Not only do I look at expense ratios when analyzing a client’s investments but I also look at turnover ratios which tell me if the funds you own are being actively traded. Meaning, if a fund you own has an 80% turnover ratio that means that if at the beginning of the year your fund held 100 different companies then at the end of the year your fund would only hold 20 of those original companies. This in turn means the fund manager is buying and selling a lot with in that fund. That creates two problems. First, that fund manager believes he or she can predict the future. Second, all that trading has a cost to it which again is affecting your returns.
We all know the strategies that we are supposed to employ, it’s just a matter of doing so…
— Nikki Earley