April is National Financial Literacy Month, so Wellview will be sharing financial fitness-related blog posts each Friday this month. Regardless of where you fall on the financial literacy scale, this is a good time of year to take a few minutes to learn something new and/or to consider your finances and come up with some ways to tweak or improve them (a financial spring cleaning). Please note that these blog posts are for educational purposes and we are not offering individual advice. For personal recommendations and support, please reach out to one of our Accredited Financial Counselors (AFC) or a Certified Financial Planner (CFP).
In case you missed it:
Part 1: Income, Expenses, & Budgeting
Part 2: Saving
Financial literacy “unfun” fact: Only 30% of Americans have a long-term plan for saving and investing.
I often compare the stages of financial coaching to a three layer cake: the first layer is basic budgeting (income and expenses), the second layer is savings, and the third layer is investing. The last two weeks we discussed the importance of and helpful tips around income, expenses, and budgeting, and the various types of savings accounts. This week’s topic is investing, and generally speaking, this shouldn’t be tackled until you know how much you make and how much you are spending (the first layer) and have set aside an ample amount of savings for emergencies and revolving expenses (the second layer).
One caveat to consider: while Accredited Financial Counselors (AFCs) can offer general advice on investing, only a Certified Financial Planner (CFP) can evaluate an individual's and/or family’s specific finances and recommend strategies on achieving their long-term financial goals. In addition, there are different types of financial planners, so two words you need to know when you are researching support in this area are suitability and fiduciary. Most financial advisors are held to a “suitability standard” which means that they can recommend or sell securities (stocks, bonds, mutual funds, etc.) so long as they are offering advice that is deemed “suitable” to your age, risk tolerance, or other variables. They are required to act in the best interest of their employer. In contrast, a financial advisor who is held to a “fiduciary standard” is legally required to act in the best interest of the client, at all times, even if it doesn’t make the advisor the most money. All registered investment advisors (RIAs) are legally required to act as a fiduciary. You can research the background of a planner you are considering by looking at the Certified Financial Planner Board of Standards (CFP Board): CFP.net | (800) 487-1497 or the Financial Industry Regulator Authority (FINRA): FINRA.org | (301) 590-6500.
One of the first things I tell participants who are confused about investments is that if you didn’t grow up around people who talked about investing and/or if you haven’t taken a personal finance course or done some self-study, investing can seem overwhelming to the vast majority of people. Many participants have told me that when they log into their 401(k) accounts, it’s like looking at a foreign language. So they log out and run for the hills (figuratively speaking). Please know that financial investment websites are created for both professionals in the financial industry AND us laypeople. So they tend to display a lot of data that may or may not apply to us mere mortals. It’s not you and your lack of knowledge that’s the issue, it’s that the website is geared towards people who do this for a living (the classic “it’s not you, it’s them”). My point is that you do not have to know or understand most of what you see when you peruse a financial investment website. You just need to know the basics.
So, what are the basics for investing?
1. Keep it simple
When a participant is ready to move some of their money from a savings account into an investment account, one of the first questions I ask is, “Where is your 401(k) housed?” or “Do you have any existing investment accounts open?” Fidelity, Vanguard, Schwab, etc., if you already have an account with one of these investment firms, it’s often very easy to add another account for personal investing, and it means that one password will get you to all accounts. In addition to the logistics of setting up an investment account, there are simple, tried-and-true guidelines for investing (which follow below).
2. Start slowly
Unless you are highly motivated to get into the market and start investing, a good rule of thumb is to start slowly. Rome wasn’t built in a day! Spend some time becoming familiar with the financial services company you are using. Listen to some podcasts regarding investing (E-Mail me if you would like some recommendations!). Know that this is a long game, and you should never feel like you need to move or act quickly. This is your money and your timeline. And as with most things, slow and steady wins the race (see dollar cost averaging below).
3. Know your risk tolerance
There is risk associated with any investment. Even putting your money in “safe” funds means that the cash might not be available if you need it (which is a risk). That being said, where there is high risk, there is high reward (think crypto). We all fall somewhere on the spectrum of high to low risk tolerance, and often, it is tied to our age. If we are young and have time on our side, we might be more willing to assume risk, knowing that we have time to make the money back. When we are older and closer to retirement and needing the money, the thought of losing a portion of it sounds terrible (we become less risk-tolerant). There are formulas and recommendations based on your personality and age, but it’s generally a good idea to know where you stand at the current stage in your life.
4. Diversification is your friend
This is a version of the old adage “don’t put all your eggs in one basket,” which is a timeless recommendation. Diversification ensures that you are protected and not vulnerable when it comes to your investments. For instance, if you have all your money in a few high-tech stocks, or even a few high-tech (growth) mutual funds, what happens when the unforeseen happens in that industry (and trust me, “unforeseen” is “unforeseen” for a reason)? You lose money. But if you have a blend of different types of equities (even international), then you are protected if one industry or country isn’t doing well. Diversification is the basis for mutual funds and ETFs (exchange traded fund), which represent not one company or industry, but several.
5. Asset allocation ties together risk tolerance & diversification.
There are only three assets to consider when looking at your portfolio and what you want to do with it: funds (equities), bonds (debt), and cash (or cash equivalents). Where you invest your assets is dependent on your age, and there are some “old school” formulas to help guide this, but generally speaking, the older you get (and the closer to retirement), the more you want to have your money in “safer” assets, such as cash and or bonds.
Another thing to consider is rebalancing your account annually. For instance, you may want 30% of your portfolio in the stock market (equities), but if they perform well one year, that portion of your portfolio may rise to 40% of your total assets. So, we need to look at that and correct it so that you have a ration that reflects your goals at any given point in time.
6. Buy and hold
This basically means that once you buy an investment, you hold it...indefinitely. Having a more long-term approach means that you aren’t reacting emotionally to the day-to-day changes in the market, which most definitely occur and can drive the average investor insane. Buy and hold also assumes that your portfolio is diverse, and that you are looking at what you own and are making sure the asset allocations match your risk level and that the investments are performing as they should. You aren’t ignoring your investments, but rather letting the fund managers (who get paid to watch each fund carefully) do their job. I promise, everybody associated with each fund wants it to perform well, and they are working hard to make you money (so you don’t need to carry that burden).
7. Dollar cost averaging
When someone is about to start investing, the inclination is to open an account and put all their extra savings into the fund(s) of their choosing. But this overlooks one thing. What if the day you decide to purchase said investments, the market is high? Then you are purchasing fewer shares at a higher cost. A better strategy is to slowly purchase investments over time. For instance, if you have $1,000 to invest, instead of transferring it over all at once, try investing $250 per month over four months to capture different price points. Ideally, this will continue indefinitely, as you invest at consistent intervals (e.g. monthly or every paycheck).
We covered a lot of information in today’s post, and we didn’t even touch on retirement planning, which is a continuation of investing and will be next week’s blog topic. As always, if you have any questions about these financial blog posts, or need support around these (or other) financial topics, please do not hesitate to reach out to us. We are here to help support you and your overall well being in any way we can!
Source: Spend Me Not
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– Tanya Runci, AFC, BA, MA, ADE, NBC-HWC
Health Advisor | E-Mail Tanya