05 Jun Don’t Listen to the Noise: Smart Investing and Practical Financial Advice to Avoid the Hype
“Interest rates are rising—get your money out of bonds!” “Start investing now in Frontier Markets!” “Inflation will be out of control—trade your US dollars for gold coins!” You probably come across headlines like these on any given week. We are inundated daily with news on the economy, the performance of the stock market, politics in Washington and throughout the world. On top of that, we have “financial experts” on networks, newspapers, and magazines offering their financial advice on how each individual event will impact our current portfolios and what they expect the next great investments to be. When I was first approached to write this article, I feared my editor was seeking another financial Nostradamus prediction. Heck, even if I were wrong, with an interesting enough article, we could still get a good readership for it. Isn’t that what the networks, newspapers and magazines are interested in, anyway? Thankfully, I was asked to write financial advice for the smartest, money-minded group of readers I could think of.
Investing Versus Gambling
In reality, investing for your financial future isn’t a get rich quick scheme. It isn’t about picking the hottest stock or market sector and then selling it to buy the next hot one. It isn’t about jumping at the chance to sell everything at the peak of the market and then buy again at the bottom. Of course, if we were capable of accurately predicting these patterns and, by doing so, guarantee how the market will perform to our advantage, we wouldn’t need any type of plan or even to read an article like this… The reality is that we are not gifted enough to see in to the future, and I don’t mean just you and me. I also mean the “financial experts.” Investing is not about predicting; it’s about calculated planning, avoiding the pitfalls that most amateur investors make and applying sensible, well-informed guidance on how to make the most of your money. Surely you have many goals on your list, short and long term. You’re probably looking into retiring as soon as possible. Perhaps you want to see your children as Ivy Leaguers. You want to provide your family the home of their dreams, or maybe you want to build a hefty legacy for future generations. The way to achieve these and other ambitious aspirations begins with ignoring all the “noise” floating around us about the economy, politics, the market, etcetera. In the grand scheme of things that’s all this is – just “noise.” It should just be an insignificant blip on your radar when it comes to defining solid, long-term financial goals. Acting on this “noise” is the equivalent of gambling.
Ignore it all and life will be less stressful, and more importantly, it will prevent you from committing costly mistakes and making potentially disastrous financial decisions. Make a conscientious effort to apply this: When it comes to investing, you can’t let your emotions get the best of you. It’s obviously difficult to watch your hard-earned money disappear like magic when your investments decline, especially if the crashing investment turns out to be the basket you had decided to put all your eggs in.
Take the guesswork out and act upon it: Have a well- constructed financial plan. You can research as much as you can on your own and put it together yourself or – what I would advise – hire a professional to give you unbiased, realistic facts and figures addressing your goals and aspirations specifically and systematically. Write out your plan and stick to it during the good times and the bad times in the market. Your account balances will go up, and they will go down. Stick with your plan.
The worst thing amateur investors do is overreact when the markets go south. Use 2008 and 2009 as your personal gauge. Did you sell as the market was crashing or did you stay the course? If you sold, as a lot of people did, your emotions probably played a big part of your decision process, and that is a major hurdle that needs to be overcome NOW. If you did sell, I sincerely hope you were able to reinvest in time for this incredible recovery that we have recently experienced. Better yet, maybe you didn’t sell at all AND you invested more as the market declined. If you did, I’m pretty sure you were acting on an appropriately constructed plan. A solid financial plan should concentrate on the elements that we do have control over — taxes, risk and fees.
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The best way to avoid or delay paying taxes is to make contributions to a qualified retirement plan (401k, 403b, 457, IRA, Roth IRA, SEP IRA, etcetera). I assume you are already taking advantage of some of these options. If not, give it some serious thought, as it is crucial to know, understand and start taking advantage of the best options available to you and your spouse. However, the IRS sets a limit to the contributions you can make to these types of accounts, so you may find that you are already contributing the maximum amount to these investments. What you do with your additional savings and how this plays a part of your overall investment strategy is critical. This is where it becomes even more important to consider the annual tax impact of your individual investments within each account.
If you’ve ever read the fine print of any investment, it always says that there are risks associated with it and that you might lose money if you choose to invest in it. It’s no secret that riskier investments offer more potential earnings and vice versa, or the fact that stocks are generally considered riskier than bonds, while small companies are generally considered riskier than larger companies. Then it should be no surprise that stocks have also historically appreciated more than bonds and the same can be said for small companies compared to larger companies. It is also important to recognize that some investments historically have the potential to go up in value while other investments go down even though over the long term both investments are expected to appreciate. Both of these concepts illustrate why it is important to have diversification amongst all your investments. Diversification not only reduces risk but ironically also has the potential to increase returns.
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This is a hotly debated topic and I am going to avoid taking sides. The point I want to make is that fees have a tremendous impact on how your investments are going to perform in the long run, and it is critical you know exactly what fees you are paying and where all those fees are going. Some investments pay people commissions to sell them. Instead of calling them commissions, the financial services industry refers to these as loads. If you are investing in a collection of investments like a mutual fund or ETF, then these investments need a manager or management team to choose investments and at what point to buy and sell these investments. These fees are appropriately referred to as management fees. You should also be aware that there are transaction level fees where it may cost a certain dollar amount to buy a stock or mutual fund. Just from this brief list, it’s easy to see how these can quickly add up. Therefore, it is important to know exactly what you are paying in fees whenever you consider an investment as well as how you expect it to perform.
What the Future Holds
Do I know – with an adequate amount of certainty – how the market is going to behave in 2014? No. Does anyone truly know how the market will shift? No. Will a lot of people out there share or sell you their research, advise you decisively on what to do, and sound very convincing in the process of doing so? Yes. I encourage you to ignore it all. After all, as 2013 was rolling in, Congress was dealing with the fiscal cliff and debt ceiling, but I am not aware of anyone who was forecasting the strong performance the US stock market would have last year.
Devise a well-constructed plan and stick to it no matter what; the rest is just “noise”.
This article was originally published in the Summer 2014 Issue of VETTA Magazine.