When working with people, especially new to our process, investing is where the conversation often circles.
I get it…it’s trendy. It’s exciting. It’s fun. And truthfully, in finance it’s the easiest conversation to have because of the allure of it. However, in the whirlwind of information, people sometimes lose sight of the fact that investments are a financial tool—a tactic, like any other financial product. It has purpose, but when not used correctly, you may not see the results you were expecting.
And with that in mind, here are five concepts about investing that could make it a much more effective option for you:
You might be investing already.
If your employer has a benefit plan that offers a retirement account like an IRA or 401K, you’re already investing. People often don’t realize the correlation because they work with their HR department to get it set-up. It’s a fantastic opportunity that employers provide, and you should take advantage of it. The problem is there is not often a lot of advice provided by HR about what type of account the money is going in to. Depending on your plan, goals, and risk tolerance (will touch on this in a bit), it’s important for them to be aligned whether you are at your company for the next two years or the next 20.
What are you investing for?
Are you saving for retirement? A new house? Your children’s college fund? All three are viable investment options and could determine how and what you invest in. The key to investing is understanding your goals, the timeline you’re on, and the money you have available in your budget.
Determine your level of risk tolerance.
First, I recommend you have a financial plan in place. Looking at your financial situation holistically is a big piece of determining your risk tolerance. You’ll be able to analyze current assets, any liquidity needs in the foreseeable future, and your time horizon. I utilize a questionnaire that produces a risk tolerance score. It’s with this score I help determine your risk tolerance. It falls on a percentage scale from 0% to 100%. After the questionnaire, I can recommend an allocation I believe fits your current situation and your goals depending on your overall risk tolerance. It could be 90%/10%, 30%/70%, or 50%/50%.
What can you invest in?
In most common cases, the majority of investments fall into stocks and bonds. A stock is essentially owning a share or portion of a company. A bond is how companies raise money for finance projects or operations. Essentially, owners of bonds are debtholders. Mutual Funds can be a mixture of stocks and bonds. That mixture can depend on many different things but mostly comes back to the investment objectives of the fund itself.
You can have passively managed funds or actively managed funds. Passively managed funds don’t have a dedicated manager and typically trade on the stock prices as it related to an index fund. For an actively managed fund, there is a professional or team of them trying to determine value of a company as it relates to its stock price. Actively managed funds often are more costly.
This can be the most confusing part of investing, so by tying it all back to your plan and risk tolerance, you can select the type of vehicle that fits your situation the best. Remember, all investments carry some level of risk so it’s important to understand what those risks are and how they can impact your goals.
Be as analytical as possible.
One of the biggest detriments to an investment strategy, or even a financial plan, is human nature. Emotions tend to derail both more often than market volatility. The adage “buy-low, sell high” is a staple of successful investing. You don’t have to be Warren Buffett to understand its impact. However, emotion can often cause you to react in the opposite fashion. The key term is react. The market takes a dip and you want to sell, or the market makes a hefty climb and you want to buy. In volatile times, you may react in a manner that is bad for your portfolio.
That’s why having a plan is critical. It helps keep your eye on the ball. A plan can help you focus on a long-term strategy instead of short-term rate of return. Focus on the long-term plan…and not allow the day-to-day effect the plan. And if you’re currently investing or considering it, take the time to speak with a professional. Find someone you trust and who will look at your whole situation before providing recommendations on how to invest your money.
Back in Black.
When looking at investing, don’t concern yourself with what’s topical or fashionable. Make sure the options you’re considering fit your future goals and current standing. Having a comprehensive plan that looks at both is the best way to accomplish it. Work with a professional you trust, who will tell you what you need to hear versus what you want to hear. As your plan evolves you’ll be much more confident in the direction you’re heading.
Special thanks to our Guest Blogger, Clint Brady, for sharing this information with us!
Clint is a financial advisor with Northwestern Mutual. He is an advocate for families and business owners on creating a path to financial independence.
Click here for a free, no obligation consultation with Clint.
Interested in learning more? Read more of Clint’s posts for Cedar Rapids Moms Blog:
Three Financial Questions to Answer When Changing Jobs
Saving for my Kids’ Education or My Retirement: Which is More Important?
How to Weather the Holiday Spending Storm
What is Financial Planning…Really?