Is one of your goals to be more financially secure? Then don’t make these five investing and planning mistakes I’ve seen after working with affluent clients for more than 25 years.
Derrick Handwerk, MBA CWPP CAPP
1. Trying to beat the stock market. This is a myth. When you look at net returns, the majority of the managers and investment advisors cannot beat the market over a 20-year period unless they take on excess risk.
In the book Stocks for the Long Run, Professor Jeremy Siegel reports that in the past 20 years, there were only three years in which many investments beat the market index (as measured by the S&P 500).
Solution: Don’t pick an advisor based on the promise of beating an index or giving you guaranteed returns. Aside from the primary market trend, investing in stocks is a sum zero net gain. For every person that beats the market, someone else has to underperform.
2. Investing only in stocks, bonds and cash. They say variety is the spice of life. This axiom also may apply to investments. Depending on definition, there are 10 asset classes. The goal is to find non-correlated assets that may give you a more steady return and not be tied to the volatility of the stock market.
Solution: Look at other asset classes that are suitable for your age and risk tolerance. If appropriate, commodities, real estate and alternative investments may be a consideration for your portfolio. How would you feel if, five years from retirement, the stock market cratered—and you had the bulk of your assets in stocks?
3. Not matching risk tolerance to return. Everyone would like to earn a 20 percent return. But with potentially high returns comes high risk.
Just look back to the 1999 to 2001 Internet craze. People were making 20, 30 or 40 percent per year in the stock market and didn’t realize with abnormal returns comes the possibility of abnormal losses. Return on a stock portfolio is commonly based on “beta.” Beta refers to the change in a stock or portfolio in relation to the overall stock market.
Solution: Depending on your age, risk tolerance, liquidity and goals, set your expected return target. Ask your advisor to show you a 5 and 10 year historical average return for the asset allocation they advise. This info may give you some sense of what you can expect.
4. Only investing, not planning. I am amazed with how the terms “investment advisor” and “financial planning” are used interchangeably. The confusion may stem from financial institutions giving financial planning advice, which is incidental to the selling of investments. I see very few financial plans. What I do see a lot of are cash flow analysis. This “plan” shows cash projections at various rates of return on your nest egg. The moment the investment advisor hands the book to you, it is becoming obsolete.
Solution: If your net worth is above a million dollars, there may be many wealth preservation tactics and strategies for potentially increasing and preserving your wealth. If you are only investing and not planning, I would suggest you are missing potential opportunities. Also, as most people with a high-net worth will tell you, constant oversight and updating of strategies is imperative.
Good planning at the margin can be more important than good investing. The problem is, many investors haven’t seen good financial planning. If you work or have worked 50 to 80 hours each week to amass your wealth, doesn’t it make sense to have a plan that is constantly updated to set the direction for your financial life?
5. Failing to save enough money for retirement. Most people I talk with underestimate their life span and the amount of money they will need in retirement.
From my experience, less than 10 percent of millionaires have enough money to retire on and keep their present standard of living. I’d suggest that if you are affluent, educated, exercise and have good genes, the chance of reaching the age of 90 increases significantly.
Having one spouse living to age 90 means your assets must support your life style for 25 years or possibly longer. This realization may not occur until age 74 and the money is gone. Can you think of many things worse than being 74 and out of money? Instead of having a grand life, you now may have to accept Medicaid and see your lifestyle dramatically change.
Solution: Save, save, save and if you think you are close to reaching that magic number, run some cash flow illustrations with various inflation levels, investment returns and “end points” until you feel comfortable that you should be OK. Remember, it is better to have too much money in retirement vs. too little.
Derrick Handwerk MBA CWPP CAPP received his MBA from Lehigh University and is a Martindale-Rauch Business Scholar. Handwerk Wealth Advisory (handwerkwealthadvisory.com) works with accredited investors and small business owners. He also specializes in working with medical and dental practitioners. The information presented is general in nature and should not be considered legal or tax advice.
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