MISTAKE #1: Failing to Plan
“He who fails to plan is planning to fail.” – Winston Churchill
A survey from MagnifyMoney (1) found that the biggest money regret among Americans is not investing sooner. A whopping 77% regret not investing earlier in life. When asked
to give advice to younger Americans, 54% of investors said to start as soon as possible. I’ve found that many people don’t have a plan because they procrastinate, and they
procrastinate because they don’t have a plan. It’s a vicious cycle. If you’re in it, you should break it as soon as you can.
MISTAKE #2: Thinking A Financial Plan Is Solely
About Investing
A big misconception about financial planning is that it’s all about investing. Don’t get me wrong, investing is a large part of financial planning. Still, there are many other parts, such as:
$ Goal identification. This includes short, medium, and long-term goals. A good financial advisor can help you assign a dollar figure and a target date to your goals.
$ Budget and cash flow planning. In 2021, Debt.com surveyed 1,000 Americans and found that 80% were budgeting. Out of the budgeters, only 4% were using a financial advisor to budget (2). I believe part of this is due to people not realizing that advisors can help them create – and stick to – a budget.
$ Debt management. A solid financial plan includes how you will tackle any debt you have. For example, you may make different decisions based on the type of debt you have, such as credit card debt vs. low-interest mortgage debt.
$ Retirement planning. Financial advisors are typically “numbers” people, who love creating spreadsheets and inputting numbers into retirement savings calculators.
$ Insurance coverage. Insurance is an important part of protecting your financial downside, and can include health insurance, disability insurance, auto insurance, home insurance, renter’s insurance, life insurance, and more.
$ Charitable giving. Your financial plan should include your philanthropy and legacy wishes. A financial advisor can help you maximize your gifts with tailored recommendations based on your situation.
$ Estate planning. This includes creating a will, which outlines your final wishes with regards to your assets, dependents, and who you want to administer your estate. It also includes keeping your beneficiaries up to date and establishing powers of attorney in case you become incapacitated.
Feeling overwhelmed, yet? And that’s merely the tip of the iceberg. You may have decisions to make about your 401k, pension, Health Savings Account, and much more.
MISTAKE #3: Not Communicating With Their
Partners About Money
According to a survey of 191 Certified Divorce Financial Analyst® professionals, 22% of divorces are caused by “money issues” (3). If you have a spouse or partner, it is critical that he/she is involved in your financial picture. I am interested in long-term working relationships with my clients, which means it’s imperative for me to know them better to make sure the financial plan reflects the
reality of the household. I understand that most relationships have one person who handles money more than the other. Still, both partners are decision makers. Their questions and tastes should be
reflected in the financial plan. For example, one partner may dream of traveling the world while another spouse imagines buying a log cabin in the woods. One partner may have an aggressive risk tolerance (more on that later) while the other finds it difficult to stomach market volatility. Financial advisors have the benefit of working with many different couples, which gives us insight into what works and what doesn’t.
MISTAKE #4: Trying to Time The Market
There’s a saying in the personal finance world that “time in the market beats timing the market”. Yet, that doesn’t stop people from trying to jump in and out of their investments at perfect times. When the market is at all-time highs, people may say they’re waiting for it to cool off. When the market is in a correction (defined as a drop of at least 10% from recent highs) or a bear market (a drop of 20% or more from recent highs), people may say they’re waiting for things to get better. Surely you can see the problem here. Research from Charles Schwab (4) analyzed various market-timing strategies to see how
they might have worked in the past. As always, past performance is no indication of future results, but here’s what history tells us… Schwab researched the performance of a few hypothetical long-term investors following different investment strategies. Each investor received $2,000 at the beginning of every year for the 20 years ending in 2020 and put the money in the stock market, as
represented by the S&P 500® Index. The first investor had perfect timing. He was able to invest his $2,000 at the lowest point of each year. For instance, instead of putting his money to work immediately at the start of 2001, he waited and invested on September 21, 2001 – that year’s lowest closing level for the S&P 500. His next investment was on October 9, 2002, the lowest closing level for the market in 2002. He continued this perfect investment strategy until 2020. The second investor invested her money on the first trading day of every year. She didn’t wait, and her strategy didn’t require a complicated strategy. As soon as the market opened in a given year, she put her money to work. The third investor was similar to the second, except that he invested his money on a
monthly basis. He divided his $2,000 into twelve equal portions, which he invested at the start of each month. This is known as “dollar cost averaging”. You may already be doing it if you contribute to a 403(b), Roth IRA, or Traditional IRA each month.
The fourth investor had the worst market timing. She invested her money each year at the market’s highest point. Her first investment was on January 30, 2001 – the year’s highest closing level. She continued this terrible market timing all the way through 2020.
So, what are the results? Well, it shouldn’t be a surprise that the perfect market timer had the best results. He ended up with $151,391. You might be thinking, “Wait, I thought you were telling me not to time the market.” I am. Take a second to think how someone might perfectly time the market. Maybe that person has a crystal ball. Perhaps financial news channels blare all day, every day in the background of that person’s home. Imagine the time – and sheer luck – required to pull off such a feat. I’m sure you have more important things to do with your time. Especially when you consider the rest of the results… The second investor, who invested her money immediately, ended up with $135,471. The third investor, who made monthly investments, ended up with $134,856. The fourth investor, with the worst marketing timing possible, ended up $121,171. Again, past performance is no indicator of future results, but our terrible market timer still ended up with nearly three times what she would have if she hadn’t invested in the market at all. Besides, it’s my belief that a financial advisor should guide you through market highs and lows to help you stay the course. Every minute you’re not worried about timing the market is another minute you can use to enjoy life.
MISTAKE #5: Not Knowing Their Risk Tolerance
This is another area where good financial advisors can pay for themselves. It’s also an area in which do-it-yourself investors struggle because they lack an objective third party’s perspective.
Risk tolerance is an investor’s ability to withstand losses in an investment portfolio. In other words, it’s how comfortable you will be maintaining your positions when they
decline. Why is this important? It’s important because it helps you grow your money while being able to sleep soundly at night. An objective third-party can ask you some questions to unearth your risk
tolerance and make tailored recommendations based on your answers. This one move could prevent you from making catastrophic mistakes.
MISTAKE #6: Keeping Up With The Joneses
Have you ever heard the phrase “keeping up with the Joneses”? The stereotypical Jones family has a picture-perfect house with a wonderful yard and a couple of luxury vehicles in the driveway. They always have the latest gadgets and go on Instagram-worthy vacations. How can they afford all that? They can’t. They’re broke. 78% of Americans are living paycheck to paycheck (6). This means that the overwhelming majority of people cannot truly afford the cars they drive and the homes in which they live. I love this quote:
Don’t compare yourself to other people if you don’t know their entire financial picture. The person you see driving a new Mercedes could be drowning in debt. True wealth is invisible, and you can’t show off your brokerage and bank statements at a stoplight.
MISTAKE #7: Not Getting Help
Picture two people in a gym preparing for a workout. One person has never been to a gym before and doesn’t know how to use the weights, machines, or cardio equipment.
The other person is a champion bodybuilder. BOTH of these people can benefit from a personal trainer. The same is true in financial planning. I may be biased, but I think both inexperienced
and veteran investors alike can benefit from a fresh pair of eyes. The benefit is obvious for people who are unsure what to do, but more subtle for do-it-yourself investors.
Because even though DIYers may know what they’re doing, that’s not a reason to avoid seeking help. Based upon that logic, one could ponder why Tiger Woods has a swing
coach or why Tom Brady has a throwing coach. And in addition to the “I can do it myself” myth, there are several myths people believe
that keep them from seeking help…
$ Financial advisors are only for rich people.
$ Working with a financial advisor is too intimidating.
$ A financial advisor will put all my money in stocks and that’s too risky.
$ Financial advisors are too expensive.
$ Hiring a financial advisor means I have to give up control.
$ All financial advisors are created equal.
BONUS: Questions to Ask Your Current Advisor or
Before You Hire a Financial Advisor…
By now, I hope I’ve made it obvious that I am a financial advisor who is passion about financial planning to help you and enjoys helping you be more confident with your plan
moving forward. I would be honored to take the time to speak with you and learn more about your situation. If you would like to schedule an appointment, please email me, give
me a call, or use our scheduling link here and ask for me: https://www.knoxcountyohiofinancialservices.com/contactus/ I want to help you on your journey to hiring a financial advisor, even if it isn’t me. So,
here is a list of questions you can use to ask during your search:
$ How do you get paid?
$ Are you a fiduciary?
$ What is your investment philosophy?
$ Who is your typical client?
$ What are your credentials?
$ How would we work together?
$ How would you communicate with me?
$ What services do you provide?
$ What’s important to you?
SOURCES
1. https://www.magnifymoney.com/blog/investing/investing-regrets/
2. https://www.debt.com/research/best-way-to-budget/
3. https://institutedfa.com/Leading-Causes-Divorce/
4. https://www.schwab.com/resource-center/insights/content/does-markettiming-work
5. https://www.ifa.com/articles/advisor_alpha_view_from_vanguard/
6. https://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-aWay-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilderSurvey
Additional Disclosures:
This newsletter is for informational purposes only, you should not construe any such
information or other material as legal, tax, investment, financial, or other advice.
The information provided has been derived from sources believed to be reliable but is
not guaranteed as to the accuracy and does not purport to be a complete analysis of the
material discussed. It does not constitute an offer or a solicitation of an offer to buy any
securities, products or services mentioned. The opinions expressed do not necessarily
reflect those of the author and are subject to change without notice. Examples provided
are hypothetical and are for illustrative purposes only and do not reference any specific
client experience. Past performance is not indicative of future results. The Standard &
Poor's (S&P) 500 Index is an unmanaged index that tracks the performance of 500
widely held, large-capitalization U.S. stocks. Indices are not managed and do not incur
fees or expenses. It is not possible to invest directly in an index.