Investment Corner: Making an Investment Plan
If you are like most people out there, you probably have some level of concern about having enough money to live out the rest of your life in comfort. You might feel uncertainty in the economy, you’ve probably read that the Social Security Trust Fund will run dry in less than 10 years (note: that does not mean Social Security will stop paying benefits), and there are plenty of experts saying real estate is too expensive and the markets are overpriced.
With all of these reasonable concerns out there, it is more important than ever that you have a good investment plan to ensure that you have the money that you need, when you need it.
Your investment plan should be personal and geared towards your unique situation. The “gurus” who give the same advice to everyone, such as “pay off your mortgage early” or “invest in dividend stocks”, are doing you no favor by treating you as a number and giving everyone the same advice. Remember that they might be looking to generate income for themselves by building up a mass following of people who will either pay for their program or click on their links.
Like a good financial plan, your investment plan should consider your goals, your timeframe (when will you need some cash, and how much?), your risk tolerance, and a host of other factors. Your starting point, then, is to determine what those are for you and your family.
Once those key basics are written down clearly, you are ready to determine your asset mix. Remember that stocks are riskier than bonds, which are riskier than cash. Because investors should be compensated for taking risk, the long-term expected returns of a good stock portfolio are higher than those of bonds, which have higher long-term expected returns than cash.
Diversification is critical in reducing risk and volatility. If you are a homeowner or own multiple properties, you probably don’t want a lot of stocks of real estate companies, since home equity is often an investor’s biggest source of wealth. If you own no real estate, having some stocks in the sector or investing a portion of your portfolio in a Real Estate Investment Trust may make sense. Precious metals (think gold, silver, platinum) and Alternative Investments can also be used as diversification, when appropriate.
Discipline is important. Many studies have shown that individual investors who trade frequently end up lagging the market. Worse yet, there is strong evidence that trying to time the market can dramatically reduce your returns. A well-designed portfolio should need only occasional tweaks, along with periodic rebalancing. Of course, if your life situation changes dramatically, more dramatic portfolio changes may be in order to match those changes!
Although there are numerous other factors to be considered in building your investment plan, I’ll mention just one more here: tax considerations. A good investment plan often involves both taxable and tax-deferred (401(k), IRA, etc) accounts. Roth IRA accounts can be beneficial to some investors. And generally speaking, there is some strategy to which investments to put into which accounts.
Take time to properly educate yourself before making your investment plan. The more you understand your plan, the more confidence you’ll have sticking with it. Your lifetime earnings are too important to leave to chance!
However you choose to build your investment plan, invest smart and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Returns are not guaranteed and past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
