For today’s guest post on a personal investing strategy, please welcome fellow personal finance blogger Joseph Hogue.
Making investing personal will not only make investing cheaper but will motivate you and help you reach your financial goals
Two stock market crashes in less than a decade into the new millennium and a lot of people wonder if investing is worth the risk and the worry. Keeping up with the ups-and-downs of the stock market and picking the best investments can seem like a part-time job.
But investing doesn’t have to be like that.
In fact, the best investing strategy is one about which you don’t worry at all.
I know this isn’t what you hear on TV or on most investing blogs. Most in the industry and on Wall Street would have you believe that ‘beating the market’ is the only way to grow your nest egg.
Investing has become about those annual returns when it should be about why you are investing, those financial goals and needs you want fulfilled.
Investing around these personal goals will open up a stress-free strategy that will not only give you the confidence that your money will be there when you need it but will help motivate you to save.
Why Investing is More Personal than the Market Lets On
This is a sore spot so pardon me if I rant a little. You see, Wall Street and the investment industry don’t want you to know how personal investing should be.
They make their money on generic, one-size-fits-all investment advice that applies to everyone but helps no one. Pitching dozens of stock picks every hour on CNBC or any investing blog keeps people entertained and coming back for more.
That’s worth billions in advertising and fees as investors jump into every stock pick they hear.
I was a part of this machine as an equity analyst. I ran a sell-side research department for a venture capital investment firm. We pumped out stock research on a daily basis with a singular goal, make investing exciting and keep investors buying.
Now I don’t want to say that everyone on Wall Street or the investment industry is this way but it’s a major part of how the industry makes its money. It wants to keep the focus on the ‘what’ of investing instead of how you should invest your money because there is no mass-market audience for the ‘how’, the best investing strategy is personal.
Making investing personal is about matching your investments with your specific goals, starting with your own needs and only then thinking about the investments you should be buying.
Investing on your own personal plan is not only going to save you money in fees but will keep you from freaking out every time the stock market tumbles. It’s going to give you the confidence that your money will be there when you need it and a strategy that doesn’t involve ‘beating the market’.
How to Make Your Investing Personal
Making investing personal is actually a lot easier than trying to follow all the noise that passes for financial advice. In fact, you can reduce most of investing down to just three steps; making your goals, finding the return you need to get there, investing in broad asset classes according to your goals and needs.
First, you can’t match your investments with your goals if you don’t know what those goals are. We’re not talking about some arbitrary number like saving a $1,000,000 for retirement. That kind of vague goal-setting is like going on a road trip with a destination but no idea how to get there.
For investing to work, you have to make your goals real.
- Create a mental picture of what retirement looks like for you. What will you do on a daily basis? What have you always wanted to do?
- Don’t forget other financial goals like saving for that dream vacation or your kids’ college education. You can create mental pictures around all of these.
Really thinking through your goal is going to help put an exact price tag on it but it’s also going to do something even more important. Making your goal real is going to give you the motivation to save like no arbitrary number ever could. Any time you find yourself wandering from your budget or not investing, take out that mental picture for all the motivation you need to get back on track.
Once you know exactly how much you’ll need to meet your financial goals, any retirement calculator can tell you how much you’ll need to save and what return you’ll need. It’s important to be realistic here. Just because the stock market has averaged an annual return of about 10% since 1928 doesn’t mean that’s how fast your retirement savings will grow.
Creating a diversified portfolio of stocks, bonds, and real estate is going to smooth out the ups-and-downs in your wealth but it will also smooth out that return. The return you can expect on your money will change as you age but a realistic range is between 4% to 7% annually.
If your financial goal and the amount you can save regularly means you need a return of 8% or more, it’s time to reevaluate your goals or your saving. Reaching for higher returns means most investors put too much in stocks and lose everything in the next market crash.
The last step in making investing personal is creating a portfolio around your needs and age. This means investing broadly in stocks, bonds, real estate, and even alternative assets that give you the return but also the amount of protection you need.
Younger investors can typically invest more of their money in stocks because they have decades to see their wealth bounce back from a stock market crash. Younger investors with smaller portfolios also generally have a higher tolerance for risk. Even larger market moves don’t amount to as much loss so younger investors aren’t as prone to freaking out and panic-selling.
Investors in their 20s and even through their 30s can usually hold up to 75% of their money in stocks with the rest in bonds and real estate.
As you get older though, you’ll want to make sure that money is there when you need it. The need for safety becomes greater than the need for growth. An investor approaching their 60s might not have the time to rebound from a market crash or might sell at the worst time after seeing their portfolio shrink by half.
This means gradually shifting your investments from stocks to bonds over the course of decades. It’s not about timing the market but about timing your own needs and making sure your portfolio is still on track to meet your goals.
By the time the investor is in their late-50s and into pre-retirement, they might have as much as half of their portfolio in bonds with only a third in stocks. You’ll always need a little in stocks to help from spending down your money too quickly and to protect against inflation, but it might be a very small part of your wealth as you age through retirement.
Investing this way doesn’t mean you have to constantly be checking your investment accounts. In fact, making your investing personal means you’ll have to check them far less. You’ll no longer need to worry about what the market or specific stocks are doing because your plan won’t depend on the year-to-year fluctuations in stock prices.
- Deposit money regularly into your investing account but wait three- to six-months to invest it. This helps to keep your trading fees to a minimum.
- Instead of selling investments in asset classes to keep the portions in stocks and bonds consistent, just put new money in the asset that has lagged. This will mean investing more in bonds as the stock market surges and then in stocks when prices come down.
- Make sure you’re getting all the free money available by maxing out your 401K employer-match contributions and getting tax-deferred savings with other retirement accounts.
Investing to meet your goals instead of playing Wall Street’s game of picking stocks can help you reach your financial goals and worry less about money. Focusing on the big picture and making your goals real will not only help motivate you to save but it will show you just how insignificant a drop in stock prices are compared to decades of investing.