Retirement Guys: Create a written investment planWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
You started investing for a reason. The goal was to build a savings account for a rainy day. To gain financial freedom and be able to retire one day could be the goal. Or the goal could be a retiree investing to generate income. Determining the reason to invest and what to buy is often the easy part. Yet, when an investor puts money into the stock and bond market, market fluctuation can make it very difficult to stay the course and investors face a threat to long-term goals: their own instincts.
The American Association of Individual Investors did a survey in March 2009 stating that at that time, only about 19 percent of investors where “bullish” about the stock market. This month, five and a half years later, almost 58 percent are now “bullish” on the stock market. The results of acting on these instincts can be costly. Several studies by organizations like Dalbar, Forbes, Marketwatch, The Emotional Investor and Morningstar all say the same thing: the average investor underperforms that stock market. Why?
“According to Dalbar’s QAIB, investors make poor investment choices that hurt their investment returns. These decisions, including when to buy and sell, are often driven by emotions.”
The solution is to develop an investment plan based upon a disciplined investment approach that can help avoid this common but costly mistake. It sounds easy in theory, but in practice it isn’t.
I, Nolan, recently attended the Schwab Impact Conference in Denver, Colorado with roughly 2,000 other financial professionals. I spent a lot of my time attending classes on what I would call behavioral finance. Here is some advice to help investors create their own unique investment plan.
Use asset allocation.
Asset allocation is how an investor diversifies their money between choices like cash, bonds, U.S. stocks, international stocks, alternatives and guaranteed investments. At any given point, one type of investment will be performing better than the others. Human nature says to get out of the “losers” and move money to the best performing asset class. This can be a mistake because it is buying high and selling low. Focusing on asset allocation can help an investor control their risk level and forces them to sell high and buy low, which is a winning investment approach. Set up a regular rebalance strategy either at a set time annually or when investments exceed limits, like when equities get to be too high of a percentage.
Avoid the financial noise.
The front page of the Wall Street Journal on Jan. 25th, 2014 said “U.S. Markets Tumble as Fear Spreads.” An investor who bought into that advice would have missed out on great stock market returns in 2014. Today more than ever we are bombarded with financial information. Listening to that noise and following the short-term advice can destroy an investor’s financial future. The media focuses on the sense of urgency since their job is to grab an investor’s attention. Financial news will tell investors what they should do this week, or next month, but in reality, they have no control over the markets in the short term. Yet, an investor who follows that advice is often making a costly mistake.
Create an investment plan.
Create an investment plan that is based upon a disciplined rules based investment approach so investors don’t just rely on instincts. Determine the risk tolerance. To prepare for a bad stock market, an investor should write down a dollar amount he or she can afford to lose, plus an amount he or she would be devastated to lose. Put specific, pre-determined steps or circuit breakers that will help limit losses. Plus, in great markets like we are having right now, develop a strategy to sell investments at a high point. Consider locking in gains each year by moving those gains into fixed investments. Before you sell or make a change to the current plan, wait ten days. It is my experience that most poor investment choices are made in to address an emotional concern such as fear or greed. Taking 10 days to think about it will help an investor avoid making an emotional decision.
For more information about The Retirement Guys, tune in every Saturday at 1 PM on 1370 WSPD or visit www.retirementguyradio.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. 419-842-0550. Asset Allocation is a method to reduce risk, it does not guarantee against loss.