“I’ve heard the winner of the Masters hosts the dinner. If I ever won it there would be no suits, no ties, and McDonalds.” – John Daly
We want to talk about the big picture this month as it relates to building wealth, the kind of wealth that can augment your paycheck now and replace your paycheck during retirement.
Before you even consider investing in your future, you need to accomplish three very important tasks.
- First, you must pay off all your credit card debt. Even if you’re a one-in-a-million investor, it won’t matter if your gains are getting wiped out by credit card debt that carries insatiable interest rates.
- Next, you must have health insurance. Don’t be a fool about this stuff, medical emergencies are still the single biggest cause of bankruptcy in America.
- Finally, everyone must have disability insurance. Without it, you could find your savings wiped out in an instant. You must be able to support yourself if you become injured and unemployed.
Fortunately, having a good job goes a long way to achieving all of these goals, as many employers offer insurance and a paycheck to help get out of debt.
Get Your Hands Dirty
Once you have your bases covered and are debt-free and fully insured, then it’s time to start thinking about investing. But what is investing? It’s a lot more than just having a percentage of your paycheck dumped into a 401(k) plan that you never look at. Just having an IRA or 401(k) is no longer enough. Investors need to get their hands dirty, get involved and pay attention.
The goal of investing is to use the money you have to make even more money, and that doesn’t come from passive investing. Diversification is the only free lunch, and investors need to remain vigilant to assure their money is never concentrated in any one stock or sector. This doesn’t mean you need to rebalance every year, but you need to look at what you have and get a second set of eyes on what you’re doing in case your emotions or biases are getting in the way of making rational decisions with YOUR money.
One mistake many investors make is investing too much into the company in which they work. No one should ever put more than 20% of their savings into a single stock. That was a mistake that many Enron and Eastman Kodak employees made and one you shouldn’t repeat. Diversify before anything else.
Take a Risk
Risk…… Conventional wisdom says that retirement savings are sacrosanct and should never be subjected to undo risk, but we argue that being too prudent can become reckless. Have you heard that the S&P500 index is up 250% since March 2009 and so what’s the big deal if the market is down 20%? The problem is that too many times along the way since 2009 investors have given up on investing in the stock market and sold out without ever getting back in . And for these investors who decided to get back in, perhaps they did late in the bull market and never captured enough gains to recoup what they were originally down. Human behavior is a very large factor in wealth creation.
When it comes to retirement, you’re in a race against time. You need to amass the money you need before you retire. Loading up on Treasury bonds with only a 2.8% yield in your 30’s and 40’s just isn’t going to get you to your goals.
How many bonds should investors have? None in our opinion as inflation eats away at your money while it is locked up.
Stable index funds? A popular option that’s likely in your 401(k) plan. These “stable” funds sound appealing but often don’t yield much more than a bank money market fund.
Timing Is Everything
Now that investors are ready to invest and know where to invest, here are some tips on when to invest. Typically people invest evenly throughout the year, setting aside a portion of their paychecks every two weeks.
But, a smarter plan would be to invest twice as much as you usually would anytime the market falls by 10% or more. Uh, February 8th of this year!!!! If the market stays down the following month, invest twice as much again. Who does this you ask…….we would and do in our own personal accounts and do for clients when feasible.
Will these subtle changes make much difference over four or five years? Maybe not, but over 40 or 50 years, they could add up to tens or even hundreds of thousands of dollars added to your portfolio. When walking the halls of Merrill Lynch I used to ask the top advisors about the best investments their clients ever made to get a black book of picks going. I realized that the answer was always, picking financially healthy companies at a reasonable price and never selling unless the fundamentals of that one company changed. These were the best investments. Not trying to figure out the next Microsoft, Amazon, Apple, etc.
Paying attention of your money makes all the difference.
Your 401(k)’s Downside
Finally some words of advice for investors cautioned about the downsides of your 401(k) plan. While 401(k)s are great ways to invest thanks to their automatic and tax-free nature, they also incur lots of fees and typically only offer a handful of investment options.
The best way to invest in your future remains a diversified portfolio of individual stocks that you control, assuming you have the time to put in one hour of homework per week. If not, hire an investment team that does their own work and research in house.
But since 401(k)s also sometimes offer employer matches, investors should always take advantage of that free money, investing up to the match limit. Once that limit is reached, we advise putting the rest of savings into an individual IRA or Roth that they control until they’ve reached the yearly contribution limits set by the IRS (currently $5,500 for those under age 50 and $6,500 over age 50)
If you would like some help making decisions or simply want advice with your financial matters please give us a call. Full disclosure, McDonald’s (MCD) is currently held in my Trust account.
Blake Parrish, CFP®
Senior VP, Portfolio Manager
Phone: (503) 619-7237
E-mail: blake@bpfinancialassoc.com
Certified Financial Planner Boardof Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”