While Wall Street and our political environment hold the purse strings of our nation. We as the average American investor, are putting money into stocks, bonds and mutual funds because it’s just “what you do,” right?
With the decrease of pensions our society has suffered from the lack of education and the uncertainty of how to ask the right questions, there’s a staggering number of us (roughly 120 million) approaching our investment by just speculating or doing what others are doing. Yet we all have different needs and family situations.
Today’s ‘I’m Investing’ really means ‘I’m Speculating’ or what I think others are doing
Our parents weren’t concerned with their retirement income questions because they had pensions, strong social security and savings. Our parents knew their retirement income and that’s a key element missing today. Our generation has fallen in the gap of financial knowledge and we’re passing that on to our kids. Unfortunately there may be other options, but few search them out because not enough questions are being asked with an open mind.
46% of employees spend, on average, two to three hours per week during work hours dealing with their personal finances rather than the work at hand
79% of Americans reported that personal finances keep them awake at night
According to a 2017 Gallup Report, 54 percent of American adults have money in the stock market. For Americans with annual household incomes between $75k and $99k, the number jumps to 75 percent. For those with incomes over $100k, it rises all the way to 89 percent. Many people that have more money to invest, aren’t aware of the different financial alternative available outside of the stock market.
Many of these accounts are through 401(k), IRAs and other qualified retirement plans and now becoming popular is the target-date funds. With a high percentage in these accounts the question is why? Easy access? What research are individuals doing and what questions are they asking? What alternatives might be costing someone? Is an advisor working for a particular company or for the individual?
Most of us remember what happened to our money in 2008… What else happened?
Remember 2008? Well at the end of 2007, there was a perfect storm. The Department of Labor actually changed the default option for qualified plan investments from stable value funds (a safe, steady investment that protects principle) to stock-based funds (more volatile). This is a big issue especially because this happened just before the stock market started the long slide that deleted TRILLIONS of dollars from American investors’ accounts. As stocks slid 50 percent from October 2007 to March 2009. Even the target-date fund that are popular because of their appeal to investors lost. Nearly 24%.
According to Smithsonian.com, the average American household lost one-third of its net worth during the recession.
Let’s stop right there because plenty of questions were asked by investors, like ‘how did this happen?’ ‘who’s responsible?’ ‘What should I do now?’ Yet somehow we’ve been programmed for the response, ‘stay in the market and overtime it’ll recover.’
Our financial world was unstable and yet there were payouts for executives, we had the financial crisis over the banks and company bailouts.
Where do we go from here? In order to ask different types of questions we need to start by asking when it became okay to accept such losses like we see in the market. Yet like many, investors follow the Pied Piper and stayed in the market with feelings that they had no choice. How did we change our investment behavior?
So what can we learn from this? How do we step back and unlearn what we’ve been ‘taught’. When it comes to “Max out your 401(k)” or “stay in the market, it’ll recover” what are the soft or wrong questions we’ve been asking? Do these sound familiar?
· “How much should I have in stocks vs. bonds?”
· “Which mutual funds had the highest returns last year?”
· “How much risk do I need to take to earn the rate of return I need?”
· “What target-date fund should I invest in?”
We can’t blame ourselves completely but this is where getting active with knowledge and learning can help ask the right questions.
Let’s start with shifting our thinking and consider these variations of questions -
“Should I invest based on anticipated (or past) rates of return, or are there more important considerations?”
As you review tv commercials or marketing material for market securities, you see the fine print that warns “past results are no guarantee of future performance,” Should you continue to gloss over that statement or now, think about what that really means to you as the investor?
While rate of return is important, you never want to stand the chance of losing the money you’ve worked so hard to save. You want to ask yourself, how am I considering safety, liquidity and tax treatments? How much control over my investment money, cash flow and more.
We understand that there are people that love to take some risk and if that’s you, that’s perfectly fine. But isn’t it a little crazy to speculate in a market that nobody can predict or control… and to pay fees and often taxes in order to do so! Check out more about the fees you’re paying in our previous article.
If we want to unlearn and ask different questions we need to think differently. Because as you shift your thinking and stop ‘following’, there’s an important and not so surprising item for you to know about individuals that have wealth and invest it…
..People who build and keep their wealth do not chase unrealistically high rates of return or take risk lightly.
Let’s begin to look at the shift of questions to consider asking.
“ How much should I have in stocks & bond’ vs. “How can I ensure my money grows regardless of market fluctuations?”
“Are there better investment choices than stocks and bonds?”
Yes there are, but you need to think about where you’ve been getting your information. If you want to know more beyond stocks and bonds you won’t find them Wall Street or a “typical” financial planner.
As we talk about the Precision Strategy section, we first need to understand the importance of your 2 phases of retirement. Maximizing your Accumulation and Understanding what happens in Distribution.
Learning about the variety of options that aren’t tied to the market or a specific company will help you assess the approach that is right for you.
At Precision Prosperity we like to take the philosophy that teaches investors to avoid the risks of investment gambling, and consider a variety of alternatives that reside outside the stock market.
“What are your fees vs. How will taxes and fees eat into my investment returns?”
Do you know how many fees are associated with your accounts? When looking into 401(k)s, there are usually more than a dozen undisclosed fees: legal fees, trustee fees, transaction fees, stewardship fees, bookkeeping fees, finder fees and more. But that’s just the beginning. The mutual funds inside 401(k)s also have fees.
Unfortunately, your advisor will likely show you charts and graphs that will show the “potential” or “average return” of an investment, but not the real returns. You’ll have to ask the tough questions or use your own calculator to get the whole truth.
“What mutual funds do you recommend? Vs How do I know you operate in my best interests?”
How do you know that mutual funds are the best fit for your situation? If you ask for something specific that’s what you’ll get but what are the long term impacts of that question? If your advisor is with a financial firm, chances are that there are particular investments that they focus on. What you may not know is that firms have access to the same funds. And if you’re asking about a type of mutual fund, that’s what you’ll get. Your financial strategist should have a variety of financial tools that include outside of the stock market. Your strategy should include options so you can leverage and control your money and savings.
“Who’s in control vs. How can I maintain control of my own money?”
Because of the uncertainty of what to ask and why, the question about ‘control’ usually comes into play in the form of asking about what fund has the lowest fees. People feel that their only control is in fees. But if you’ve read our other articles you’ve learned about fees.
By understanding that once you sign the dotted line, the money managers are in control and that, even small fees add up over time as the fees which impact your opportunity costs and your compound cycle. Losing out on opportunity costs is taking the control out of your control hence your wealth.
If we look at who’s in control, the financial system enables money managers to control the money you invest. Today we see a variety of Profile Funds that companies design for a risk level or time frame. But what are you investing in?
· What are your mutual funds invested in?
· Where are your target-date funds allocated?
· Few investors have any idea, and even the money managers making the decisions have no control over the market or its returns.
It’s another reason why unlearning some assumptions we have is important if we want to move into a stronger financial situation.
