Investments

Investing properly is a crucial part of maximizing your savings and cash flow.

I could tell story upon story of people who missed out on serious potential money because of not investing properly or at all, and it doesn’t make any sense to me. Why wouldn’t you want to get as much as you reasonably could for your money? I don’t know anyone who would gladly do the same job at work or in their business for less pay, but I regularly see people passing up opportunities to have their money work harder for them.

And let me be clear- I’m not just talking about investing in the stock market though that is definitely part of the conversation. I’m also talking about properly investing in education, the people you hire, savings. People use the term investment loosely (If you haven’t read my article on debt yet, you should do so now so you get a better sense of my view on what is and isn’t an investment), but they shouldn’t. An investment should give you some kind of quantifiable return whether in dollars and cents or otherwise.

The bulk of your cash and emergency savings should be getting the highest interest rate available. Why would you leave your savings in an account giving you .3% if you could be getting 1.05% on your money at another bank? It doesn’t make sense. You might not think it’s alot of money being given up if your account is small, but it’s often the difference between seeing dollars credited to your savings instead of cents. Why not have the bank buy you a couple coffees every month instead of you having to work to pay for them?

All of your retirement dollars should be invested- whether aggressively or conservatively. There are fixed accounts and conservative investments that can help your money grow if you’re afraid of the market or conservative. There is hardly any reason anyone’s retirement accounts should be in cash or money market funds no matter how close you are to retirement. It doesn’t make sense. Retirement accounts have the benefit of tax deferral, which means your investments are free to grow without being eaten up by taxes each yer. This is a huge benefit that gets even bigger if you can also grow your money by investing it. If you leave your retirement dollars in cash, you’re giving up the potential power of this benefit.

People who have their investment money sitting in cash are the minority. What is more common are people who have their money invested improperly. I can’t tell you how many people have presented me with their investment statements and either said “I’ve had this account for x years and it’s just never really grown” or “ I’ve had this account invested for x years and it seems we’ve lost money year after year but I just haven’t known what to do with it”. This is always puzzling to me. These people worked hard to contribute the money to those accounts in the past (and are often still working hard to add to them) and for some reason the pain of not seeing it grow isn’t worth seeking out advice from a professional on how to get that money to work harder for them.

I have a new client that shared that she’s had $3,000 in an old retirement account that hasn’t grown over the past 10 years. There is something in finance called the rule of 72. The rule of 72 says that if you divide 72 by whatever interest rate you can get on your money, you’ll see how long it will take for that money to double. So if this client could get say, 10% each year on her $3,000 had she invested it (this is for easy numbers)- her $3,000 would have become $6,000 in 7.2 years and right now she’d be 4.4 years away from it being $12,000. The cost of not getting proper advice on how to grow that money could literally be worth thousands of dollars.

This is unbelievably common.

Another very common mistake is thinking you’re diversified and/or that your investments are performing optimally because you’ve bought a few mutual funds. The biggest threats here are high fees with performance that doesn’t justify them and diversification in terms of number of stocks in your mutual funds but not in the sectors and asset classes represented.

Mutual funds can be an expensive way to invest without returns to justify those fees if you don’t do a bit of research. A fast and efficient way to make sure you’re diversified and that your investments are performing optimally is to get objective professional advice. If for whatever reason you’re unwilling or unable to, the next thing you can do that doesn’t involve taking courses, getting certifications, or doing a ton of research is not asking a friend, colleague or family member who doesn’t manage or recommend investments for a living. There is also NOT doing nothing and maintaining the status quo. Or you can do the thing that takes the least time commitment is to go to morningstar.com type in the names or symbols of the funds you currently hold. It will quickly tell you whether the fees and past performance are higher than, lower than or on par with other mutual funds in a similar category. Remember, past performance is no guarantee of future results. You can also get information on their fund rankings. The website won’t give you recommendations of what to invest in if you find that all your current funds are sub-par, but it will tell you which ones to consider getting your portfolio.

Not being diversified is another threat to growth. Diversification goes beyond having both stocks and bonds in your portfolio or making sure to buy a mutual fund instead of one stock. I had a client recently who thought he was diversified because he was invested in a Target date fund in his 401(k). Target date funds adjust to be more conservative over time (less stocks and more bonds) as you get closer to the retirement year in the title of the fund. In reality, even though he was partially diversified in that the fund owned hundreds of different stocks because target date funds are mutual funds invested in dozens of other mutual funds, when we did an in-depth analysis we found that actually the fund was fully invested in one classification of US stocks and one classification of international stocks when there were actually 10 potential subcategories of US and international stocks he could’ve been exposed to. Further research could show other opportunities, while similar risk and fee profiles, and different return potentials. The benefits of changing strategy were ongoing just like the costs of not investigating other options and understanding what he was actually invested in would have been.

The point here is that at a minimum, most people can do better than they’re doing by taking a small amount of time to sit down and honestly assess whether their savings a and investments are working hard for them. Are your savings making at least 1%? If the answer is no, you have room for improvement. Are your investments typically growing? If the answer is no, you have room for improvement. If the answer is yes, the next question is are you sure the funds you’re invested in have reasonable fees and solid performance compared to others in it’s category? If the answer is no, you have some research to do and likely some room for improvement. If you are unwilling or unable to spend the time doing the research yourself, you should be using someone to help you. Even if you are willing to spend some time looking at the basics, over the long run your goal should probably be to get an objective second opinion here. The worst that can happen is you spending money to find that you’re actually doing the best you can do- if this is what you find then great, you have confidence that you’re on the right track and lucky that you’re money has been working hard for you. The best that can happen is you find out you weren’t maximizing your investments and that there is opportunity for you to do so going forward.

Investing involves risk including loss of principal. No strategy, including asset allocation, assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Investing in mutual funs involves risk, including possible loss of principal. Value will fluctuate with market conditions and may not achieve its investment objective. The principal value of a target fund is not guaranteed at any time, including at the target date.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.