Last week, five of our financial planners at Financial Finesse shared their best and worst personal investment decisions in our blog. (Yes, even elite financial planners in the top 2% make investment mistakes.) So what can we learn from their experiences? Here are five key lessons:
1) Invest in yourself.
One of our planners discussed how his best decision was investing in himself. He was the first in his family to go to college and worked his way not just through college but also to an MBA and the CFP® designation. That education enabled him to have the career and the income he does today.
For most people, that ability to earn a living is the most valuable asset they have so it’s important never to forget about investing in your own human capital. A college degree has been estimated to boost lifetime earnings by $250-$300k even after the costs of that education. A graduate degree can boost that even further. A study of recent MBA graduates found that they were able to recoup their investment in only about 4 years on average. Another study found that those with a graduate degree earned an average of 38% more than those in their same field of work who only had a bachelor’s degree.
2) But do your homework first.
Your homework should start well before you even set foot in a classroom. Not all graduate degrees are equal. That same study found that while those in the natural and social sciences benefited quite a bit financially from their graduate degrees, earning 70% and 55% more respectively, those in other fields like communication/journalism and the arts benefited less from their degrees while still spending tens of thousands of dollars on tuition. In those cases, getting more work experience might have been more valuable.
There’s even growing talk of a higher education bubble in areas like law. In fact, another of our planners said that getting a law degree was his worst investment decision. Although he received a full scholarship and didn’t have to pay for his degree, he gave up several years of earnings in a lucrative position for a degree that didn’t really boost his career as a financial planner.
So if you’re thinking about going to school, make sure you do it for the right reasons and that you’ve considered all the costs, including the opportunity cost of possibly being out of the workforce for an extended period of time. (If you do decide to go, here are some ways to get Uncle Sam to share in the cost.) Finally, keep in mind that there are other ways of investing in yourself like living a healthy lifestyle that can make you more productive, expanding your knowledge informally through reading and taking ad hoc classes on your own, or developing your social network.
3) Start investing early.
Most of us won’t be able (or want) to work forever so no matter how much time, money, and effort you invest in building your human capital, at some point you’ll want to begin converting it into financial capital. Given the power of compounding, that point should be as soon as possible. That’s why another of our planner’s best investment decision was starting to save at age 22. If he made $40k a year, saved 10% of that every year, received a 5% employer match, and earned an average annualized return of 5% after inflation, he could retire at age 67 with $1 million in today’s dollars, not including any raises or promotions he’s likely to get throughout his lifetime. But if he started saving twice that much at age 40, he would still have less than $700k at retirement. By waiting until 50, he cuts that amount by more than half.
Even if you can’t afford to save much now, you can start with a small percentage and slowly increase that over time. Many retirement plans allow you to automate this with a contribution rate escalator. Using this method, you’ll be surprised how quickly you’ll be saving more than you ever thought you could.
4) Have a plan.
Once you save something to invest, you need to have a plan as to how to invest it. Otherwise, it’s very easy to get caught up following the herd, which was the most commonly cited investment mistake by our planners. Several of them invested in risky technology stocks at the height of the .com bubble in the late 90′s and lost a good chunk of change when the bubble eventually burst.
Even though they were all financial planners at the time who should have known better, there is one thing we all have in common as human beings, emotions, and that, rather than lack of knowledge, is why most investment mistakes are made. Here’s how it tends to go. When the stock market (and this applies to other investments like real estate, gold, and bonds too) is doing well, people tend to invest more aggressively since everyone else seems to be making money and the aggressive investments have the best performance records. When the market eventually takes a downturn (and it always will at some point), the tendency is to hold on and hope it comes back. If instead it keeps getting worse (think back to 2008), people tend to panic and sell out, moving their money into more conservative investments. When the market eventually turns back around (and it always has at some point), people wait for it to go back up for a long time to make sure the recovery is real before they get back in. This “greed, hope, and fear” cycle then repeats itself.
One way to avoid this is to have an investment plan in place and to put it in writing, which was another of our planner’s best investment decisions. The plan should include a target asset allocation (or how your money is divided between different types of investments like stocks v. bonds) based on the time horizon of your goals and your personal risk tolerance. By sticking to your plan, you can avoid the day-to-day distractions of the market.
5) Buy low and sell high.
Having an asset allocation plan and periodically re-balancing it can also help you buy low and sell high. For example, let’s say your plan is to have 60% in stocks and 40% in bonds. When the market goes up and your stocks are now 70% of your portfolio, it’s tempting to put more in but you’re actually now taking more risk than you should even if it doesn’t feel that way. By shifting enough money out of stocks and into bonds to bring your stock percentage back down to 60%, you’re selling those stocks while they’re relatively high. When the market declines and you only have 50% in stocks, you would then move money out of those bonds to bring the stock percentage back up to 60%, buying those stocks while they’re relatively low.
Having an investment strategy like this can help you manage your risk and even improve your returns by buying low and selling high. As Warren Buffet once said “Be greedy when others are fearful and fearful when others are greedy.” Since this can be emotionally hard to do, you may also want to automate this process with an automatic re-balancing feature if your retirement plan offers it or by investing in a fund that will do it for you like a balanced or target date fund.
Avoiding bubbles and buying low applies to the real estate market as well. One of our planners said his best investment decision was not buying a home near the top of the real estate bubble. Another took advantage of the real estate crash by purchasing an investment property at a considerable discount.
Look back on your own best and worst investment decisions. Do you find similar themes? What did you learn from them? Share your thoughts in the comments section below.
Liz Davidson is CEO of Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff CERTIFIED FINANCIAL PLANNER™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.
Source: FULL ARTICLE at Forbes Latest
