In the 25 years I have been advising families regarding the financial decisions they make in life, one issue stands head and shoulders above the rest. Whatever you do, AVOID THE BIG MISTAKE!
The big mistake is a financial decision made based on emotion rather than a logical one based on your goals. The goal of investing is not to “beat the market”, or get a better return than your neighbor. The goal is to achieve financial security with the least amount of risk possible. There are three main risks I help all investors address as they save for retirement.
In no special order they are:
* Risk of significant principal loss
* Risk of longevity
* Risk of disabling illness
Principal Loss
I remember meeting with a prospective client in his 70’s who had accumulated an 800K portfolio for retirement. Rather than focusing on financial security, for some reason he wanted to get to a million. By investing in high growth stocks in 1999 he managed to turn his $800K into $415K. When I talked to him about reducing his risk he said he couldn’t afford to take the loss. He stuck with the technology stocks and ended up with $125K within three years. What was so special about the $1 million mark? Wasn’t his goal to retire comfortably? Could he have achieved this goal with less risk? What is he going to do now?
Longevity
When I started in this business in 1991 you could get a 7% 1- year certificate of deposit at the bank. Since your money was insured by the FDIC, many thought this was a very low risk strategy to get retirement income. A $1 million portfolio of these CD’s would have gotten you $70K a year! This strategy might have worked well 60 years ago when people retired at 62 and died, on average, at 70. Today people are living longer. When the cost of living increases, your income must increase or your standard of living will decrease. Additionally, interest rates have gone down sharply over the past 20 years. That same $1 million would get a CD investor $10,000 a year today, if you can find a 1% CD.
Disabling illness
The cost of long term care has increased dramatically over the past several years. A prolonged stay in a nursing facility, for example, can easily cost $6K - $12K a month. This is a real financial risk to a financial plan that should be addressed.
In addition to these three risks, investors face these other obstacles:
∙ Risk of emotional investing (Buying high out of greed or selling low out of fear)
∙ Risk of Media reporting (They focus on the short run and “beating the market”)
∙ Risk of overconfidence (day trading doesn’t seem too hard)
∙ Risk of fraud (s)he seems like a nice person.
A good financial advisor should keep you focused on your goals and help you achieve them with the least amount of risk possible. Remember, you can’t avoid risk, but you can manage it. Stick to your goals with discipline, patience and common sense and you stand a better chance of reaching them.