So the question of the day is, “should I be investing?”
And the answer is no.
All right, obviously I'm only kidding.
I'm an investment professional working for a financial firm, so yeah,
everybody should be investing.
But of course, not everybody should be investing for every goal they have in life.
And it all comes down to time horizon, and whether or not you can take risk.
If you have a long time horizon for what you're trying to accomplish,
then yeah, go ahead and invest.
Do you have a short time horizon?
Is this money that you need next week or next month?
Then absolutely no.
Don't invest that money - stick it in the proverbial mattress.
Don't do that.
I actually met somebody once upon a time who put a bunch of money under the mattress for
a new car and had a roommate that literally stole the money from under the mattress.
So even money under the mattress may not be safe.
But more realistically, or maybe more commonly, is that the money won't be stolen by an individual.
Money under the mattress gets stolen by something called inflation.
And inflation is the increase in the price of goods and services that you notice every day.
Your money needs to earn some rate of return in order to at least keep
and maintain its purchasing power.
Now again, if your goal is short term - if you're saving for your children's wedding,
your children's education, if you're saving to buy a new home, if this is your rainy day
fund just in case the roof falls in, don't take a lot of risk.
Save that money and put it in a certificate of deposit at the bank.
Put it in a money market account.
Put it in a savings account.
Put it in a very short term bond fund.
All of those choices are superior to seeing your money lose pace to inflation because
they provide at least some rate of income.
When you should invest is when your goal is longer term in nature.
Albert Einstein once said, “the most powerful force in the universe is compound interest.”
I'm not smart enough to argue with Albert Einstein, so I'm gonna go with that.
Compound interest works like this:
If I take a dollar and I invest it at 10 percent, I earn a dime.
If I keep that dollar ten invested, the next year I earn 10 percent again on my original
one dollar investment, plus the dime that I earned from the last year.
So now my return is not 10 cents the next year, it's 11 cents.
Over time compound interest can work magic.
Now when it comes to investing, you want to maintain an asset allocation comparable
to your investment time horizon.
So if you've got a very long time horizon - if you're saving for retirement and you're
in your 20s or 30s, if you're saving for your grandchildren's education and maybe your grandchildren
haven't been born yet - you want to be more aggressive.
The goal of financial planning is to find your target rate of return, then take the
least amount of risk possible to get that return.
If you don’t need to be aggressive, don’t be aggressive.
Don't go out of your way to try and beat the market if you don't need to.
And then match your horizon to your risk.
For those longer term goals,
take a more aggressive stance.
Maybe have more stocks, and within your stocks, maybe have more aggressive stocks.
Small cap stocks, small company stocks, emerging market stocks and the like.
When it comes to your intermediate term goals, maybe money that you need out 10 or 15 years,
maybe you're still taking on some risk, you still own some stocks.
Maybe they’re somewhat more stable stocks - larger company stocks, dividend payers,
maybe there's a larger percentage of high quality bonds in there, relative to your
very long term horizon.
And of course, this time horizon and this asset allocation gets mixed in with your tax
planning as well, in the sense of asset location.
You may choose to invest for different goals, and hold different kinds of assets in
different kinds of accounts.
So maybe in your tax free pool, which is your Roth accounts, maybe there you're holding
your very aggressive investments.
You have a very long time horizon and you're never going to pay taxes on those gains.
Be aggressive - hold that in your tax free pool.
Maybe if you're entering into retirement, you're going to pull money from your tax deferred
account, from your IRA, relatively soon.
There, you're paying tax at the highest rate - the ordinary income tax rate.
Maybe you hold more conservative investments, your fixed income or your bonds over there.
Of course, a lot of times the question comes back, “but I'm afraid to invest in the market.”
After a couple of years of relative calm and more or less an upward trajectory in stocks,
things have gotten volatile, as markets will.
Over time, it turns out that the stock market falls from peak to trough about 14 percent
once every 12 months.
That decline lasts, on average, 56 days.
Stocks fall.
Bear markets, which is defined as a decline of 20 percent or more, happen on a regular basis.
If you are investing in stocks, at some point, you will lose money.
It's a certainty.
While stocks do suffer those declines on a regular basis, we also know that over time
they compound magnificently.
So again, should you be investing?
And again I go back to, no.
No, you shouldn't be investing, unless you have the right time horizon.
And if your time horizon is very long, then yes, absolutely you should be investing.
For more information, contact Pure Financial.