We’ve put a lot of effort in trying to educate clients about common retirement horror stories and ways to avoid becoming one. But this time, I thought I’d take a different approach and instead focus on how to become one of the successful retirement investments stories you’ve heard about. You know, the neighbor who is loving retirement and is always traveling somewhere exotic; the former co-workers who talk about “living the life” now that they’re no longer punching the clock; the aunt who was able to leave your cousins a hefty inheritance after she passed away.
The short answer to how these successful retirement investments stories happen is: Take the 5 ways investors commonly sabotage themselves and do the reverse.
The more in-depth answer to this question? Follow the steps outlined below:
1. Take the right amount of risk.
First of all, it’s crucial that you’re taking the appropriate amount of risk. In many cases, investors make fatal errors because their portfolio is too risky. While aggressive investing may have at one time been appropriate, some investors never revisit their financial plan and continue to take on too much risk.
By truly understanding your risk tolerance, you need to understand the expected upside and downside over the short-term. When you can put these answers into numerical dollar terms, you can see what these situations can really mean.
For example, if you are a moderate investor, you should understand that at any given time, your account can be down 10 percent or up 18 percent in a six-month period. If you’re an aggressive investor, it’s important to understand what a dip can look like, and if you’re not taking much risk at all, you need to know that your investments probably won’t do much for you.
When it comes to investing, taking too much risk is very common. Do you know the 3 main reasons why people typically take on too much risk? Read this recent blog post.
2. Know what you’re buying.
Another key aspect to the successful retirement investments stories you’ve heard about is finding the right financial advisor to work with. Unfortunately, many investors are not properly educated, and therefore, go with an “advisor” from a well-known, brand-name firm, only to later realize that this “advisor” has major conflicts of interest and works on commission.
Conflicts of interest can be detrimental. Think about it: If an advisor who works on commission has two similar products that are suitable for your situation, but one costs more and will reward the advisor with a hefty commission, which one do you think he or she will sell you? This happens a lot at big-name firms, because there are stockholders to please, board of supervisors to worry about and quotas that need to be met. I know. I used to work for one of these firms. And it’s why I ultimately left to start Global View.
We try to teach investors to go against what may sound good: “Free advice” is never free. “Guarantees” are impossible without a crystal ball. Yet both claims sound great to most investors.
3. Make changes when necessary.
Remember what I said about risk tolerance? It changes. So don’t stay status quo just because it may be easy. Review your financial plan with your financial advisor at least annually. Let him or her know if you’ve had a life-changing event, such as a divorce, marriage or loss of a family member. Doing so will help ensure your beneficiaries are up to date, your risk tolerance is still appropriate and your financial goals are still attainable.
In my experience, it’s safe to say that most people don’t like change, especially when it comes to their money, but not making a change when necessary can be much worse.
4. Understand your weaknesses as an investor.
I’ve said it before and I’ll say it again: You are a terrible investor.
By design, people make emotional decisions when it comes to their finances. Unless you’re a financial genius, history shows that most people will buy and sell at exactly the wrong time. It’s extremely important to know this.
One of the reasons this happens is because investors react to situations instead of doing the proper research and relying on the right people to make an informed decision. Read this recent blog post where I outline the “Chimp Paradox,” which helps explain why we do this: Chimp Management – It’s Not Just for Cyclists; It’s For Investors Too!
If you read the stories of millionaires and how they reached success, most admit they know their weakness and work with a trusted financial advisor.
5. Seek the help of the right professionals.
Do your homework before hiring a financial advisor. A little extra time in the beginning can save you a lot of time and money in the long run.
Is your advisor a fiduciary and paid only by fees? Can he or she help you set up a comprehensive financial plan without the fear of a conflict of interest?
Can your advisor also help you with your estate planning? What about your tax returns?
Is your advisor well-established in the state in which you live in and therefore aware of any local programs you may be able to take advantage of? (Financial planning in Greenville, SC, for example, is different than in different parts of the country.)
What is the experience level, credentials and background of the financial advisory firm you are working with? Many investors miss these questions because they’re blinded by a friendly (salesman) personality.
To become a successful retirement investments story (and not a retirement horror story) you need to take a few crucial steps.
If you’re currently working with a financial advisor but want a second opinion, or if you’re searching for a financial advisor in the Greenville, SC area for the first time, contact Global View to see how we can help.