Are you getting in your own way? Sometimes we ourselves are the roadblock to what we want for our financial future.
Here are a few ways this happens in relation to growing your assets:
- Impatience. You invest and expect great gains in a short time. When that does not happen, you dump that investment and search for another.
A better approach is to keep an investment log. Here are some useful entries:
Date: Buy xyz at such and such a price
Reason: I bought it because….
Target: I expect it to do ….. by such and such date…..
Date: Sold xyz at such and such a price
Reason: ………………….
Gain/loss: ……………………….
After a month, look at the investment, did it continue to decline or grow? _____
Your evaluation of your buy and sell decisions ______________
This sort of investment log helps you look clearly at your choices and gives you data to help you make further decisions. The log can help you see if you are the problem. Did your emotions get in the way? Did you get spooked by the action of the investment and sell when you should have been patient and held on? Did you forget to do more research to back up your decision?
- Fear of the unfamiliar. It’s likely that you are familiar with some investments. When someone brings to your attention an investment that is unfamiliar, what do you say? “No, thanks.” Maybe that quick response is triggered by a vague recollection that your aunt had a bad time with that sort of investment. Do you automatically push away whatever is not in your comfort zone?
A better approach is to learn. It does not mean you must invest, but it does mean you are open to knowing what else is available to you that could be a benefit to you. You ask questions and learn about the investment’s capabilities, limitations, and risks. Then, you make a reasoned decision.
- Inaction. There are abundant reasons for not investing- the market is volatile; I don’t know enough about investing; I missed the lowest prices; I don’t have enough spare cash; I don’t want to tie up my money, and many more reasons.
A better approach is to start with some dollar amount and add it to savings if there is no investment that you are comfortable with. Be consistent with a dollar amount, just as you would be with a rent or mortgage payment. You can build up the account. In the meantime, learn about an investment that interests you; whatever it is, study it. When you feel confident, invest what you have saved. If no investment seems worthwhile, keep building up your savings.
- Very risk averse. You can be afraid of risk and just invest in bank instruments if you are willing to save more and maybe live below your take home pay. The reason is that you have to set aside more dollars if your investment earns 1% rather than 8%. Here are some hypothetical examples to explain living below your means as a very risk averse investor.
Hypothetical example one: Suppose you invested $1,000 then $200 every month for five years and the hypothetical interest rate was 1%. You might have at the end of five years about $13,293. You would have contributed $13,000.
https://www.Investor.gov/financial-tools-calculators/calculators/compound-interest-calculator.
Hypothetical example two: same investing but the interest rate is 8%. Your future value might be $15,549 and your total contributions $13,000.
Hypothetical example three: to achieve roughly the same target of $15,549 at one percent, you would invest the initial $1,000 and then $236.85 monthly for five years. The total contribution is $15,211.
Notice in example two, you invested only $13,000 not $15,211 to reach the target of $15,549.
These are modest numbers but if we scale them up to contributions needed for retirement you would see a much greater difference in the amount you need to contribute each month to get to the same goal.
Hypothetical for Retirement
Suppose you have an IRA and you contributed $6,000 which is currently the maximum contribution for those over 50. Then every month you contributed $500 for 25 years at 1%. You might have $177,153 and you contributed $156,000.
If you invested in the same pattern but the hypothetical investment earned 8% you might have $479,726 and you contributed only $156,000
To achieve the same hypothetical $479,726 at 1%, you would have to save
about $1,300 monthly not $500 monthly. To do that you might have to cut back on your other spending for daily life.
If you want to avoid the risk of the markets and their volatility, consider how much more you should set aside to reach your goals. You may be blocking the growth in your portfolio by investing too few dollars or by investing at low interest rates.
Onward
Of course, you should invest in a way that does not frighten you when you hear the daily market reports, but you should be aware of how your personality is determining the tradeoffs you are taking. If you are in our own way, think about how you can stop blocking yourself. Give yourself the mental space to reconsider what you are doing. If change is appropriate, make the change. A change may take effort but it’s likely better than being stingy with yourself or running out of money. Allow yourself to learn and think and find the best choices for your circumstances. Your money should help you enjoy your daily life, not squish it.
Penelope S. Tzougros, PhD, ChFC, CLU. Financial Planner, Author, National Speaker. Wealthy Choices.com. 51 Sawyer Road, Suite 340, Waltham, MA 02453. Direct to Penelope 781 577 2311.
Penelope@wealthychoices.com. Fax 781 893 3565. In all 50 states, Penelope S. Tzougros is registered with, and securities and advisory services are offered through, LPL Financial, Member FINRA/SIPC. She is affiliated with Bay Financial Associates, LLC. Financial Planning is offered through Wealthy Choices® and Bay Financial Advisors, Inc. Both are registered investment advisors. Neither is a broker-dealer nor affiliated with LPL Financial.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.