Where Have All of the Investors global Gone?
"When you fall off the horse" you're told to get right back on. After the last financial market episode, known as the credit crisis of 2008, you may be wondering how you will ever achieve financial security after seeing your 401k drop by more than 30% in one year. Even though the market has had a remarkable recovery since the bottom was struck in March, 2009, there is fresh data that shows the individual investor is not fully participating in the rebound so far.
According to the Investment Company Institute, since April of 2009 no net new money has been added to equity based U.S. focused mutual funds; the money is being allocated to bond funds instead, whereas the level of money market funds has remained steady. Perhaps these individual investors are saying to themselves "fool me once shame on you, fool my twice shame on me". This behavior is understandable, even expected. Maybe the general investor population knows something the professionals do not about the future of equity returns in America. One can only wonder.
Below are 17 guidelines to consider when investing or reinvesting for your future to achieve financial security and reduce personal financial risk. The underlying premise is to remain fully invested through out your life and connect your investments to a purpose, such as retirement or paying for your kids college education. Another premise is to use your entire life to finance your life's liabilities, not just the middle 30 or 40 years while working. This reduces personal financial risk.
A summary of this guidance follows:
1. Use your full "century of life", not just your middle 40 years; start accumulating assets and managing liabilities as early as you can; optimize the long compounding period in front of you; remember the value of lump sum deposits, even small ones
2. Prepare an accounting of your life's liabilities as of today; take regular check points to make sure your funding plans are on track and reduce exposure to longevity risk - address serious funding gaps as soon as you can
3. Define your investment purpose and do not invest without a purpose; prepare an investment policy statement, particularly if you work with an adviser
4. Trading is not investing and investing is not gambling;
5. Maximize compounding benefits by using funding compartments - make the difficult choice between spending today and saving; less time means more risk and more anxiety
6. Have conviction. Stay invested in the market at all times, otherwise stay out entirely and find some safer investments; diversify and don't concentrate your investments
7. Be religious about taking and securing your gains by placing them into your safe deposit account
8. You cannot beat systemic risk, but be alert to significant changes often telegraphed well ahead of time - control your response to it so check your emotions
9. Use insurance to protect against risks to your quality of life - even if you think you can self fund risk - why would you? Insurance is a much cheaper way to go
10. Have sufficient liquidity at all times
11. Secure your income for later in your century of life; cash flow keeps your life flowing the way you want
12. Get rid of unproductive assets - if the house is a burden and you could use the equity then do it
13. Remember only you can be accountable to you; all others may not put your interest first unless they are obliged to by law
14. Make changes to your investments when you decide they no longer fit your investment purpose - do not let anyone force you into a change you do not understand
15. If you have to trust someone, there are many advisers out there who really want to help you finance your century of life; if you want to do it on your own make sure you have the time, tools and the temperament
16. Be careful with web sites, blogs and trendy financial columns, that profess to know what is going to happen in the market beyond today - NO ONE knows. Avoid the get rich quick trading systems and strategies - it usually involves investment concentration
17. Investing mistakes are seldom fatal, except when you concentrate; do not get scared away; remember the parable about "when you fall off the horse..."
You can take charge of achieving financial security. It is your quality of life - you earned it.
Thomas Warren is a Certified Financial Planner(R) practitioner. He resides in Oceanside, N.Y.
Comments about this article can be sent to ACenturyoflife@gmail.com
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