Category Archives: Financial Literacy

Purpose of Saving

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Save for the long term. Saving and investing are a marathon. To power through saving and investing, you need purpose, patience and stamina.

As a general rule, it’s recommended that individuals save and invest 15% of their gross income into a retirement fund or funds like a 401(k), 403(b), IRA, etc. The exact amount depends on the individual, but the sooner individuals begin saving, the better.

Delaying saving until you have more money to contribute could mean less funds in the future, as your investment won’t have as much time to earn compounding interest.

The impact of compounding is greater the earlier you start saving. You’ll earn not only from the money you invest but also from previous earnings. Not to mention, the sooner you work savings into your budget, the easier it will be to live within your means and prioritize savings in the future.

No matter how little, contribute what you can to your selected plan. Any time you see an increase in salary, receive a bonus or pay off a debt, consider increasing your contribution.

“Savings is the money set aside for emergencies and major purchases like a vehicle or a house. Savings is about setting aside money for future use.”

Most Americans don’t feel prepared for retirement. Fully 58% of workers with pay of more than $100,000 indicated they are not saving enough for retirement; that percentage increases to 69% across income levels. Additionally, 18% of people who earn more than $100,000 say they live paycheck to paycheck which makes it difficult to save for retirement, according to a survey of 8,000 workers by global advisory firm Willis Towers Watson. Frankly, the problem is simply that Americans aren’t saving enough.

Experts say there are ways to up your retirement savings, even if you’re feeling financially stretched. First, look for ways to slash your current spending to free up extra cash or consider a side gig to earn more.

Saving money takes effort and discipline

“Do not save what is left after spending but spend what is left after saving.” Warren Buffet

Saving does requires self discipline and desire to save and to not spend more than you earn. That lack of frugality could explain why 58% of Americans have less than $1,000 in savings. But, saving money can be simple when you develop the correct mindset and create positive savings habits. Add, savings can get easier to accomplish when you actually know where your earnings go month after month.

Automate your savings

Automate your savings is about setting aside a portion of your earnings that would go directly into either a bank account or a retirement plan, depending on your financial goals and plan. You can also set automatic transfers from your checking to savings accounts to fund important goals and create automatic bill pay so you never forget to handle a fixed expense. With an automatic transfer of a portion of your earnings, you’re effectively paying yourself first as a means to save money, and at the same time, you will not really miss the cash you’re socking away.

Reasons to Save and Invest

If you require motivation to save money, make a competition or game out of saving money. By making it interesting and competitive, saving should become more deliberate. Thus, a good way to boost your cash reserves is to find someone who’s willing to engage in a savings contest.This will encourage you to save money that will put you on the path of buying yourself more financial security.

Another trick to staying motivated and on track, set small saving goals and milestones that will give you a sense of progress. For example, make a point to celebrate saving and investing accounts reach $10K, $25K and $100K in assets.

You cannot save your way to financial independence and wealth. The only reasons to save are to create an emergency fund, to set aside money for a short term major purchase like a house or vehicle, and to invest it.  Saving money will put you on the path of buying yourself more financial security.

The difference between saving and investing comes down to accumulating money vs. making money grow. Both are important and it essential to understand how to make saving and investing work together. It’s important to put your money to work for you. Put your saved money into investment accounts and never use these accounts for anything, not even an emergency.  This will force you to create an emergency fund.

Avoid debt that doesn’t produce cash flow

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Albert Einstein

Make it a personal financial rule that you will never use debt that doesn’t make you money. You should only borrow money to purchase assets that increase your income or create positive cash flow. Financially savvy people use debt to leverage investments and grow cash flows. Financially non-savvy spenders use debt to buy good and services that make others richer.

Debt is one of the big three destroyers wealth and can wreck havoc on one’s ability to achieve financial security and independence. It can quickly get out of hand especially when people habitually spend more than they earn to live a lifestyle they cannot afford. Debt can compound to the detriment of a spender if consumers fail to pay off credit card balances each month.

References:

  1. https://makingcents.navyfederal.org/knowledge-center/retirement-savings/making-a-retirement-plan/planning.html
  2. https://www.marketwatch.com/story/1-in-5-people-making-more-than-100000-a-year-are-still-living-paycheck-to-paycheck-2020-02-11?mod=retirement&link=sfmw_fb
  3. https://www.schwab.com/resource-center/insights/content/youre-saving-should-you-be-investing-too?SM=uro#sf229772500

Wealthy Recommend Index Investing

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For the most part, many wealthy Americans and ‘next door millionaires’ favor for their own investment portfolios and recommend for small retail investors to invest in market index funds or ETF. An index fund is a mutual fund or exchange-traded fund (ETF) that mimics the behavior of an underlying index such as the S&P 500.

Investing in index funds is a winning strategy when playing the stock market for two reasons:

  • They’re broadly diversified, eliminating the risk of picking individual stocks, and
  • They’re lower in cost.

If someone does not have the time or inclination to research companies financial balance sheets, management effectiveness and business operations, they should buy index funds. I’ve invested in Vanguard’s ETF (VOO) because of its low fees and its return track the S&P 500 market index. In short, the average American doesn’t have the time, knowledge, and desire to properly invest in individual stocks.

Beating the market versus moving with the market

When you invest in index funds, your goal is to keep pace with the market. That’s very different from the approach taken by stock traders and active mutual fund managers. Stock traders don’t want to keep pace with the market; they want to beat the market.

The trouble is that few people can consistently beat the market over a five or ten year period. According to S&P Indices Versus Active (SPIVA), 80.6% of actively managed large-cap mutual funds underperformed the S&P 500 over the past five years. In other words, beating the market is hard for anyone and especially hard for the part-time investor.

When you invest in an index fund, you’re signing up for the good and the bad. That’s why it’s important to invest for the long term and only invest funds you don’t need for seven years or more. That way, you can ride out the inevitable downturns calmly, without having to liquidate at a low point.

Warren Buffett’s recommendation

Billionaire investor Warren Buffet is a strong proponent of of investing in the market index for most retail investors. At Berkshire Hathaway’s 2016 shareholder meeting, Buffett said that most investors’ best option is to put their money into a low-cost index fund.

Buffett’s reasoning for index fund investing, and for S&P 500 index funds in particular, is that they will match the market’s performance over time — no more, no less. This may sound boring, but the reality is that the market’s performance has been quite good over time, producing annualized returns of 9%-10% on average. And with rock-bottom management expenses, investors will be the beneficiary of virtually all of the gains.

Essentially, investing in a broad basket of stocks, such as the S&P 500 index, is a bet on American businesses, which Buffett feels is sure to do well over time. “American business — and consequently a basket of stocks — is virtually certain to be worth far more in the years ahead,” Buffett said in his 2016 letter to shareholders.

I’ve been a disciple and follower of Warren Buffett since 2007. I invested in his company back in 2008 when I found myself wondering how I could get the sweet stock warrant deals like Warren received from Bank of America. Then one day it dawned on me that I could get the benefit of his sweet stock deals by investing his Berkshire-Hathaway stock. 

In short, we concur with Warren in the most part. But, I also believe that every American should save and be invested in the U.S. equity stock market if they invest and want to accumulate wealth and achieve financial security. 

References:

  1. The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.
  2. https://www.marketwatch.com/story/warren-buffetts-latest-advice-could-help-you-retire-much-richer-2020-03-16
  3. https://www.fool.com/investing/2017/06/25/warren-buffett-on-index-funds.aspx
  4. https://www.businessinsider.com/millionaires-investment-strategy-low-cost-stock-index-funds-building-wealth-2018-12
  5. https://apple.news/ANEWc5MJtRM2erbrPfyjxvA

Asset Allocation Strategy

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Asset allocation is designed to help an investor take short-term fluctuations more in stride.

When you divide your money among a variety of asset classes — stocks, bonds, real estate and cash — you can potentially smooth the ups and downs of financial markets. Diversifying your investments within the major asset classes and investment styles can help balance out a portfolio.

Asset allocation enables you to own a wide selection of investment types to potentially benefit when one asset class does well and limit the downside when another asset class does not. Once you create an asset allocation strategy as part of your comprehensive financial plan, it helps to keep a long-term perspective when the inevitable financial market volatility occurs.

It’s important to note that asset allocation and diversification do not ensure a profit or protect against loss. However, it makes sense to remember your long-term financial plan and asset allocation strategy, and stick with it, no matter how great short-term economic challenges may seem.

A long-term commitment to your asset allocation strategy doesn’t mean you shouldn’t take action during periods of uncertainty. The key is taking the right action. You may discover the original percentages you allocated to different asset classes and types of investments are not in sync with your strategy due to shifts in the market.

Your portfolio may be overly concentrated or under-represented in one area. If so, you can reallocate your assets and ensure your long-term asset allocation strategy is back on track.

Of course during times of market volatility and economic uncertainty, many investors are tempted to move out of stock investments, into the safety of cash positions. Yes, cash is an asset for investors, but understand that you earn nothing with this asset class…no return from cash.

As a result, investors tend to stay on the sidelines until financial turbulence settles, but this may be a costly mistake. One thing previous recessions and bear markets have taught us is that life goes on. In each of the most recent five bear markets since 1987, sell-offs and correction were ultimately followed by economic and market recoveries.

Thus, once stock markets unexpectedly rebound, as they typically have done in the past, you may end up getting left behind during what could have been a good opportunity to benefit from market rapid recovery and gains.

We live in a world fraught with headline risk and conflict, something that will be ever-present. This fact will always be an integral part of the investment landscape. Those who exit or try to “time the market” tend to miss a significant rally. Those who remained invested or rebalanced towards equities tended to boost their returns during a market rally.

The length of time an investor is in the market can make a difference in the amount they will save and invest to potentially grow their investments. If you sell assets while the market is declining, you risk missing upward trends that have historically followed. If you want to retire someday, start saving and investing now. It takes decades of long-term financial planning, saving and investing to get there. 

Always remember…

Learning to manage money. You need to learn and understand core principles of financial planning — long-term investing, risk management, diversification, asset allocation, retirement, estate and tax planning.

Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.

All investments involve risk including loss of principal. Certain investments involve greater or unique risks that should be considered along with the objectives, fees, and expenses before investing.

References:

  1. https://im.bnymellon.com/us/en/individual/articles/letter-from-the-lion/spring-2020/stick-with-a-plan-in-uncertain-financial-markets.jsp

Hindsight Bias: Don’t abandon your financial plan | Vanguard

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In times like these, it makes sense to start with a plan, stay committed, stay aware and stick with a plan.

Hindsight bias exists prominently in investing.

No matter the market conditions, there are always sensational reports from the financial entertainment media or the investing community that a market event, such as an extreme market correction or increase, was foreseen, perhaps even obvious. If you begin to believe you’ve missed opportunities or you’re at risk for losses, you might attempt to overcorrect by trying to time the markets or weighting your portfolio too heavily in one area.

Hindsight bias is unavoidable behavior, but don’t let it derail you. You’ve followed your financial plan and made good investing decisions in the past. Trust those decisions and trust the financial plan you’ve put in place.

And remember your financial plan the next time hindsight says you’re wrong.

Read more: https://investornews.vanguard/hindsight-bias-says-to-abandon-your-plan-heres-why-you-shouldnt/

Principles for Investing Success | Vanguard Investment Management Company

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Whatever financial challenge you’re facing, you can put yourself in a better financial position by setting goals, planning now and investing for the long term. The sooner you start, the sooner you’ll get on track.

Investing for the long term in order to grow your money is a marathon, not a sprint. An investment’s annual return provides perspective and growth over time.

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Goals: Create clear, appropriate investment goals. Create appropriate investment goals you can measure and attain. Defining your goals clearly and planning realistic ways to achieve them can help protect you from common mistakes that could derail your progress.

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Balance: Develop a suitable asset allocation using broadly diversified funds. Create a sound investment strategy by choosing an asset allocation in line with your financial objectives. Build your allocation based on reasonable expectations and diversify your portfolio to avoid exposure to unnecessary risks. Balance is the key:

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Costs: Minimize costs. Markets are unpredictable. Costs are forever. The lower your costs, the greater your share of an investment’s return. And research suggests lower-cost investments outperform higher-cost alternatives. You can’t control the markets, but you can control your costs and tax liability:

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Discipline: Maintain perspective and long term discipline. Investing can provoke strong emotions. During times of market uncertainty, you may find yourself tempted to make impulsive decisions or you may experience “paralysis by analysis,” unable to decide on how best to implement an effective investment strategy or when to rebalance your portfolio. Discipline and perspective can help you remain committed to a long-term investment philosophy through periods of market uncertainty.

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References:

  1. https://www.vanguard.com.au/adviser/en/article/cec-investment-philosophy/vanguards-principles-for-investing-success

Tonight Show Starring Jimmy Fallon featuring bestselling author Dr. Brené Brown.

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The Tonight Show Starring Jimmy Fallon featured Professor and New York Times bestselling author Brené Brown.  Dr. Brown shared strategies for handling sudden “effing first times” during the coronavirus pandemic.

Dr. Brené Brown is a research professor at the University of Houston where she holds the Huffington Foundation – Brené Brown Endowed Chair. She has spent the past two decades studying courage, vulnerability, shame, and empathy. She is the author of five #1 New York Times bestsellers: The Gifts of Imperfection, Daring Greatly, Rising Strong, Braving the Wilderness, and Dare to Lead.

She believes that you have to walk through vulnerability to get to courage, therefore . . . embrace the suck. She tries to be grateful every day and her current motto is “Courage over comfort.”

7 Habits to Help Build Your Wealth | U.S. News and World Report

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By Paulina Likos. — U.S.News & World Report May 18, 2020

Successful investors practice these habits to be one step ahead of the market.

Develop a routine of successful investing habits.

When you’re investing for your financial future, practicing successful habits is a fundamental step in constructing a resilient portfolio. It’s evident that in the world of investing, money management can get complex. That’s why having the right habits ingrained in your investment approaches is important in bringing clarity to your decision-making and confidence in your portfolio management. Here are seven habits that will help guide you through investing decisions during unprecedented market movements.

Read more: https://money.usnews.com/investing/portfolio-management/slideshows/habits-to-help-build-your-wealth

Periodically review your investment plan.

Know what your specific financial goals are and develop an investment policy statement. An IPS is a plan that outlines investment objectives and goals for a particular investor drafted by the portfolio manager and their client. This can be a helpful tool to guide portfolio managers on implementing strategies to grow or preserve a client’s investments. Experts advise that clients stick with the initial plan even when drastic market changes occur; however, certain benchmarks should be monitored from time to time. You should examine your risk tolerance and investment plan every six months to ensure you’re on track with your investments when a financial crisis hits. “Changes will likely need to be made in accordance with a well thought out plan that was put in place before the first punch is landed,” says Tim Bain, president of Spark Assessment Management Group.

Invest in what you know.

While experienced investors can try to evaluate the quality of a company, more often than not, it can be difficult to define its overall valuation and understand its trends. Taylor Kovar, CEO of Texas-based Kovar Capital Management, says, “Don’t invest in something you’ve never heard of just because someone online said it was going to make you a millionaire.” It’s best to focus on companies with products that you’re familiar with, that way it will be easier to predict and understand the ebbs and flows of a company and, most importantly, help in managing your portfolio effectively. “Look in your closet [and] kitchen cabinet, and invest in the brand of the products you see,” he says. “This will help you invest in companies you actually enjoy. It’s like you are paying yourself every time you buy their products.”

Stay away from the latest fads.

Investors seeking yield in a low interest rate environment should try to steer clear of fads. This short-term phenomenon is prevalent during market underperformance and tends to be pretty risky. “It is psychologically very difficult to remain true to your patient investing convictions when it seems investors speculating in the latest fad (think cannabis or tech ‘unicorns’) are being rewarded,” says Robert Johnson, professor of finance at Creighton University in Omaha, Nebraska. There are plenty of other ways to diversify your assets rather than putting your money at risk with fads. “One doesn’t need to chase the latest trend to have investment success. Quite the contrary, chasing investment trends can be hazardous to your wealth,” Johnson says.

Be honest with your risk tolerance.

At any stage of your investing journey, it’s important to know if you are a conservative or aggressive investor. Defining risk tolerance is a habit that directly aligns with your financial goals. But sometimes, it can be unclear on how to determine where you lie on the risk spectrum. “Many investors tend to overestimate their level of risk tolerance, which causes them to sell at the worst times,” says Jerry Verseput, president at Veripax Wealth Management in Folsom, California. Market sell-offs like the one in March are good opportunities for investors to assess their feelings honestly as they saw the value of their investments drop.

Keep educating yourself.

An expert tip: Keep reading about how the market is changing. With the pandemic in mind, think about how habits and behaviors are changing in the short term, how that will affect the long term and how future trends might evolve. “What is going to be long-lasting in work and personal life? Do you want to be [investing in] Kodak film or the person investing in digital cameras? Don’t believe what you hear as much as know-how and where to find the facts,” says Peter Creedon, CEO at Crystal Brook Advisors in New York City.

Save for retirement.

Keep investing in your future by adding into your retirement account each month — that’s the power of dollar-cost averaging. Even if some months are fewer than others, allocating some of your income to retirement savings consistently puts long-term investors in a better position toward meeting their future financial goals. You can measure how successful you are as a saver by monitoring your retirement score, an estimate of what your retirement income may look like according to the steps you are taking to save now. This estimation will predict whether you’re on target on meeting your retirement needs or if you need to boost your allocation. It will also give you an idea of how much you will need for retirement and what changes you need to make that happen.

Know when to seek assistance.

Many individual investors try to find “do it yourself” methods for investing. There’s a misconception that successful investors should be monitoring the markets constantly and hold a finance degree, but most experts say the biggest hurdle is knowing when to seek help and how to find the right financial advisor. One tip: Find out what kind of experience the advisor has and which investing strategies they often use. “Make sure in an interview that the advisor shares your investing values and has a well-defined process to develop an investment policy statement for you and your goals,” says Jamie Ebersole, founder and CEO of Ebersole Financial in Wellesley Hills, Massachusetts. “If you and your advisor are not aligned on these important issues, it will make for a very frustrating relationship.”

Setting yourself up for investing success.

  • Periodically review your investment plan.
  • Invest in what you know.
  • Stay away from the latest fads.
  • Be honest about your risk tolerance.
  • Keep educating yourself.
  • Save for retirement.
  • Know when to seek assistance.

Sources:

  1. https://www.entrepreneur.com/slideshow/307635
  2. https://money.usnews.com/investing/portfolio-management/slideshows/habits-to-help-build-your-wealth

6 habits of successful investors| Fidelity Investment

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Planning, consistency, and sound fundamentals can improve results.

FIDELITY VIEWPOINTS – 03/19/2020

For most people, achieving success as an investor means reaching their financial goals, like owning a home, paying for college, or having the retirement you want.

What separates the most successful investors from the rest are habits. It is the reason why some individuals successfully accumulate wealth while others seem unable to save and invest successfully. Essentially , it can be traced back to daily habits.

Here are the 6 habits of successful investors that we’ve witnessed over the years—and how to make them work for you. Read more: https://www.fidelity.com/viewpoints/investing-ideas/six-habits-successful-investors?immid=100864&imm_pid=272043316&imm_aid=a466972197&dfid=&buf=99999999

Investing can be complex, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and be aware of taxes, you will have adopted some of the key traits that may lead to success.

References:

  1. https://grow.acorns.com/7-daily-rich-habits-anyone-can-adopt/

It’s best to be invested.

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The global financial crisis of 2008 proved no one can consistently predict how the market will perform. Thus, it is best for investors to stay invested in the markets.

“You always have to remember the markets are forward-looking, and you don’t know when they’re going to take off—just like you don’t know when they’re going to tumble. So it’s best to be invested than to try to time it, because it’s close to impossible.” Tim Buckley, CEO, Vanguard Investments

If you’re confident in your financial life plan and investment strategy, leaving your investments alone during short-term market corrections and Bear markets could help you accumulate wealth over the long-term and help ensure your retirement nest egg. 

Getting Better at Something

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To Get Better at Something, Ask Yourself These Two Questions

Anyone can get better and improve at anything, including personal finance, with the right mindset and deliberate action. That includes getting better at saving by paying yourself first, investing for the long-term and accumulating wealth.

But in order to get better, individuals need to honestly answer “yes” to two very basic questions. Those two questions are:

  1. Do you want to do or get better?
  2. Are you willing to feel the discomfort of putting in more effort and trying new things that will feel weird and different and won’t work right away? To fail?

If the answer is “no” to either question, then it would be foolish for an individual to believe they can improve and get better by doing things the way they’ve always done it or thinking the same way they’ve always thought. Additionally, it would prove a waste of time and effort for any coach to undertake a client or player to improve their skills who do not answer yes to both questions.

Essentially, getting better, especially at saving and investing, is about wanting to get better by embracing a positive mindset and is about having a willingness to experience discomfort. It is important to know that you can become better at anything if your willing to do what is necessary.

But you will not get better if 1) you don’t believe you can and 2) you aren’t willing to accept the discomfort of doing things differently and do whatever it takes to get better.

Learning anything new means moments of feeling uncomfortable. You will need to act in ways that are unfamiliar and take risks that are new. Try things that, in many cases, will be initially frustrating because they won’t work the first time.

You are guaranteed to feel awkward and possibly experience failure for the first time. You will make mistakes. You may be embarrassed or even feel shame, especially if you are accustomed to succeeding.

The key take-away is that answering these two questions yes are a prerequisite to growth and achieving financial success.

  1. https://hbrascend.org/topics/if-you-want-to-get-better-at-something-ask-yourself-these-two-questions/