If you put any money aside for the future, congratulations. That single act of fiscal responsibility puts you light years ahead of nearly half the country. If you do that and keep a few thousand in a rainy day fund for emergencies, give yourself two gold stars. Those two small things put you in the top thirty percent of all Americans.
If you’re one of that select group, the last thing you want to do is handicap your investment returns. Sadly, many people are doing just that, mostly because we’re all busy and it takes time to manage investments and finances. There’s little time for learning, maintenance and reading financial statements, especially at times in your life when other priorities clamor for attention and retirement seems a long way off.
You’ve already done the hard part; getting on the path is the difficult step for most people. Here’s how to get more out of being financially responsible.
Dumping Funds on Top of a TDF
Investment companies that run 401(k) plans know you’re busy and many offer what are called TDF funds or Target Date Funds. You know all those columns where we’ve talked about diversifying your assets and then rebalancing periodically and adjusting your asset mix for your age? Well, most companies offering 401(k) plans offer funds that will do all that for you! Neat, right? The fund automatically rebalances and adjusts your asset allocation for your age. What people sometimes do is start with a TDF and then, over time, start mixing in other funds with it. That has the effect of a portfolio that’s actually overly diversified and that can hurt returns. If you’re going with a TDF, and that’s not a bad plan if the fees are reasonable, then go all in with it. Don’t buy other funds, sink more money into the TDF.
Neglecting Hard Assets
The one thing most TDFs won’t do for you is put a fixed percentage of your wealth in hard assets. Hard assets can be things like real estate, but that tends to an illiquid hard asset, meaning it’s hard to convert into cash and carries high transaction costs. High quality gold and silver bullion, like Gold and Silver Eagles from the U.S. Mint, are an example of liquid hard assets, meaning they’re very easy to convert into cash. With central banks actually experimenting with ideas like negative interest rates, it’s more important than ever to shield part of your wealth in hard assets.
One of the worst things you can do in your investment life is become a financial news show junkie. All financial news is a backward facing metric. It’s what happened, not what will happen. Keep in mind that financial television gets the highest ratings during financial disasters. So, for that industry, it’s in their best interest to work up a crisis about something every day. Immersing yourself in financial media will give you a very short-term outlook to investing, which is not at all healthy. If you want to get rich, you have to think and act in time frames measured in decades.
Being Too Conservative
The opposite of chasing returns, and an equally deadly mistake, is being too conservative. Risk in your investment portfolio should be directly proportional to your age and how much time you have until retirement. The percentage of your wealth in stocks should go down as you get older but not reach zero. Stocks tend to make most of their gains on just a handful of trading days. If you miss those days, your stock returns will be dismal.
Keeping things in perspective, more people should have these types of problems. If you’re one of the few already doing a good job, you should be rewarded for it by having a pile of money when you reach retirement age.