Fortune 500 employees or retirees, increasing your wealth over time is about more than making the right stock picks or always buying low and selling high. Too often, we see intelligent investors hamstring their potential for success by making fundamental errors in their investing strategy.
Over the years, we have observed the effects of fear, greed, lack of discipline, groupthink, and many other pitfalls that investors experience. Accordingly, we have compiled this list of seven principles of long-term investing for Fortune 500 employees and retirees. These principles are by no means exhaustive, nor will they guarantee investment success, but we hope that you will find them useful in helping you make investment decisions.
A Roth IRA rollover, To maximize investment growth over time, it’s critical to factor in the effects of fees, taxes, and inflation on your returns. Many posted investment returns explicitly exclude the effects of fees, which come right off the top of each year’s gains, so it’s important to dig a little deeper and find out how much that performance is costing you each year. In our experience with Fortune 500 employees and retirees, taxes can also take a serious bite out of your investment gains each year and it’s important to structure your investments to account for taxes on capital gains, dividends, and income. While we don’t believe that taxes should be the primary driver of an investment strategy, incorporating tax efficiency into your overall plan will help you keep more of what you earn. If taxes are a problem for you, we strongly recommend that you consult a qualified professional who can help you structure your investments to manage taxes.
Inflation, the increase in the cost of goods over time that erodes your purchasing power, is another insidious force that can eat away at investment growth each year. For example, a candy bar that cost 25 cents in 1975 would cost over a dollar today, due to the effects of rising prices. That same candy bar would cost approximately $1.35 in 2020 if we assume annual inflation of 4 percent per year. Consumer prices have risen each year in the United States. In the century since the U.S. Department of Labor was founded and began tracking consumer prices, inflation has averaged 3.31 percent each year, which means that what cost one dollar in 1913 costs $24.02 in 2015. To put these numbers in the context of investments, an assumed inflation rate of 4 percent will reduce the value of a $100,000 portfolio invested today to approximately $67,500 in just ten years; inflation means that your investments would have to grow to $148,000 during that time period – a 48 percent gain – simply to keep pace with rising costs. And this number doesn’t include the effects of taxes and fees on investment performance.
From our experience with Fortune 500 employees and retirees, in an effort to reduce risk, many Fortune 500 employees and retirees over-invest in fixed-income securities like bonds, which are highly exposed to inflation risk since they do not have the same potential for capital appreciation as equities. We recommend that our client's portfolios contain enough exposure to equities for their ability to fight inflation through growth. Historically, common stocks have offered the best performance over time. For the period 1928 to 2014, the S&P 500 returned an average annual performance of 11.5 percent, while 10-Year Treasury bonds returned just 3.5 percent. It can be psychologically difficult for Fortune 500 employees and retirees to weather the volatility of equity markets, but investors who fail to adequately plan for the effects of inflation risk running out of money later in life. An investment strategy that fails to account for the effects of fees, taxes, and inflation on overall return will severely handicap your ability to increase your wealth over time. After some research, you may find that in some cases, an investment with a lower return may actually have a higher total return once your account for taxes, fees, and inflation.
If you have any questions you can reach out to your HR Department.
“Never Follow the Crowd.”
Bernard Baruch
Economic Adviser to Presidents
Woodrow Wilson & F.d.
Roosevelt
No one knows with any certainty which direction markets will go in the future. However, a good axiom that we like to remind Fortune 500 employees and retirees is that it is usually wise to avoid following the herd. By the time your friends, family, neighbors, and newspaper columnists are all investing in a particular sector or security, it’s often too late to benefit because the hype has already inflated the price. Whenever investment dollars charge in, prices soar and savvy investors usually move on. By the time the mass of average investors has caught on to a new fad, prices are often too high and investments are overvalued, making them a poor choice for investors who are seeking value. We don’t necessarily advise becoming contrarian investors, i.e. those who believe that crowds are always wrong and look for opportunities to invest against the prevailing trend. Instead, we strongly encourage an investment strategy that is based on objective research using the best information available, calculated choices, a realistic assessment of risk, and a determination to avoid emotional decision-making.
Emotional investing is a well-documented pitfall among investors and it can have striking consequences for investment performance. A recent study found that while the S&P 500 returned 9.9 percent between 1995 and 2014, the average investor fared much worse, seeing only a 2.5 percent return during the same period. Much of the difference can be attributed to jumping in and out of markets during downturns. Letting emotion take over and following the crowd can be extremely costly to any investor's long-term performance.
If you have any questions you can reach out to your HR Department.
In today’s volatile markets, a successful long-term investment strategy for Fortune 500 employees and retirees can often benefit from the flexibility and proper diversification. Diversification is one of the pillars of modern investment theory and can be a powerful tool to help Fortune 500 employees reduce certain types of risk in their portfolios. Be sure that your overall portfolio contains a variety of quality investment types, including stocks, bonds, international securities, and a few alternative investments if your risk profile and investment goals support them. That’s not to say that diversification can guarantee success. No matter how careful or prudent you are, you cannot predict or control future market movements. Much of the market volatility of the last few years has been driven by economic events that are outside any investor’s control.
Global economic events, natural disasters, and government activities can all cause large-scale market movements. While we can’t diversify away all forms of risk, a flexible strategy can help you find investment opportunities in many market conditions.
“Diversify. In Stocks and Bonds, as in Much Else, there is Safety in Numbers.”
Sir John Templeton
Stock Investor & Philanthropist
On the level of individual companies, any number of unforeseen factors can affect a stock’s price: Natural disasters, supply line disruptions, unexpected technological advances by a competitor, or the loss of a major partner can all cost a company millions of dollars in losses and affect its value to your portfolio. Since it’s impossible to predict these events, we advise Fortune 500 employees and retirees to implement an investment strategy that diversifies by industry, risk level, country, investment type, and other factors. While diversification can’t always protect your assets in times of widespread market declines, by spreading investment risk among a wide variety of securities, we hope that what affects one part of a portfolio doesn’t bring down the value of the whole. It’s important to remember that there is no single kind of investment that is always best. There is a time to purchase corporate bonds, treasuries, blue chip stocks, small-cap stocks, internationals, and so on. And there are times to be more conservative about your purchasing.
If you have any questions you can reach out to your HR Department.
“In My Opinion, There Are Two Key Concepts Investors Must Master: Value and Cycles.”
Howard Marks
Investor & Writer
Wise investors focus on value when evaluating investment options. We see too many investors focus on buying market trends and economic outlook, not realizing that trends can be deceiving and markets often perform very differently from the economy. Individual stocks can easily surprise you – rising in a down market, and falling during a rally – making it important for long-term investors to focus on buying quality investments with good fundamentals.
While economic trends can exert a powerful effect on market movements, the stock market, and the economy do not move with perfect correlation and there are many occasions in which markets rally in spite of poor economic fundamentals or declining corporate earnings. This is not to say that the economic outlook is unimportant. Over the long term, market movements often foreshadow economic trends as investors attempt to “price in” how they expect the economy to affect stock prices. A smart investor keeps an eye on the economy and factors economic outlook into investment decisions but ultimately seeks out high-quality individual investments.
If you have any questions you can reach out to your HR Department.
Experience and research have taught us that investors do best when they take on the right amount of risk for their individual goals and tolerance. Too many investors focus strictly on generating returns while ignoring the importance of managing risk properly. Although there are many different types of risk, when discussing portfolios, we generally are referring to systematic risk: the risk that affects markets as a whole, such as recessions and wars; or unsystematic risk: the risk that is specific to individual stocks and securities that can be addressed through diversification. Too much risk can leave your nest egg vulnerable to market swings with too little time to recover before you must start withdrawing money and locking in the losses. Too little risk in your portfolio will reduce your potential for capital appreciation and allow inflation to eat away at the long-term value of your investments.
The challenge is in ascertaining how much risk is right for you and your portfolio. Determining risk tolerance and the appropriate amount of risk for your investment goals is one of the most important things we help our Fortune 500 clients with. Obviously, no one wants to see their portfolio lose money at any point, but it’s important to understand that, generally, one must take on more risk in order to achieve higher long-term returns. It’s vital, to be honest about your ability to withstand short-term swings in value and take investment losses in the pursuit of returns. Another essential question that you must answer is how much risk you need to take on in order to meet your investment goals. The right risk allocation for a portfolio will depend on a number of factors, including your expectations for return, investment objectives, time horizon, and appetite for risk.
Many popular asset allocation tools focus on age – or time until retirement – as the primary driver of an allocation strategy. While this can be useful, we believe that age is only one factor in determining a proper asset allocation strategy for Fortune 500 employees and retirees; other factors include liquidity needs, net worth, and investing priorities. Unfortunately, many simple age-based allocations fail to adequately account for longer lifespans and the effects of inflation, putting investors at risk of running out of money later in life. Today’s markets can be unforgiving of the wrong risk management strategy. Ultimately, holding the wrong amount of risk means that you may not realize the investment gains that you expect or that you may experience wider swings in portfolio value than you can stomach. If you are unsure about how much risk you are taking or have questions about managing risk in volatile markets, please give us a call. We can help you understand your options.
If you have any questions you can reach out to your HR Department.
“The Game of Life is the Game of Everlasting Learning. At Least It is if You Want to Win.”
Charlie Munger
Investor & Philanthropist
The words “this time is different” are among the most costly words in the history of investing. One of the key differences between successful long-term investors and those who are not is that successful people learn from their own mistakes and commit to never making the same mistakes twice. Even when a mistake results in a large loss, take a step back to review the actions that led to the loss. Don’t compound the errors by taking bigger risks in an effort to recover your money. Determine where you went astray and take steps to ensure that you avoid the same mistake in the future.
Many common investing mistakes can be attributed to emotional decision-making. Whenever you make financial or investment decisions, you will confront the challenges of overcoming fear and greed. Fear can cause you to run for the exits when markets decline or your portfolio takes losses. Greed can encourage you to chase fads and take on too much risk in the pursuit of a big score.
However, by recognizing your emotional triggers and engaging your rational mind, you can overcome your impulses and cultivate discipline. Working with a financial professional can help avoid emotional decision-making and many other pitfalls commonly encountered by amateur investors. It’s our job to remain focused on the long-term strategy and act as a voice of reason when emotions run high. In today’s world of high-tech investing, major financial decisions are only a click away and investors pay a high price for short-term thinking. Professional financial representatives can be invaluable for their ability to answer questions, provide reassurance, and keep financial strategies on track despite volatile conditions.
If you have any questions you can reach out to your HR Department.
The Retirement Group is a nation-wide group of financial advisors who work together as a team.
We focus entirely on retirement planning and the design of retirement portfolios for transitioning corporate employees. Each representative of the group has been hand selected by The Retirement Group in select cities of the United States. Each advisor was selected based on their pension expertise, experience in financial planning, and portfolio construction knowledge.
TRG takes a teamwork approach in providing the best possible solutions for our clients’ concerns. The Team has a conservative investment philosophy and diversifies client portfolios with laddered bonds, CDs, mutual funds, ETFs, Annuities, Stocks and other investments to help achieve their goals. The team addresses Retirement, Pension, Tax, Asset Allocation, Estate, and Elder Care issues. This document utilizes various research tools and techniques. A variety of assumptions and judgmental elements are inevitably inherent in any attempt to estimate future results and, consequently, such results should be viewed as tentative estimations. Changes in the law, investment climate, interest rates, and personal circumstances will have profound effects on both the accuracy of our estimations and the suitability of our recommendations. The need for ongoing sensitivity to change and for constant re-examination and alteration of the plan is thus apparent.
Therefore, we encourage you to have your plan updated a few months before your potential retirement date as well as an annual review. It should be emphasized that neither The Retirement Group, LLC nor any of its employees can engage in the practice of law or accounting and that nothing in this document should be taken as an effort to do so. We look forward to working with tax and/or legal professionals you may select to discuss the relevant ramifications of our recommendations.
Throughout your retirement years we will continue to update you on issues affecting your retirement through our complimentary and proprietary newsletters, workshops and regular updates. You may always reach us at (800) 900-5867.
|
© 2024 The Retirement Group, LLC |
