Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

Of course, investment selection matters. But luck invariably plays a crucial role in financial success, too, even though a lot of the lucky ones do not like to admit it. But do not underrate the mundane financial jobs—the no-fun, super-unsexy financial equivalents of eating lots of fruits and vegetables and logging 10,000 steps a day. Do a passingly decent job with them over many years and it is a near-certainty the rest of your financial life will fall into place.

Here are some of the key ones to focus on:

Maintain an Appropriate Saving/Spending Rate
This one is near the base of the “investment pyramid” for an obvious reason: Even if you make killer investment selections, it is tough to make a plan work if you have not saved consistently and lived within your means both before and during retirement. Consider taking time to gauge the adequacy of your savings rate. High-income investors saving for retirement need to stretch beyond maxing out their company retirement plans and IRAs. And while most people stop saving when they are retired, maintaining an appropriate portfolio-withdrawal rate is essential to good financial health.

Nurture Your Human Capital
If you are just starting out in your career, you are long on human capital and your financial capital is likely small. How much you can contribute to your investments—not the gains on them—is going to be the biggest share of your portfolio’s growth at that life stage. The best and most painless way to increase those contributions is by enlarging your earnings and not overspending (see the above). That is why investing in human capital—through additional education or training—is such a smart use of funds if you are just starting out in your career. If you can increase your earnings power with such an investment, you have a long time until retirement to benefit from it. Big outlays for education may not pay off (financially, at least) later in life, but mid- and late-career accumulators should still work to burnish their own human capital through networking, attending conferences in their fields, learning new technologies, and taking advantage of additional training.

Develop a Sane Asset Allocation Mix
Asset allocation can seem hopelessly black-boxy, but it is useful to remember that your financial capital should align with your human capital. When you are young and long on human capital, your own earnings power is your biggest asset. It makes sense to invest aggressively (at least as aggressively as you can stand) because it is unlikely you will need to rely on your investment portfolio for living expenses for many years. You can afford to withstand more volatility, and that means more stocks. As you get older and get closer to drawing upon your portfolio, you will still want to make sure your portfolio has growth potential, but you will also want to steer more into safe investments because you do not want to be in the position of withdrawing from investments as they are falling.

Do Not Skimp on Insurance
Investing will not protect you against big risks—only insurance products can do that. That means the best health insurance and property and casualty insurance you can afford, of course, but also disability insurance, life insurance if you have dependents, and an umbrella policy to protect you in case you get sued. Older adults should, at a minimum, consider long-term care insurance; while it is controversial, do not rule it out before doing your homework. Whether you end up claiming anything from these policies is beside the point; the idea is to protect yourself financially from catastrophic risks that could otherwise derail your plan. And of course, knowing you are insured provides immeasurable peace of mind.

Limit Investment, Tax, and Behavioral Costs
Mutual funds—especially index funds and exchange-traded funds—are in the midst of a fee war. That is all for the good, but fund expenses are not the only cost investors face. Investors may face transaction costs to buy and sell, fees if they rely on a financial professional for advice, and administrative costs in their company retirement plans, to name some of the key ones. Tax costs can be a further drag on bottom-line returns. All of these expenses look pretty innocuous on a standalone basis, especially because they are often expressed in percentage rather than dollar terms so they do not look like real money. But compounded over a typical investing time horizon of 50 years, they can mean the difference between a plan that is on solid footing and one that is on shaky ground.

And speaking of costs that erode returns, one of the biggest costs all of us investors face is the toll that irrational, emotion-driven decision-making can take on our returns—selling when we are nervous and buying after the easy money has already been made. That means that you need to understand the difference between risk capacity and risk tolerance. And if some soul-searching leads you to conclude that your emotions have contributed to financial decisions that you regretted later on, money spent on professional financial guidance can be money well spent.

 

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