Ask GFC 031: Can I Still Contribute to an IRA – Even if I Don’t Get a Tax Break? – Good Financial Cents®

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Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.

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Money Basics

Ask GFC 031: Can I Still Contribute to an IRA – Even if I Don’t Get a Tax Break?

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Reader Interactions

Good Financial Cents, and author of the personal finance book Soldier of Finance. Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.

You Might Also Enjoy

BE THE FIRST TO KNOW

Each week, we’ll send you money tips to guide you on the path to financial freedom.

Arrow pointing right

Source: goodfinancialcents.com

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How Scanners and Screeners Can Revolutionize Your Trading

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If you are ready to move your trading up a gear then you need to invest in a scanner or screener. Find out why here. 

By

Jeff Broth, Contributor
January 25, 2021

NASDAQ and NYSE have upwards of 7,000 stocks listed, you may wonder how anyone can efficiently identify good targets.

Don’t worry if you aren’t a committed full-time day trader; these apps work just as well for the part-time investor who is looking to put away a few hundred dollars into good quality companies.

The good news is that by using a scanner or screener app, you can quickly find stocks that fall into your investing plan and snap up those bargains early.

Don’t worry if you aren’t a committed full-time day trader; these apps work just as well for the part-time investor who is looking to put away a few hundred dollars into good quality companies.

Scanner and screeners—what’s the difference?

Sometimes people will blur the lines between scanners and screeners.  It is important to understand the difference because each are useful for different situations.

A stock screener is a filtering mechanism that will look at a market and filter out stocks that don’t fit your particular strategy.

For example, perhaps you only want NYSE traded stocks, in utility companies, with high trading volumes that have shown a 5% increase over the last week.

A good stock screener will give you a list of the companies that fit your criteria in seconds, providing you with targets to investigate further.

For most modern screener apps, the list of criteria you can choose is almost endless. This gives you the power to spot the type of company stocks you want to buy with pinpoint accuracy.

Stock screeners are one of the first types of apps for investors devised for the internet age. They are designed for people who might log on once a day, download a series of longer-term targets, and then do their research.

In general terms, stock screeners tend to be quite light on resources, which means that you can use them on pretty much any computer or device.

Screeners are great for investors as they give you targets to look for based on a series of attributes. However, they tend not to be used as much by day traders — for that, you need a good stock scanner.

Stock scanners may look similar to screeners but they are quite different. These apps are more useful for active day traders.

Stock scanners bring in real-time information showing stock movements based on a series of criteria that you set.

Because they are real-time, they tend to be used much more by very active day traders who need instant access to quality information.

Many traders look more at current movements in stocks rather than historical results and so they need to spot shares that suddenly have a large volume of trades or swing wildly in terms of price.

Day traders make money from volatility—this means that they need to be constantly looking for stocks that fit into their definition of a target.

Day traders make money from volatility—this means that they need to be constantly looking for stocks that fit into their definition of a target.

Because they take in huge volumes of data and process patterns, movements and fundamentals of stocks instantly, scanner programs require a large amount of computing resources. This means traders need a very capable PC or MAC.

Web-based scanners are available but can tend to be slower. When the difference between a good and bad trade is measured in milliseconds, day traders can’t afford to take a chance.

Scanners and screeners—just the starting point

It’s important to note that scanners and screeners are really only the starting point for a professional investing or trading strategy.

Screeners in particular will only identify potential targets for you to invest in based on the criteria you set. If you set the wrong criteria then you’ll get a list of poor targets—Garbage in Garbage Out (GIGO)!

Professional traders will take the results that they get from a scanner and use that as a jumping-off point to understand whether it is worth investing or not.

Depending upon the type of trader they are, they will look at the fundamentals of a company, including things like a ratio analysis and news research, or perhaps will chart the stock movement over a period of time and then make their move.

It is important to remember that an app really should be seen as one weapon in the armoury for professional traders and only by building up a rounded picture of a stock can you make successful trades.

Things to look for

If you are thinking about using a scanner or screener, then what should you look out for?

Here’s a selection of attributes that are important when looking at this type of tech.

The best advice here is to make sure you take a trial (most apps offer free or low-priced trial periods) and really test all aspects of the software to make sure it does what you want, how you want it to.

Scanners and screeners can really make a difference

If you have been running your investment or day trading strategy manually until now then maybe it is time to take the leap.

Using tech to take the strain off of you will give you better access to more suitable targets faster than your peers, which will really ramp up your trading.


Source: quickanddirtytips.com

Money Basics

Updated Trinity Study Simulation – 2021 and Beyond – The Best Interest

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Share the Best Interest

Today we’re going to take a look at the well-known Trinity Study. For those who aren’t familiar, don’t worry. I’m going to start off by explaining what the Trinity Study is, how it was done, and how to use its results. It’s all about saving for retirement and planning for retirement.

Table of Contents show

But then I’m going to take a look at a few possible visions of the future. We’re going to create an updated Trinity Study that we can use as part of our retirement planning.

I’m also going to introduce an interesting risk-mitigation tactic. It’s called consumption smoothing. Bears do it, trees do it, and it feels like it should work for retirees. But we’ll see why Mother Nature’s tactics fail in retirement planning.

The What: Describing the Original Trinity Study

If you’re already intimately familiar with the Trinity Study, feel free to skip down to the Wade Pfau section. Right now, we’ll introduce the original Trinity Study.

The Trinity Study was a retirement planning study published in February 1998 issue of AAII by three professors at Trinity College, in Texas. They based their work off of William Bengen’s SAFEMAX study (1994).

The goal of the study was to determine a safe withdrawal rate (SWR) for retirement accounts. A withdrawal rate is the “salary” that you pay yourself during retirement, by withdrawing money from your retirement nest egg—investment options like mutual funds, taxable accounts, tax deferred 401k, tax advantaged Roth IRA, annuities, defined benefit pensions etc. (Social security funds are not part of the Trinity Study).

A safe withdrawal rate is a withdrawal rate that allows a retiree to not run out of money by the time they die. SWR can also be thought of as a portfolio success rate. What’s a sustainable withdrawal rate and asset allocation that leads to retirement success?

Running out of money would be bad—not safe for one’s retirement plans. The Trinity Study aimed to provide a reliable SWR such that retirees would know how at-risk they were to run out of funds.

People in the FIRE movement frequently reference the Trinity Study when planning early retirement withdrawals. If you Google “4% Rule” or “retire with 25x your annual spending,” you’ll see what I mean.

Many FIREees directly tie their Savings Rates to the Trinity Study so they can figure out when it’s safe for them to retire.

Study Assumptions, Method, and Outcome

Let’s dig into the specifics of the Trinity Study. It’s got more nuance than most people in the FIRE community are aware of.

Asset Allocations

The study assumed that most retirees portfolios can be categorized based on their stock and bond allocations. The study looked at portfolio that were 100% stocks + 0% bonds, 75% stocks + 25% bonds, 50/50, 25/75, and 0/100.

This is fair. Most retirees’ portfolios contain a mix of stocks and bonds.

Both in the Trinity Study and Bengen’s original research incorporated long-term, high-grade corporate bonds. Corporate bond returns are typically higher but riskier than government bonds (note: as of January 2021, 10-year treasury bonds are yielding less than 1%. In 1995, they were yielding 7.9%).

The stocks in the portfolios were assumed to be a diverse mix of stocks from developed market countries i.e. a portfolio with returns using historical data. For example, a Vanguard or Fidelity total market index fund.

Summary: the Trinity study examined many mixes of stocks and bonds.

Retirement duration

The study also looked at various lengths of retirement. Some people will retire at 50 and live until 90—a 40-year retirement. Other people retire at 65 and live until 80—a 15-year retirement.

A short retirement might succeed even if the retiree withdraws a high percentage of their nest egg every year. A long retirement, on the other hand, might fail even if the retiree withdraws a lower percentage of their nest egg every year.

Different Withdrawal Rates

The study authors varied their withdrawal rate variable from 3% to 10%.

A 3% withdrawal rate is likely to be more successful—you’re spending less money every year, and allowing more of your money to remain in your portfolio to (ideally) grow. But a low withdrawal rate also leads to a more restricted retirement lifestyle.

A 10% withdrawal rate is opulent, but is more likely to fail. An unfortunate side effect of spending more money is that you’ll quickly run out.

The question, then, is “How do we find the highest withdrawal rate possible while not running out of money?”

Heart of the Trinity Study

The real heart of the study—the question being asked and answered—is:

“If a person retired in Year A, stayed retired for B years, and withdrew C% of their portfolio each year, will they run out of money using a D ratio portfolio of stocks and bonds?

The researchers asked this important question for every single combination of

Ostensibly, a retirement that is too long, or suffers through a bad market, or that withdraws too much money each year…that retirement could run out of money. That retirement could fail.

The withdrawal rates are tested using historical data from 1926 to 1995. For example, when B = 30 years, the authors tested all 30-year rolling periods from 1926 to 1995.

The creation of the 4% Rule

While there are many interesting outcomes from the Trinity Study, the main result has been nicknamed the “4% Rule.” The highlights are the 4% Rule are:

So this would suggest that a retiree with $1 million dollars could reasonably expect to withdraw $40,000 (which is 4% of $1 million) in their first year and afterwards increase for inflation each year**.

This would have allowed that retiree to successfully live a 30-year retirement without running out of money in 95% of the rolling 30-year periods that the study looked at.

**Note: increasing for inflation is the most-often overlooked aspect of the 4% Rule.

“4%” applies to Year 1 of your retirement. Each subsequent year’s withdrawal assumes you’ve adjusted that number up by the rate of inflation.

The Wade Pfau Updated Trinity Study

Wade Pfau is a professor and PhD in Financial Planning. He’s written excellent pieces on the Trinity Study, including an updated Trinity Study using data through the year 2014.

Along with the extended data set, Pfau also changed the type of bond that the study assumed. The original study used corporate bonds, but Pfau thought it was wiser to look at intermediate-term government bonds.

With this change, Pfau’s outcomes actually look more optimistic than the original study. Pfau found a 100% chance of success (instead of 95%) using the same assumptions that created the original 4% Rule. In Pfau’s update, every 30-year retiree still had money using a 50/50 stock/bond portfolio and withdrawing 4% (plus annual inflation) of their retirement savings each year. This is good news!

But Pfau also asks and examines a crucial question in his updated Trinity Study: will the future look like the past?

Will the future look like the past?

To call this a “million dollar question” would be an understatement. It’s a trillion dollar question.

The Trinity Studies are based on historical market data. That data was taken from a period of wild growth. In the past 100 years, our society has taken unprecedented leaps in manufacturing, technology, and information. Is it wise to assume that the future will look like that past? Will growth continue to be as positive? Should we continute to invest at all-time highs?

The contrarian might point out that the Trinity time periods also included the Great Depression, Stagflation in the 70’s, the Dot Com bubble and the 2008 subprime crisis. So, there are some bad times in there too.

Does it make sense to analyze a scenario where everything is wonderful?

What will our retirements look like if the entire world achieves peace and harmony, enough wealth for daily lattes and avocado toast, and nobody wears clothes?

Is that a question worth answering? And why are all utopias also nudist colonies?

No! That’s not a question worth examining! We don’t need to be worried about utopia.

I say “Hope for the best, but plan for the worst?” That’s what we want to do here. We want to plan on things being tough.

We might have to choose lower withdrawal rates. If we’re right, we’ll be very thankful we planned for it. But if we’re wrong and things are great…well, great! If I’m wrong, I’ll accept “things are great” as a consolation prize.

Just be careful—I don’t want some hairy dude too close to my avocado toast.

The Best Interest Updated Trinity Study Simulation

Riffing off of Wade Pfau, I’m unofficially addending to the Trinity Study to look at possible bleak futures.

Assumptions

To create my version of the updated Trinity Study, I ran Monte Carlo simulations.

I created an alternate reality (no nudists), used randomness to determine the nature and volatility of that reality, and then figured out how a retiree would fare in that reality. Then I repeated that random reality a few million times for different market returns, SWRs, etc.

Some assumptions in my analysis:

Keep in mind, this took me a few hours to set up and get results. The actual Trinity authors are career academics and ran their studies like professionals.

I admit than my assumptions and methodology are not as rigorous as theirs. But I think we can glean some insightful information nonetheless.

On Pessimism:

A lot of people felt that my original analysis was too pessimistic. So pessimistic, in fact, that it lost integrity. That it’s worse than the worst-case scenario.

So, I want to emphasize: I’m only asking What if? there’s a terrible, bleak future.

How might someone conservatively alter their retirement goals? How might someone’s current savings plan and savings rate be affected? Is it worth re-checking the retirement calculator?

I, like you, hope the future is as good or better than the past. So I don’t want anyone to start stockpiling precious metals because of my fictional simulation.

In the post-coronavirus investing world of zero percent interest rates, is it so crazy to think that the next few decades might behave differently than the past?

Results

Below is the summary table of results from my random simulations.

The SWR varies by column, and the average annual return varies by row.

The actual entries in the table are the percentage of simulations that created a successful retirement based on a particular combination of SWR and market return.

What sticks out? Where do we start?

To me, I immediately take a look at the 4% SWR column, because that’s what the Trinity Study has convinced us is safe.

If the Market Stagnates Long-term, Then the 4% Rule is in Trouble.

Thankfully, Microsoft Excel has some cool color schemes to help us with the visualization.

If traditional 50/50 portfolios underperform compared to historical precedent, then the 4% rule is in trouble. This isn’t shocking.

If we want to achieve the “security” that the tradition 4% Rule provides, we have to look for a ~95% chance of success. Moving to a 3% or 3.5% Rule immediately provides that safety margin (even in some terrible markets). But, of course, move to a lower withdrawal rate means that we have to save more money in order to maintain the same standard of living.

A few question, though, immediately arise.

First, what are the good reasons to expect this underperformance? Have we ever seen a period perform this poorly?

And second, can we do anything about it?

On the first question: yes, we have seen 50/50 portfolios perform as poorly as 6.17% per year for a full 30-year period.

With government bond rates at historic lows and the stock market at historic highs, there are legitimate concerns over future returns. The optmistic news: average 50/50 portfolio performance is 8.6% per year.

Can we do anything about it?

Consumption Smoothing

One idea that neither the original Trinity Study nor Pfau’s update looked at was the idea of consumption smoothing. In brief, consumption smoothing means “do more when times are good, do less when times are bad.”

To explain more, let’s think about a tree.

Here in chilly Rochester, NY (and other non-equatorial climes) trees only have leaves during the late spring, summer, and early autumn. During the long summer days, the trees absorb as much solar energy as they can.

But during the winter months, days get short. It doesn’t make sense for the tree to maintain its leaves–which consumes resources–for such a short day. Therefore, the tree drops it’s leaves in the autumn and survives off the previous summer’s gathered energy.

Put another way: the tree uses surplus energy gathered during the bountiful summer in order to survive the harsh winter.

For our purposes, consumption smoothing means “withdraw more money when the market is up, and withdraw less when the market is down.”

You know that phrase Buy low, Sell high? Well, consumption smoothing helps you emphasize the Sell high part by withdrawing more money when the market is high. It also prevents you from Selling Low too much, by withdrawing less when the markets are down. You use your extra Sell High money to “smooth out” the bad years that may come later.

Simulation with Consumption Smoothing

So I ran the simulation again, this time using a consumption smoothing algorithm. What did this algorithm look like?

In short, I created a “Cash Reserve” in the simulation, which started at $0. After each year that the market went up, I would pull that both that year’s withdrawal (the SWR amount) and extra money to go into the Cash Reserve. But if the market went down, I used a combination of the previous years’ Cash Reserve and retirement withdrawal to fulfill that year’s spending need.

It’s just like my tree. During good years, we’re the tree in summer. We’re withdrawing money for this year, and money for a time when we’ll need it in the future. During bad years, we’re the tree in winter. We]re borrowing from the good years’ reserve before tapping into our retirement account.

Consumption Smoothing Results

The results might surprise you. It feels like we’re being cautious. We’re “gettin’ while the gettin’ is good.” But what works for bears and trees does not work for retirees.

This is the same exact simulation as before, except with consumption smoothing turned on. Our portfolio failure rate increases dramatically. But why?!

The answer is simple: pulling out extra cash—even during “high” markets—will stifle your long-term portfolio growth. Money left alone in your portfolio will continue to grow. Money that you pull out will cease to grow. Consumption smoothing stifles long-term growth.

Remember John Bogle’s advice:

Don’t do something. Just stand there.

John Bogle

Living beings are trained for action. Trees need to gather sunlight. Humans reward hard work. A bear who doesn’t prepare for winter will surely starve.

But John Bogle succinctly pointed out that markets work in the opposite manner. Interfering with your portfolio doesn’t help. It hurts.

Parting Thoughts about the Updated Trinity Study

At the end of the day, we don’t know what the future will look like. Today, I chose what most people would consider an overly pessimistic view. It can be scary, but as the Roman civium used to say, “praemonitus, praemunitus.” Forewarned is forearmed.

I’m not suggesting that a 2% SWR is needed. I don’t think it’s the only way forward. But I do think it’s worth the mental exercise. How prepared will you be for a pessimistic future?

There are many personal finance ideas that work this way. You can educate yourself on the objective possibilities, but the final decision really comes down to your subjective feelings about risk.

I hope today’s post brought you a new perspective, and provides you with some objective possibilities so that you can make your best financial decisions.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

-Jesse Cramer

Share the Best Interest

Tagged 4%, consumption, FIRE, matlab, smoothing, trinity

Source: bestinterest.blog

Money Basics

Updated Trinity Study Simulation – 2021 and Beyond

admin 0 Comment
Share the Best Interest

Today we’re going to take a look at the well-known Trinity Study. For those who aren’t familiar, don’t worry. I’m going to start off by explaining what the Trinity Study is, how it was done, and how to use its results. It’s all about saving for retirement and planning for retirement.

Table of Contents show

But then I’m going to take a look at a few possible visions of the future. We’re going to create an updated Trinity Study that we can use as part of our retirement planning.

I’m also going to introduce an interesting risk-mitigation tactic. It’s called consumption smoothing. Bears do it, trees do it, and it feels like it should work for retirees. But we’ll see why Mother Nature’s tactics fail in retirement planning.

The What: Describing the Original Trinity Study

If you’re already intimately familiar with the Trinity Study, feel free to skip down to the Wade Pfau section. Right now, we’ll introduce the original Trinity Study.

The Trinity Study was a retirement planning study published in February 1998 issue of AAII by three professors at Trinity College, in Texas. They based their work off of William Bengen’s SAFEMAX study (1994).

The goal of the study was to determine a safe withdrawal rate (SWR) for retirement accounts. A withdrawal rate is the “salary” that you pay yourself during retirement, by withdrawing money from your retirement nest egg—investment options like mutual funds, taxable accounts, tax deferred 401k, tax advantaged Roth IRA, annuities, defined benefit pensions etc. (Social security funds are not part of the Trinity Study).

A safe withdrawal rate is a withdrawal rate that allows a retiree to not run out of money by the time they die. SWR can also be thought of as a portfolio success rate. What’s a sustainable withdrawal rate and asset allocation that leads to retirement success?

Running out of money would be bad—not safe for one’s retirement plans. The Trinity Study aimed to provide a reliable SWR such that retirees would know how at-risk they were to run out of funds.

People in the FIRE movement frequently reference the Trinity Study when planning early retirement withdrawals. If you Google “4% Rule” or “retire with 25x your annual spending,” you’ll see what I mean.

Many FIREees directly tie their Savings Rates to the Trinity Study so they can figure out when it’s safe for them to retire.

Study Assumptions, Method, and Outcome

Let’s dig into the specifics of the Trinity Study. It’s got more nuance than most people in the FIRE community are aware of.

Asset Allocations

The study assumed that most retirees portfolios can be categorized based on their stock and bond allocations. The study looked at portfolio that were 100% stocks + 0% bonds, 75% stocks + 25% bonds, 50/50, 25/75, and 0/100.

This is fair. Most retirees’ portfolios contain a mix of stocks and bonds.

Both in the Trinity Study and Bengen’s original research incorporated long-term, high-grade corporate bonds. Corporate bond returns are typically higher but riskier than government bonds (note: as of January 2021, 10-year treasury bonds are yielding less than 1%. In 1995, they were yielding 7.9%).

The stocks in the portfolios were assumed to be a diverse mix of stocks from developed market countries i.e. a portfolio with returns using historical data. For example, a Vanguard or Fidelity total market index fund.

Summary: the Trinity study examined many mixes of stocks and bonds.

Retirement duration

The study also looked at various lengths of retirement. Some people will retire at 50 and live until 90—a 40-year retirement. Other people retire at 65 and live until 80—a 15-year retirement.

A short retirement might succeed even if the retiree withdraws a high percentage of their nest egg every year. A long retirement, on the other hand, might fail even if the retiree withdraws a lower percentage of their nest egg every year.

Different Withdrawal Rates

The study authors varied their withdrawal rate variable from 3% to 10%.

A 3% withdrawal rate is likely to be more successful—you’re spending less money every year, and allowing more of your money to remain in your portfolio to (ideally) grow. But a low withdrawal rate also leads to a more restricted retirement lifestyle.

A 10% withdrawal rate is opulent, but is more likely to fail. An unfortunate side effect of spending more money is that you’ll quickly run out.

The question, then, is “How do we find the highest withdrawal rate possible while not running out of money?”

Heart of the Trinity Study

The real heart of the study—the question being asked and answered—is:

“If a person retired in Year A, stayed retired for B years, and withdrew C% of their portfolio each year, will they run out of money using a D ratio portfolio of stocks and bonds?

The researchers asked this important question for every single combination of

Ostensibly, a retirement that is too long, or suffers through a bad market, or that withdraws too much money each year…that retirement could run out of money. That retirement could fail.

The withdrawal rates are tested using historical data from 1926 to 1995. For example, when B = 30 years, the authors tested all 30-year rolling periods from 1926 to 1995.

The creation of the 4% Rule

While there are many interesting outcomes from the Trinity Study, the main result has been nicknamed the “4% Rule.” The highlights are the 4% Rule are:

So this would suggest that a retiree with $1 million dollars could reasonably expect to withdraw $40,000 (which is 4% of $1 million) in their first year and afterwards increase for inflation each year**.

This would have allowed that retiree to successfully live a 30-year retirement without running out of money in 95% of the rolling 30-year periods that the study looked at.

**Note: increasing for inflation is the most-often overlooked aspect of the 4% Rule.

“4%” applies to Year 1 of your retirement. Each subsequent year’s withdrawal assumes you’ve adjusted that number up by the rate of inflation.

The Wade Pfau Updated Trinity Study

Wade Pfau is a professor and PhD in Financial Planning. He’s written excellent pieces on the Trinity Study, including an updated Trinity Study using data through the year 2014.

Along with the extended data set, Pfau also changed the type of bond that the study assumed. The original study used corporate bonds, but Pfau thought it was wiser to look at intermediate-term government bonds.

With this change, Pfau’s outcomes actually look more optimistic than the original study. Pfau found a 100% chance of success (instead of 95%) using the same assumptions that created the original 4% Rule. In Pfau’s update, every 30-year retiree still had money using a 50/50 stock/bond portfolio and withdrawing 4% (plus annual inflation) of their retirement savings each year. This is good news!

But Pfau also asks and examines a crucial question in his updated Trinity Study: will the future look like the past?

Will the future look like the past?

To call this a “million dollar question” would be an understatement. It’s a trillion dollar question.

The Trinity Studies are based on historical market data. That data was taken from a period of wild growth. In the past 100 years, our society has taken unprecedented leaps in manufacturing, technology, and information. Is it wise to assume that the future will look like that past? Will growth continue to be as positive? Should we continute to invest at all-time highs?

The contrarian might point out that the Trinity time periods also included the Great Depression, Stagflation in the 70’s, the Dot Com bubble and the 2008 subprime crisis. So, there are some bad times in there too.

Does it make sense to analyze a scenario where everything is wonderful?

What will our retirements look like if the entire world achieves peace and harmony, enough wealth for daily lattes and avocado toast, and nobody wears clothes?

Is that a question worth answering? And why are all utopias also nudist colonies?

No! That’s not a question worth examining! We don’t need to be worried about utopia.

I say “Hope for the best, but plan for the worst?” That’s what we want to do here. We want to plan on things being tough.

We might have to choose lower withdrawal rates. If we’re right, we’ll be very thankful we planned for it. But if we’re wrong and things are great…well, great! If I’m wrong, I’ll accept “things are great” as a consolation prize.

Just be careful—I don’t want some hairy dude too close to my avocado toast.

The Best Interest Updated Trinity Study Simulation

Riffing off of Wade Pfau, I’m unofficially addending to the Trinity Study to look at possible bleak futures.

Assumptions

To create my version of the updated Trinity Study, I ran Monte Carlo simulations.

I created an alternate reality (no nudists), used randomness to determine the nature and volatility of that reality, and then figured out how a retiree would fare in that reality. Then I repeated that random reality a few million times for different market returns, SWRs, etc.

Some assumptions in my analysis:

Keep in mind, this took me a few hours to set up and get results. The actual Trinity authors are career academics and ran their studies like professionals.

I admit than my assumptions and methodology are not as rigorous as theirs. But I think we can glean some insightful information nonetheless.

On Pessimism:

A lot of people felt that my original analysis was too pessimistic. So pessimistic, in fact, that it lost integrity. That it’s worse than the worst-case scenario.

So, I want to emphasize: I’m only asking What if? there’s a terrible, bleak future.

How might someone conservatively alter their retirement goals? How might someone’s current savings plan and savings rate be affected? Is it worth re-checking the retirement calculator?

I, like you, hope the future is as good or better than the past. So I don’t want anyone to start stockpiling precious metals because of my fictional simulation.

In the post-coronavirus investing world of zero percent interest rates, is it so crazy to think that the next few decades might behave differently than the past?

Results

Below is the summary table of results from my random simulations.

The SWR varies by column, and the average annual return varies by row.

The actual entries in the table are the percentage of simulations that created a successful retirement based on a particular combination of SWR and market return.

What sticks out? Where do we start?

To me, I immediately take a look at the 4% SWR column, because that’s what the Trinity Study has convinced us is safe.

If the Market Stagnates Long-term, Then the 4% Rule is in Trouble.

Thankfully, Microsoft Excel has some cool color schemes to help us with the visualization.

If traditional 50/50 portfolios underperform compared to historical precedent, then the 4% rule is in trouble. This isn’t shocking.

If we want to achieve the “security” that the tradition 4% Rule provides, we have to look for a ~95% chance of success. Moving to a 3% or 3.5% Rule immediately provides that safety margin (even in some terrible markets). But, of course, move to a lower withdrawal rate means that we have to save more money in order to maintain the same standard of living.

A few question, though, immediately arise.

First, what are the good reasons to expect this underperformance? Have we ever seen a period perform this poorly?

And second, can we do anything about it?

On the first question: yes, we have seen 50/50 portfolios perform as poorly as 6.17% per year for a full 30-year period.

With government bond rates at historic lows and the stock market at historic highs, there are legitimate concerns over future returns. The optmistic news: average 50/50 portfolio performance is 8.6% per year.

Can we do anything about it?

Consumption Smoothing

One idea that neither the original Trinity Study nor Pfau’s update looked at was the idea of consumption smoothing. In brief, consumption smoothing means “do more when times are good, do less when times are bad.”

To explain more, let’s think about a tree.

Here in chilly Rochester, NY (and other non-equatorial climes) trees only have leaves during the late spring, summer, and early autumn. During the long summer days, the trees absorb as much solar energy as they can.

But during the winter months, days get short. It doesn’t make sense for the tree to maintain its leaves–which consumes resources–for such a short day. Therefore, the tree drops it’s leaves in the autumn and survives off the previous summer’s gathered energy.

Put another way: the tree uses surplus energy gathered during the bountiful summer in order to survive the harsh winter.

For our purposes, consumption smoothing means “withdraw more money when the market is up, and withdraw less when the market is down.”

You know that phrase Buy low, Sell high? Well, consumption smoothing helps you emphasize the Sell high part by withdrawing more money when the market is high. It also prevents you from Selling Low too much, by withdrawing less when the markets are down. You use your extra Sell High money to “smooth out” the bad years that may come later.

Simulation with Consumption Smoothing

So I ran the simulation again, this time using a consumption smoothing algorithm. What did this algorithm look like?

In short, I created a “Cash Reserve” in the simulation, which started at $0. After each year that the market went up, I would pull that both that year’s withdrawal (the SWR amount) and extra money to go into the Cash Reserve. But if the market went down, I used a combination of the previous years’ Cash Reserve and retirement withdrawal to fulfill that year’s spending need.

It’s just like my tree. During good years, we’re the tree in summer. We’re withdrawing money for this year, and money for a time when we’ll need it in the future. During bad years, we’re the tree in winter. We]re borrowing from the good years’ reserve before tapping into our retirement account.

Consumption Smoothing Results

The results might surprise you. It feels like we’re being cautious. We’re “gettin’ while the gettin’ is good.” But what works for bears and trees does not work for retirees.

This is the same exact simulation as before, except with consumption smoothing turned on. Our portfolio failure rate increases dramatically. But why?!

The answer is simple: pulling out extra cash—even during “high” markets—will stifle your long-term portfolio growth. Money left alone in your portfolio will continue to grow. Money that you pull out will cease to grow. Consumption smoothing stifles long-term growth.

Remember John Bogle’s advice:

Don’t do something. Just stand there.

John Bogle

Living beings are trained for action. Trees need to gather sunlight. Humans reward hard work. A bear who doesn’t prepare for winter will surely starve.

But John Bogle succinctly pointed out that markets work in the opposite manner. Interfering with your portfolio doesn’t help. It hurts.

Parting Thoughts about the Updated Trinity Study

At the end of the day, we don’t know what the future will look like. Today, I chose what most people would consider an overly pessimistic view. It can be scary, but as the Roman civium used to say, “praemonitus, praemunitus.” Forewarned is forearmed.

I’m not suggesting that a 2% SWR is needed. I don’t think it’s the only way forward. But I do think it’s worth the mental exercise. How prepared will you be for a pessimistic future?

There are many personal finance ideas that work this way. You can educate yourself on the objective possibilities, but the final decision really comes down to your subjective feelings about risk.

I hope today’s post brought you a new perspective, and provides you with some objective possibilities so that you can make your best financial decisions.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

-Jesse Cramer

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Tagged 4%, consumption, FIRE, matlab, smoothing, trinity

Source: bestinterest.blog

Money Basics

Average Net Worth Targets by Age – The Best Interest – Percentiles & Avg.

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Today, we’re going to compare net worth targets by age. How much money should you have as you age? How should your average net worth grow?

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Digest the 25th, 50th (i.e. average net worth), and 75th percentile data below. In particular, focus on how bleak some of the real savings data looks, and how large swaths of the population fall into these less-than-ideal buckets.

Note: If you have some money but you’re unsure what to do with it, use the financial order of operations.

Apologies to my international readers—most of this data is pulled from or targeted towards U.S. readers. I suggest you use Numbeo to scale these values to your locality.

Let’s get started!

**Note: I recommend using YNAB to track your progress. You and I both get a free month of YNAB if you end up signing yourself (or someone else) up with the link above. No extra cost to anyone involved. You get a 34-day trial, and then an additional free month. That’s two months to figure out if you like it.

The Good Stuff—Average Net Worth By Age

You didn’t come here to scroll to the end of the article to see the average net worth targets. Let’s get to the good stuff!

So here are five expert viewpoints of average net worth targets by age. This initial plot is the 50th percentile, or median, net worth.

Where are these values coming from?

Fidelity

First, I pulled from Fidelity. Their recommendations are all relative to salary (e.g. “3x your salary by age 40”). I used the median American salary by age to convert salary targets into average net worth targets.

Note: Fidelity defines net worth as retirement savings only, and does not count other assets (e.g. your primary home’s value). The other methods below do include other assets beyond your retirement savings.

DQYDJ

Next, I pulled data from DQYDJ. DQYDJ originally pulled of their data from the Federal Reserve Board’s Survey of Consumer Finances (labeled “The Fed” on the plot).

This Fed data is from 2016—the next set of data will come out later this year.

Keep in mind: the stock market is up about 50% since 2016. But for someone who might not have access to the market—or does not have lots of money in the market—that 50% increase might not make a large difference in their average net worth.

This DQYDJ/Fed data is real data. It’s not a hypothetical target or subjective goal. In my charts today, you’ll see three sets of “subjective targets” and only one set of “real data.”

The Balance

Next, the financial aggregation site The Balance follows a similar formula to Fidelity. At particular ages, they say, your average net worth should aim for an ever-growing multiple of your salary.

Financial Samurai

The Financial Samurai, a.k.a. Sam, is a long-time financial blogger with a no-nonsense attitude about saving money. Sam’s lofty targets are for, he says, people who:

Fair enough, Sam! Sam’s high net worth targets are going to be far above average.

The Best Interest

And finally, I took my own stab at some average net worth targets by age. I did this based on deciles of American salaries, typical milestones in the average American’s life (various debts, children, growing salaries) and the savings rates that might rise and fall as a result of those life events.

Inflation Multiplier

I also took inflation into account.

The average 30-year old today might be making $40,000 per year. But the average 60-year old today was making $25,000 per year back in 1990 (i.e. when they were age 30). What are the consequences?

While the average 60-year old today might hope to have an average net worth of $800K (Best Interest opinion), that’s not what a current 30-year old should treat as their target or goal.

If we assume 2.5% annual inflation for the next 30 years (leading to a 2.10x total inflation increase), then a 30-year old today should target $800K * 2.10 = $1.68 million by the time they are 60.

Here are some approximate inflation multipliers based on the number of years you want to project into the future. For example, someone age 50 would want to look 20 years into the future if they want to see what their net worth target for age 70 should be.

Number of years in future Inflation multiplier
5 1.13
10 1.28
15 1.45
20 1.64
25 1.85
30 2.10
35 2.37
40 2.69
45 3.04

Looking at the table above, forecasting 20 years in the future requires an inflation multiplier of about 1.64.

Analysis of the Median Net Worth Targets

Let’s take another look at those median net worth targets. What conclusions can we draw?

median net worth targets by age

Of course, this is just my opinion. But the non-Best Interest American net worth target numbers seem low to me.

This is probably an obvious (and biased) conclusion. My method comes up with higher numbers, so I’m going to be biased into thinking the other goals are low. But why do I think so?

Let’s start by analyzing this data through the lens of the “4% Rule,” which states that you should take your annual spending and save ~25x that much for retirement.

The Best Interest target ($850K) allows for a retirement income of roughly $34K ($850K/25) per year, or $2800 per month. Financial Samurai’s targets lead to $40000 per year or $3300 per month. When you add in Social Security benefits, that’s a very reasonable allowance for the average American.

The other methods suggest median net worths of $500K, $300K, and $220K, for a monthly allowance of $1660, $1000, and $730, respectively. With the assistance of Social Security, it’s certainly possible to live off these amounts. But there’s more risk involved.

The average Social Security benefit in 2020 is estimated to be about $1500 per month. Let’s add that to the allowances from the previous paragraph.

Would you feel comfortable living off of $3160, $2500, or $2230 per month? Depending on your area of the country, cost of living, medical expenses, retirement goals, etc., it’s a scary question.

What happens if something goes wrong with your plans? Going back to work at age 80 is not an enticing prospect. Neither is asking your children for a handout.

Are these hyperbolic outcomes? I don’t think so.

How to Compare? Apples to Apples?

Does it make sense to set the same average net worth goals for both a teacher and a doctor? We know that their net worths targets by age will be dramatically different.

The average American doctor’s gross income in 2019 was more than $300K. Meanwhile, the average teacher’s salary was $60K. Of course, there are millions of people that will fall within and without this range. Does it make sense to compare average net worth targets when incomes are so different?

In my opinion, yes it does make sense to do this comparison. But it’s only one data point that you should use—not an end-all-be-all.

It’s just like a young track athlete comparing their race times to record holders. Of course, they’ll be slower than the record holders. But it gives them a target, an understanding of the gap, a percentage difference to track their progress against.

Besides, the comparisons I presented above are median net worth calculations. They account for the highs and the lows, and they let you know where the middle of that scale lands. Some people start from nothing and build net worth. Others benefit from large generational wealth transfer. This average net worth analysis does not discern between the two.

If you’re making a lower salary but you love to be frugal, then set your targets high! Aim for a high net worth that’s a decile or two above your salary decile.

If you’re fresh out of law school, you’ll probably be in a mountain of debt. You might be low on the scale now, but your long-term financial prospects are good.

Keep circumstances like that in mind as you review today’s charts. This is where age, work experience, education level, etc can all play important roles.

Location and Cost of Living

We’ve covered how inflation and income can affect your position in the average net worth plots. But we should also discuss how your cost of living can affect these results.

Life in San Francisco or New York City costs more than life in Rochester, NY. And life in Rochester costs more than life in rural Kansas. Rent, gas, groceries—all these commodities have different prices around the country.

Therefore, the average net worth benchmarks should change with location.

Use the crowd-sourced site Numbeo to do some of these comparisons. For example, here are some results comparing Rochester to Boston—where Numbeo suggests we need 50% more spending in Boston than in Rochester to maintain similar standards of living.

Numbeo uses New York City as a baseline, giving it an indexed score of 100. The United States as a whole has an index score of 56, suggesting that the average American has a cost of living that’s about 44% less than the average NYC resident.

Look up your city or region to compare it to the United States index score of 56. The percentage difference will give you another way to interpret the average net worth results.

For example, Philadelphia has an index of 62, which is 10% higher than 56. If a Philly resident is using today’s data for retirement planning, they should consider adding 10% to all of the data points.

75th Percentile Net Worth Targets by Age

75th percentile net worth targets

The plot above shows the same five experts’ opinions, but at the 75th percentile.

One interesting aspect of the 75th percentile net worth targets is that the Fidelity recommendation lines up well with the Fed data.

This suggests that people who earn more also save a larger proportion of their income, and people who save more are more likely to meet Fidelity’s thresholds. That’s real data lining up with Fidelity’s subjective targets.

These people have higher average gross income. They have a high net worth. They likely utilize a retirement savings plan. Or they might be the secret millionaire next door.

If we go back to the average net worth chart, we notice that the Fed data lags behind both Fidelity’s targets and the Balance’s targets. In other words: average real-world saving does not meet the average expectations of Fidelity and the Balance.

It takes above-average earning and saving to meet the Fidelity and Balance targets. This is an important point.

It’s not ideal, but it’s reality.

In general, systems that require above-average effort in order to obtain average goals (e.g. to meet suggested average net worth thresholds for retirement) are bad systems.

A good system would only require an average effort to achieve average results. But this is where the Stockdale Paradox is important. Don’t find yourself ten years in the future having not taken action today.

25th Percentile Net Worth Targets by Age

And to make matters worse, check out the 25th percentile chart below.

Here, three of the subjective net worth targets are all in family. Fidelity and my Best Interest targets line up very closely to each other, with the Balance falling 20-30% lower.

But how does the real net worth data compare? At retirement age, real people’s net worths are only 15% to 25% of where they “should” be.

It’d be nice to reach Financial Samurai’s targets, but many people do not have the means to maximize their savings accounts to the extent he recommends.

Let’s put a face to this data. It’s 25th percentile, meaning that one out of four people in the U.S. falls on or below this graph. Dunbar’s Number suggests that the average human can comfortably maintain 150 meaningful relationships–which would suggest that you (yes, you) closely know ~40 people (on average) on or below the 25th percentile plot.

Real people, real lives, real worry. For a 60-year old, to retire on a $50K net worth (or less) is likely impossible to do. On DQYDJ, I looked at the 25th percentile net worth for 70 year olds—it’s $56,000.

25th percentile net worth is meager all the way to the end of life. That’s a sobering fact.

The Wealth Divide

What might be causing this household net worth disparity? How do people have negative net worth, or lower-than-needed net worth?

Rising expenses and wage stagnation is an easy cause to point to. The lack of financial education hurts. So does poor financial health—like having a low credit score and paying high interest rates. Student loan debt and credit card debt suck.

Some people are behind from the start. Your first net worth out of college is likely to be negative. Many people wake up 10 years later and find their net worth hasn’t grown. That’s the python-squeeze nature of debt.

Wealthier college graduates don’t have to battle that python. It’s not their fault—that’s just how it is. Without that student loan debt, their average net worth increases rapidly.

After 10 years of work, they’re likely to be debt-free. They’re likely to own real estate. They’re more likely to be collecting passive income or contributing to their retirement account. What do all these activities have in common? They all increase net worth!

Sure, annual salary matters. Total household net worth is a function of salary—just ask the Federal Reserve.

But the net worth divide we’ve seen today starts at the beginning of people’s careers and often never closes. It’s there at age 30, age 40, age 50, age 60.

Why Do Net Worth Targets by Age Matter?

I’m just another personal finance writer, but I think average net worth benchmarks are an important metric of financial health.

Your current net worth isn’t make or break, but it let’s you know how you compare to your age group. Age 30 millennials should think about their financial future. Age 60 retirees should be aware of their cash, stocks, bonds, mutual funds, etc.

Personal net worth is like your blood pressure. It’s a good metric of health.

If you’re behind, you need to take action. While something like wealth transfer inheritances usually helps, you probably shouldn’t rely on one. Instead, increase your savings rate. Utilize your 401(k) i.e. pretax income.

Your financial future will grow from your financial present.

What Counts as Net Worth? And What Doesn’t?

Let’s do some housekeeping. What actually counts towards net worth? The answer is subjective, but it comes down to assets minus liabilities.

In general, I considered the following as contributors to net worth (i.e. liquid net worth contributors).

Note: Fidelity’s targets were based solely on retirement account funds.

And what doesn’t count towards net worth?

And what is a maybe? These are assets that are fairly subjective and up to you.

Today’s values account for a single person. The average American family’s net worth is likely ~double what we’ve presented today. I.e. average household net worth = 2x average individual net worth.

How to Calculate the Value of a Pension or Social Security

This involves a little bit of math. First, I’ll ask you to come up with four important numbers. Then I’ll show you two important equations. And then we’re going to work through an example together.

The four important numbers are:

  1. [N] The number of years you estimate you’ll be retired. If you’re retiring at 60, a safe number to use here would be 25 (assuming you live to the above-average age of 85) [ 85 – 60 = 25 ]
  2. [M] The number of years until you retire. I’m currently 30. If I retire at 60, then the number I’ll use here is 30. [ 60 – 30 = 30 ]
  3. [R] The rate of return of the pension plan or Social Security. Here are some good sources for pension plan historic data and SS historic data. If you want to be safe, use less than 6% for a pension or less than 5% for Social Security.
  4. [P] The assumed annual payment once you retire. For Social Security, here’s a convenient calculator. For pensions, each specific fund will likely have its own rules. Example: a typical pension pay-out might be equal to 50% of a worker’s average salary during their final three years of work.

Equations for Pension/Social Security Value at Retirement and Discounted Current Value

The two important equations are:

Fund Value at Retirement = P * [(1 – (1+R)^(-N)]/R

…we’ll call this Fund Value at Retirement the FV. Next, we need to take the FV and discount it backwards to today’s Present Value, or the PV.

Present Value = FV/[(1+R)^M]

Example: Calculating the Present Value of a Pension Fund

Wallace is a 35-year old teacher. He’ll likely retire at 60. And he’s going to be conservative in estimating that he’ll live to 82.

We now know that N = 82 – 60 = 22 and that M = 60 – 35 = 25.

Being conservative again, Wallace is going to use R = 7% as the fund’s rate of return.

And finally, Wallace knows that his pension will pay him 55% of his final year’s salary. He’s currently making $55,000 and assumes he’ll get a 2% raise for each of the next 25 years. His final year salary, therefore, will be about $90,000. And 55% of $90,000 is $49,500 per year = P.

We now know N, M, R, and P. Let’s plug them into our equations. I like to use Microsoft Excel to help keep track of my values and (if needed) easily change them to adjust my final values.

Future Value = FV = P * [(1 – (1+R)^(-N)]/R = $49500 * [(1 – (1+7%)^(-22)]/7%

FV = $547,531

Present Value = PV = FV/[(1+R)^M] = $547,531/[(1+7%)^25]

PV = $100,882

So, if Wallace wanted to include his pension value in his current net worth calculation, he’d use $100,882.

Retiring for Today

We’re at the 95th percentile for this article. I hope the average net worth comparisons today did not steal your joy, but instead opened your eyes to the wide gradient of net worth targets by age in the U.S.

Net worth targets by age are not an extrinsic competition. They’re intrinsic: will I be able to set up my loved ones and myself for fulfillment today, tomorrow, and for the rest of our lives? At least that’s how I think of it.

Looking at net worth percentile data simply helps gauge whether you’re on track, making progress, or need to change behavior. It’s important to realize—ideally at a younger age—that many people in this country are struggling against themselves in their intrinsic race. I hope today’s post might help you avoid that struggle.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

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Tagged DQYDY, fidelity, financial samurai, net worth, the balance, the fed

Source: bestinterest.blog

Money Basics

75 Personal Finance Rules of Thumb – The Best Interest

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A “rule of thumb” is a mental shortcut. It’s a heuristic. It’s not always true, but it’s usually true. It saves you time and brainpower. Rather than re-inventing the wheel for every money problem you face, personal finance rules of thumb let you apply wisdom from the past to reach quick solutions.

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I’m going to do my best Buzzfeed impression today and give you a list of 75 personal finance rules of thumb. Some are efficient packets of advice while others are mathematical shortcuts to save brain space. Either way, I bet you’ll learn a thing or two—quickly—from this list.

The Basics

These basic personal finance rules of thumb apply to everybody. They’re simple and universal.

1. The Order of Operations (since this is one of the bedrocks of personal finance, I wrote a PDF explaining all the details. Since you’re a reader here, it’s free.)

2. Insurance protects wealth. It doesn’t build wealth.

3. Cash is good for current expenses and emergencies, but nothing more. Holding too much cash means you’re losing long-term value.

4. Time is money. Wealth is a measure of how much time your money can buy.

5. Set specific financial goals. Specific numbers, specific dates. Don’t put off for tomorrow what you can do today.

6. Keep an eye on your credit score. Check-in at least once a year.

7. Converting wages to salary: $1/per hour = $2000 per year.

8. Don’t mess with City Hall. Don’t cheat on your taxes.

9. You can afford anything. You can’t afford everything.

10. Money saved is money earned. When you look at your bottom line, saving a dollar has the equivalent effect as earning a dollar. Saving and earning are equally important.

Budgeting

I love budgeting, but not everyone is as zealous as me. Still, if you’re looking to budget (or even if you’re not), I think these budgeting rules of thumb are worth following.

11. You need a budget. The key to getting your financial life under control is making a budget and sticking to it. That is the first step for every financial decision.

12. The 50-30-20 rule of budgeting. After taxes, 50% of your money should cover needs, 30% should cover wants, and 20% should repay debts or invest.

13. Use “sinking funds” to save for rainy days. You know it’ll rain eventually.

14. Don’t mix savings and checking. One saves, the other spends.

15. Children cost about $10,000 per kid, per year. Family planning = financial planning.

16. Spend less than you earn. You might say, “Duh!” But if you’re not measuring your spending (e.g. with a budget), are you sure you meet this rule?

Investing & Retirement

Basic investing, in my opinion, is a ‘must know’ for future financial success. The following rules of thumb will help you dip your toe in those waters.

17. Don’t handpick stocks. Choose index funds instead. Very simple, very effective.

18. People who invest full-time are smarter than you. You can’t beat them.

19. The Rule of 72 (it’s doctor-approved). An investment annual growth rate multiplied by its doubling time equals (roughly) 72. A 4% investment will double in 18 years (4*18 = 72). A 12% investment will double in 6 years (12*6 = 72).

20. “Don’t do something, just sit there.” -Jack Bogle, on how bad it is to worry about your investments and act on those emotions.

21. Get the employer match. If your employer has a retirement program (e.g. 401k, pension), make sure you get all the free money you can.

22. Balance pre-tax and post-tax investments. It’s hard to know what tax rates will be like when you retire, so balancing between pre-tax and post-tax investing now will also keep your tax bill balanced later.

23. Keep costs low. Investing fees and expense ratios can eat up your profits. So keep those fees as low as possible.

24. Don’t touch your retirement money. It can be tempting to dip into long-term savings for an important current need. But fight that urge. You’ll thank yourself later.

25. Rebalancing should be part of your investing plan. Portfolios that start diversified can become concentrated some one asset does well and others do poorly. Rebalancing helps you rest your diversification and low er your risk.

26. The 4% Rule for retirement. Save enough money for retirement so that your first year of expenses equals 4% (or less) of your total nest egg.

27. Save for your retirement first, your kids’ college second. Retirees don’t get scholarships.

28. $1 invested in stocks today = $10 in 30 years.

29. Inflation is about 3% per year. If you want to be conservative, use 3.5% in your money math.

30. Stocks earn 7% per year, after adjusting for inflation.

31. Own your age in bonds. Or, own 120 minus your age in bonds. The heuristic used to be that a 30-year old should have a portfolio that’s 30% bonds, 40-year old 40% bonds, etc. More recently, the “120 minus your age” rule has become more prevalent. 30-year old should own 10% bonds, 40-year old 20% bonds, etc.

32. Don’t invest in the unknown. Or as Warren Buffett suggests, “Invest in what you know.”

Home & Auto

For many of you, home and car ownership contribute to your everyday finances. The following personal finance rules of thumb will be especially helpful for you.

33. Your house’s sticker price should be less than 3x your family’s combined income. Being “house poor”—or having too expensive of a house compared to your income—is one of the most common financial pitfalls. Avoid it if you can.

34. Broken appliance? Replace it if 1) the appliance is 8+ years old or 2) the repair would cost more than half of a new appliance.

35. Used car or new car? The cost difference isn’t what it used to be. The choice is even.

36. A car’s total lifetime cost is about 3x its sticker price. Choose wisely!

37. 20-4-10 rule of buying a vehicle. Put 20% of the vehicle down in cash, with a loan of 4 years or less, with a monthly payment that is less than 10% of your monthly income.

38. Re-financing a mortgage makes sense once interest rates drop by 1% (or more) from your current rate.

39. Don’t pre-pay your mortgage (unless your other bases are fully covered). Mortgages interest is deductible, and current interest rates are low. While pre-paying your mortgage saves you that little bit of interest, there’s likely a better use for you extra cash.

40. Set aside 1% of your home’s value each year for future maintenance and repairs.

41. The average car costs about 50 cents per mile over the course of its life.

42. Paying interest on a depreciating asset (e.g. a car) is losing twice.

43. Your main home isn’t an investment. You shouldn’t plan on both living in your house forever and selling it for profit. The logic doesn’t work.

44. Pay cash for cars, if you can. Paying interest on a car is a losing move.

45. If you’re buying a fixer-upper, consider the 70% rule to sort out worthy properties.

46. If you’re buying a rental property, the 1% rule easily evaluates if you’ll get a positive cash flow.

Spending & Debt

Do you spend money? (“What kind of question is that?”) Then these personal finance rules of thumb will apply to you.

47. Pay off your credit card every month.

48. In debt? Use psychology to help yourself. Consider the debt snowball or debt avalanche.

49. When making a purchase, consider cost-per-use.

50. Make your spending tangible with a ‘cash diet.’

51. Never pay full price. Shop around and do your research to get the best deals. You can earn cash back when you shop online, score a discount with a coupon code, or a voucher for free shipping.

52. Buying experiences makes you happier than buying things.

53. Shop by yourself. Peer pressure increases spending.

54. Shop with a list, and stick to it. Stores are designed to pull you into purchases you weren’t expecting.

55. Spend on the person you are, not the person you want to be. I love cooking, but I can’t justify $1000 of professional-grade kitchenware.

56. The bigger the purchase, the more time it deserves. Organic vs. normal peanut butter? Don’t spend 10 minutes thinking about it. $100K on a timeshare? Don’t pull the trigger when you’re three margaritas deep.

57. Use less than 30% of your available credit. Credit usage plays a major role in your credit score. Consistently maxing out your credit hurts your credit score. Aim to keep your usage low (paying off every month, preferably).

58. Unexpected windfall? Use 5% or less to treat yourself, but use the rest wisely (e.g. invest for later).

59. Aim to keep your student loans less than one year’s salary in your field.

The Mental Side of Personal Finance

At the end of the day, you are what you do. Psychology and behavior play an essential role in personal finance. That’s why these behavioral rules of thumb are vital.

60. Consider peace of mind. Paying off your mortgage isn’t always the optimum use of extra money. But the peace of mind that comes with eliminating debt—it’s huge.

61. Small habits build up to big impacts. It feels like a baby step now, but give yourself time.

62. Give your brain some time. Humans might rule the animal kingdom, but it doesn’t mean we aren’t impulsive. Give your brain some time to think before making big financial decisions.

63. The 30 Day Rule. Wait 30 days before you make a purchase of a “want” above a certain dollar amount. If you still want it after waiting and you can afford it, then buy it.  

64. Pay yourself first. Put money away (into savings or investment accounts) before you ever have a chance to spend it.

65. As a family, don’t fall into the two-income trap. If you can, try to support your lifestyle off of only one income. Should one spouse lose their job, the family finances will still be stable.

66. Every dollar counts. Money is fungible. There are plenty of ways to supplement your income stream.

67. Savor what you have before buying new stuff. Consider the fulfillment curve.

68. Negotiating your salary can be one of the most important financial moves you make. Increasing your income might be more important than anything else on this list.

69. Direct deposit is the nudge you need. If you don’t see your paycheck, you’re less likely to spend it.

70. Don’t let comparison steal your joy. Instead, use comparisons to set goals. (net worth).

71. Learning is earning. Education is 5x more impactful to work-life earnings than other demographics.

72. If you wouldn’t pay in cash, then don’t pay in credit. Swiping a credit card feels so easy compared to handing over a stack of cash. Don’t let your brain fool itself.

73. Envision a leaky bucket. Water leaking from the bottom is just as consequential as water entering the top. We often ignore financial leaks (e.g. fees), since they’re not as glamorous—but we shouldn’t.

74. Forget the Joneses. Use comparisons to motivate healthier habits, not useless spending.

75. Talk about money! I know it’s sometimes frowned upon (like politics or religion), but you can learn a ton from talking to your peers about money. Unsure where to start? You can talk to me!

The Last Personal Finance Rule of Thumb

Last but not least, an investment in knowledge pays the best interest.

Boom! Got ’em again! Ben Franklin streaks in for another meta appearance. Thanks Ben!

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

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Money Money Basics Retirement Travel

15 Reasons to Invest After Retirement

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March 16, 2018 &• 6 min read by Josh Smith Comments 0 Comments

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The time has finally come: you’re ready to retire. For many, this means living off savings or social security, but in reality, now that you’re unemployed it’s time you started making real money. Investing after retirement is a great way to continue making income, cover expenses in lieu of a regular paycheck, and stay plugged into the booming American economy.

  1. Social security is drying up

If you plan on retiring any time after the next 20 years, you shouldn’t count on social security funds. A 2014 report estimates that social security will no longer be able to pay full benefits after 2033. This means that those that retire after this demarcation point should expect to supplement federal aid with individual income — such as investments.

  1. Life expectancy is increasing

Clean living, improved healthcare resources, increased social awareness, and many other factors have all contributed to a steady increase in life expectancy over the years. Today, being young at heart means more than ever — retirees can expect to live an additional 15 – 20 years into their twilight years. The average life expectancy today is 80, which is almost a decade older than the to 71 year life expectancy of 1960.

  1. Investing is fun

Many retirees will take up new hobbies to fill the time previously occupied by professional obligations. Why not make your daytime hobby making money? Day trading stocks is the perfect retiree activity because it’s just as complicated as you want it to be. You can trade casually, and pick up some minor gains here or there. Or, go in full bore and make it your new job. After all, investments provide extra money, so have some fun with it.

  1. Delaying social security payments boosts your benefits

Let’s say your investments are performing exceptionally well, and maybe you don’t necessarily need social security yet. Your social security payout increases by 8 percent for every year you delay payments. So if you’ve held off on social security, and it has come time to cash out investments, your federal retirement benefits will be worth far more than usual.

  1. Moving

Want to spend the next chapter of your life in Myrtle Beach? Naples, Florida? Now that you’re retired, you’re free to live anywhere you want — unfettered by professional constraints, the world is your oyster. But there’s one problem: how will you afford it? Your savings account should be preserved for medical expenses, and you already checked the couch cushions for loose change. Well, investments with high yield interest rates or dividend payments are a good way to boost your income and gain a little extra cash.

  1. You earned it

What has decades of penny pinching amounted to if you can’t spend your savings during retirement? Part of the reason you budgeted so carefully in your professional years is to ensure security as you grow old. Well, here you are, and it’s time to tap that sacred savings account. As you assess your finances in old age, consider how much savings you’re willing to gamble on the market — what do you have to lose?

  1. There’s no better time to invest than now

This is not to say that the market is particularly ripe for new investors right now — although 2017 saw record high economic numbers — but more so that anytime is a good time to invest. You can guarantee the market will fluctuate in your 15+ years of retirement, but that’s not the point. As long as you build a portfolio that can bear a bear market, you will be in good shape to weather market slumps. As they say, “don’t play with scared money.”

  1. Grandchildren

Your kids are all grown up, but that doesn’t mean you’re off the hook. As a retired grandparent, you’re in charge of vacations, dinners out, movie nights, and other fun activities with the grandkids. And, you guessed it, one of the best ways to bankroll fun money is through thriving investments. In fact, while it might not be the most exciting prospect for the kid, a safe, slow-maturing investment is a great grandkid birthday gift.

  1. Jumpstart a startup

Are you passionate about the future of tech? Small philanthropies? Artisan dog treats? Whatever your calling may be, there is likely a startup that you can help get off the ground. One study found that 100 million startups try to get off the ground every year, and they need your help. Invest in a cause you care about, and in the process make someone’s entrepreneurial dreams come true.

  1. Broaden your horizons

Now that you’re retired it’s time to read those books you never got around to, learn a new skill, travel the world, and, most importantly, diversify your portfolio. Financial experts suggest that retirees pursue many different types of assets to help offsite potential market volatility.

  1. Travel

For most, vacation tops the list of most anticipated retirement activities. It’s easy to get swept up in fantasies of cold beer and catching rays on the beach, but you you need a way to pay for it. Investments are a good way to compound your savings, and make a little extra vacation money.

  1. Health

Studies show that retirees require upwards of $260,000 to cover medical expenses as they age. Maybe, thanks to years of frugality, you have this kind of money in savings, but it never hurts to stash away a little extra cash. The population nearing retirement needs to be able to expect the unexpected, so use the stock market as an opportunity to compound your emergency fund in case of expensive medical bills.

  1. Taxes

Just because you’re retired doesn’t mean you can avoid the taxman — after all, according to Benjamin Franklin, alongside death, taxes are one of the two certainties in life. While you no longer have to pay payroll taxes, you will still pay taxes on social security benefits. Plus, you are required to pay taxes on IRA withdrawals. Tax season can feel extra overwhelming if you are without a reliable source of income, so avoid the April financial crunch and tap investment gains to pay taxes during retirement.

  1. Support a company you care about

If you’re on the verge of retirement you probably had a long, prosperous career. Maybe you jumped around to different positions, or maybe you logged a couple decades at one company. Either way, chances are there is a company you want to be involved with that you never got a chance to work at. Investing in a company is a good way to gain a sense of belonging, and do your part to support a company dear to your heart — even if you never actually worked there.

  1. Stay sharp on market trends

All of the financial benefits of investments aside, investing in the market gives you a reason to care. One of the scariest prospects of retirement is the threat of complacency, so fend off apathy by giving yourself a reason to stay up-to-date. You are far more likely to take a keen interest in economic trends when you have a little skin in the game.
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Money Basics

What Are The Best Investments Right Now? – The Best Interest

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Everyone wants to find the best investments. That’s a natural thing to want.

However, it isn’t that simple. Are we looking for the best investments for the long term? The best investments right now or for the next couple of years? What’s the risk of either of these choices?

That’s what we want to explore in today’s post.

The stock market has a lot of people spooked right now. The massive swings from day to day, week to week, and from quarter to quarter are more than many people can take. The second quarter of 2020 is a perfect example.

Take a look at some of the returns:

That volatility was enough to drive many individual investors out of the market entirely. Others sold large portions of their stock holdings.

Then things got much better. From the March 18 low to June 3, 2020, the S & P 500 gained 31%, erasing all of what it lost. In the second quarter of 2020, the S & P 500 increased by 20.54%. For the year, it’s down -3.09%. That’s enough to make even the strongest stomachs queasy.

The truth is that these kinds of swings are now the norm in the stock market. As is always the case, information about the economy, earnings, geopolitical events, and many other factors can have a dramatic short term effect on stock prices. Diversifying your investments has never been more critical. Those who have the right mix of stocks, bonds, cash, and alternative investments do much better in the topsy-turvey markets of today.

For those who feel like they lost more than they thought this year, I want to offer some investments to help you better diversify your portfolios. Doing so may help you stay invested in times like these.

Table of Contents

Alternative Investments

We have talked about how alternative investments are a great way to dampen risk in a portfolio.

Much of what we’ll talk about in this post we’ve discussed in previous posts. However, we’ve found some additional options we think worthy of consideration. The SEC calls these investors accredited investors.

The idea behind the rule is that accredited investors (the wealthy) are more sophisticated and can afford to take more risk that comes with some alternative investments.

To be fair, we want to offer our thoughts on the best investments right now for both accredited and nonaccredited investors. Some of these we’ve mentioned before. Others we have not.

Please keep in mind that what we focus on here are investments to help you diversify your portfolio. They are those that are not tied to the stock markets and will not move in the same direction at the same time (noncorrelated).

With that background, let’s get started.

Finding the Best Investments Right Now

We will break these down into categories. There are many choices in each category. We will highlight some we feel are unique and some that trade publicly and are readily available.

Real Estate Investment Trusts (REITS)

REITs are a familiar investment people use for diversification. There are public and private REITs.

Some REITs invest and almost any kind of real estate. Some specialize in a specific area. Others diversify across many types of real estate.

Publicly Traded REITs

There are dozens of publicly-traded REITs on the market. By publicly traded, we mean that anyone can purchase them, and they are available on a public market exchange. The most common are mutual funds or ETFs (exchange-traded funds).

We like REITs that are low cost and that mirror a real estate index. Indexes capture the returns of all the securities within the index. They are passive investments. That means they do not have a fund manager picking which stocks to buy and sell.

Here are some to consider.

Vanguard Real Estate ETF (VNQ)

VNQ is an ETF that invests in a diversified portfolio of REITs that invested in real property and the types of real estate (office buildings, hotels, etc.) The goal of VNQ is to closely track the return of the MSCI US Investable Market Real Estate 25/50 Index. In doing so, the fund invests in the REITs included in this index. It has a low expense ratio (0.12%) and has 183 holdings in the fund. It’s a great low-cost option to diversify into real estate.

iShares Global REIT ETF (REET)

REET is a global REIT, meaning it invests in real estate inside and outside the U.S. The real estate in REET mirrors the FTSE EPRA Nareit Global REITS Net Total Return Index. Like VNQ, the iShares Global REIT has a low expense ratio that comes in at 0.14%, slightly higher than VNQ.

Though average annual returns lag other REITs, most of that is due to negative returns for 2020. Except 2018 which showed a loss of -4.89%, yearly returns since its 2014 inception are positive. The best year’s performance was in 2019, with a gain of 23.89%.

Unique Alternative Investments

Collectibles

popculture

We found a very unique alternative investment that’s available to both accredited and nonaccredited investors. Mythic Markets offers investors the opportunity to invest in fractional shares in rare pop culture collectibles.

Some things you might find in their marketplace are vintage comics, Magic: The Gathering, Pokemon, film & T.V. memorabilia, eSports Teams, and sports memorabilia. 

Because collectibles are rare and unique, they do not correlate with the stock market. The result is the chance t own an investment that brings true diversification to your portfolio. Like any alternative investment, investors should limit that percentage owner in their portfolio. Nonaccredited investors can only hold up to term percent in shares.

If you are into collectibles, Mythic Markets may be something to consider. Even if you’re not, collectibles might be a good option.

Read our detailed review for more information.

Fine Wine

vinovest

If you are one who enjoys a glass of fine wine now and again, consider that the wine you drink might be a good investment. Vinovest offers investors a way to invest in fine wine without having to do the research, store, protect, and preserve the wine. How do they do it? With technology and expertise.

Vinovest is an online platform to allow everyday investors to reach the fine wine investment field, an asset class that has traditionally only been available to the ultra-wealthy. On average, fine wine has provided an average return of 11.6% since the mid-1980s. The team at Vinovest measured their portfolios’ correlation in the last two market downturns. They found it to be negative, meaning it provided good diversification.

And that’s the theme of looking for the best investments right now. We want those that bring diversification and noncorrelation to the stock markets.

Vinovest checks all those boxes. Read our full review to learn more.

Farmland

farm

Another unique alternative investment is farmland. Most investors would never consider an investment in farmland, thinking they would have to invest a large sum of money. If you’re trying to invest in farmland on your own, that is likely the case.

However, we found a great option with a low minimum investment. The company is Farm Together. Though one needs to be an accredited investor to participate, the minimums are much smaller than most alternative investments.

The typical investments range from $10,000 – $50,000 per transaction. That $10,000 number is much more accessible than many of these types of offerings. And there are precious few funds that offer investment in farmland with cash flow.

Real land is less subject to inflation and more stable than many other investments. For one thing, we’re not making any more of it. The law of supply and demand means it’s likely to increase in value. As a tool for diversifying your stock and bond portfolio, we think Farm Together is an excellent option for accredited investors.

Read our full review to learn more.

The Marketplace to Find the Best Investments

When we think about alternative investments, we try to get outside the box and look for unique options outside of publicly-traded REITs, though we believe they are a great place to start. If you want to do your research to find good choices, there are a couple of ways to go.

First, you can go to our good friend Google and input and search until your heart’s content. Many people enjoy that process. My wife is one of those people. Her choice isn’t investments, but she can spend hours researching something she’s interested in finding. That’s not me. I like to simplify things.

That’s where option two comes into play. MoneyMade is an online marketplace where investors can look for alternative investment options. They have done much of the research for you. I’ve talked about them in another article. Here’s what we said:

“It’s a discovery engine built to help you find and compare all types of investment opportunities, spanning from alternative investment platforms through to Robo Investing.” And it’s super simple to use. Just enter the criteria of the investment you’re looking for and let MoneyMade do the rest.”

We encourage you to give it a try.

Read our review to learn more.

Final Thoughts

Today’s post is by no means supposed to be a comprehensive guide to finding the best investments right now. However, we hope it offers things you may not have heard of in the past. We left out recommendations on crowdfunded real estate for this post. There have been numerous reviews and articles written about these options. If you’d like to hear our thoughts on those, here is our analysis of two crowdfunded REITs we think merit investment.

It’s relatively easy for investors to find index mutual funds and ETFs for the stock and bond portion of their portfolios. These funds provide a good foundation for investors. With that said, to get true diversification, which can increase return and, more importantly, reduce risk, portfolios need noncorrelated assets.

With volatility at a fever pitch and likely to continue, we think the best investments right now are those that add true diversification as described here. Do you have a favorite we’ve missed? Let us know in the comments. We love learning about excellent investment opportunities.

In the meantime, check out the investments listed here. We hope you may find one that fits your needs.

Source: yourmoneygeek.com

Investing Money Basics Mortgage Student Loans

Better Investing for Beginners

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November 11, 2020 &• 10 min read by Credit.com Comments 0 Comments

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Are you new to investing? Not sure where to start? Investing for beginners can be overwhelming. There are so many moving parts. With that said, we hope the process we’ll show you today will make it easier for you to get started.

What follows are ten steps you can take to become a successful investor. Let’s get started.

1. Work from a Budget

I put your budget first for a reason. It should be obvious. If you don’t know where your money is going, it will be challenging to save and invest consistently. I’m not suggesting you need to be inflexible with your budget—quite the contrary.

However, you need to know where your money is going every month to know to analyze areas where you might reduce expenses and increase the amount available to save and invest.

You’ll need to know how much you have left after paying all the bills, funding your emergency fund, and taking care of things like food, clothing, cars, school supplies, and any other expenses you might incur.

What’s left after taking care of all of these things is your discretionary income. That’s where you’ll get the money to invest. That’s where you can determine how much you can put toward funding your various investment objectives (See #2 below).

Tip: You can boost your discretionary income with money making apps and cash back sites like Swagbucks, Honey, and Rakuten.

2. Know Your Why

Before starting any investing, you must know why you’re investing. How will the money invested eventually be spent? When? Will it be withdrawn in a lump sum? Over a period of time?

If you are investing for retirement, what are the best accounts to use? 401(k)? Traditional  or Roth IRA?

If you’re a beginner, perhaps you’re saving to buy your first home. If that’s the case, you shouldn’t invest that money in the same way you’re investing your retirement dollars.

Maybe you’re saving for your kids’ college education. Once again, that money will be invested differently than money for a house or retirement.

Before you put any money to work in investments, know how and when the money will eventually be used.

3. Build Your Emergency Fund

Before you start investing, make sure you have built up an emergency fund. The money you put into your emergency fund should be a part of your budget until you get it to the desired amount.

Like many things in personal finances, how much one should keep in an emergency fund is subjective. At a minimum, you should have three to six months of your monthly expenses set aside in this fund.

If you’re a more conservative person, you might be more comfortable with a one-year cushion in your fund. I know others who have as much as three years set aside in their fund. Managing your monthly expenses by reducing or eliminating unnecessary expenses means you can have a smaller emergency fund.

The reason is simple: if your fund’s size is based on a multiple of your monthly expenses, the smaller your expenses, the smaller your fund. Another way to look at it—if you lower your monthly expenses, whatever amount you have in your emergency fund will last longer.

Either way, be sure to think about how many months you want to be covered and keep that amount or more in this fund.

One last thing on this. Do not invest your emergency fund money in anything that has a risk of loss. Look for an FDIC-insured interest-bearing savings or money market account.

4. Have a Plan

Once you’ve decided why you’re investing your money, it’s time to develop a plan to invest it.

For example, let’s say one of your goals is to invest for retirement. I brought up some questions above about what type of retirement accounts would be best. Here are some other basic questions to answer:

  • When do I want to retire?
  • How much income do I want in today’s dollars?
  • What will my expenses be?
  • What sources of income will I have (Social Security, pension, inheritance, etc.)?
  • How long will the money need to last, or how long do I expect to live?

Once you have that last number, you can work backward to calculate how much you need to save each year based on a given growth rate. If you have 30 years until retirement, need $1 million, and earn 5% on your investments each year, you’d need to save roughly $15,000 every year. Viewed monthly, you’d set aside $1,250. Use a compound interest calculator to figure out what you need for your plan.

If you have a company retirement plan, the bulk of that investment might go into that account. Remember, most employer plans have a matching contribution. Many companies will match your contributions 100% up to 3%, 5%, or more. That’s free money and reduces the amount you need to contribute to reach your $1 million goals.

Use this same calculation method for each goal you’re trying to achieve.

5. Follow Your Plan

I know it seems unnecessary to say this, but many people seem to get distracted, discouraged, or convinced that there is a better way.

If you’ve done the work to calculate how much money you need to fund your goals, how much you need to save, and the kind of return that will get you there, that’s really all that matters. Don’t worry about what others are doing. That’s not to say you shouldn’t listen to others. However, just because someone is doing well for themselves doesn’t mean how they’re doing it is good for you.

Stay focused on the plan you’ve created for yourself. If your circumstances change (job loss, income reduction, health issue, etc.), see how that affects your plan. If need be, make adjustments along the way.

Be sure to calculate how these changes affect your goals and adjust accordingly. Doing this will help keep you on track.

6. Invest Wisely

There are many differing opinions on how to invest your money. There will always be someone who tells you they’re getting a much better return on their investments than you are. Don’t be swayed. No one wants to appear to be stupid. Some need to toot their own horn to make themselves feel better.

It doesn’t matter what someone else is earning on their money at the end of the day. It has nothing to do with what you’re trying to do with your money.

You’ll also hear a lot of noise from the financial and mainstream media. Ignore it for the same reason.

Figure out how much you need to earn to have the amount of money you need when you plan to use it. Apply a conservative return percentage to calculate the annual investment needed. Keep in mind that investment returns are not fixed or linear. They will fluctuate, sometimes pretty dramatically.

Here’s an article that will introduce you to some of the investment options available in 2020 and beyond to help you choose.

7. Be Flexible

We covered this briefly in the section on following your plan. Being flexible means being open to adjusting your plans. Any change in life circumstances should be the reason for any changes you make.

Being flexible doesn’t mean popping in and out of investment funds to chase returns. Chasing returns or timing the market doesn’t work over the long term. Once in a while, people get lucky. But I know of no one, individual, professional, or otherwise, who has had long-term success trading or timing the market.

If your returns lag what you calculated, you can adjust by doing one of two things:

  1. Increase the amount of money you’re contributing to your investments.
  2. Move more of your money into riskier investments with higher expected returns.

There are some caveats to discuss with option #2. No one should take more investment risk than they are willing, able, and need to. Any increase in risk should be incremental. For example, if you have 50% of your money in stocks, adding another 5%­–10% more in stocks may offer the additional return needed without substantially increasing your risk.

That brings us to the next important step in the process.

8. Invest for the Long Term

When we say have a plan, follow a plan, and invest wisely, we are talking about doing that for the long term. Investment success comes over time. 

If you’ve made your plan, determined how much you need to save and invest, and determined how much you need to earn to get there, you’ve done the bulk of the work. Markets reward investors over the long term.

Develop your portfolio based on all of these things, be sure it’s diversified across many asset classes, and stay with it until you reach your goals. It really is that simple.

I said simple, not easy. There will be many distractions along the way that may make you think you need to change your plans or portfolio. Be very careful!

If you’ve done your homework and know what you need to get where you want to go, stick with the plan and tune out all the noise.

9. Monitor Your Investments

Monitoring your investments does not mean changing them all the time. Nor does it mean looking at them every day, week, or month and fretting over what the market is doing. Markets over the short term are very volatile.

Any changes you make should be incremental. Let’s say you want 50% in stocks and 50% in bonds. If you look at your portfolio at the end of the year and see you now have 60% in stocks and 40% in bonds, consider making some adjustments.

Called rebalancing, this means you would sell 10% of your stocks and invest that money into your bonds to keep your allocation at 50/50 stocks/bonds. After all, that’s how you determined you needed to invest your money to accomplish your goals.

Rebalancing keeps you on track. You needn’t rebalance more than once, maybe twice, a year. Market fluctuations often help rebalance the portfolio back to where you need it to be. In other words, the market swings both up and down pretty regularly. When people sell stocks, they often buy bonds. These fluctuations can bring your portfolio back into the balance you want.

10. Have Patience

Patience is one of the hardest principles to keep when investing. That is especially true in volatile times. We’ve had days in 2020 when the market dropped 9% in one day, only to bounce back over the next day or two to erase that one-day drop.

It can be unnerving and make you want to get out of the market. Resist the temptation. Investors who sold out of the market in the financial crises of 2000–2002 and 2008 damaged themselves badly. If they had stayed invested and, better yet, invested more in the market, they likely would have been way ahead.

Rebalance. These market drops are a great way to take advantage of lower prices in either stocks or bonds. If you are not comfortable with these kinds of price swings, you probably shouldn’t be invested in the markets.

The markets reward long-term investors and, more often than not, punish short-term investors. Hang in there. Be patient. Don’t listen to the advice of well-meaning friends, family, neighbors, or coworkers. Turn off the news.

Final Thoughts

I don’t know about you, but I tend to overcomplicate many things. It’s not a good idea when it comes to investing. Please keep it simple. Follow a process, whether it’s these ten steps or something else. Stick with it. Be patient, and do your best to ignore the noise.

People who appear smarter than you often aren’t. Don’t sell yourself short. The plan you set is yours, not anyone else’s. Remember that when other well-meaning people tell you how well they’re doing and how much better you should be doing.

Play the long game. Don’t follow the crowd. They are often wrong. Turn off the noise. That’s a recipe for both investment success and success in life.


Michael Dinich is a personal finance expert, podcaster, YouTuber, and journalist. Michael is the founder of Your Money Geek, a rapidly growing personal finance and pop culture website. Michael has appeared as a guest on numerous personal finance podcasts and blogs. He is passionate about helping others, side hustles, and all things geeky.  

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