Making investing personal will not only avoid losing money but will help motivate you to reach your goals.
Brian makes a great point in a recent article about investing. Too many people think of investing as something that’s only for the rich, something most people can’t afford.
The fact is that it’s the regular people like you and me that benefit most from investing. Us un-wealthy 99% should be using investing as a way to create wealth and generational fortunes.
Because of the misconception about investing, we rarely learn what makes a good investment plan from parents or people in our social circles. If anything, we hear the worst kind of investing strategies like investing in hot stocks and passing fads.
More important, something Brian talks about in the article, is understanding how you react to risk and using it to develop a solid financial plan. It’s that understanding of risk and your own goals that will make investing personal.
It’s something you won’t hear a lot about on stock-picking websites or TV shows, but it’s one of the most important investing lessons you’ll ever get.
Why Investing is More Personal than You Know
Turn on the TV or any investing website on any given day, and you’re likely to see ten stock picks within ten minutes. Financial news and blogs love to make investing ‘exciting’ to get you coming back for more.
Nothing could be more impersonal. Nothing could be worse in terms of investing advice.
It’s part of the reason the average investor earned an average annual return of just 4.6% through the two decades to 2015, according to researcher DALBAR, even though the market produced an annual return almost twice that amount.
Investors follow the advice of stock-pickers, make bad investing decisions when prices fall and end up losing their money.
Of course, the stock-pickers are nowhere to be found when your nest egg comes up short. The average American household owes more than $50,000 in debt and has almost nothing saved for retirement.
Investing can’t be about picking stocks. It has to be personal. Investing needs to be in a customized plan to meet YOUR goals and needs.
What’s more important, picking the right stocks or beating your investing goals for the retirement you always wanted?
How to Make a Personal Investment Strategy
Making investing personal isn’t as difficult as you may think. In fact, it can help motivate you to stick to a plan and will mean less stress that you’ll meet your goals.
Start with your goals. What does retirement look like for you? What are the things you always wanted to do and what do you want to do on a daily basis?
We’re not talking about some vague idea here but an actual picture of your daily life in retirement. Sit down with your partner and write down your goals.
Creating a mental picture of exactly what you want in retirement is going to make the goal real. It’s going to give purpose to the sacrifice of saving and investing. When you’re tempted to blow through your budget, you can take out that mental picture to stay motivated.
Detailing your retirement goals also helps to estimate how much you’ll need to save. Put a price tag on everything and figure out how much you’ll need on a monthly basis.
Retirement calculators can help understand how much you’ll need to meet your annual expenses, but a rule-of-thumb is to have 20-times your estimated expenses. That means you can withdraw about 4% or 5% a year without worrying too much about outliving your nest egg.
Use a retirement calculator to find how much you need to save each month to reach your goal, given about a 5% or 6% annual return. This is a good starting point and a realistic return for a portfolio that includes both stocks and bonds.
How Does Your Personality Affect Investing?
The most neglected part of making investing personal is how your personality affects the investments in your portfolio.
Some people are risk-takers, they love the thrill and uncertainty of taking a chance. Other people…not so much. Some people get stressed out over the smallest change in their schedule. They get knots in their stomach just thinking about the uncertainty of a stock market crash.
If you are one of these latter, risk-averse investors, then seeing your portfolio melt as stock prices fall would probably have you panic-selling so fast it would wear out the keys on your computer. Conversely, a risk-seeker might get bored with a portfolio in bonds and lose interest in investing.
No one should have all their money in stocks or all of it in bonds but how you react to risk and stress is going to help shift your investments to a more appropriate mix.
• Younger investors have more time to benefit from stock returns and can bounce back from a crash. The 20-something investor might have 80% in stocks and just 20% in bonds, but if you want a little less risk, consider shifting to 70% in stocks and 30% in bonds. Conversely, the risk taker might shift to 85% stocks and only 15% in bonds.
• As you get older, your portfolio should shift from stocks to bonds because you’ll have less time to see it bounce back from stock market weakness. By the time you reach your 50s, you might have more than half your nest egg in bonds, but your personality will still dictate exactly how much you keep in safe investments.
Balancing the amount you have in stock and bonds according to your tolerance for risk while still getting the return you need to meet your investing goals is a delicate task but not something you need to worry about more than once a year. Invest in broad-based funds that hold hundreds of investments and only adjust your portfolio a little every couple of years to keep the right amount in stocks and bonds.
It’s this general view of investing, worrying less about stock picking and instead just managing how much is invested in assets, that will make investing easy and help you reach your goals.
Investing doesn’t have to be a mystery, and it’s a critical part of everyone’s financial life. Making investing personal will not only help you avoid the worst investing behaviors but will also motivate you to reach your own goals.
Joseph Hogue worked as an equity analyst and an economist before realizing being rich is no substitute for being happy. He now runs five websites in the personal finance and crowdfunding niche, makes more money than he ever did at a 9-to-5 job and loves building his work from home business.