More and more Americans like you are actively saving for their future. But how and where should you invest your money to make sure it provides you with the dollars you’ll need?
If you drop a rock from your hand, it will fall; if water gets cold enough, it will freeze. These are laws of nature. There are also Twelve Universal Laws of Successful Investing. These laws were developed to assist individuals to set and then achieve their financial goals and objectives. The sooner you develop these habits, the sooner you too can be on the path to creating wealth. As Will Rogers said, “Even if you’re on the right track, you’ll get run over if you just sit there.”
Unfortunately, many people spend more time planning their annual vacation than they do planning for their future. Hopefully, after reading The Twelve Universal Laws, it will motivate you to start now to plan and provide for your future.
If you have medium financial ability, between 10% and 33% of your household income goes to paying debts. In case of an emergency, you’ve saved enough money to pay 2 to 4 months of living expenses; it’s not very likely that you’ll lose or change your job in the next year.
If you have high financial ability, you spend less that 10% of your household income paying debts. In case of an emergency, you’ve saved enough to cover at least 5 months of living expenses; it’s not very likely that you or anyone else in your household will lose their job in the next year.
After determining your financial ability risk, you next need to determine your willingness to take financial risks. What is your comfort level with different types of investments? What is your attitude toward a drop in the value of your investments?
You are a conservative investor if you will quickly change to another investment if the value drops. You prefer putting your money in a guaranteed account—one where your money is absolutely safe—even if this means you will earn a lower interest rate. Your current investments are CD’s, money market funds and/or Treasury bills and notes. They don’t pay a lot of interest, but you know your money is safe and secure.
You are a moderate investor if you will change to another investment if the value drops 15% or more. You think it makes sense to put some of your money in more risky investments because you have to keep up with inflation; your current investments are stocks from big corporations, mutual funds that are pretty reliable and/or high quality corporate bonds.
You are an aggressive investor if it doesn’t bother you if the investment you own drops in value. This might even be a good time to increase your investments since prices are low. You are willing to put most of your money in investments that have the potential to pay big returns, because you want the chance to beat inflation. Your current investments are in the stock market. Even though you could lose money, you prefer to invest in smaller, newer companies because they pay off handsomely if they succeed.
After you determine if you have the ability to invest and the type of investor you are; you’re on your way to setting your objectives by selecting your personalized Investment Portfolio.
There are three broad investment objectives that successful investors consider. These objectives are:
c. Total Return
These objectives are used in structuring a broad cash/equity/fixed asset mix (asset allocation) within the portfolio.
The next step in establishing the asset allocation and the guidelines for the overall portfolio is to determine which of these objectives best fits your individual circumstances. By putting this into writing, you are establishing your own Investment Policy Statement. In writing your Investment Policy Statement you will understand your own goals and constraints (fiscal and psychological) for creating your investment portfolio.
It is doubtful whether an equity portfolio can be even minimally diversified with fewer than eight securities. At the other end of the spectrum, a portfolio with 35 selected securities could produce a diversification equal to 98% of the S&P 500. Studies have shown that a portfolio of 16 selected securities can produce a diversification equal to 85% of the S&P 500.
Keep in mind that the Law of Diversification accomplishes two things: 1) It can help protect you from any loss that may occur if one investment should perform poorly, by reducing risk, and 2) it reduces the potential for outperforming the market.
It is therefore the balance between the Law of Concentration and the Law of Diversification that presents the greatest challenge to successful investing.
Not only does money grow faster the earlier it is invested, the odds of your being a successful investor, particularly in the stock market, goes up the longer you have your funds invested. For example, based on the action of the market for the past 80 years, if you invested for just one year, you had a 62% chance to have your account grow. This means that 38% of the time, you could have lost money in the stock market.
However, stocks have increased in value during 89% of the rolling five-year periods dating back to 1926, 97% of the 10-year periods and 100% of the 15-year periods over the past 80 years. By contrast, investing for the short-term can produce extremely volatile results, whether in stocks or long-term U.S. Government or corporate bonds.
Of course, stocks (equities) have a greater degree of risk of price fluctuation than short-to-intermediate term U. S. Government securities such as Treasury bonds and bills, which offer a government guarantee as to the repayment of principal and interest if held to maturity. The past is no indication of future returns for stock market investments. There is no guarantee that stocks will continue to produce a remarkable long-term record despite the Depression of the late 1920’s and early 1930’s, several wars, numerous recessions and fundamental changes in the economy.
Even if inflation averages just 4% per year, today’s retirees will need twice as much income 20 years from now to meet the same expenses. A modest inflation rate quickly shrinks the buying power of your income. To protect against loss, you need to factor inflation’s impact into your savings plan.
And finally, the law of goal setting can’t be complete without a discussion of estate planning. If you’ve accumulated substantial wealth, it makes sense to have a comprehensive plan involving gifts, trusts, and other strategies. The more you’ve accumulated, the more estate planning can preserve for your heirs, sometimes to the tune of several hundred thousand or even millions of dollars.
In conclusion, the best time to get started is now. The financial markets fluctuate every day and you may miss out on opportunities while trying to avoid volatility. Remember that while market timing may be critical in short-term investing, most planning is a long- term process, requiring time—not timing.
This article represents the opinion of John R. Stewart as of June 15, 2022. John R. Stewart is an investment advisor representative with Physicians Wealth Solutions, LLC, a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risks and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discusses herein.