Investing: A Question of Objectives and Time.
The objective of investing is to take a sum of money you can save and turn it into a larger sum of money in the future. This captures the entire scope of creating a plan for your investments on a high level. There are details like specific investment choices, diversification, rebalancing, and tax-loss harvesting that come with investment management, but the goal is to grow whatever money you can save.
Growth
Overall, the stock market is effective in accomplishing this growth. Take, for example, the returns of the S&P 500 Index since the beginning of 2003.
*Note: The S&P 500 Index is unmanaged and you cannot invest directly in an index
That particular index – comprised of the 500 largest companies in the United States – grew a sum of $10,000 to just over $50,000 over a 20-year period. And this time period includes the ongoing war in Afghanistan and Iraq, the Great Financial Crisis, rising political tensions, and the COVID-19 pandemic. Even with all that going on, if you stuck with your initial investment plan you received an average return of 8.2% per year or more than 5X your initial investment. Not bad!
This is why discipline and behavior matter so much in your investing. A conversation for another time.
Time Horizon
The other consideration when picking your investments – alluded to above – is your time horizon. Markets over time tend to go up, which all sorts of data out there show, but the short-term returns in the stock market (and even the bond market to some extent) are volatile and risky. This means you can take on more risk in your investments the longer into the future your timeframe for needing income from those savings is. However, your shorter-term goals require another approach.
Your time horizon is going to matter a lot here. For instance:
Are you saving for a home in three years? If so, your “investing” should be in a high-yield savings account or a CD or bond that matures on that timeframe to ensure you are not losing savings that were meant for a specific goal requiring a specific amount of money.
Do you have children who need funds saved up for college? Assuming your children are younger, you have 10-18 years to plan for this type of expense. Your investment strategy can align with this by owning a mix of stocks, bonds, mutual funds, and/or ETFs based on your risk tolerance and how much longer you have until the funds are needed. Our recommendation to clients is always to ratchet down on risk (own fewer stocks and more bonds, CDs, or cash) as you get closer to the goal – some nuance is required here as you may have several years where you take from the account to fund college, but the idea remains.
Saving for financial independence. For many, this is 20-30+ years away, or maybe a bit sooner depending on your savings rate (how much of your income you save). In any case, you can take substantially more risk to achieve this long-term goal and allow the market to compound your savings for you over time.
Have a Plan
Establishing a plan for your investments is critical to your success and peace of mind. You need to know what you are investing in (stocks, bonds, real estate, mutual funds, ETFs, etc.), how you will manage volatility in the markets, and what your investment timeframe is.
Without this, your investment road is going to be difficult and stressful.
All that said, having a plan in place for your investments is not the same as having a robust plan for your financial life. For that, you need to develop a comprehensive financial plan for every aspect of your finances.
Comprehensive Planning for Your Financial Life
A real financial planner will cover many additional areas in your life and finances – not just investments. And even further, a particularly attentive professional will help you identify your values when it comes to money, what is important to you, and how those things align with the current use of your money.
The ultimate aim of the financial plan is to create alignment between your values and what you set your time, money, and attention on.
Scope of Engagement
Investing is important because the investments you make are the engine that powers particular areas within your plan, but alone won’t provide you with clarity and peace of mind that your financial house is in order.
Consider these areas that investments ignore which a financial plan (and financial planner) will systematize and cover for you:
- Cash Flow Planning and Budgeting
- Savings and Emergency Fund Planning
- Debt Management Strategies
- Family and Education Planning
- Risk Management and Insurance
- Business Consulting
- Tax Projections and Planning
- Wealth Transfer and Estate Planning
As you can see, there is a larger picture being drawn via a financial plan. Investments remain a part of it, but it can be so much more.
Time Horizon Risk
A unique aspect of direct comparison to investment planning is time horizon and risk. These questions are handled differently with investments and comprehensive planning because so much more is involved than just the investment timeframe.
If you are so focused on the investment goal and time horizon, you may miss out on the fact that you value experiences in the here and now with your loved ones. A financial plan identifies that need and adjusts cash flow accordingly. Ignoring that may lead to fatigue in chasing a numbers “goal” that doesn’t even align with what you value. So maybe that investment “goal” needs to be pushed back a few years on the horizon to accomplish a necessary immediate goal of enjoying your life.
Similarly, risk encompasses a great deal more than “How many dollars can I stand to see my investment balance go down if the market experiences a correction?” Proper planning includes that risk besides the other risks needing to be managed, such as: damage to your home, a car accident, untimely death, or loss of income due to injury. These are all risks that need to be managed!
A comprehensive financial plan can ensure you enjoy your use of money now while saving for future goals and protect you against losing the wealth you have built by managing the risks that could threaten it.
Options for Professional Help
You can always look for professional help you with your investments and financial life planning.
Some financial professionals focusing on investments work with clients on a commission basis (when they sell an investment). Others charge a transparent percentage “advisory” or “asset management” fee to manage your investments rather than receiving commissions for the investments they sell, which is preferable.
To create a financial plan, you can work with a financial planner (or wealth advisor) who has expertise in a variety of financial topics beyond investments. Some planners charge the “advisory” fee mentioned above, but often have a minimum amount of investments they require clients to hold with them for that work.
Other financial planners – like my firm, Defining Wealth Partners – charge a flat fee for the comprehensive financial plan and advice provided, which you can then implement on your own or work with their planners to implement collaboratively.
Understanding the difference between investing and a financial plan is critical. The tools and help for creating your financial plan are out there – be sure to explore them and pick what is right for you!
One good way to assess a financial professional’s capability of helping you is to ask whether they are a CERTIFIED FINANCIAL PLANNER™ professional. The CFP® program is generally considered the highest standard of financial planning expertise and ensures that the person giving you advice has the expertise and qualifications necessary to help you appropriately. Not only that, but CFP® professionals have an obligation to act in your best interest and adhere to a Code of Ethics from the CFP Board. You can learn more about the qualifications and ethical requirements of a CFP® professional here: https://www.cfp.net.
My goal at Defining Wealth is to create confidence and peace of mind with the way you use your money, from the investment choices you make to the values hold. Whether it is cash flow planning, tax planning, business consulting, or wealth transfer advice, we are help to help you with all of it. And the best time to start laying the foundation of your comprehensive financial life plan is today.