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Investing

A Thanksgiving Lesson for Investing Smart

November 24th, 2015 | 3 min. read

By Jacob Schroeder

A_Thanksgiving_Lesson-image.jpgThe most important rule of Thanksgiving: focus on what you can control. Thanksgiving Day is here and you know what that means. Your home is invaded by more family and friends than you ever knew you had. Or, you’re stuck fighting for your life through airport crowds or road traffic, as if you’re in a really bad zombie movie. And, there’s nothing you can do. So this year, why not accept the madness and worry only about the things you can do. 

Would it be faster to walk home in the same time it takes to get through airport security? Deep breaths. You’ll be home safe and sound eventually. A typo in the turkey recipe and now it’s as dry as a bone? Rejoice! There’s an easy, delicious Plan B – who wants Chinese? Dirty dishes a mile high? That’s how much they love your cooking. Take it plate by plate, or help guests burn some calories by asking them to pitch in.

Above all, relax. Everything will work itself out.

The same principle should be applied to how you invest. The market moves on millions of factors, some not even human, almost randomly. Like a stubborn turkey, you can’t control it. Instead, focus on the parts of investing you can control, such as:

The financial services you pay for

Everyone has different financial circumstances. There’s not a single financial recipe we all follow. As an investor, you can hire a financial adviser or firm that can best meet your specific needs. You don’t have to pay for more or less than is necessary.

Young investors may primarily need investment advice and basic financial planning. Older individuals, on the other hand, likely have more complex finances and bigger goals. Should you take a monthly or lump sum pension? When should you file for Social Security? When is the right time to retire? If you’re asking these questions, then you’re likely better served by comprehensive wealth management.

Not everyone needs a full menu of financial services, but as your life changes, it’s helpful to work with someone that can provide those options. Additionally, it is important to hire a fiduciary, which is someone who is legally obligated to act in your best interests.

Investment expenses

High investment costs eat your returns. Each dollar you pay in investment expenses, commissions and management fees is one less dollar you’ll see from your returns. This makes investment costs a good indicator of your future returns. By taking a low-cost approach to investing, you have a better chance at keeping more of your money working toward your goals.

Your asset allocation

The mix of investments – your asset allocation – in your portfolio is one of the biggest factors in your portfolio’s performance. Fortunately, you get to choose what to invest in. Your asset allocation should align with your unique characteristics such as your objectives, age, savings and income, current assets and attitudes toward risk. For example, younger investors, who have many years to work and grow their portfolios, can generally tilt toward risky investments such as stocks. Conversely, retirees, who are trying to preserve wealth, will generally want more conservative investments such as bonds.

Your emotions

When markets fluctuate or steadily decline, it can feel as if you’re on an emotional roller coaster. Some investors might panic and sell off their assets. Unfortunately, they typically do so near the bottom, essentially locking in their losses. Often, it is better to keep your emotions in check and stick with your investment plan. Markets historically have always recovered, so it’s important to be there when they do.

The appropriate asset allocation can help you control your emotions, as it may prevent you from making inopportune investment changes. If you feel uneasy during times of market turmoil, it may be a sign you need to reduce risk in your portfolio to a more comfortable level for you.

Tax efficiency

Taxes are an additional investment cost. Therefore, they also reduce your returns. When you sell an asset at a profit, you will likely pay taxes on those realized gains. The goal is to efficiently manage your portfolio to limit your tax burden. For instance, it can be more tax-efficient to own more income-generating investments in a tax-sheltered account and more growth-oriented investments in your taxable account. Also, keep in mind that exchange-traded funds (ETFs) are generally more tax efficient than mutual funds.

Tax efficiency is especially important in retirement when you use your assets to help support a sustainable income. You should work with an adviser to help avoid generating unnecessary taxable gains as well as avoid investing in funds with high turnover, in which the fund manager constantly buys and sells assets and passes the taxes on to shareholders.

Withdrawals

Even with good management, there is the possibility of a significant market decline that can impact your portfolio. If you’re withdrawing money for retirement, temporarily lowering the income you take during a market downturn, or correction, will likely aid your portfolio’s eventual recovery and long-term balance.

When it comes to cooking a turkey or investing for retirement, if you focus on what you can control, then the rest is gravy.

 

If you’d like to learn more about how to make smart financial decisions, download our Pocket Guide to Good Financial Thinking below.

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