Easy Steps

Investing is not easy, and there’s a lot on the line when we’re dealing with our life savings. Fortunately, there are some easy steps we can take to start moving in the right direction.


Get Educated Or Get Help


The first step is an easy one - you just have to make a decision.

Studies show most people do best with outside help, even after fees are factored in. If your employer gives you access to discounted financial planning and coaching, this can be the easiest route to better investing.   While of course there are no guarantees, studies show that retirement investors who get professional help make an average of 3% more per year after fees. While that may not sound like a lot, over the period of 30 years, this could amount to an average of about 70% more in your account.  So for most people, it’s a smart decision.

Managed Accounts are a complete investment service offered by some employers (check with your Benefits Department).  If this is available, a professional team will invest your money based on your choice of investment style and will make all necessary transactions and adjustments over time.  The fee for the investment management service is automatically deducted out of your account,  so there are no extra bills or ongoing efforts involved.

Managed accounts do not guarantee a particular return and all investing involves the risk of loss.

As long as the fees are reasonable, this can be a good option to save you time and increase your peace of mind.

If Managed Accounts are not available, Target Date Funds may be another  option offered by your plan.   A target-date fund is a mutual fund that is structured for those who plan to retire in a particular time frame.  These can be an aid, since professional mutual fund managers take care of the management of the fund.

However, a Target Date Fund is still a mutual fund and all mutual funds involve risk.  A target date does not have any guarantees on performance and its returns will vary based upon how the market performs.

Your other alternative is to do it yourself. This will give you complete control, but you need to commit to getting educated.  Then you need to stay engaged to make it work over the long run. You just don’t want to be another one of those statistics that DALBAR found.

You can get started by taking our Investing 101 course.  Then, it’s usually recommended to meet with a financial professional regularly to check in and make sure you’re on the right track.

There’s unfortunately no one-size-fits-all answer. However, with your retirement money, there is a lot on the line.   Do it right and you’re set up for a comfortable retirement. Make a mistake, or just ignore it, and risk a retirement where you’re constantly worried about money.

Investing is a big undertaking. For those who don’t work in the investing industry, learning can be time-consuming and mistakes can be expensive. Given that studies show those who use professional help usually accumulate much more for retirement, this often is a good choice.

But the most important thing is to decide which course is best for you, and commit to it.

Albert Einstein has been quoted as saying “Compound interest is the eighth wonder of the world.” Whether he actually said it or not, it’s an amazing thing!  Not familiar with the concept?  Get a quick review here.

The take-home message is: Start now and make sure you have at least part of your retirement money in the market where it can grow over time.

Prioritize your retirement savings to fully fund tax-advantaged accounts first. Instead of paying taxes on gains, those earnings stay working for you, further increasing the compounding of your investments.

So max out your 401k, 403b, 457, or any IRA you may have, before putting money in taxable accounts.


Prioritize Time and Taxes


Supercharge your investing simply by prioritizing two things.


Put It On AUto-Pilot


Use simple systems to do some of the work for you.

A core principle of investing is to put money to work consistently. We do that by saving and regularly adding to our investment accounts. If we just force ourselves to remember to transfer it, it may or may not happen. But by having money automatically deducted from your checking account or paycheck, it’s more effort to stop it.

So, take a minute and decide which accounts you can have automatically funded through auto-withdrawals from your paycheck or your checking account.  Then, set them up!  Even if you start with small amounts and increase them later, consistency is what counts.

The other big benefit is we never see the money so we aren’t tempted to spend it first. Out of sight, out of mind.

Yes!  We’re all for using technology to do the hard work for us:

  1.  Digits monitors your spending habits, then takes very small amounts from your checking account frequently and places them into a free savings account.   According to their website and reviews, it avoids problems by carefully getting to know your spending habits, and even will refund your overdraft fees if it creates any problems (see their terms for complete information).  After  a few months Digit will have saved some of your money, which you can then leave there for an emergency fund, or transfer to an investment account.  Digits charges you no fees and your savings account earns ‘bonuses’ which are similar to interest.
  2. Acorns rounds up your purchases and puts the additional amounts directly into an investment account for you.  While there are fees associated with this app, it does put your money straight into an investment account that is managed automatically for you. The fees are $1 per month for accounts under $5,000, or 0.25% for over $5,000.  If you’re under 24 or a student, it’s totally free.

Do your own research to make sure these apps are right for you.  But they can help make things easier for many of us.

Remember, these apps are just for extra savings.  First we should be maxing out our retirement accounts, but these apps can help you build an emergency fund and then find more money to invest in a taxable account-all without thinking about it!

(For advice on investing outside of your retirement account, see Selecting an Advisor here.)

Well, it’s not quite magic, but by taking the stress out of investing, it can feel like it.  It’s a system called Dollar-Cost Averaging. Basically, you decide on one amount (let’s say $500 per month).  Then, you invest it at the same time each month (i.e. the 1st of the month).  And you buy the same investment each month (a particular mutual fund).  The key is that you cannot vary from the formula. Always invest the same amount on the exact same day of the month, and buy the same investment. The only thing that will vary is the amount of shares you receive each time.

When prices are lower, the system forces you to automatically buy more. When prices rise, it has you buy less. You no longer have to worry about judging just how high or low the prices are, or worrying if you should or should not be buying now. The system makes those decisions for you.

By doing that, it also creates discipline for you. While it’s not perfect, dollar-cost averaging removes the most dangerous component of our investing: our emotions. (See the Investing 101 course to learn more about this system).

As consumers, we usually hate overpaying, right?

Strangely, not only do most people not look at how much they are paying in fees for investments, most people have no idea how to even find out the cost.

That is unfortunate since fees can make a HUGE difference in how much you end up with for retirement.

With investments such as mutual funds, do you get what you pay for?  Are more expensive funds better?  Are the low-cost ones cheap for a reason?  That’s a good question! 

study by Morningstar.com found that “in every single time period and data point tested, low-cost funds beat high-cost funds!”    This research shows that the best predictor of mutual fund performance is, surprisingly, low fees!

Further, the impact of high fund expenses can take a big bite out of your retirement nest egg.  Over 30 or 40 years, high fees can mean having several hundred thousand dollars less in savings.

So the fastest way to give yourself a raise is to make sure the funds you are invested in have reasonable fees.

To learn more about fees for mutual funds, exchange traded funds (ETFs) and stocks, see Lessons 6 through 8 in the Investing 101 course.

Fees can be complex.  But, learning to manage fees can mean tens or even hundreds of thousands of dollars in your pocket over time.  Wouldn’t you say it’s worth spending an hour learning?

To learn all about investment fees, see Lessons 6 through 8 in the Investing 101 course.


Review The Fees You're Paying


A fast way to increase your return is to decrease your expenses.

“Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”
–Will Rogers


For those of you who choose to do it yourself, here are more tips to keep you on track.

The media loves to play up every movement in the stock market, large or small. But the market naturally goes up AND goes down. If it didn’t, we should really be worried!

Watching the news too much or paying attention to every daily up or down move is a recipe for disaster. This activates our emotions and leads most people to either want to over-invest in whatever has been going up, or sell everything and run.  Both of these responses are what hold most investors back.  Learn more about these natural tendencies and how we can control them in our Investing 101 course.

What is asset allocation? Simply, it’s how you split your money into different investment types.  How much do you put in stocks, and how much do you put in bonds?  There’s no set formula.  It varies with your financial situation and your goals.

While it might not seem to be a big deal, it is. In fact, asset allocation can be more important to your return—and your ability to sleep at night—than your specific investments. This is one area that novices ignore, but the pros spend the most time on.

And, when the markets start dropping, asset allocation can help you sleep at night.  Learn more about asset allocation in the Investing 101 course.

Once you have an asset allocation plan, you’ll put a certain percentage of your investment money into stocks, bonds and other asset “classes.” So you can put your feet up and relax, right?

Not yet. Your investments must be managed over time. Fortunately, there’s another system that helps us avoid emotions, and that’s called rebalancing.   What is rebalancing?  Basically, we take some of what has done well, and sell enough to get back to our original target percentage.  Then we buy more of what has underperformed, to again, get back to the percentage we originally wanted.   We automatically ‘sell high’, since we sold the investments which had done well. Then we took that money and bought more of the losers, so we ‘bought low’. Brilliant!   This way we outsmart our natural urges, which would have been to dump the losers and go all-in on the winners.

Learn about rebalancing in the Investing 101 course.

Investing is a long-term activity. You need to give your money time to get through the normal ups and downs of the market. And you need to give your money a long enough time period to allow it to benefit from compounding.

If you invest for the short term, the market may be down when you need the money, forcing you to take a loss.

For short-term needs, we can use things like savings accounts, money market funds or CDs. That way we can access money when we need it.

In sports, we usually do well betting on the winning team. They’ve got the right formula, so their success is likely to continue.

Interestingly enough, mutual funds and ETFs are not that way. One of the most common disclaimers you will find when you research funds is “past performance is no indication of future performance.” Believe it!

The reason it doesn’t work is that the stock market is cyclical.  It’s more like betting on an endless summer. Just ask any Northerner on Game of Thrones: winter is coming. Study after study show that today’s outperformers turn into tomorrow’s losers. And vice versa. So by the time performance chasers jump on the train, it changes direction. So when choosing between mutual funds, it’s important to not chase performance. It’s a complex subject, so find out more in the Investing 101 course.

We humans usually love a sale.  We will even stand in line to get good prices at times. But strangely, with stocks, humans would rather pay more!

We can’t help it, we’re just wired that way.  Sadly these natural emotions force us to miss opportunities and then do worse—buy at the wrong times.

Especially for those of us with a lot of time until retirement, bear markets (markets where stocks are dropping) can be our best friend. They give us the opportunity to buy stocks on sale. The longer the bear market, the more we can buy on sale.

True, it’s hard to resist our emotions and buy, especially when the news is reporting on yet another horrible day on Wall Street.  But, history shows us that these are normally the best times to use dollar-cost averaging to increase what we own.

With stories of early investors in Apple, Microsoft, etc., it’s easy to think most wealth is created by picking individual stocks. However, statistics tell us that is not true.  Studies show that most stock pickers fail.

In fact, even professional stock pickers, those who run mutual funds with so-called “active” approaches, don’t win the vast majority of the time.

The biggest problem with individual stocks is something called “company risk.” You can put 10% of your money in one company, but what if that company faces a huge lawsuit, a product defect, or a natural disaster? If the stock price drops a lot, you get really hurt.

Fortunately, company risk is the easiest risk to sidestep. You can avoid it altogether by investing in mutual funds and their newer cousins, exchange-traded funds (‘ETFs’). These allow you to buy a small slice of hundreds or thousands of companies, so if one goes out of business, it doesn’t impact you much.

All information provided on myfwcenter.com is general in nature and not tailored to you. It should not be considered individualized advice.

Financial education and website provided by Wavelength Financial Content Inc.