Planning to start investing? Outstanding idea!
Want to do it yourself? Well, that’s a bad strategy.
Sure, there’s a wealth of financial data and tools
available on the internet. But there’s a
world of difference between a professional doing a job for which he or she is
qualified, trained, and experienced, and an average Joe doing the same thing
after a few hours of online research. After all, would you trust a doctor to operate
on you if he would be getting the instructions for the surgery from Wikipedia
pages or YouTube videos?
Bad retirement planning can ruin your financial goals
and leave you penniless at an age when you need money the most. That’s why it’s critical that you choose a
trusted, reputable, and well-experienced personal financial planner to secure
your financial future.
Here are just some of the ways in which bad retirement
planning can cause big problems.
An Emotional Rollercoaster
It’s not an understatement to say that smart investing
requires a heart of steel. Most people
let their emotions get the best of them.
You are online, analyzing recent financial results. You find that stocks have gone up and bonds
have gone down. What do you do? Many people take it as a sign to move all
their funds into stocks. This 100% or
nothing plan is a financial strategy doomed to disaster!
Here’s
the golden rule of Retirement Planning: It is a long-term strategy.
Over the course of many years, the performance of
stocks, bonds, mutual funds, and other instruments in your portfolio will rise,
fall or stagnate multiple times. You cannot let your emotions get the best of
you and keep changing your investment strategy based on every new piece of
financial planning advice you get. If
you do that, your entire retirement funds will be subjected to the vagaries of
short-term market fluctuations. In other
words, you’ll be losing a substantial amount of money in short order and may
never be able to get it back.
Absence of the Right Benchmarks
How do you know which investment options are
performing best and should be in your portfolio?
You probably follow the standard benchmarks that
market professionals use, such as the Standard & Poor’s 500 index. But the S&P 500 and other popular
benchmarks only reflect the market performance of individual asset
classes. Individual asset classes have
no diversification, but diversification is the key to the potential for
worthwhile gains while limiting risk exposure.
These single-class benchmarks outperform some of the time, and
underperform at other times. So, when
you focus on them without seeing the bigger picture, you are not getting the
right financial planning advice.
Without a broad view, you will mostly end up investing
in the wrong instruments, which will leave your retirement funds largely
depleted by the time you retire.
On the other hand, industry professionals such as Certified
Financial Planners will have comprehensive benchmarks that are diversified
extensively to reveal more accurate market trends. Their investment strategies will be better constructed
and more likely to produce better returns.
No Hedging
Stocks, bonds, and other financial instruments always fluctuate
widely in the short term. So it’s
important to stick with your portfolio. This
holds true even if a few of the holdings in your portfolio are not performing well.
But what about those investments that go
down in the longer term? How do you
protect your retirement funds from that? And how do you protect your portfolio from
commitments that plunge unexpectedly and never come back up?
Since it is impossible to say which stock or bond will
fall unexpectedly, there are countless examples of amateur investors suffering
major losses after having invested heavily in poor selections.
Professional advisers counter this risk by using a
broad variety of asset classes. It's
just like weaving together many fibers to create a strong fabric. The goal is to ensure that even if there's an
occasional disappointment, the rest of the portfolio will continue performing
well and preserve your retirement funds.
How diverse is diverse enough? The global economy is complex and
extraordinarily interconnected. If one
industry goes down, many others will be affected. Some industries will suffer negative shocks,
while some industries might experience a boom. A DIY investor can never gain the expertise or
knowledge to determine which industries are well-protected and which are not.
Only a seasoned professional planner with years of
experience in the industry can determine that and spread your funds properly over
a well-conceived group of asset classes to increase the likelihood of the good
returns you are hoping for while limiting exposure to risk.
N. Russell Wayne, CFP®
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