The world of finance and investing is obsessed with ideas such as tips, tactics, and strategies, but if you try to implement them without a strong foundation, you risk hitting roadblocks along the way to retirement. That’s why it’s important to start with the foundation of financial planning when you’re investing for retirement before diving into the deep end.
The foundation I’m referring to consists of the timeline principles underlying all financial planning. There are three timeless principles of investing that everyone needs to know, and they have to do with expectations, measuring success, and understanding the purpose of your money.
When you understand these principles at the core of good investing, you can use them to build the right investment strategy for you.
Principle #1: There’s No Such Thing as a Perfect Investment
If you were able to design the absolute perfect investment where you could put all of your money, how would you describe that perfect investment?
You’d probably want it to make you a ton of money, be completely risk free, and remain accessible without penalties. But there’s a name for an investment that offers high returns, safety, and total access: a dream.
The truth is that there’s no such thing as a perfect investment. You won’t find all three of those characteristics in a single investment, but you can find investments that offer two of the three. For example, a certificate of deposit (CD) offers safety and high returns, but you give up access. Alternatively, the stock market offers access and the potential for higher returns, but it is not considered safe. You’ll want to consider your own needs and prioritize what you value the most—returns, safety, or accessibility—and then find investments that align with your retirement goals.
As a general rule, when you’re choosing an investment, if it sounds too good to be true, it either is too good to be true, or you just haven’t heard the bad news yet. Keep this principle in mind, and you can save yourself from big losses by avoiding investments with hidden drawbacks.
Principle #2: Success is Measured by Who Accomplishes Their Goals
The second timeless principle to know is that when you are investing, success isn’t actually measured by who earns the highest rate of return. Success is measured by who accomplishes their goals. Before you determine where you put your money, you need to have a clear idea of what you want your money to do for you.
If your goals are completely different than someone else’s, logic dictates that you should use different strategies. For example, think about if we were trying to determine the “best” mode of transportation. If I am going over to my next-door neighbor’s home, how am I going to get there? I suppose I could drive, but I am pretty sure that simply walking would make more sense. If I’m going downtown for a date with my wife, I could walk, but it would take hours. So, therefore, I would drive. What determines my method of travel is my destination.
The same idea applies to investing: depending on your goals, you’ll be successful if you choose the investments that best align with them.
You might say, “But if you make the highest average return, wouldn’t you automatically accomplish your goals?”
The answer is, sometimes, yes. Sometimes, no.
Consider a hypothetical person who starts putting money into their 401(k) at age twenty-five, works until sixty-five, then lives off their nest egg until ninety-five. Let’s assume that they averaged 8 percent returns per year. In the first ten years of investing, the markets soared. Let’s assume it was the same as the 1990s. During that decade, the S&P 500 went up an average of an incredible 19 percent per year.
Then, let’s assume that the worst ten-year stretch of investing for them came right when they turned sixty-five. Now, when the balance of the investment account is being reduced by market losses at the same time as someone is withdrawing for retirement, it is a perfect storm that can accelerate the nest egg toward a zero balance.
As you can see, the investor would have achieved their goals with a lower-risk investment strategy, even if it meant lower average returns. Remember, success is measured by accomplishing your goals, not by the rate of return.
Principle #3: The Purpose of Your Money is Affected by Your Current Phase
We’ve covered the fact that there’s no perfect investment and that the purpose of your money needs to dictate what you do with it. Lastly, the third principle is this: The purpose of your money is affected the most by the phase of your investing lifetime you currently reside in.
When you consider your investing lifetime, climbing a mountain is a fitting analogy. Even if you aren’t a mountain climber, you can probably visualize climbing to the top of Mount Everest. You might think your goal is to scale the mountain, but really, it’s to scale the mountain and return safely to the bottom. What does this have to do with investing?
Climbing the mountain represents that portion of your investing lifetime when you are accumulating your nest egg. That moment of exhilaration at the top of the mountain represents the very moment of your retirement. You still need to get down that mountain safely, meaning you still have to make investment decisions about your nest egg. But at this point, most retirees are also taking income from their investments, which changes their purpose dramatically.
Although there are many factors that help you determine the purpose of your money, whether you are on your way up or down the mountain is one of the biggest factors affecting your investment decisions. Where you are will influence whether you’re saving for decades into the future, or whether you’re shifting your focus to income and preservation, not growth. Knowing which phase applies to you is critical for choosing the right investing strategy.
The Principles Form a Foundation for Growth
When you’re planning for retirement, it can be tempting to jump straight into complicated strategies, but you’ll have better long-term results by starting with the foundational principles.
These three principles form the foundation on which you can grow your personalized investment plan. Remember that there’s no such thing as a perfect investment, and you’ll avoid too-good-to-be-true schemes that drain your savings. Measure your success by whether you accomplish your goals, and you won’t make mistakes chasing the highest returns possible. Lastly, recognize where you currently are in your investing lifetime, and you’ll make better investment decisions for this phase of your journey.
Build a financial foundation with these timeless principles, and you’ll be able to make better-informed decisions as you create your personal retirement plan.
For more advice on investing for retirement, you can find The Retirement Secret on Amazon.
Securities offered through Kalos Capital, Inc. and Investment Advisory Services offered through Kalos Management, Inc., both located at 11525 Park Woods Circle, Alpharetta, GA 30005, (678) 356-1100. Preservation Specialists, LLC is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.