Joel Dresang: Steve, when people say it’s better to light a candle than curse the darkness, it’s an acknowledgement that we should control what we can instead of being controlled by what’s out of our hands. I know that you share that sentiment a lot of times with investors, to tell them that they should take control of what they can and not be distracted.
Steve Giles: Yes, Joel. There’s a lot of peripheral noise out there that I think can distract investors. And they want to worry about interest rates. They want to worry about inflation. They want to worry about what’s going on overseas. Those are all things that at the end of the day we have absolutely no control over. I try to reorient their focus and make sure that they pay attention to the things that they have control over. And I’ve narrowed those down to four.
Joel: Let’s talk about those. The first one that you talk about is that you can control as an investor how much you save.
Steve: Yes, Joel. You know, I can’t save for you. At the end of the day, you’re the one that’s got to save for yourself. If you want to retire, you need to put some money aside.
Saving is critical. You and I both know that the more we’re able to put aside, the better off we’re going to be longer term. The less we can spend, the more we’re going to be able to save in the short term, and that’s going to help us longer term.
Joel: And part of how much you save is also how long you save.
Steve: The longer that you save, the better off you’re going to be. Compounding interest is a wonderful thing. Consider that a 20-year-old who’s able to put aside $2,000 a year between being 20 years old and when they retire at 66, will have $1 million because of compounding interest.
But the flip side of that, Joel, is – and I have this conversation a lot with clients, the longer you’re able to delay retirement, the longer that that portfolio, the longer your nest egg, is going to be working for you before you’re able to pull the trigger.
Joel: So, how much you save, how long you save, the third thing that you say that investors have control over, is watching their expenses, watching their costs or how much you spend investing.
Steve: Consider that when you invest in mutual funds there is an expense ratio that’s associated with that. I think that investors that pay attention to investing in low-cost funds, low-cost investments, are going to have a benefit longer term.
I also think that if you pay attention to your tax savings as an investor. Consider that a lot of investors have available to them, tax-advantaged 401(k) accounts through their employers, tax-advantaged saving accounts outside of your 401(k), like a Roth or a traditional IRA, give investors incentives to put money away and save on taxes until they retire. And they need that money in retirement.
Joel: And, lowering those costs can give you bigger bang for your investing buck.
Steve: Absolutely, Joel.
Joel: So the fourth point that you make is how you allocate your investments.
Steve: Studies have shown that 92% of our success is driven by our asset allocation.
Most people when I first meet them, want to come in and talk about stock selection. They want to talk about market timing. Less than 8% of our success is attributed to stock selection or market timing.
If 92% of our success is attributed to asset allocation and we have control over that, it’s important for us to make sure that we’ve got the right mix.
Make sure that you have in your portfolio plenty of longer-term holdings, stock allocations, stock mutual funds, to give you a hedge against inflation. But you also want to make sure you’ve got enough money in shorter-term investments, conservative investments, bond funds, fixed-income funds, to provide you with stability, less volatility and also distributions when you enter into retirement.
Joel: And we’ve talked in the past that setting that balance isn’t a set-it-and-forget-it thing. That it’s an ongoing factor that you control.
Steve: Well absolutely, Joel. Of course, situations change. As we go through our investing life, we’re going to have different circumstances that will drive that allocation.
The younger we are, obviously, the general rule of thumb is you can probably take more risk, have more money in stocks. As you get older, the less risk you’re going to want to take.
So whatever plan you come up with needs to be flexible. At the end of the day, I think it comes down to making sure that we focus on controlling the things that we have control over, and your allocation is one of the most important.
Steve Giles is vice president and investment advisor at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Jason Scuglik and Peter May
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(initially posted August 30, 2017)
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