What mistakes are made when investing money
In two decades of helping people with their money, I’ve learned that most people – left to their own devices – make mistake after mistake. They do precisely the wrong thing at the worst time – zigging when they should be zagging. These errors crush people’s finances and scuttle their retirement dreams. A good financial planner can help but it doesn’t guarantee success either. Planners can only advise; our best advice sometimes goes unheeded.
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Some people don’t like financial “guru” Suze Orman. She shoots from the hip and tells people the raw truth, which often hurts. I must say that I do like her common-sense advice. In her book The Money Class: How to Stand in Your Truth and Create the Future You Deserve, Orman admits that no one knows what the stock market will do this year or next. Not Warren Buffett, not the best fund manager and not the smartest investment advisor.
Predicting markets is a fool’s game
During good markets, I’ve had clients tell me I’m brilliant. I’m sure some also think I’m an idiot when markets are lousy and their investments are doing poorly. I’m neither a genius nor an idiot. I’m just a guy who knows how to build good portfolios, how to create a financial plan, how to stay on track, how to minimize taxes and – perhaps most importantly – and how to avoid the colossal investing mistakes that destroy retirement dreams. the truth is I have no idea where the markets are going in the next year or two. I do think I have a pretty good idea where they’ll be in the next 10 years, which is the period you should be concerned about. That is unless you’re within a few years of needing your money for retirement, or for some other purpose.
“Don’t worry if the market goes up or down,” Orman says. “Focus on building a diversified portfolio with a mix of stocks and bonds that will grow in value over the long term. Think decades, not quarters.”
Related article: Is it possible to predict the future of the stock market?
Investing is important but not everything
Orman says that there are more important factors to your success than an investment’s rate of return.
“A financial planner can help you figure out an allocation strategy,” Orman contends, in other words, the proper mix of stocks, bonds and cash to fit your goals. “That said, how much money you set aside is more important than how you invest it. You need to be putting away at least 10 to 15 percent of your salary every year – around 25 percent if you started saving in your 30s or 40s.”
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That requires people to – wait for it – spend less and take on less debt. Orman writes. “I am going to challenge you not merely to live within your means, but to live below your means.”
Orman says that income from your savings plus government benefits should replace 70 to 80 percent of your pre-retirement income. If you get a raise, invest half of it. Actually, I think that some people can manage fine on 50 to 60 percent of their pre-retirement income.
The last thing I’ll highlight from Orman’s fine book is that if you’re not retiring or otherwise don’t your money in the next 10 years, a stock market decline is actually good news. You should be cheering for bad markets.
Related article: Understanding that Buy Low, Sell High works best
Orman invites you to imagine that there is a jacket you’ve had your eye and it’s discounted by 25 percent. “Wouldn’t you be thrilled?” she asks. “You should feel the same way about stocks. When the price of an investment drops, your dollar buys more shares—and more shares will earn more money when the markets inevitably go back up.”
She’s saying what I have said much time – that a market downturn is an opportunity to buy into a rising tide at reduced prices. Learning this important fact should help you avoid investing mistakes and make you a more successful investor.