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And Why it’s Never Too Early to Begin the Financial Planning Process

Are you ready to begin investing but unsure how to get started? You’re not alone. Beginning the process of building an investment plan can be overwhelming. Following are several tips to help you get started.

1. Think about your portfolio, not just the investment

Many people put blinders on when they evaluate investments and restrict their analysis to a single investment, without considering it in the context of their other holdings. I’m often asked whether X stock is a good investment, and my response is always, “A good investment for whom?” There’s no way to answer that question without understanding the individual’s portfolio.

For example, let’s say I’m asked if Apple is a good investment by someone who is already invested in Google, Microsoft and Samsung. My answer is going to be very different than if I’m asked about Apple by someone who is invested in Target, Johnson & Johnson and JPMorgan. Apple’s contribution to these two portfolios will differ greatly in terms of risk. Chances are that the other technology companies have a very similar risk exposure as Apple, and it may not make sense to add another tech stock to the mix. In contrast, the portfolio that includes a retail chain, big pharma and a bank is much more risk-diverse and may benefit from the addition of Apple.

Another frequent mistake is holding overlapping fund styles. For example, holding a large-cap growth fund, a mega-cap growth fund and a large-cap index fund offers very little in the way of diversification. In fact, I would guess that the overlap across the average fund in each of these general styles is greater than 80 percent. Having multiple large cap funds is not diversification, even though you have multiple line items on your monthly statement.

In the current market environment, I also recommend caution with regard to the outperformance of the S&P 500 Index over the last year. Most likely, these funds have outperformed because they have more exposure to big technology. So, if you’re screening for outperformance in the hope of unearthing the next Peter Lynch or Warren Buffett, you’re likely over exposed to a certain asset class. Don’t let a stock-picking money manager fool you with asset allocation.

2. Assess your timeframe

Each investment has its own level of risk and return. As a general rule of thumb, if you accept greater risk, you have the potential for greater return. If you accept less risk, you can likely expect less return. While the two concepts are linked, time is also an important consideration, so don’t forget to consider short-term risk/return versus long-term risk/return.

For example, your FDIC-insured checking account has zero risk and, correspondingly, no reward. No interest accrues, but the principal is guaranteed. We all need checking accounts to pay our bills on a regular basis. We can’t risk the money we plan on using to pay for food and other necessities. However, over time, the purchasing power of assets held in a checking account will erode due to inflation; therefore, a checking account is best suited for the short term.

In contrast, stocks have significant price fluctuations on a daily basis. In 2020, the markets dropped over 30 percent in a matter of weeks only to go on to set new highs several months later with daily fluctuations that gave even seasoned investors quite a roller coaster ride. This is why it is important to commit to stock investments for a longer timeframe in order to increase your probability of capturing the return you expect for taking on more risk. By being committed to a longer time horizon for stocks, you can help mitigate the realization of short-term losses due to hitting a bad stretch in the markets. A long-term time horizon for stock investments is typically seven to 10 years.

To put this point simply – Long-term money is for stocks, short-term money is for cash.

3. Don’t pay for something you don’t need

As with any industry, the financial services industry offers a wide range of services and charg