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4 Tips for Starting Your Investment Plan

Travis Bezella, MBA, CFP®

Director of Financial Education

Last Updated
August 13, 2020

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.

Tip #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.

Tip #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.

Tip #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 charges for them in a variety of ways. It is important to know what services you need, what you are paying for and how you are paying.

There has recently been a shift in the industry that has intensified competition among financial services firms, which is great for investors. As recently as 10-15 years ago, investors needed to pay more than 1 percent of assets for help building a diversified portfolio. There were also multiple other expenses, such as trading costs and mutual fund fees. Those days are gone. Now, a diversified portfolio is standard, trading costs are basically zero and there are a host of index funds available with very minimal fees.

Where there is still value is in wealth management. It is well worth a 1 percent fee for money management and comprehensive financial planning. In fact, most advisors now offer financial planning as part of the money management fee they charge to invest your accounts. (If not, you may need to consider a new advisor.)

The bottom line here is that it’s important to work with a wealth advisor who will provide investment advice alongside a full suite of services specifically customized to meet your needs.

Tip #4 – Get started yesterday

Of course, investing yesterday is not possible, but you should begin as soon as you can. You don’t need to know the absolute best way to invest before you get started, just don’t let your cash sit and earn mothing. Consider beginning with low-cost, broad-market index funds. Enroll in your 401(k). Don’t wait a year to do the research, just begin buying into the broad market. In this current low-interest-rate environment, there has never been a worse time for inaction when it comes to investing. Don’t lose your future purchasing power to inflation by sitting on the sidelines.

If you’re still intimidated by the time commitment of researching and monitoring your investments, consider working with an experienced advisor. Interview several advisors to learn about what they offer, what they charge and what you can expect when working with them.

At Creative Planning, we work with clients to develop diversified investment portfolios that help them achieve their long-term goals. We believe investments play a vital role in the financial planning process, yet they are only one piece of a much larger puzzle. If you would like to speak with one of our qualified advisors about how we can help guide you toward your long-term goals, please contact us.

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This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.

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