What’s the best investment plan?
Photo: Andreas Praefcke. Source: Wikipedia
Lots of people ask for investment advice. They need help managing their money. They talk about the stock market or bank rates. But what they really need is financial guidance.
Classically, finance has three major reports: income, assets, and cash flow. Each of these areas has inflows and outflows—positive and negative entries. An income statement covers income and expenses; a balance sheet shows assets and liabilities; with cash flow there are inflows and outflows. Investment advice just addresses the asset side of the balance sheet—a small part of our total financial profile.
For most of us, our planning needs are pretty simple. When we’re young, we need to manage our income and expenses to save as much as we can and invest that. Ten to fifteen years from retirement, we need to get serious about asset allocation. But for most of our lives, our human capital is worth a lot more than our financial capital.
But simple isn’t easy. It’s one thing to talk about saving—it’s another thing to do it. Saving requires us to invest in ourselves when you’re young and avoid frivolous purchases and expensive credit card debt. Sticking to a budget is critical. As we grow older, it’s more important to manage risk—time is no longer on our side. The last ten years of saving are the most important, because that’s when the magic of compound interest kicks in. For example, if we are able to save $6000 per year starting at age 30 and earn 7% per year, our assets will double from $1 to $2 million in the last 10 years. But the world doesn’t travel in smooth curves. By the end of our accumulation period, we can’t afford to ride through a significant downturn.
Source: Douglas Tengdin
That’s why robo-advising may work for young people, but it’s not so good for people approaching retirement. Because it’s not just about what we make. It’s also about what we can keep.
Douglas Tengdin, CFA
Charter Trust Company