Money Management Mistakes to Avoid
By Kim Ciccarelli Kantor, CFP®, CAP®
While some people do an exceptional job of instilling sound financial education within their families, the level of formal education offered on this topic is quite lacking. And, if you wait too long to learn valuable money principles, lessons are especially hard to come by in our adult lives. All too often, we learn the hard way. Scores of inexperienced investors have fallen prey to “quick fixes” that prove disastrous.
Any of us can learn and benefit from another’s experience – regardless of your age or financial circumstance. When considering the intentional process of building wealth over time, the words of my father come to mind: “Focus on what you can control: helping to avoid mistakes.”
His guiding philosophy – one which continues to shape our firm to this day – was that wealth could be achieved by doing the right thing consistently, steadily and patiently. Learning proactively from the mistakes of others (helping to avoid the most common mistakes) can be highly beneficial to your financial health and well-being. A few examples include:
Run your finances like a business: Whether you are investing assets of $500,000 or $5 million+, you have a great deal at stake.
As the CFO of your “financial company”, you must ensure that your assets are invested in a systematic, disciplined way that reflects your desired outcome. To accomplish this, you must have (1) a business plan that encompasses short-term and long-term goals; (2) quantifiable benchmarks by which to measure results; (3) a well-defined strategy for attaining your benchmarks and goals; and (4) an experienced, knowledgeable team of professionals to facilitate and execute your plan.
Define your investment policy: All too often, investors are susceptible to the vogue or conventional wisdom of the day. In reality, blanket statements like “This isn’t the right time to buy stocks,” or “Bonds are safe,” or “Cryptocurrency is hot,” do not constitute an effective investment policy. A smart investment policy is a strategic long-term framework that begins with your asset allocation. Consider your time horizon, income requirements, tolerance for risk and volatility, and return expectations.
When a significant change to assets occurs, such as a large withdrawal or contribution, the asset allocation should be revisited. Otherwise a minimum of every 1-2 years might be appropriate.
Give the market time: Despite all of the evidence to the contrary, our human nature drives us to believe that we will be able to successfully time the market – that is, realize all of the gains and get out in time to avoid all the losses. Regardless of this temptation, the consensus is clear: it is time in the market – not timing the market – that correlates to the greatest gains. Even the most experienced investor would find it nearly impossible to time the market correctly on a consistent basis. This is particularly true with stocks, where most of the gains are made in short, climatic spurts.
Consistency is the one key to success; however, the road to success is filled with peaks and valleys. While some especially gifted people like Warren Buffet or John Templeton have achieved admirable success in the realm of investing, we have seen numerous examples over the years where their investment approaches did not perform as strongly as anticipated. The common thread to their success was to create a distinct, well-articulated philosophy about how money is made in the market and to stick with it.
When you emphasize the process of advancing steadily and purposefully towards your money and life goals, you will likely find it easier to overcome the emotion and disappointment that could arise from searching for a “magic bullet” solution.
Limit your emotions in investing: Investing is all too often a manifestation of one of two emotions: fear and greed. While financial management should not be completely devoid of emotion, irrational fear and excessive greed can be damaging to your long-term prospects. Fear often creates the foundation for a classic money management mistake; directing your manager to sell all your stocks after the market plunges. On the flip side, you could lose your shirt going all-in on an overperforming stock or security during a bull market and not having a planned approach for selling.
Having a well-thought-out investment direction, one you genuinely believe in and are committed to, should be the conduit to making good decisions.
Plan for a lifetime: Most people underestimate the income they will need during each stage of life, with the greatest deficit occurring during retirement. It may be tempting to believe that you will remain in good health indefinitely, or that increasing your savings level is not necessary. However, not accumulating enough capital can leave you in a position where you could outlive your money – infringing on your financial security when you need it most.
Your CAS advisor can help you estimate your income needs throughout retirement, and determine a sustainable level of spending and savings based on your unique short and long term goals. With this in mind, develop an asset allocation policy that coincides with your lifestyle planning throughout your life time.
Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation. Additional securities and investment advisory services offered through FSC Securities Corporation, Member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail N, Naples, FL 34108. 239-262-6577.
