Three Rules For Financial Success

 

We live in an age of information overload. If we have a question, countless answers are at our fingertips and sometimes we just don’t know where to start. This can be especially true when it comes to finances. For example one of the most searched topics when it comes to finances is on how to reduce or eliminate debt.  We’ve discussed some of these strategies before when discussing student loan debt but the concepts apply to other loans as well.  A quick Internet search will give you the “snowball method” or the “avalanche method” as well as a plethora of debt reduction calculators. If you are worried about saving for retirement, multiple articles will give you a variety of different percentages you should be contributing to your retirement accounts and giving you advice on what accounts you should open. 

When it comes to investing,  I’ve included below three of my basic rules to help investors set up their finances for success and build a firm foundation for the future.  So step away from your search engine and consider my three rules for pursuing financial success. 

1. The Power Of Compounding 

We live in an age of information overload. If we have a question, countless answers are at our fingertips and sometimes we just don’t know where to start. This can be especially true when it comes to finances. For example one of the most searched topics when it comes to finances is on how to reduce or eliminate debt.  We’ve discussed some of these strategies before when discussing student loan debt but the concepts apply to other loans as well.  A quick Internet search will give you the “snowball method” or the “avalanche method” as well as a plethora of debt reduction calculators. If you are worried about saving for retirement, multiple articles will give you a variety of different percentages you should be contributing to your retirement accounts and giving you advice on what accounts you should open. 

When it comes to investing,  I’ve included below three of my basic rules to help investors set up their finances for success and build a firm foundation for the future.  So step away from your search engine and consider my three rules for pursuing financial success. 

1. The Power Of Compounding 

One of the most significant benefits of saving early and regularly is the power of compound interest. Compound interest helps the money you put away grow faster due to interest building upon itself. For every year you delay in saving, you’ll have to contribute exponentially more to reach your savings goals because of compound interest. Here’s an example of how this works.  If you start saving $400 per month at age 25, you would have $1 million saved by age 65 (assuming a hypothetical constant 7% annual investment return, no withdrawals from the account and the gains are reinvested at that constant rate). If you don’t start until age 35, you’ll have to save around twice as much to reach $1 million by age 65. 

The magic of compound isn’t limited to your money though. The personal decisions you make throughout your life also compound and eventually make up your lifestyle, your habits, and your mindsets. Be intentional about what you are investing in and let the compound effects be positive, not negative! 

2. Understand Your Unique Risk/Reward Profile 

Have you ever taken the time to determine how much risk you are willing to take with your investments? It’s not as simple as choosing investments in the moderate risk category. Each person has their own unique risk level based on his or her personality, time horizon, and life circumstances. If you want to maximize your investment life, you need to know where you fall on the risk meter.  I believe this is one of the hardest things for most investors to conceptualize.  It is easy for many to say they might be willing to accept a 10-20% decline in their portfolio’s value.  It is another thing to stare at a monthly statement and see the losses in actual dollars.  This is especially true for many when markets go through longer periods where they either decline or at best churn in place while making no substantial progress towards the investor’s goals.  

Eventually markets will rebound when the climate improves but often investors don’t wait around to see that period of recovery.  The market bottom in March of 2009 saw some of the largest investor redemptions ever just as things started to improve.  Similarly many who were scared out of equities during that period have sat out one of the best and longest bull market periods ever because they were worried about a repeat of the last market collapse.  Having a more realistic view of their risk profile might have stopped some of this behavior occurring for many over the last decade.  

Similarly, you also need to have realistic expectations for how much of a return you will get based on the risk level you invest at. For example, if you choose high-risk investments, you might have a better chance at receiving better returns. But if the market goes sour, it could affect you more than if you invested at a different level and received more moderate returns. Helping clients and potential clients understand their own unique investment profile is one of the major roles of most investment advisors.

3. Stick To A Systematic Approach To Investment Portfolios 

Do you have an investment strategy or do you piece together your portfolio? Having an organized portfolio driven by a personalized strategy and philosophy will help you reach your objectives. Systematic portfolio construction is about structuring your investments based on your risk level and your investment goals. Not only does this help you achieve diversification and appropriate allocation, but it also allows you to be objective and rational about choosing your investments because your decisions are based on pre-set criteria. 

Next Steps 

There is a lot more to the three concepts addressed above that I would be happy to discuss with anyone on an individual basis.  A short letter like this doesn’t give us the space to go into detail on any of these.  Investing isn’t always easy or simple, but sticking to a set of core guidelines can help you make better decisions. At Lumen Capital Management, we can help you understand investments and assist you in holding to these core principles. Give us a call today at 708.488.0115 or email us at lumencapital@hotmail.com to schedule an appointment and set your finances up for success. 

This will be the last time I'll ask for a favor. I'm trying to do an overall review of my communications strategy to clients and friends of the firm going forward.  If you are a client of mine please let me know via dropping me an email, text or call if you've been reading this blog in the past few months.  I'd appreciate finding that out.

Thanks.