Thank you to Gerard Reho of Edward Jones for discussing some of the important aspects of financial planning that we should consider when planning out our financial future. One of the most stressful things in life is worrying about our finances, current and future, but there are some things we can do to help keep our money safe. For many of us, we need help and it is advised to consult with a financial advisor about your financial situation and how to best achieve your financial goals.
5 Crucial Questions
There are 5 questions that we need to ask ourselves, sometimes more than once, as we start down the road to financial stability:
- Where am I today? – What does your current financial situation look like? What are your financial goals – immediate, long-term, something else?
- Where would I like to be? – In an ideal world, what does financial stability look like? Are you looking for a comfortable retirement or to purchase a home? Your goals will have a direct impact on how best to achieve them.
- Can I get there? – Is there enough time? Do I have enough money? Do I have the right financial products to fulfill my goals? Does my risk tolerance make my goals unachievable?
- How do I get there? – Can I go at this alone? Do I need to diversify my portfolio?
- How can I stay on track? – What happens if I lose my job? What if the market crashes? How often should I reevaluation my financial situation?
Unfortunately, the answers for many of these questions will be specific to the individual rather than a one-size fits all response. However, there are some general steps we can take to help us along our financial wellness journey.
Steps to Financial Success
As mentioned before, it is highly recommended to work with a financial advisor to identify your goals and go over the available options to achieve your goals.
Develop a Strategy
The first step in any financial planning decision, whether short or long term, is to develop a strategy that will serve as a roadmap to achieving your goal. This strategy will depending on a variety of factors, including how the money will be used (retirement, college, house), timeframe of the use (5, 10, 20+ years), and your risk tolerance. Perhaps you are young and starting to plan for retirement; you might want to start putting money away in a IRA, 401k or other retirement account so that the money can continuously grow tax-deferred for many years. Perhaps you are looking to fund your child’s education, but started late; do you you have enough time for your money to grow to cover all of their expenses? Or maybe, you are confident in your financial situation, but have some extra money and want to take more risk for a higher return.
We cannot all be day-traders who are constantly monitoring the markets and making split-second decisions; in reality, only about 10% of day-traders are actually successful. In general, sticking with the stock market will net you larger returns in the long-run. The stock market, historically, produces gains of 7-10% per year in its more than 100 year history. Bonds, on the other hand, while more stable in many cases, produce gains of about 3.5%. While the stock market can be more volatile in the short-run, it is often the best option for those looking for long-term investments and gains.
Here is a great example of how sticking with the market can benefit in the long-run. Someone who invested $10,000 in the S&P 500 in 1980 would have made $566,000 by the year 2016. If that person had instead tried to “play the market” and missed the 10 best days in the S&P 500, they would only have made $273,000, less than half of their potential.
Asset Allocation
“Where do I put my money?” can be a very complex question and can be heavily dependent on your goals. There are so many investment options out there from stocks, to bonds, to mutual funds, to crypto, and so on. Each comes with its own inherent risks, historical trends, and potential yields. Economic downturns can have varying effects on each investment option, which is why many financial advisors advocate for diversifying your investment portfolio. Spreading your money out in different investment options and even different sectors or types of a specific investment, can help lessen the impact of an economic downtown on your financial wellbeing.
Many people think of diversification as just stocks vs. bonds, both of which are important considerations in asset allocation, but the concept of diversification goes even deeper; who or what you are investing in can have just as big of an impact as the type of investments you choose. For example, you can invest in domestic and/or international companies, funds, and markets where local events might not affect your portfolio as much. You may also wish to consider whether you want to focus on value, growth, or a combination of both. Choosing quality companies and investment options that have a proven track record over the long term can help secure your money rather than trying to speculate on new or unproven entities to make a quick profit. These considerations can drastically alter your investment portfolio and help further insulate you from economic instability.
This is where all of your planning and work with a financial advisor can come in handy. Being able to match your goals and risk tolerance with the many options out there is essential in creating a confident, robust, and resilient portfolio that helps you sleep at night.
More Information
If you would like more information about financial planning, please visit Gerard Reho’s page at https://www.edwardjones.com/us-en/financial-advisor/gerard-raho to find his contact information or to set up a free, no obligation consultation.
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