Step one is to consolidate all your assets and liabilities with one institution for one statement every month.
If you have multiple brokerage accounts and bank accounts and IRAs, get everything into one place, one institution that will allow you to see at a glance your financial plan. There are many reasons to consolidate and one not to.
Consolidation provides clarity. If adjustments need to be made, and they will need to be made, you’ll be able with one statement to see where and what needs adjustment.
Where to consolidate your accounts? What you want is a full-service entity — an institution that can provide you with brokerage help for buying securities, loans for mortgages, and money market mutual funds for cash access. Many banks and most brokerage firms provide such services through cash management accounts. You will want to look for a type of consolidated account that offers you cash management, the ability to write checks, as well as brokerage and hopefully mortgage and insurance information.
The only reason not to consolidate is if you have multiple certificates of deposit with banks. Since banks offer FDIC insurance up to $250,000, anything over than amount is uninsured if the bank goes under. Certificates of deposit as an investment vehicle provide protection but at the cost of any meaningful interest levels and since they tie up your cash by providing penalties for early withdrawal, having multiple certificates of deposit at different banks makes no investment sense.
Diversity, Diversify, Diversify!
Never put all your eggs in one basket.
Who in their right mind would put all their investments into one investment vehicle?
Unfortunately, many people do. And, if a company goes bankrupt, and they do, the value of all your investments will be lost. Approach investing in an enlightened manner — diversify, diversify, and spread your investments over many different investment styles and “sectors.” Sectors include pharmaceuticals, technology, healthcare, bioengineering, utilities, communications, real estate, etc.
Investment professionals point to the “Rule of 92” — this refers to a study of investment success that indicates 92% of the success of an investor over the long term is directly related to whether or not the investments are diversified, not to whether the investor happened to pick the next Microsoft.
Market timing, jumping in and out of the market, simply doesn’t work:
- First, the average investor has no idea what stocks are going to move when. Insider trading, trading on information that is not publicly available, is illegal. This means all information released to the public is released on the same day and available to everyone at the same time—why would anyone think that because they saw John Q. Doe on CNN talking about his new company’s latest gadget, that information was not also disseminated to millions of other people. How could a “sound bite” possibly be a reason for buying a stock? Or hunches? When to buy, when to sell, all of this market timing simply doesn’t work for the average investor.
- Second, every time a person buys or sells a security, they pay a commission to a broker. These transaction costs eat up a lot, if not all, of any profits incurred through market timing. Most people who engage in these activities are better off going to the racetrack—this is gambling, pure and simple. Unfortunately, many people gamble with their life savings. And lose.
Your Secret Weapon: Compound Interest
The best part about investing is that you can expect to make interest on your interest.
Compounding is a simple concept but relates directly to your ability to be a successful investor. In year one, let’s say you buy a stock for $100 per share that pays a dividend of $1.00 a share annually — this means you are making 10% on your investment. If you leave the dividends untouched, they will be added to your principal so that by year two, you will have $101 invested and you can expect to receive 10% or $1.10 in interest for year two. By year three, you will expect to receive 10% return on your investment of $102.10. That’s compounding — if the rate of return on your investments remains consistent and you reinvest, then you will grow your assets considerably through compounding. Taking full advantage of the concept of compounding is why financial planners advise you to start investing at an early age. If a 20-year-old put $200 a month into investments yielding a 7% rate of return, he or she would have $528,025 at age 65. At a 12% rate of return, he or she would have $2,376,484.
Don’t Obsessively Watch the Stock Market
The media exists to sell advertising and is an entertainment medium. To fill up the 24-hour-a-day financial “news” broadcasts like those on CNN and CNBC, the media have to focus on “sound bite” financial analysis. So, the CEO of a company sounds intelligent. So what? Unless the company is sound, with a solid earnings record and long-term prospects, who cares? Why expose yourself to barrages of sound bites — the only effect is surely to cause you self-doubt about your investment choices. Turn the noise off, or sit back and enjoy the entertainment of it. Don’t use the information conveyed to you through business media as your justification for making an investment.
Business media have intensified the focus on quarterly earnings reports. Every day, every minute, the financial media are citing companies’ quarterly earnings. And pity the company that doesn’t report an increase in earnings. Their stock drops. This emphasis on short-term profits no doubt contributed to the corporate scandals of 2001-2010. Corporate officers, afraid to report true corporate conditions, have manipulated their accounting systems to show continual increases in quarterly returns (taking huge bonuses based on those returns, too).
As a long-term investor, who cares what the stock price is on a day-to-day basis? Your goal is to purchase investments that are sound over a long period of time. What you are buying is a piece of a company that you hope will provide long-term and consistent returns. The movement of stocks up or down is called “volatility” and all markets are volatile and move according to many different factors, most having nothing to do with the fundamentals of any investment.
About the Author: Lyn Striegel is an attorney in private practice in Chesapeake Beach and Annapolis. Lyn has over thirty years experience in the fields of estate and financial planning and is the author of “Live Secure: Estate and Financial Planning for Women and the Men Who Love Them (2011 ed.).” Nothing in this article constitutes specific legal or financial advice and readers are advised to consult their own counsel.