Understanding Risk vs Return
The second biggest mistake we see investors make is NOT taking an appropriate amount of risk to sufficiently grow assets to meet long-term goals and weather life’s storms. Specifically, it is very common practice for investors to significantly reduce their exposure to equities (stocks) in favor of fixed accounts and annuities leading up to their impending retirement. I hear it all the time, “Rick, you know I am going to be 60 soon. I can’t afford to have much money in the markets.” The perception is that they have a very short time horizon, which would be true if they were planning liquidate their entire portfolio (or die) in five years. The fact of the matter is that when most of us “retire” from our vocation, we will often have another 25 or 30 years to fund our chosen standard of living. This is especially true for married couples. Statistically, one of us will live that long. Keeping a long-term perspective is a biblical principle for successful money management (Ecclesiastes 11:1).
With all of the amazing advances in medicine that are prolonging our lives (most cancers will likely be cured in the next decade or two), this reality is further magnified. People are living longer, while quality of life is not necessarily being enhanced. As we grow older, things simply cost more. Long-term care and health care in particular is growing increasingly expensive — far outpacing the general inflation rate. To think that we will necessarily live on less in retirement than during our peak working years is a fallacy.
Avoid the Biggest Investor Mistakes with a Financial Plan
Investors who fail to determine what rate of return is required to meet their goals run the risk of running out of money before they run out of life. Faced with this reality, investors unwilling to accept enough prudent risk are faced with a tough choice either to change their goals and live on less or delay retirement long enough to accumulate more assets. This is why it is so important to have a solid financial plan in place as the foundation for making wise investment decisions. Investing without one could lead to unforeseen and disastrous results… The sooner you get started, the better off you will be. To begin crafting your unique financial plan with one of our highly skilled guides or to learn about Biblically responsible investing, please call us at 540-345-3891 or email email@example.com.
If you missed the previous post, be sure to read The Biggest Mistakes Investors Make – Part 1.