This article poses six questions to ask yourself before embarking on an investment or making an important financial decision. They provide a simple, effective way to outline any financial plan.
Before Investing, Ask Yourself
“What funds are right for you? Should you invest in stocks or bonds?” If your employer offers a retirement savings plan, you likely have brochures or a sales rep posing such questions – and offering to answer them. If you lost money in the markets, you might be asking, “How can I protect myself against ever losing money again?” With children to raise and college costs looming large, your worrisome mind may want to know, “Should I go 100% in social media and biotech, and hope they win big?”
Suppose you had answers to such questions. Would you know with confidence how to plan for your financial future and protect your assets? Clearly not. Questions like these raise legitimate concerns and sketch a starting point. But by themselves, they don't print a path to your financial goals.
Seeking a deeper analysis, you might consult a financial planner and gather details about your finances, family status, risk tolerance, investment experience, spending plans, and current assets. With this mass of data, your planner may generate a long document with tables, charts, and advice. Overcome with the sheer volume of it all, you might opt to delegate investment powers to the advisor, for a fee. (A cynic might say that was the planner’s agenda all along.)
Between ad hoc questions and full-blown financial plans, is there a happy medium? At able2pay.com, we believe there is. We pose six core questions which, if considered carefully, can provide sound and lasting guidance for any financial goal. We give you calculators, tools, and information to find answers that work for you, enabling you to make your own, well-informed decisions.
Suppose you had answers to such questions. Would you know with confidence how to plan for your financial future and protect your assets? Clearly not. Questions like these raise legitimate concerns and sketch a starting point. But by themselves, they don't print a path to your financial goals.
Seeking a deeper analysis, you might consult a financial planner and gather details about your finances, family status, risk tolerance, investment experience, spending plans, and current assets. With this mass of data, your planner may generate a long document with tables, charts, and advice. Overcome with the sheer volume of it all, you might opt to delegate investment powers to the advisor, for a fee. (A cynic might say that was the planner’s agenda all along.)
Between ad hoc questions and full-blown financial plans, is there a happy medium? At able2pay.com, we believe there is. We pose six core questions which, if considered carefully, can provide sound and lasting guidance for any financial goal. We give you calculators, tools, and information to find answers that work for you, enabling you to make your own, well-informed decisions.
1. How much will you need?
Any financial plan has a reason. You want to retire some day. You want to buy a home. You or your children will have education expenses. You have debts to pay.
To turn the reason into a plan, you must set a goal in dollars. It doesn’t have to be exact. In fact, it can’t be. None of us can accurately predict the future of markets, inflation, interest rates, personal health, and other factors that affect how closely your target will match your eventual spending.
To estimate the dollars you will need, some rules of thumb can be helpful. If you plan to spend all the money one to three years from now, current prices with a 2% to 5% adjustment for inflation will normally work well. Even this short-term forecast, however, is no guarantee. During three separate periods in the 20th century, inflation was so much higher than expected, and economic conditions so treacherous, that almost everyone lost purchasing power over the near term.
For retirement planning, rules of thumb exist for how many years of income to have saved by your retirement date (eight to eleven) and how much you might spend as a retiree (70% to 80% of your pre-retirement spending).
College expenses are tricky, because they can vary widely depending on the particular college, the availability of scholarships, the cost of loans, and the inflation rate of college tuition and fees. Similarly, the total cost of purchasing a home or apartment depends on future mortgage rates and on inflation or deflation in real-estate prices. With uncertainties like these, your target will be approximate. You must set it nonetheless.
At able2pay.com, we can help you generate a sensible target. More important, we will give you advice and encouragement on refreshing the target every year or two. As conditions change, your goals must be adjusted accordingly.
To turn the reason into a plan, you must set a goal in dollars. It doesn’t have to be exact. In fact, it can’t be. None of us can accurately predict the future of markets, inflation, interest rates, personal health, and other factors that affect how closely your target will match your eventual spending.
To estimate the dollars you will need, some rules of thumb can be helpful. If you plan to spend all the money one to three years from now, current prices with a 2% to 5% adjustment for inflation will normally work well. Even this short-term forecast, however, is no guarantee. During three separate periods in the 20th century, inflation was so much higher than expected, and economic conditions so treacherous, that almost everyone lost purchasing power over the near term.
For retirement planning, rules of thumb exist for how many years of income to have saved by your retirement date (eight to eleven) and how much you might spend as a retiree (70% to 80% of your pre-retirement spending).
College expenses are tricky, because they can vary widely depending on the particular college, the availability of scholarships, the cost of loans, and the inflation rate of college tuition and fees. Similarly, the total cost of purchasing a home or apartment depends on future mortgage rates and on inflation or deflation in real-estate prices. With uncertainties like these, your target will be approximate. You must set it nonetheless.
At able2pay.com, we can help you generate a sensible target. More important, we will give you advice and encouragement on refreshing the target every year or two. As conditions change, your goals must be adjusted accordingly.
2. When will you start spending your investments?
To appreciate the subtle importance of this question, consider a hypothetical parent, Alice, who wants to plan for her own retirement and for the college expenses of her two children. Alice was recently diagnosed with diabetes. She is 45 years old and expects to retire early, at 62, in part because of her health. By then, she thinks her two children will have finished their undergraduate degrees. Her daughter Bea will start college five years from now. Her son Colin is younger, and will start in ten years.
Alice really needs three plans. For herself, she needs to estimate the mix of investments that will give her the best payoff 17 years from now. For her older child Bea, she needs a different mix – a more conservative one – that will optimize the payoff five years hence; and for Colin, something in between that will give good results ten years from now.
At able2pay.com, we’ve analyzed the U.S. stock and bond markets from 1871 to 2015, and developed a proprietary model. The model applies directly to Alice. It can answer the question: “Suppose Alice invested in stocks and bonds for any 17-year period starting in 1871 or 1872 or 1873 … and so on to the present. What mix of stocks and bonds would have worked best over all these 17-year periods, adjusted for the actual inflation that occurred in those periods?” The model also gives separate answers for the 5-year and 10-year horizons for Bea and Colin.
Recommendations based on historical data can never guarantee future results. Your results will almost certainly be different, and with any investment, you can lose money. Our recommendations have the virtue of deriving from historical facts of long duration, over widely varying economic conditions, including inflation, stagflation, deflation, market panics, market bubbles, and economies that grew, shrank, and were flat.
Alice really needs three plans. For herself, she needs to estimate the mix of investments that will give her the best payoff 17 years from now. For her older child Bea, she needs a different mix – a more conservative one – that will optimize the payoff five years hence; and for Colin, something in between that will give good results ten years from now.
At able2pay.com, we’ve analyzed the U.S. stock and bond markets from 1871 to 2015, and developed a proprietary model. The model applies directly to Alice. It can answer the question: “Suppose Alice invested in stocks and bonds for any 17-year period starting in 1871 or 1872 or 1873 … and so on to the present. What mix of stocks and bonds would have worked best over all these 17-year periods, adjusted for the actual inflation that occurred in those periods?” The model also gives separate answers for the 5-year and 10-year horizons for Bea and Colin.
Recommendations based on historical data can never guarantee future results. Your results will almost certainly be different, and with any investment, you can lose money. Our recommendations have the virtue of deriving from historical facts of long duration, over widely varying economic conditions, including inflation, stagflation, deflation, market panics, market bubbles, and economies that grew, shrank, and were flat.
3. When will you stop spending your investments?
Consider Alice again and her two children. Her planning can’t stop at age 62, when she intends to retire. It has to span at least 16 additional years to cover her life expectancy of 78 years (and, to be safe, somewhat more). So a revised question is, “What mix of investments works best for Alice if she starts spending 17 years hence and needs to cover 16 years of additional spending – or more?”
The plans for Alice’s children, in contrast, entail a fast spend-down. Once they enter college, the balance drops to zero in four short years.
The calculators at able2pay.com cover all possible combinations of starting and stopping dates for accumulating and spending your investments. They use a proprietary model that automatically recommends more cautious investments as you approach the date to spend your savings and according to how long you need them to last.
The plans for Alice’s children, in contrast, entail a fast spend-down. Once they enter college, the balance drops to zero in four short years.
The calculators at able2pay.com cover all possible combinations of starting and stopping dates for accumulating and spending your investments. They use a proprietary model that automatically recommends more cautious investments as you approach the date to spend your savings and according to how long you need them to last.
4. What matters more to you, limiting losses or optimizing gains? Or are both important?
Investing can be an emotional experience, ranging from elation when markets are rising to panic when they are plunging. Just one emotional decision can undermine the best-laid plans.
Until you are actually in the moment of a market that is persistently climbing or steeply falling, you won’t know whether you will be able to resist emotional impulses and stick to your plan. It will be easier to stay on plan, and to tamp down any not-so-rational impulses, if you have a clear rationale for the amount of risk the plan entails.
At able2pay.com, we think it helps to select one of three rationales:
Until you are actually in the moment of a market that is persistently climbing or steeply falling, you won’t know whether you will be able to resist emotional impulses and stick to your plan. It will be easier to stay on plan, and to tamp down any not-so-rational impulses, if you have a clear rationale for the amount of risk the plan entails.
At able2pay.com, we think it helps to select one of three rationales:
- Maximize gains. The goal here is to maximize long-term gains, while tolerating occasional losses similar to those experienced in the past with U.S. Treasury bonds, adjusted for inflation.
- Minimize losses. Here you accept smaller long-term gains, in return for using an investment mix which, in the past, would have suffered very little loss, after adjusting for inflation, even under extreme economic conditions.
- Do some of each. This option takes an intermediate path that combines (literally, averages) the other two strategies.
5. What fees will you pay?
You will have to pay some fees. They will reduce your gains, and you can’t avoid them entirely. If you are a smart shopper, you can keep them low.
- A mutual fund or exchange-traded fund (ETF) will charge a percentage of your assets, continuously, as long as you own the fund. The lowest are under $1 per $1000 per year. The highest are above (sometimes far above) $10 per $1000 per year.
- Insurance and annuities come with fees and indirect costs that may exceed an expensive mutual fund.
- If you buy and sell individual stocks and bonds, your brokerage firm will charge a commission. The amount may be a few dollars, but the total can quickly become large if you trade often.
- A financial adviser who manages your investments will normally charge a percentage of your account value. Automated systems may hold this fee close to $2.50 per $1000 per year, but at this rate you won’t get advice from a person. For a personalized, human adviser, you might pay around $10 per $1000 per year, above and beyond the additional fees for stocks, bonds, and funds that the adviser purchases in your accounts.
- Even savings at a bank will have indirect costs. While not fees per se, they cost you real money. A bank’s indirect fees result from the reduced interest rates they pay you, compared to the higher rates they pocket by investing your deposits in loans, mortgages, and other assets. To estimate your bank’s implicit fees, compare the yearly interest you earn on bank deposits to the one-year return you would earn by investing the same dollars in a low-fee index fund for short-term, government-issued bonds.
6. How will you execute your plan?
Answers to the preceding questions will define the portion of investments to allocate to stocks, bonds, or short-term savings, and will specify how to adjust your allocations to fit the dates when you expect to start or stop spending.
Executing these decisions is another matter. For example, suppose Alice’s retirement plan invests 60% in U.S. and international stocks, and the rest in U.S. and international bonds. One company could do this with a single fund that charges only $1.60 per $1000 per year and automatically re-balances to the 60-40 allocation. Alas, Alice’s employer offers a retirement plan that requires her to invest at a different company. That company has some index funds with fees of $2.70 to $5.10 per $1000 per year, but no fund that will automatically rebalance at acceptably low fees. Alice will have to use several funds, periodically re-balance them herself, and accept average fees of about $3.50 per $1000 per year.
The calculators, news, and articles at able2pay.com can help you create an execution plan that’s right for you.
Executing these decisions is another matter. For example, suppose Alice’s retirement plan invests 60% in U.S. and international stocks, and the rest in U.S. and international bonds. One company could do this with a single fund that charges only $1.60 per $1000 per year and automatically re-balances to the 60-40 allocation. Alas, Alice’s employer offers a retirement plan that requires her to invest at a different company. That company has some index funds with fees of $2.70 to $5.10 per $1000 per year, but no fund that will automatically rebalance at acceptably low fees. Alice will have to use several funds, periodically re-balance them herself, and accept average fees of about $3.50 per $1000 per year.
The calculators, news, and articles at able2pay.com can help you create an execution plan that’s right for you.
Disclaimer: Historical data cannot guarantee future results. Although a mixture of bonds, stocks, and real estate may be safer than investing exclusively in one class of assets, diversification cannot guarantee a positive return. Losses are always possible with any investment strategy. Nothing here is intended as an endorsement, offer, or solicitation for any particular investment, security, or type of insurance.