4 Financial Commandments to Live By

Saving for retirement and figuring out a long-term financial plan can be challenging, but you may find it significantly easier to reach your financial goals when you have a solid road map to follow. That means more than just picking out investments with a financial planner. Getting on the right path also means adopting the right mind-set to get you through the highs and lows of your financial life and to optimize your financial plan to meet your financial goals.

To help you get and stay on that path, our financial planning firm in the Richmond, VA, area has put together these four financial commandments to live by:

1. Don’t Compare Your Investments to the Stock Market Without Context

Depending on factors such as your age and risk tolerance, your returns can look very different from average stock market returns or the portfolio returns of other investors. However, it’s crucial to make comparisons in the right context.

For example, if you have a low risk tolerance and want to obtain stable income from your investment returns, you might invest more in low-volatility, dividend-paying assets. While these assets may not match the returns of a benchmark like the S&P 500, they may be a better fit for your risk tolerance.

Yet if you were to compare your investment returns with the S&P 500 without context, you might assume you have the wrong investment strategy in place. In contrast, if you compare your investments to benchmarks with similar risk profiles and other characteristics, then you can more easily tell if your financial plan is meeting realistic expectations.

2. Don’t Give Up Before Giving Your Investment Strategy Time to Play Out

It is important that you avoid jumping out of your investment strategy before you give it enough time to work.

Say you see that after one month of deploying your strategy, your investments are lagging average stock market returns. It’s important to realize that one month is not enough time to see whether your financial plan will achieve your objectives over the long term. When dealing with investments, you need to think in terms of years rather than weeks or months.

In addition to giving yourself plenty of time when comparing your investments, try to be patient and focused on the long term when analyzing market conditions. If you change your strategy every time the market goes up or down, chances are you will end up buying high and selling low, thereby harming your long-term returns.

Instead of reacting to frequent market swings, plan out a long-term strategy that you can stick with over time. Think of this commitment as being similar to how you’d want to build a diet that you can stick with over time, rather than changing it every week or getting discouraged if you’re not immediately reaching your goal weight.

3. Don’t Chase Big Investment Returns Too Late in Life

As you get closer to retirement, there’s a good chance you’ll want to reduce your risk and gain more stable income from your investments. When you’re in your 30s, for example, you can invest aggressively and have time to recoup losses from stock market downturns. Yet if that volatility happens during your 60s, you may not have enough time for the markets—and your portfolio—to recover for you to build enough savings to last throughout retirement.

This financial commandment doesn’t mean you can’t be aggressive at all with your investment portfolio later in life. For instance, you may want to take a risk with a small portion of your portfolio while the rest of your investments provide a stable income in retirement. Generally, though, you should adjust your risk tolerance later in life and avoid chasing returns when you may not have time to weather market volatility.

4. Don’t Ignore Investment Portfolio Costs and Fees

This last financial commandment often gets overlooked, but it can make a huge difference in your ability to meet your long-term goals. For example, a 1% difference in fees may not sound like much, but on a $1 million portfolio, that equals $10,000 per year. Over 20 years, the difference could equal at least $200,000, and perhaps more if the value of your portfolio increases.

Not only do you have to pay fees on your portfolio balance, but you also can face expenses that affect investment returns. The less that you earn net of fees, the less your investment balance can compound over time.

However, lower fees aren’t always better. You need to consider what you’re getting when you pay for financial planning and investing. If you’re paying high fees to invest in basic mutual funds, then that may not be making the best use of your money.

On the other hand, if you’re paying fees for comprehensive financial planning that includes areas such as tax planning and estate planning, you might be getting good value. Make sure you analyze all costs and fees associated with your financial plan to see whether you’re getting the best deal for your situation.

Use These Investment Commandments to Help Position Yourself for Success

Living by these financial commandments can allow you to feel more confident in your financial plan and optimize your returns. These guidelines don’t mean you’ll necessarily earn the highest possible returns, but you can help position yourself for investment gains that align with your risk tolerance and income needs.

If you’d like to discuss these four commandments or any other financial planning questions, reach out to the team at Financial Dynamics for some guidance. You can call us anytime at 804-777-9999. Or simply text the word “tips” to that number, and we’ll be sure to respond back to you shortly.

You can also listen to our podcast where we discuss these four financial commandments in more detail.

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The information contained in this presentation does not purport to be a complete description and is intended for informational purposes only. Any opinions are those of the content creator and not necessarily those of the named advisor(s) or JWCA. This information is not intended as a solicitation or an offer to buy or sell any security or investment product. Information is solely intended for recipients in jurisdictions where the named advisor(s) are licensed to engage the investing public. Investments and strategies mentioned may not be suitable for all investors. The S&P 500 and other such indices are unmanaged, do not incur fees or expense, cannot be invested into directly and individual investor’s results will vary. Past performance is no guarantee of future results. As with all investments, various risks may exist and JWCA recommends you consult with your financial advisor prior to making any investment decisions. Advisory Services offered through J. W. Cole Advisors, Inc (JWCA). Financial Dynamics & Assoc. Inc and JWCA are unaffiliated entities.