At Keil Financial Partners, we are lucky enough to spend our days talking to many people about their financial pictures, and because of this, we’ve learned what mistakes people tend to make around their planning that they could have easily avoided.
Today, we want to help you get ahead of the game so you can avoid these mistakes before they happen.
Read on to find out the nine most common financial planning mistakes — and how you can avoid making them yourself!
1) Focusing on Past Performance
One phrase we hear people say a lot is, “What is the market doing?”
But there’s no such thing as what the market is doing - only what the market has done, in the past.
There is no reason to believe that what happened in the past will happen again in the future — at least any time soon.
Because of this belief that past performance is an indication of what’s to come in the future, we tend to see a lot of people who only look for top performers when choosing their investments.
But remember, what goes up must come down. When you find top performers from the past they might not do nearly as well in the future as they have in the past.
One of the biggest places we see this mindset is inside of 401(k)s. People know that they’re supposed to diversify their investments, but a lot of times when they’re looking at the list of different funds for their 401(k), they simply choose the five top performers, spread their money and believe that they’re diversified because of this.
You believe you’re diversified, but just because there are five different investment names doesn’t mean you have five different types of investments. Those top funds that went up together may have pretty much the same types of investments. If that’s the case (and it probably is) then when one goes down, they are also likely all go down together.
Picking the top five funds now doesn’t mean you’re picking the top five funds of the future. So if you only look at what happened in the past and believe that it’s going to continue in the future, you’re setting yourself up for disappointment.
2) Buying High and Selling Low
Buying high and selling low is something that we would all like to avoid, but unfortunately, our emotions can make doing this especially challenging.
Two emotions that can make us buy high and sell low are the fear of missing out (FOMO) and the feeling that you can’t afford to lose.
If you see that people are making lots of money from their investments, it’s easy to experience FOMO and feel as though you don’t want to miss out on the great earnings others are experiencing. This can lead you to believe that you need to get in on certain high performing investments before you miss out.
However, FOMO tends to come in when things are looking good. And when things are looking good, it’s probably because it was already good, in the past. It doesn’t mean that it’s going to continue that way.
When the opposite happens, especially if you’re someone who bought in at the high point and the market starts dropping, you can also easily get a fear mindset where you start thinking that you can’t afford to lose. And that’s when you start selling low.
That’s why it’s important to be mindful of our emotions when making investment decisions and stick to our plans — not our emotions.
3) Trying to Beat the Market
When investing, many people have the mindset of trying to find the next best stock, or what will be the next Amazon, Microsoft, or Apple.
And a lot of the time, people just want to beat the market.
But do you know how hard it really is to beat the market? It’s incredibly difficult.
We’ve seen a study that surveyed investment professionals to see who beat the market and who didn’t, only six of 1000 professionals beat the markets — and we don’t know if those six beat the market because they were smarter, or simply lucky.
So when you’re trying to beat the market, you’re trying to do something that is near impossible. And when you combine that with the emotions of buying high and selling low, usually the opposite happens.
On the other hand, if you just try to catch the market instead of beating it, you tend to do a lot better.
4) Having Too Much Or Too Little Risk
Another common mistake that we often see is having too much or too little risk.
Many believe that they’re safe because they have conservative stocks. However, there’s no such thing as a “conservative” stock. When you buy a stock, you buy a piece of a company. You never know what will happen to that company, no matter how much you believe it can’t fail and will keep growing.
This is one way many people end up having too much risk — believing that their stocks are a sure thing.
On the opposite end of the spectrum, there are also those with too little risk because they think they can’t risk losing. Instead, they put all their money in the bank or in short-term money markets.
However, when you do this, you’re guaranteeing that you’re going to lose your money to inflation.
How? If you invest into the bank at 0.5% interest and inflation is any higher than that (which it probably will be), all you’re doing is guaranteeing that you won’t have as much money in the future.
At the end of the day, we believe that you should have some short-term money in the bank, but don’t have all your money there just because you’re afraid of losing it through investing. If you do, you might not lose to the stock market, but you will lose to inflation.
5) Not Diversifying And Rebalancing Your Investments
Another investment mistake is not diversifying or rebalancing your investment.
When investing, we recommend deciding what level or risk you’d like to take — like having 60% of your investments in the stock market and 40% elsewhere, for example.
As the stock market goes up and down, your investments will likely get out of balance from where you started. If the market drops and you don’t re-balance, you may end up with less of your investments in stocks than what you initially signed up for. Similarly, if the market goes up, you may have more than you wanted — meaning you need to rebalance to get back to the level of risk you wanted to have to begin with.
6) Not Setting a Goal
When you’re taking a drive, if you don’t know where you’re going, how will you know once you get there?
The same goes for financial planning. If you don’t set any goals, how will you know what you’re achieving and whether you’re on-track to reach those goals?
A lot of times when people set their goals, they just think of something like “I need a million dollars to retire.” But that’s not necessarily what your retirement goal should be based on. Usually, your goals should be based on a matter of ‘how much income do you need, and when do you need it?’
What age are you going to retire and how much income are you going to need? That million dollars, or whatever you’re shooting for, is related to the income you will need, but that’s not actually the goal.
The goal is to get enough income to match the lifestyle you are looking for. To get there you should begin with the end in mind — which is how much income you need and when you need it. From there, you can work backwards to find out how much money you need to have saved and ways to track whether you’re on-track to reaching those goals.
7) Not Tracking Your Spending
At the end of the day, who wants to budget? Some do, but many don’t.
If you’re not tracking your spending, that’s like not knowing how much fuel is left in your tank — which leaves you at a major risk of running out of gas part-way through your journey.
If you want to know how much you’re spending, an easy way to find out is to look at your bank account. For example, if you start with $10,000 in your bank account on January 1 and end up with $10,000 at the end of the year, that means you spent every dollar that came in during the year. If you happen to have less in your account at the end of the year, you spent more than what came in.
Step 1 then is to see if your bank account is going up or down - if it’s fairly even then you know that your spending is equal to your take home pay - and it’s a lot easier to look at your take home pay every 2 weeks than to spend time budgeting every penny.
Step 2 is to spend less than you make. If you’re somebody who has set a goal and has determined how much you need to save to get to that goal, then you can set up your savings plan where you’re automatically putting away a certain amount each month. By automating it, you’re making sure that it actually happens and that you’re working towards those goals no matter how much you’re spending with the rest of the money in your account.
That way, if you have a goal for how much you’re going to save and you make it happen automatically, you don’t need to get down to the penny when tracking your spending - you just need to know how much your take home pay is, and how much your saving each month.
People procrastinate their planning for a lot of different reasons. Whether it’s because they don’t want to sit around and plan out different strategies because they don’t want to be faced with reality, or they don’t want to meet with a planner because they know they’re not on top of their planning and they don’t want to see how bad it might be, there are many reasons why people forego financial planning and instead turn a blind eye to their financial picture.
But a lot of the time, the cost of not doing your planning is worse than just going ahead and getting it done.
There are a lot of decisions that need to be made before you retire. You can’t just fill out all your retirement paperwork and check a few boxes. You need to meet with a planner and make sure all your decisions are working with each other to make sure that you will be okay no matter how long your retirement lasts.
There are many things that come up as you journey towards retirement that professionals can help you with so you can avoid making mistakes down the road.
Plan for success, but be prepared for failure. Professionals can help you plan for the worst case scenario to make sure you’re covered for whatever may come your way.
9) Planning Without a Guide
Have you ever retired before? Chances are, if you haven’t reached retirement age yet, you haven’t. Your retirement will be your first time doing it, and you get one shot at it. It’s amazing what the decisions you make can cost you, whether you didn’t plan for what you need or filled out a form at the wrong time.
That’s why you need a guide, somebody who has helped others do the same and has been through the process before.
We like to say we retire about once or twice a month. Why? Because that’s how many people we help hit retirement each and every month. Because of this, we understand what works with pensions, social security, Medicare, taxes, and estate planning strategies.
This transition into retirement is a big, important part of your life. And if you don’t have a strategy or a guide who’s been there before and is helping you through it, you’re going to miss out on a lot of things.
What other financial mistakes have you learned along your journey to your ideal retirement?
If you’d like to learn more about how we can help you avoid these nine financial mistakes, please be sure to contact us today!
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This material is provided for informational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The views and strategies described may not be suitable for all investors. They also do not include all fees or expenses that may be incurred by investing in specific products. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. You cannot invest directly in an index. The opinions expressed are subject to change as subsequent conditions vary. Advisory services offered through Thrivent Advisor Network, LLC.