On this episode of Saving the American Dream, we’re talking about cutting corners. It’s never a good idea in life, especially when it comes to your finances. Here are some ways that can hurt you.
People often find themselves in a position as they approach retirement of, “Hey, I need to make up some ground.” Instead of steadily investing over their lifetime, they cut corners at the end and take on too much risk to try to make up those returns a lot quicker.
We’re not entitled to any specific rate of return. You can’t make up for not saving enough in your early years by being more speculative with your investments and hoping maybe you get a 12% annualized rate of return instead of like a 6% or 7%. You’re not even promised 6% or 7%.
We don’t control the rate of return that we’re going to get, and risk and return are correlated. So the more risk that you take, the wider variance of what your potential returns are going to be.
What that means is if you’re going to have 100% of your investments in stocks, there’s going to be more volatility. It’s going to be a bigger roller coaster for you. If you have a diversified approach over a long period of time, you’re probably going to produce a pretty good result.
But if we’re talking about a shorter period of time – five or even 10 years – and you are trying to be really risky and you’re trying to allocate heavily towards stocks to make up for lost time from not saving early, we don’t know what any specific five-year period is going to look like.
You’re not promised a positive result if you ramp up the risk just because you have a short time period.
Legal documents are not exciting, can take a lot of time to work on, and can force you to think about things you don’t want to think about, like death.
Cutting corners here could mean trouble and stress for your family. If something happened to you, your beneficiaries could have to sit in probate, a costly and timely process.
Organizing Your Finances
We all think of cutting corners when it comes to organizing. But cutting corners can leave someone in a bind later down the road. Life is busy, we get it! There’s always something to distract us from getting organized.
You’ll want to make sure those working on your finances are coordinating together. This is a big area where an advisor can help you out.
A lot of time we hear advice from others. Maybe it’s our uncle or coworker recommending a certain type of investment or stock. It can be tempting to believe them but it’s important to understand your investments and not go in blind.
Recency bias can also affect our decision-making. If an investment has been doing well in the current market that is great. But there is no way of knowing what the future holds. Many people don’t acknowledge their risk tolerance or even know how to calculate it. Make sure you are speaking with your advisor about what kind of risk is best for your situation.
Navigating the Show
[6:02] – Risk
[10:05] – Legal documents
[12:34] – Getting organized
[14:58] – Investing
“We don’t control the rate of return that we’re going to get, and risk and return are correlated.”
– Michael Schulte