By |Published On: Sep 4, 2023|Categories: Financial Planning|

Investments are a crucial piece of your financial life. Without understanding your investment beliefs it’s very difficult to know how you should invest your hard-earned money to best serve you.

Keep in mind that investing is only one small slice of your overall financial picture.

There are many other financial items to think about such as, alignment of spending with your values, creating a debt payoff plan, and adjusting your strategies for changes in tax policy – to name a few of the many.

Investment Beliefs are Unique

I was speaking with a new client last week, and Anita asked.

“How will you invest my money?”

That’s a very good question. Each person’s investments are unique to them, their circumstances, preferences, and beliefs.

Investing Principles for You

In this article, I will tell you about the investing philosophies that I use for clients and myself. These are guidelines to help you focus on having the best investments for you and your life.

Rule #1 – Investing Should Not Be Exciting

As long as it’s done right, investing is typically boring. If it’s exciting, then it’s gambling or speculation. Neither of these usually end very well – lost money, higher taxes, and a lot of grief.

If you’re chasing shiny objects and hoping to strike it rich, the likelihood of it working out is low. Further, if you are checking the price of your investments every 30 seconds, that’s not investing either.

Investing has a methodical and well thought out approach, which leads me to my next point.

Rule #2 – Understand Your Dreams

What are your financial dreams? When would you like this to happen? Can you estimate how much money this will require?

The amount of money, the timeline, and being realistic will influence how your money is invested.

In this context, some examples of dreams include:

  1. You are 32 years old and want to know how to invest your money for retirement
  2. Perhaps you would like to buy a home in the next year
  3. You are a new parent and thinking about the best way to accumulate money for educational purposes

Rule #3 – Keep Your Costs Low

There are many ways to keep your investment costs low and here are some guidelines.

First, keep expense ratios of investments to a minimum. For example, the expense ratio on an investment is the amount you pay annually to the investment company for managing your investment. Many investments have low, annual expense ratios (0.07% or 0.15%) so it’s best to choose low expense ratio investments in order to save money.

Second, be aware of transaction costs when buying or selling an investment. Some investments have high transaction costs. These high costs are not worth it.

Both the expense ratio and the transaction costs are disclosed in the prospectus of the investment. Please read it before making an investment decision. If you can’t find this information, send me your investment ideas and I will help you determine the costs.

Finally, keep investment management service costs low when working with a financial planner. Make sure that the costs are fair and you get good service and advice.

Rule #4 – Minimize Taxes

Although this is a straightforward concept, there is subtlety to it. You want to minimize taxes over time, not within a single tax year. This is a very important investment belief.

Furthermore, don’t minimize taxes at the expense of damaging your portfolio. Make investment decisions first, and tax decisions second.

Here’s a great example of what not to do. Bonehead Bob doesn’t want to sell any of his company stock that makes up 90% of his overall portfolio, because he doesn’t want to pay taxes on the sale. Company stock at 90% of his portfolio is an incredibly risky position.

Alternatively, there are some good examples of what you can do:

  1. Sell some investments this year and purposefully pay taxes because you are in a lower income tax bracket this year [on a leave of absence this year / getting promoted next year with a higher salary] and the tax rate on the gains will be lower.
  2. Diversify your portfolio by selling some of the shares this year and then sell more shares next year to lengthen the holding period and incur lower taxes.
  3. Look at your cost basis of company shares, and sell the higher cost basis ones to encounter a lower tax bill.

Rule #5 – Asset Location – Keep Minimizing Taxes

You can minimize your taxes through “asset location.” This jargon means that you should have the appropriate investments in the appropriate accounts.

Here are some principles to help you:

  1. Investments that generate taxable income each year – bonds – are invested in an IRA because you don’t have to pay taxes on the investments while they are held in an IRA.
  2. Tax efficient investments – index funds and ETFs – are invested in a taxable account. You will owe taxes on these investments but they are very tax friendly, so there won’t be a lot of tax to pay.
  3. Place high growth investments – stocks – in a Roth IRA. These investments have the best chance to grow into large sums of money and you won’t pay taxes on the gains or when you take the money out.

Rule # 6 – Diversified Portfolios

Investments across many areas are extremely important so that your exposure to losing money with one asset or an asset type is limited. This concept means owning US stocks, international stocks, bonds, US Treasuries, emerging markets, real estate, etc. You spread all of your investments across many types of investments to lower your risk.

Bonehead Bob subscribes to ideas such as “betting the ranch” or “putting all of your eggs in one basket.” These are the opposite of a diversified portfolio and they do not apply here. If all your investments are up at the same time, you should be worried. This means they could all go down at the same time.

Rule #7 – Disciplined Approach

Setting up a diversified portfolio and sticking with it is very important. Staying invested is a simple strategy that can sometimes be painful in the short run (when markets are down, i.e., March 2020) but wonderfully beautiful in the long.

For instance, taking your money out of your investments when they are down and then trying to time the proper re-entry point into the investments is an expensive idea that will cause you a tremendous amount of stress.

Remember, stay invested. If markets are down, and you have some extra cash lying around, it’s even better to invest it when prices are “on sale.” This sounds simple but it’s not so easy.

Rule #8 – Keep Investing Simple

Having fewer accounts with fewer companies will benefit you. Moreover, having simple investments will make them easier to grasp.

The results are:

  1. Understand how you are invested
  2. Easier to track your investment performance
  3. Spend less time shuffling between various accounts at several companies
  4. Gathering all of your documents at tax time will be a cinch
  5. Avoid the latest “flashy” investment

This is an overview of investment philosophies at Fortrove. There is a lot more to discuss about each of the topics mentioned above.

Would you like to work with a financial planner who will manage your investments according to these principles and beliefs? Reach out for a free consultation.