It's easy to make mistakes when you are an inexperienced investor. Even financially successful people have fallen prey to a hot stock tip that led to large losses or a slick sales pitch for a complicated investment. Here are a few ideas and pieces of advice that will help you to grow wealth:
Be careful when selecting the latest hot fund. It's fun to review the list of the best performing investments and mutual funds of the past year. The only problem with these lists is that the financial markets rarely repeat the same course year after year. It's not uncommon for the best performing funds or asset classes to get bogged down in mediocre or poor performance in subsequent years.
Solution for financial success: Develop an investment plan that reflects your age, risk profile and goals. Investing should not be viewed through short-term investment lenses.
Avoid being influenced by salespeople. Don't let the sizzle of a presentation influence the investment options you select. It is common to see investors who have been sold a product based more on the skill set of the salesperson than the need of the individual investor. Not everyone needs complicated investments such as variable annuities, separate managed accounts or hedge funds, but there are plenty of salespeople who would like to sell you one.
Solution for financial success: Understand the difference between an advisor who is working as a fiduciary and has a legal obligation to put your interests first and a salesperson who isn't required to find you the best possible investments for your situation. There's nothing wrong with voting with your feet and walking away from an offering because you don't understand the inner workings or the purpose of the product. A sophisticated investment is not always better.
Define what success looks like for you. Many people have internal checklists that define what success should look like. Living a successful life could mean a new luxury vehicle in the garage or a vacation home where the family can gather. There are even cottage industries that will promote vacation homes that can be money makers. However, they often fail to highlight the ongoing maintenance and repairs. Plus, if you rent the property out, you might not be able to use the property during the ideal seasons.
Solution for financial success: Understand what your individual success plan looks like. If you plan to retire early, then you'll need to build up your investment accounts and alternative income sources as soon as possible. Deferred gratification is the key to achieving the long-term goal of financial independence.
Don't underestimate how comforting it is to have cash. Now that real estate values are back on the rise, it is likely that many people will once again be offered the opportunity to leverage their home equity through home equity lines of credit. There was a dangerous time in the not so distant past when people were using their home's equity to finance vehicles, their lifestyle and even emergency reserves. Be careful about using the equity in your home to supplement how you live your life and plan for emergencies.
Solution for financial success: Don't risk the asset that keeps you dry, warm and sheltered. Cash reserves truly need to be cash. It was not uncommon during the recent real estate crisis for banks to freeze home equity lines of credit. As you can imagine, this was probably horrible timing for those who counted on this equity to get them through the hardship. There's no substitute for keeping three to six months of expenses in cash reserves.
Don't be scared to test yourself. The start of the year is the perfect time to test your limitations. A dream can become reality, but it requires thought, research, preparation, savings and patient implementation. This coming year could be the year you plan the launch of your next career or business endeavor.
Solution for financial success: Being financially successful and obtaining financial independence is not a myth or unattainable goal. With the right plan, keeping your eye on the ball and remembering some of the points of success above, you can reach your goals much more easily than you realize.
Brian Preston and Bo Hanson are fee-only financial planners who host the podcast, "The Money-Guy Show".
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