How to build solid financial position for ourselves for years to come
What is the biggest threat that we face on the journey towards building a solid financial position for ourselves?This question could be asked over and over again and the chances are high that many different answers would be given.There would definitely be people saying that the economy would be a great threat while others would blame the stock market and its uncertainties.
Others may say that low wages and expensive housing reduce the chances for someone to build up wealth and live a comfortable life with solid financials in place. There is though a threat that could be far greater and that threat is even one that is controllable and one that with proper coaching, discipline and a better understanding of how money works and what truly affects wealth building is simple to eliminate.
According to a Dalbar who studies investor and fund returns the average fund investor earned an average of 5.19% over the past 20 years, compared to 9.85% for the S&P 500*.
This is a significant spread between what an individual could have earned and what they actually ended up earning and it can be the difference between having enough to retire or having to keep working to make up for the lack of portfolio performance.
So what does investor behavior have to do with the spread between returns that are available and what investors actually are getting?
First of all, it is obvious that keeping money invested for an extended period increase your chance of getting good returns.
First, major reason for a lack of return could be that many individuals use their 401(k) for loans and even though that in certain situations could make sense it takes money out of the market and potentially takes money away from having positive returns.
A second reason could be that many people decide that they will try and time the market by moving in and out as they find fit and even though it will feel good to time it correctly once twice or even three times the difficulty lies in having to do it consistently over and over again.
So we naturally tend to move away from a market that is dropping in value or have dropped in value and buy back again when the economy is looking good and the market have moved up.
What this means is that by buying and selling individual may miss the best days in the market and may end up with not so great rates of returns.
spread between what an individual could have earned and what they actually ended up earning and it can be the difference between having enough to retire or having to keep working to make up for the lack of portfolio performance
To avoid this, make sure you always build multiple portfolios that are invested to fit with the timeframe when those funds are needed.
And make sure to have short term liquid savings in place so that you do not have to take loans against your 401(k) and plan to invest for the long term.
It is very difficult to time the market and knows what will happen tomorrow, this year, next year or even over the next few years.
What we can plan on is investing for longer timeframes and working towards those timeframes with appropriate portfolios that are invested to match the time horizon.
Stay the course and understand how volatility works and build a plan that matches your risk profile.
Written by CreativeNurse Team
2016-23951 Exp. 6/18