Strategies for Successful Investing

 Some people have recently started to invest for the first time. Others have been investing money for decades through their employer retirement savings plan or on their own.

Regardless of whether you are a “newbie” or a seasoned investor, there are time-tested investment strategies that have been proven over and over to produce positive investment returns over time.

 

I count myself in the later camp and have been an investor for four decades both on my own and in an employer 403(b) plan. Below are ten strategies for successful investing that have served me well over time:

 

Develop an “Investor’s Mindset”- Expect the unknown when switching from savings products (e.g., savings accounts  and money market accounts and certificates of deposit, a.k.a., CDs) with fixed returns to investments (e.g., stocks and growth mutual funds) where returns are unpredictable and variable. Savers can expect no loss of principal and regular (albeit currently very low) interest payments. Investors must accept a potential loss of principal and irregular payouts.

Determine Your Time Frame- Match the time frame of financial goals to investment characteristics. Stocks have historically outperformed other investments over long time periods and are recommended for long-term goals like retirement. On the other hand, stocks are volatile and often lose value during short time frames.  If a financial goal is less than 3-5 years away, select alternative investments such as Treasury securities, a money market account, or CDs.

Dollar-Cost Average Investment Purchases- Make regular investment deposits at regular time intervals, such as $100 per month in a mutual fund or 5% of pay every payday in an employer 401(k) or403(b) plan. Doing so will reduce the average cost of share purchases over time. Mutual funds and stocks with a dividend reinvestment plan (DRIP) or direct stock purchase plan (DSPP) are well-suited for dollar-cost averaging. 

Take Advantage of Tax-Deferred Investments- Set up investment accounts for retirement savings where earnings can grow free of tax for decades until required minimum distributions (RMDs) must begin at age 72. Examples include traditional individual retirement accounts (IRAs), tax-deferred employer retirement plans (e.g., 401 (k), 403(b), and TSP), and SEPs (for self-employed workers).

Review Your Investment Risk Tolerance- Consider how much loss of investment principal (e.g., 20%) you could withstand without losing sleep. To assess your personal preferences, take the risk tolerance assessment from the University of Missouri to determine whether you are a conservative, moderate, or aggressive investor.

Know Your Limits- Never invest in securities that you do not fully understand or feel comfortable with. If you can’t explain how an investment works in simple terms to a friend, you probably don’t understand it very well yourself. Take a pass and never let anyone talk you into investing beyond your knowledge level or comfort zone.

Consider Tax-Exempt Securities- Select municipal bonds or bond funds if they provide a higher after-tax return than taxable securities.  Divide the available tax-exempt rate by1 minus your tax bracket (e.g., 24%). This provides its taxable equivalent. For example, a 2% tax-exempt bond provides the equivalent of 2.63% (2 divided by .76) to persons paying income taxes at the 24% marginal tax rate.

Diversify Your Investment Portfolio- Purchase different types of investments (e.g., stocks, bonds, and cash equivalent assets) or shares of mutual funds or exchange-traded funds (ETFs) that contain many securities. Broadly diversified index funds that track a stock market index, such as the S&P 500 or Wilshire 5000, are another good option as a target date mutual funds that contain different types of investments and automatically get more conservative over time.

Increase Your Investment Knowledge- Read periodicals like Kiplinger’s Personal Finance and The Wall Street Journal.  Other good financial information sources include workplace seminars, blogs, podcasts, websites, certified financial planner® professionals, adult education courses, radio and television shows, and investment clubs.

Review and Rebalance- Read reports on the performance of your investments and replace poor performers, as needed. Rebalance portfolio asset class weights to their target asset allocation levels (e.g., 50% stocks, 40% bonds, 10% cash assets) periodically. Consider repositioning assets when financial goals are achieved or to adjust to changes in the economy, tax laws, or personal circumstances (e.g., unemployment, divorce, or widowhood).

For additional information about investing and common types of investments, review the Cooperative Extension Investing for Your Future course and/or the FINRA Investor Education Library.

How to Write a Personal Finance Book

 

Two years ago, I was in the early stages of writing my latest personal finance book, Flipping a Switch, about 35 transitions that people experience in later life. I was in between houses and living alone at the Rutgers University Inn for 13 weeks with plenty of time at night and on weekends for research and writing.

Last year, I co-presented an on-demand recorded workshop about book publishing with Axton Betz-Hamilton, author of The Less People Know about Us, at the 2020 AFCPE Symposium. Axton’s book describes her experiences as a child identity theft victim.

In the workshop, Axton and I described our experiences as recent book authors and steps that we followed from first deciding to write a book to marketing the finished product. 

Below is a brief description of the five-step book-publishing process that we shared with the participants in our workshop:

         

Develop a Creative Title and Content- Ideally, write about something that has not be covered widely before. You need to have a unique value proposition. Axton’s book filled a void because no memoirs existed on familial identity theft. My book juxtaposes financial, social, and lifestyle transitions experienced in later life into one book versus other books that cover only financial aspects or social/emotional aspects of retirement. My content wasn’t necessarily “new,” like Axton’s, but it was approached from a different vantage point.

Develop a Book Proposal- Axton developed her book content with the assistance of a literary agent. Her proposal, which included a proposed outline and several sample chapters, was sent to 25 traditional publishers. I followed Wiley’s proposal guidelines, got rejected by Wiley (“there were too many books in the space”), and sent the same exact proposal to Atlantic Publishing, a hybrid publisher. I then requested an in-person meeting and received a contract soon thereafter. At that point, nothing had been written. No literary agent was involved.

Research Content and Write the Book- Axton conducted many interviews and reviewed diaries, documents, and photographs. She wrote her book over a period of six years in a “catch as catch can” manner around her “day job” as a college professor. I read 500+ blog posts and 100+ journal articles and also conducted  interviews. With some existing content from my work as a Cooperative Extension personal finance specialist, I wrote my book over a nine-month period (around work obligations) from September 2019 through May 2020.

Design Cover and Marketing Materials- Axton reviewed several versions and revisions of her book cover and eventually used an old family photo for her front cover. I wanted a light switch on my book cover to reflect its title. My hybrid publisher prepared three sample covers with different colors and graphics and I picked one.

Market Your Book- Marketing methods that Axton used included graphics for social media, social media posts, postcards, book reviews, press releases, book signings, and television interviews, including the Dr. Oz show. I used social media, press releases, and guest appearances on podcasts and webinars along with a 35-day #35DaysofFlippedSwitches campaign on Twitter. I have not done any book signings yet due to COVID-19.

There are three types of book publishing: self-publish, hybrid, and traditional. Each has pros and cons. As my story and Axton’s show, there are multiple paths to producing a book and getting it in the hands of readers.

Are You Financially Resilient?

Financial resilience is the ability to withstand life events that impact one’s income and/or assets.  In everyday language, resiliency is the ability to “roll with the punches” and carry on despite life’s setbacks. Resilient people often “use lemons to make lemonade.” 

Some financially stressful events, such as unemployment, divorce, disability, and health problems affect people individually.  Others, such as the COVID-19 pandemic, economic recessions, stock market downturns, and acts of terrorism, affect society as a whole.

Research by Dr. Sharon Danes, a professor at the University of Minnesota, found that there are five characteristics that enhance people’s resilience in the face of life’s changes and challenges.  These five characteristics are being positive, focused, flexible, organized, and proactive:

¨     Positive people view challenges as opportunities. They reframe situations positively and often use the expression  “it could have been a lot worse” when comparing their misfortune to others.

 

¨     Focused people determine where they are headed in the future and stick to their goals so that life events and other barriers do not deter them.

¨     Flexible people are open to experimenting with new ideas and different options when faced with uncertainty.

¨     Organized people set priorities and develop structured approaches to manage change and get things done.

¨     Proactive people work with change rather than defend against it. They anticipate and prepare for what might happen instead of responding to events after they happen.

 

Financial resiliency is enhanced with financial resources, such as savings, health insurance, and a good-paying job.  Another resource for financial resiliency is one’s human capital.  Economists define human capital as all of the knowledge, skills, experiences, and other personal qualities that people have to “sell” to potential employers. 

Social capital also increases financial resiliency.  This includes a support system of family, friends, co-workers, neighbors, and others that can provide financial assistance, not to mention emotional support, during hard times.  An example is someone driving a friend to a cancer treatment, thereby saving them the cost and stress of getting to the hospital on their own.

Commonly recommended financial behaviors can increase financial resiliency.  Below are five examples:

¨     Maintain a Low Debt-to-Income Ratio- Keep monthly consumer debt payments (all debts except a mortgage) at 15% or less of monthly take-home pay.  A ratio of 20% or more is a danger zone. Example: $275 of debt payments ÷ $2,500 of net pay equals a consumer debt-to-income ratio of 11% (275 divided by 2,500).

 

¨     Accumulate an Adequate Emergency Fund- Save at least three month’s expenses.  Keep this money liquid in cash equivalents such as a credit union, money market mutual fund, or short-term certificate of deposit (CD).

 

¨     Learn to Earn - Never consider your education or job training finished.  Continue to gain knowledge and develop new skills to increase human capital and remain employable in today’s competitive labor market.

 

¨     Purchase Adequate Insurance- Protect dependents against the loss of a breadwinner’s income with life insurance and buy disability insurance to provide continued income following an accident or illness.

 

¨     Increase your Financial Knowledge- Learn one new thing every day about personal finance. Good financial information sources include magazines, workplace seminars, blogs, podcasts, websites, certified financial planner® professionals, adult education courses, radio and television shows, and investment clubs.

 

For more information about increasing financial resilience, review this post from the Get Rich Slowly blog.

Retirement Research Results and Recommendations

 

I recently attended several webinars and listened to several podcasts about issues related to retirement planning and personal finance issues in later life. Below are nine of my key take-aways:

¨     Plans Often Change- According to the 2021 Retirement Confidence Survey (RCS) from the Employee Benefit Research Institute (EBRI), workers said they plan to retire at a median age of 65 and retirees said they actually did at age 62. Thus, people don’t always end their careers when they plan to. According to the EBRI RCS, 46% of the retiree subsample said that they retired earlier than planned and 6% retired later.

 

¨     Waiting to Retire Has Benefits- In addition to providing more time to save money (e.g., in an IRA and/or a 401(k) or similar employer retirement savings account) and earn higher pension and/or Social Security benefits, working longer delays the need to take withdrawals from retirement savings and see balances decline. Postponing withdrawals from tax-deferred accounts also postpones income taxes due on these withdrawals

 

¨     Many Workers Want to Phase Out- According to the EBRI RCS, 51% of workers said that they expect to have a gradual reduction in their work hours over time (like a dimmer switch) instead of an immediate exit from the workforce (like an ‘on-off’ switch). Unfortunately, many employers and/or jobs are not set up to do this and phased retirements often do not occur. Once retired, most people stay retired. It is mostly a “full stop.” Workers who want to continue working often need to develop their own plans to “phase out.” It is risky to plan on continued income from work in later life and then not have that source of income that you are counting on.

 

¨     Certain Expenses Will Likely Increase- Among the budget categories for increased spending in retirement that many retirees do not fully expect are medical and dental expenses and income taxes for retirees with large savings nest eggs once required minimum distributions (RMDs) begin at or before age 72. Travel and entertainment costs and gifts are other household expenses that often increase and are underestimated.

 

¨     Spending Down Savings is Difficult- The EBRI RCS reported that 37% of retirees want to increase their assets during retirement and 42% want to maintain what they have for a total of 79% who want to hold on to their money. Their reasons mirrored those that I wrote about in my book Flipping a Switch: fear of the unknown (e.g., long-term care costs), desire to leave an inheritance, and not wanting to experience the psychological pain of loss that occurs when account balances go down after withdrawals are made.

 

¨     COVID-19 Had Mixed Impacts- A webinar speaker described “push and pull” effects arising from the pandemic. Some older workers had reasons to continue working longer than planned (e.g., more time to save and recover market losses, lenient employer work-from-home policies, and dashed travel plans resulting in a “I might as well just continue working” mindset). Other workers exited the workforce earlier than planned due to layoffs, fear of contracting COVID-19 at work, or a new mindset about priorities for how to spend their time.

 

¨     The Security of a Regular Income- Labor economist Teresa Ghilarducci noted on a podcast that knowing that you have enough money (whatever the amount) to last the rest of your life is more valuable than having that same amount of money in an account that you have to manage. There is much less stress when people know that they have “enough” and do not need to actively manage savings withdrawals.  Fear of running out of money to last their lifetime is a common fear of older adults.

 

¨     Hold Family Conversations- There are many financial issues in later life that require family communication, especially estate planning. As a conversation starter, list key financial data in a notebook or on a financial inventory worksheet. Next, find a quiet, dedicated time to discuss the information with family members. Use non-threatening language to overcome everyone’s reticence to discuss sensitive topics. For example, frame discussions with the mindset of “let’s take care of each other.”

 

¨     Two Regrets in “Old-Old” Age- A podcast speaker spoke about a study that asked 80- and 90-year olds for advice that they would have given to their “60-something year old selves.” Two big regrets surfaced from these elders: 1. They wished they had not bought so much “stuff” in their 60s because they are now running out of money and 2. They wished that they had not quit working as early as they did because they were bored.