Barbara O’Neill, Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
Seize Control of Your Financial Life
Want to be a successful investor? Seize control of your financial life with the eight strategies described below:
Accept What You Can’t Control (e.g., stock market volatility, cutbacks made to employer benefit plans, and declining housing market values) and Control What You Can (e.g., spending decisions, enhanced training and education, and money contributed to an IRA or employer retirement savings plan). Buying quality stock and mutual fund shares when prices decline is like buying items on sale at a department store.
Control Your Emotions (e.g., panic selling when stock market indices plummet). Investors who lose money often do not understand “normal” market fluctuations and convert “paper losses” into actual capital losses. Not only do they lose money, but they lose the ability to have investments “bounce back” in value. Investors must know their risk tolerance, of course, but should also consider holding some money in stock. Even if investors are 65, they may live to 85 or 90, which is plenty of time to ride out market volatility
Control Your Greed- After an extended bull market, such as 2009 to the present, many investors think “they’re smarter than average.” They’re not. Stock markets move in cycles in response to economic, political, and other events. Also, buying penny stocks and day trading amounts to gambling. Smart investors don’t gamble. They pick quality stocks and hold them for the long term.
Control Your Spending- There are two ways to accumulate money: earn higher returns or decrease spending and save the difference. Many people spend on impulse and “forget” about tomorrow instead of paying themselves first. To avoid this problem, sign up for an employer 401(k) or 403(b) plan and stock or mutual fund automatic investment plans and invest windfalls such as tax refunds and reimbursement checks.
Control Your Investment Costs- High expenses reduce investment returns. Not surprisingly, many investors never “beat the market” and, in fact, lag it by 2% to 3% per year. An inexpensive way to buy stock is through stock index funds. For broad exposure to the U.S. stock market, consider a “total stock market” index fund that tracks the Wilshire 5000 (an index of U.S. companies of various sizes: small, medium, and large). To get even broader stock exposure, consider putting 75% of assets in a U.S. stock index fund and 25% in an international index fund.
Control Your Income Taxes- Employer tax-deferred retirement savings plans, such as 401(k) and 403(b) plans, provide a “triple play”: a federal tax deduction for the amount of the worker’s contribution (e.g., 6% of pay), tax deferral of investment earnings, and, in many cases, employer matching. A fifty cent match for every dollar contributed by employees is equivalent to an automatic, guaranteed 50% investment return. Employer matching is “free money” that should be taken advantage of, if possible.
Control Your Portfolio’s Risk Level- Have a “safe money account” in low-risk investments (e.g., money market fund) for emergencies and short-term goals and a “growth account” for higher-risk investments (e.g., stock and stock mutual funds) for long-term goals such as college and retirement. The Rutgers Cooperative Extension Financial Goal-Setting Worksheet (http://njaes.rutgers.edu/money/pdfs/goalsettingworksheet.pdf) can help identify the time frame for financial goals so that appropriate investments can be selected.
Control Your Asset Allocation- A key factor in determining what percentage of assets investors place in stocks, bonds, and cash is their investment risk tolerance, which can be assessed with this online quiz: http://njaes.rutgers.edu:8080/money/riskquiz/.Retired investors may want to consider setting aside up to five years of expenses (not covered by a pension or Social Security) in “safe money” accounts (e.g., money market funds) and invest the balance of their portfolio in stock, real estate, and/or bonds. This avoids the problem of having to sell investments at a loss during market downturns. When the stock market does well, use some of the gains to replenish the safe money account.
Check out our Archived Monthly Investing Messages.