JUST PLAIN TALK: Don't make the mistakes everyone makes
It’s good to learn from your mistakes. Sometimes I don’t, but as Warren Buffett said, “It’s better to learn from someone elses.” One year in his annual letter to Berkshire Hathaway shareholders, the Oracle of Omaha detailed a litany of massive losses he incurred. Everyone makes mistakes. Don’t reload and make the same ones again.
Too often, we focus on things we can’t control and overlook the things we can. Think of it as The Serenity Prayer seen through an investor’s eyes. Take interest rates. The Federal Reserve only sets short-term rates, but long-term rates, those used for mortgage and business loans, are set by supply and demand. Worry all you like about corporate earnings, Brexit, and tariffs, but it won’t matter. If you happen to get it right, it leads to overconfidence and the next time you may make a more significant blunder. Look at Buffett, and you don’t have his cushion.
Whether you save and invest is your decision. I scoffed the first time someone mentioned IRAs to me. “Son, how much money do you throw away?” When you are the poster boy for young and dumb, you earn derision. Once you start saving, how you allocate is essential. Investments have to be appropriate for your goals, time horizon, and how you handle risk. Fees and commissions are in your control, and every dime they take up means fewer dollars to grow. Minimize, not evade, taxes when you can. Deferring income during working years then taking withdrawals during retirement is tax-efficient and with current low tax rates, converting a Traditional IRA to a Roth IRA could be tax-savvy, too.
Recency bias is when we extrapolate what happened recently into the future. Recency bias is a vestige of caveman days — purple berries were tasty; the green ones made you sick. From January 2009 through last year, the stock market, as measured by the S&P 500, grew over 13% annualized. It’s easy to project those numbers into the future, but it would be dangerous. Where recency bias truly hurts is bear markets. People panic and sell when it looks like the world is ending, “This time is different.” To minimize recency bias, look at 20-year returns and make sure your portfolio is appropriate for your goals and time horizon.
Too much information is counterproductive. Financial news channels exist to sell advertising; any investment advice is ancillary. OK, it’s impossible to put your finances on mute but keep perspective. A man retiring at 65 has a 20-year life expectancy so anticipate a couple or three recessions. The probability of a market decline in any one year is much higher than over 20 years. With CNBC blaring you get constant updates, but it’s just chatter designed to sell stuff. Focus on what you can control and try to ignore the rest.
You can’t always get what you want but Buz Livingston, CFP can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.