How Investments Returns Jeopardize Your Financial Future

If you give in to the urge to focus too narrowly on your investment returns, you are looking for trouble. This point was brought home to me yesterday when I spoke to Caroline.

Caroline is 37 and Jim is 35. They have 3 kids and after speaking with them for a few minutes, it seemed to me they were doing great. They have no debt. They’ve saved over $120,000 earmarked for a down payment on a house and they’ve got a combined $250,000 in retirement accounts. It all sounded solid.

But Caroline was unhappy with their erratic investment returns. When I reviewed the couple’s investment statements, I understood what was going on. They were taking big risks on high-flyers that didn’t always work out. On top of that, Caroline was spending way too much time investigating stocks and learning about sophisticated strategies with some of their money. And they were completely “hands off” with other accounts – including having older retirement accounts left at former employers. Some of these tactics worked out but others didn’t. The losing transactions brought down the overall return significantly and they wanted to make a change.

Of course they were right to take action around this problem. But investment results were just the tip of the iceberg for Jim and Caroline. They just didn’t realize it at the time.

They didn’t have a plan around life insurance, spending, college funding, retirement or estate planning. And those are just the major milestones they’ve ignored. They didn’t really understand that the slightest blip in any of these areas could sink their financial ship. More on that in a bit.

When I asked Caroline about her overall plan she told me it wasn’t a problem. She explained that the family’s income was rising and as long as that continued, they didn’t need any plan.

I wasn’t so sure. In my experience, as income rises, so does spending. Increased income doesn’t automatically translate into higher saving and investment.

As much as I wanted their investment business, they needed an overall plan first. In my book, your investment strategy has to support your life goals. But in my experience, if you put all your attention on the investments, your life goals could be compromised as I’ll explain. That’s super “no Bueno” in my mind. Let’s look at Caroline and Jim to see how dangerous these unattended issues might become:

1. Life Insurance

Not everybody needs life insurance. If you have enough money and low enough expenses, you can self-insure. But Jim and Caroline weren’t in that situation. Their combined savings ($370,000) could generate about $15,000 annual income tops. And that’s if they don’t buy the house.

That isn’t enough to support the family so they need life insurance. Without it, the family would be placed in an impossible position if either Jim or Caroline were to die prematurely.

2. Spending

I don’t know if this couple has a problem with spending and neither do they. They won’t know until they start tracking. Once they do that, they’ll know if their spending supports their life priorities or not. The nice thing is these guys are young and minor shifts in spending could have huge payoffs.

If you are looking for the easiest and most powerful way to transform your financial future, look no further than you’re spending. This will have a far greater impact on your financial future than the decision to buy buying Apple or Google stock.

3. College Funding

Want a quick way to lose your life savings? Try sending your children to a very expensive college you can’t afford. I’ve seen case after case where hard working couples spend all they’ve saved – and then go into debt – to pay for their children’s college.
If that happens, what difference does it make if you invest like a genius? It’s all going down the drain anyway.

Do you have a particular question about your own plan?  connect with me. and I’ll either answer you directly or include the answer in a post.

4. Investments

If you want to make smart investments, match your investments to your goals. I’ll explain why this is a near-genius level tactic by way of example.

Let’s say you have money to invest and you earmark those funds for retirement. Why would you speculate with this money? This is long-term money and if you invest with a long-term strategy you’ll probably do far better with less risk.

The reality is when you speculate you take on more risk and that will probably result in very volatile returns including hefty gains and losses. If all you care about is long-term results, why invest for the short-term? It is not your best approach.

By simply realizing what your goals are for each pot of money and investing accordingly, you’ll be ahead of the game.

5. Estate Plan

Without an estate plan, all your work for could be swept away in probate. What is probate? This is a nasty and expensive process that lets the lawyers and the courts duke it out over your money. It’s really a bad scene that can take a very long time and waste a ton of money. Here’s an extreme example.

Elvis Presley was worth $10 million when he died. But his heirs only got $3 million when the estate was settled. Where did the other $7 million go? P-R-O-B-A-T-E. The money went to lawyers and courts. What a waste. Don’t be a hound dog. Get an estate plan together instead.

Bottom line – if financial security is what you are after forget about maximizing short-term investment results. Instead, take a holistic approach to your situation. You’ll probably do much better, have less stress, and have more fun along the way.

Are you focused on short-term investment results? How has it worked for you?