Just over 100 years ago, my great grandfather, Moshe Cohen, dictated his final will and testament as his days were numbered. Other than providing instructions on how to divide his meager estate, he offered his two sons some tidbits of wisdom, some spiritual (“Don’t play baseball on the sabbath”) and some very practical. On the practical side, Moshe advised his sons to “…always save a for a rainy day”.
Whether you are saving for a rainy day, a big purchase, or retirement, saving is the smartest financial decision you can make, no matter what age you start. How much you save and how you invest your savings will vary greatly depending on factors such as age, chosen career and your risk appetite. Still there are a number of helpful “rules of thumb” to consider as you think about your financial health. Here are my top Do’s and Don’t for investing:
Save, Save Save
No matter your age, make savings a priority. It may not be possible to save a certain percentage of your paycheck every month, but when ever possible tuck away money, invest it, and let it begin to grow. It is helpful to start with a complete and realistic monthly budget which will allow you think more carefully about your expense. Small changes in your lifestyle can make a big difference later in life. For example, making coffee at home rather than splurging for a $7 Starbucks caramel macchiato each day from age 25 to 50 would yield savings of $125,000 invested at 7%. Don’t try to keep up with Kardashians — focus on the “need to haves” and your nest egg with expand exponentially.
Don’t be afraid to take some risk
1% to 2% of improved annual return over decades can make a big difference in your savings. using the coffee example above, if your return on the skipped Starbuck’s visit is 9% vs. 7%, by age 50 you will have an additional $40,000. Of course, higher returns come with higher risk and everyone needs to find the balance they are comfortable with. Still, there is a portion of your savings that you may not need to tap into for many years. Think about taking a bit more risk with these funds.
Don’t watch your portfolio on an hourly basis
The ability to see one’s net worth on a minute-to-minute basis is a double edged sword. I love access to data and information, but the bulk of investing should be thought of as a long-term pursuit and short-term movements in stocks and bonds are just noise that can cause investors to make poor decisions.
Don’t use credit to improve your lifestyle
Just because its a "December to Remember”, does not make it a great idea to buy a $60,000 Lexus by borrowing $45,000. In the world of finance, leverage equals risk and when you are taking risk by investing in securities, it often does not make sense to take additional risk by adding to your debt load.
Do diversify
The key element of risk management in investing is diversification. Spreading risk among different asset classes and among different industries within an asset class will protect your investment account from uncomfortable, and sometimes permanent, shock losses. Those of us that lived through the 2008 financial crisis and were overexposed to industries such as banking (present company included!), learned a painful but valuable lesson.
Do get help if you need it
Successful investing takes time, knowledge, and skill. If you are lacking any of these items, it might make sense to seek out assistance from a professional money manager to help you achieve your goals. Make sure to use a licensed, insured, and reputable money manager rather than relying on Uncle Henry to manage your money. “Hot stock” tips from friends should be avoided.
Do adjust your portfolio as you age
The risk tolerance for a 25 year old who still has 40 years until their retirement should be vastly different that someone in their late 50’s who plans on retiring in the next several years. Accordingly, the make-up of your investment portfolio should reflect a changing risk portfolio as you age. Typically, that means gradually shifting assets from higher risk equities to dividend paying stock and fixed income instruments.
ABOUT JAY COHEN... Until his retirement in 2020, Jay was a managing director at Merrill Lynch where he was an equity analyst and head of the company’s financials research team. Over his 30 year Wall Street career, he was consistently a top-ranked analyst and member of the firm’s US1 committee.