In the world of financial advice, one thing that has become clear over the years is that people are afraid to do the wrong thing with their money. In fact, there’s a lot of fear around money in general.
Fear of not enough, of doing something foolish, or even of how other people will perceive our financial situation, can cause a bit of paralysis when it comes to planning for the future. For better or worse, you tend to fall back on the habits you were raised on – and you may find it difficult to trust anyone else to have your best interests in mind.[i]
Imagine you come into a sum of money. Do you spend it? Save it? Give it to your family and friends? Donate the lot to charity?
The first thing to cross your mind if you won Lotto might not be to invest, but it should be a close second. The worst way to build wealth (outside of spending beyond your means) is to leave it in a bank account and hope interest will keep apace of inflation and fees.
We just used the Lotto analogy, but – you don’t have to wait for cash to fall from the sky to start making savvy investment plans. Time and consistency are far more import than the amount you start with.
Back to the paralysis. Many try to wait for a ‘good time’ to start. Maybe the markets seem uncertain, or ‘retirement’ still seems part of a nebulous ‘someday’ they don’t have to worry about yet.
So, they wait. Delaying the commencement of essential savings and creating powerful savings muscle memory and habits. And it will cost them in potential earnings from compound interest over time.[ii]
Let’s say a 20-year-old invested a $10,000 inheritance today. If they didn’t touch it until they retired at age say 70, their money could increase by 32 times. This means they could end up with around $320,000 (assuming a 7.2 percent growth rate, which is reasonable).
But what if they waited another 10 years to invest that $10,000 and leave it be until retirement? In that case, they’d only end up with half as much as above — just $160,000. And if they waited until 40? That’d cut the amount they’d be left with in half again: around $80,000.
When we go through setting up a portfolio for new clients, we model how a particular investment strategy will likely play out over a specific timeframe overlaid with the client’s capital and cashflow needs. These show that, in general:
1. If you have more time, it will act as a buffer to volatility so you can take on more risk in your strategy.
2. Every bit counts, so contributing regularly over this time will yield greater results.
3. Discipline and time in markets will always trump timing the markets, no matter what your nephew’s friend’s father who’s really into Crypto says.
The best way to achieve your goals for future financial security is to start today and keep going. This is true whether you have a traditional investment portfolio, a UK pension, a KiwiSaver fund, or another option like a tax-efficient PIE fund.
And the best way to stay disciplined? Work with the professionals. Engaging a trusted financial adviser offers value beyond your financial returns. By working with a fiduciary, you will be working with someone well versed with evidence and data, who can create a plan for your unique situation and goals.
Emotions and investment don’t mix. This why it can be so difficult to DIY investments even if you have a great knowledge of markets. It’s much safer to play the long game and bat for the average and not for the boundary. Your financial adviser will keep you on the agreed path by handling the everyday of it, so you can stay focused on the big picture.
There is little safety in short term thinking. We humans hate uncertainty, which is why holding out and playing the long game feels counterintuitive.
You miss all the shots you don’t take, as my basketball-enthused son might say… and you certainly miss returns from market upswings if you weren’t in the market to start with.
Sitting down with your local financial adviser for a face-to-face chat is a great first step forward in your financial journey – you just have to lift your foot, ignore the fear, and take charge of your financial destiny.
by Nick Stewart (CEO and Financial Adviser at Stewart Group)
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 355.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://thethreeseas.com.au/unlocking-the-mind-exploring-the-psychology-of-money/#:~:text=No%20one%20is%20entirely%20rational,often%20shape%20our%20financial%20choices.
[ii] https://www.aesinternational.com/blog/investment-mistakes-you-dont-even-realise-youre-making-case-study?utm_campaign=Hs2.0%3A%20Social%20Storm%20Sam&utm_content=287274770&utm_medium=social&utm_source=linkedin&hss_channel=lis-cMatYMjDjb
