I just got a call from a close friend who has had several upper management jobs in his lifetime and lives a comfortable simple lifestyle.
He called me because he got a pension check from a company that he no longer works for.
He wanted to know if I could get him a 20% return on his money if he invested it with me.
Since I have written and practiced as a fee-only financial advisor for over 30 years, he seemed like a wise thing for him to do.
My first reaction was sadness.
Sadness at the fact that although my friend was very comfortable financially, he was like so many people financially illiterate.
As of October 26, 2012, the 10 year total return for the S&P 500 was 6.
7% including reinvested dividends.
That means that my friend has a better chance of getting 20% in Las Vegas than he does in the stock market.
A fixation on returns on investments always gets an individually into trouble.
Here are the key points you need to remember when you are looking for total returns on investment: 1.
Are my returns keeping up with taxes and inflation? 2.
Are my total portfolio holdings in risky things that worry me or I don't understand? 3.
Do I feel good about how diversified my investments are? 4.
Do I have enough money in emergency cash reserves that I could ride out a stock market downturn? 5.
Are my projected returns over the long term enough to supplement my social security in case I decide to now work or unable to work? These are the questions my friend needs to answer before he invests.
The way we are wired is to think short term and that kind of behavior can ruin a good investment plan.
Investing money means it grows over time and it isn't always upward.
But studies have shown that the long term payoff is worth it if you don't panic, stay the course, and keep saving.
My friend will probably take the largest check he has ever received in his life and give it to his friend who trades penny stocks from a spare bedroom out of his home.
While he may hit some big profits, he will also lose big.
Every time his account is traded there will be brokerage fees and trader fees accrued.
In addition, every time his account is traded, he will incur a taxable gain or loss.
That doesn't look like a good investment plan to me.
Investing invokes all kinds of unwanted emotions -loss, greed, and risk that you have to deal with.
We all carry some money personalities from our parents.
Being mindful about that as well as knowing our tax bracket, our risk tolerance and what returns we need to get ahead will help us invest successfully.
He called me because he got a pension check from a company that he no longer works for.
He wanted to know if I could get him a 20% return on his money if he invested it with me.
Since I have written and practiced as a fee-only financial advisor for over 30 years, he seemed like a wise thing for him to do.
My first reaction was sadness.
Sadness at the fact that although my friend was very comfortable financially, he was like so many people financially illiterate.
As of October 26, 2012, the 10 year total return for the S&P 500 was 6.
7% including reinvested dividends.
That means that my friend has a better chance of getting 20% in Las Vegas than he does in the stock market.
A fixation on returns on investments always gets an individually into trouble.
Here are the key points you need to remember when you are looking for total returns on investment: 1.
Are my returns keeping up with taxes and inflation? 2.
Are my total portfolio holdings in risky things that worry me or I don't understand? 3.
Do I feel good about how diversified my investments are? 4.
Do I have enough money in emergency cash reserves that I could ride out a stock market downturn? 5.
Are my projected returns over the long term enough to supplement my social security in case I decide to now work or unable to work? These are the questions my friend needs to answer before he invests.
The way we are wired is to think short term and that kind of behavior can ruin a good investment plan.
Investing money means it grows over time and it isn't always upward.
But studies have shown that the long term payoff is worth it if you don't panic, stay the course, and keep saving.
My friend will probably take the largest check he has ever received in his life and give it to his friend who trades penny stocks from a spare bedroom out of his home.
While he may hit some big profits, he will also lose big.
Every time his account is traded there will be brokerage fees and trader fees accrued.
In addition, every time his account is traded, he will incur a taxable gain or loss.
That doesn't look like a good investment plan to me.
Investing invokes all kinds of unwanted emotions -loss, greed, and risk that you have to deal with.
We all carry some money personalities from our parents.
Being mindful about that as well as knowing our tax bracket, our risk tolerance and what returns we need to get ahead will help us invest successfully.
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