Three steps to building weath

RT Jeffreson

Each investor is unique. Each individual’s situation is unique, but while each person’s plan has unique qualities, there are fundamental principles that must be part a part of every financial plan.

These fundamentals are the building blocks for wealth accumulation over the long term, and it’s important to keep them in mind. Always.

Avoid trying to time the market It sounds so simple: Buy low, sell high. However, in both cases, this credo oversimplifies the issues. You see, people aren’t wired to dive off a cliff and buy when everyone is selling. Instead, the temptation is to circle the wagons and play defense.

In reality, it’s much easier to buy when markets are heading higher. Euphoria can breed euphoria, which leads to a feeling of invincibility. It’s the “follow the crowd” mentality.

Don’t try to pick a few winners, avoid trying to predict the future, (i.e., market timing) and remember diversification and a disciplined approach that strip the emotional component from your investment plan.

Longer term, stocks have historically been an excellent vehicle to accumulate wealth. Crestmont Research produces a chart each year that reviews the annual 10-year total returns for the S&P 500 Index going back to 1909. (These are rolling 10-year periods; i.e., we are reviewing over one hundred 10-year periods.)

Since 1909, there have been only four 10-year timeframes that have generated negative returns. Want to guess as to when those occurred?

The late 1930s and the end of the last decade. That shouldn’t come as too much of a surprise, given extreme valuations that occurred in the late 1920s and late 1990s and early 2000s.

And the average annual return? It can vary by a considerable amount, but it averages 10 percent.

2. Diversify

Both Mark Twain and Andrew Carnegie allegedly said, “Put all your eggs in one basket, and watch that basket closely.” Twain and Carnegie didn’t live in an age where access to information is continuous and almost instantaneous. Bad news comes like a defensive end hammering the quarterback – it can happen in seconds.

Strive to select the right mix of securities that leaves you exposed to the longer-term appreciation potential in all major sectors of the economy. And don’t stop at the U.S. border; recognize the potential the global economy offers.

A fixed income component is critical for most folks. Being 100 percent diversified in a portfolio of stocks can leave you exposed to a market decline. It’s for someone with a long-term time horizon. If you are nearing retirement, you may not have the time to recover in the event of a steep market decline.

Bonds, cash and fixed income securities are not earning spectacular returns right now. However, they help anchor the portfolio. As the percentage of stocks decline in relation to cash/fixed income, the portfolio is likely to experience less volatility. You won’t see the peaks in a roaring bull market, but you’ll sleep better at night knowing that a sudden dip in the market is far less likely to take a big bite out of your investments

3. Have a Goal

Why are you saving? Who are you saving for? While each client’s scenario differs, one objective consistently tops the list of retirement goals: replacing income. Creating income is typically the top priority, with the biggest worry for any client being running out of money. With the current low interest rate environment, more and more clients are turning to the returns of the stock market. What type of portfolio will help you achieve these goals?

A balanced 60/40 equity to fixed income is always a great place to start, and can be adjusted based on your tolerance for risk.

As your representative, I can help you find the perfect balance between growth, protection, and preservation of capital.

RT Jeffreson