Four Things Investors Can Control

By Aaron Bates, Investment Advisor

By Aaron Bates, CFP®, Investment Advisor Representative

One constant over the past three years has been the uncertainty that lingers with a volatile stock market.  As we move beyond the credit crisis of 2008, the intense focus on the economy has triggered paralyzing emotions of uncertainty among many investors.  While we cannot predict the future with absolute certainty, we do have direct control over the following four things:

1.       How much we save prior to retirement

2.       How much we spend during retirement

3.       When we switch from saving to spending

4.       How we diversify our investments

 “How much should I be saving for retirement?”   The answer depends on how much you need to live on and when you need it.  We can make these projections most accurately with our financial planning software, or you can try a host of online calculators.  Some people even recommend the old rule of thumb to save 10–15% of your earnings throughout your working years.  However, we find many investors are only saving the minimum for retirement and then hoping for asset growth from the stock market to offset any shortage in savings.  Since the market hasn’t grown like they hoped, they feel pressure to save more, spend less, or work longer.  The more you save now the less dependent you are on the market for high annual returns. We suggest that reluctant savers think of saving simply as deferred spending. 

“How much should I spend during retirement?”  This answer depends on how much you have saved for retirement and how long you need to maintain your basic lifestyle.   Living below your after tax income allows for healthy savings and more flexibility when transitioning to retirement spending.  When you start retirement planning, you begin with an awareness of how much annual income you need to live on.   It’s surprising how few people really know what they spend each month for their necessities.  In 2012, you might start a cash flow sheet to help you track what you spend.  You can’t manage what you don’t measure!  Knowing what you actually spend goes a long way to helping you plan properly!

“So when can I retire?” Answering this question drives all other variables because when you retire you must begin to live off your savings, effectively switching from saving to spending.   Deferring retirement by just one year can have a huge impact on pension benefits amounts, Social Security benefits, and the flow of assets from savings rather than to savings.  Conversely, the earlier you plan to retire puts more emphasis on the other variables like spending amounts, savings amounts and investment performance.

The fourth thing you can control is your investment diversification.  Asset allocation is the most critical factor in your long-term investment performance.   Since the future is uncertain and no one can predict anything with 100% certainty, it’s important to manage your risk by diversifying your investments.  No one can control how an investment performs or what the economy does.  But, since each asset class has its own set of risks and rewards, you can control what percentages you put into stocks, bonds, commodities, real estate, etc.   

Helping you decide what risks and rewards best suit you is one of the things we offer as investment advisors. We don’t try to “time” the markets in the short-term because of the increased risks of that strategy.  However, based on your timeline and risk tolerance level, we will allocate assets across various asset classes, using investment managers who have historically demonstrated high levels of competence.  We, like you, share the same goal—the greatest return for the risk that suits us best.

In summary, if you find yourself stressed about all the things in the world that you cannot control, direct your energy in 2012 toward the four things you can control. If you need guidance in any of these areas, we would be honored to help you!