“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.”William Feather
It’s no surprise that right now you might be feeling uneasy about the stock market. We’re currently seeing an unprecedented bull market right after startling losses at the beginning of the pandemic. While promising, uncertainty still looms and there seems to be a disconnect between the stock market and the economy as a whole. If you feel that investing in 2020 feels less than exciting, we’re with you.
We’re glad to see portfolios beginning to bounce back, yet we’d be remiss if we didn’t recommend taking a beat to look at the big picture. Now that the economy looks to be improving, it’s time to consider how you will proceed. And we think this is especially prudent if you currently have money in the stock market.
A Different Approach to Finance
If you’ve browsed our website, you’ll know that the advice we offer is a bit different than that of typical financial advisors. We strive to offer an alternative to advice that relies on stock market speculation for wealth building.
This is largely because true wealth is rarely built through the stock market, since it offers so little control. Some of the wealthiest people in America may have money in stocks, yet this acts as a supplement to their wealth—it’s not how they built wealth.
Instead, we advocate for putting individuals back in control of their finances. It’s not that investing in the stock market is a recipe for disaster; we just think that over the last few decades, too much emphasis has been placed on stocks. The reality is—whether stocks rise or fall, it’s out of your control.
If you’re looking to change up your investing game, or you’re thinking about investing for the first time, we hope this article will help you gain a better sense of control in your financial life.
If You’re in the Stock Market…
In spite of the risks, the vast majority of adults have a portion of their money invested in the stock market. Stocks are so pervasive in today’s economy that people practically equate the word “investing” with stocks or mutual funds. It’s peddled as the must-have long-term investment.
Some people may even find that they’ve been automatically enrolled in a qualified retirement plan, like a 401(k), by their employer. Others are chasing the 12% that Dave Ramsey has promised them, even though the market isn’t so easily predicted. That’s not to say anything of the time it takes to recover from losses.
And yet opportunities for investing are far more varied. These other options are less likely to come up in conversation with typical financial advisors because they don’t benefit Wall Street.
So we’d like to offer you alternatives to investing in 2020 (at least in the stock market). You don’t need to pull your money and run, either. Instead, we’d like to show you ways to better diversify your dollars so that you can:
- Limit your risk
- Increase stability
- And reclaim more control of your own dollars
How to Diversify Your Investing in 2020
1. Save First
Investing before you save is a backwards approach. And the past few months had many Americans realize the importance of accessible funds. Your savings should be easily accessible (liquid) in the event that you need those dollars.
What’s just as important as “emergency” money, yet gets little attention, is how important savings are to partake in opportunities! Many label their savings as an emergency fund (which is a good start), and it’s even better when you leave the door open for rare occurrences.
This fund will help you make choices without disrupting your investments, which you won’t want to pull from at the “wrong” time.
2. Expect Volatility
If you have money in the market, expect volatility. A ideal to adhere to is, “Never invest more than you are willing to lose.” It’s a harsh reality, and if the thought of losing your investments makes you uneasy, it’s a sign that you should avoid it.
It’s true that over time the stock market goes up, yet there is still no guarantee that you’ll make money. In fact, it can take nearly a decade of consistent growth to recover from a crash. Consider the emotional volatility tied to that, especially when your retirement or your children’s education is linked to your stocks. Don’t let investments keep you up at night.
Typical financial programming has people believing that risk is unavoidable, yet that’s not the case. There are ways to minimize and even eliminate the risk of loss when it comes to your finance.
3. Limit Your Exposure
With significant exposure comes significant risk. If you’re expecting volatility, as any stock market investor should, you should also consider limiting your exposure. We recommend exposing no more than 20-25% of your investment dollars to that kind of risk.
If all of your available investment assets have been poured into the stock market, you’ve got some diversifying to do. Placing so much of your available capital at that kind of risk takes away all of your control. And if your investments are tied up in a retirement account with limited options, focus on your new dollars.
This is another word, like “investment,” that’s been warped by Wall Street. To “diversify” does not mean buying different kinds of mutual funds (although we still recommend having broader holdings in the market).
True diversification includes a range of investments in different asset classes. As we said above, you can still invest and maintain control. To lower your risk and balance out your stock market holdings, consider assets such as:
- Real Estate
- Life insurance
- Business and Personal Lending
You can read more about these alternatives here.
5. Roth-ify Retirement
If your retirement savings are in a 401(k) or IRA, and you have the ability to convert to a Roth or Roth IRA, take the time to see if it makes sense for your financial desires. Many look at the up-front taxes all wrong! By paying your taxes now, you’ll be able to enjoy the growth of your account without any concern for changes in the tax law.
So many are lulled into the false security of a tax-deferment because they can “save” money now. Yet not only will you have to pay those taxes on the growth of your money…who knows what taxes will even be when you retire? If you had to guess, are they more likely to go up or down?
There’s also an opportunity to save on those taxes you pay now by doing a self-directed IRA and then doing a Roth conversion using life settlements.
6. Slash Those Fees!
Fees are the silent killer of your accounts. Even the comedian John Oliver and Vanguard founder John Bogle can agree on their stance on fees: keep them under 1%. Employees with company-sponsored plans will find this difficult, as they’re often paying around 3% in fund fees, plan fees, brokerage fees, and administration fees.
The reason these fees are so deadly is because they don’t just lower your results by 3%. Fees can slash your growth exponentially because of the compounding effect. These tiny little fees can actually eat up a third of the money that should have been yours. This is just another reason you may want to…
7. Build Assets Outside of Retirement Plans
Government sanctioned retirement plans trap your money and limit you in ways that hinder your journey to Prosperity in significant ways.
Say you wanted to build equity in a second home that you could utilize part of the year and rent out when you’re gone. With a self-directed IRA, there are strict rules against purchasing properties you can use yourself.
Interested in starting your own business before the age of 59 ½ ? You’ll have to pay through the nose in fees and taxes if you want to utilize the funds in your 401(k).
While getting that employer match can make sense, we recommend against maxing out your contributions in plans that limit what you can do with your own money. Instead, take diversification to heart and build up non-correlated assets so that you have the freedom to fund your life when and how you want.
Investing in 2020
If you’ve been looking for something other than the stock market, we hope you feel like control and Prosperity are within your reach. You’re not limited to the stock market, and just because you have money in the stock market doesn’t mean you’re doomed to fail.
All you need is some balance, and a healthy dose of control. If you’re looking for a financial advisor who advocates for “wealth without Wall Street,” and can help you set up new strategies, contact us today.