If you think achieving higher expected returns on your investments is difficult, you are mistaken. But an even bigger mistake is assuming more money will make you happier.
Bigger Returns Are Achievable
Earning higher expected returns can be simple. Here is the process in three steps:
Determine what you want your asset allocation to be -- how you want to balance your portfolio between stocks and bonds. One way to help identify the right asset allocation for you is by taking a free risk-capacity survey, such as this one from Vanguard.
Create a globally diversified portfolio of low-cost, low-management-fee index funds.
Rebalance your portfolio once or twice a year to keep your actual asset allocation in line with your target balance, or to adjust the allocation if your investment objectives or tolerance for risk have changed.
I don't want to oversimplify the case for evidence-based investing (also called passive or index-based investing). Maintaining a disciplined investing plan can often be difficult for self-directed investors. When the inevitable market corrections appear, it can be emotionally challenging to rebalance by purchasing stocks when they're declining in value, and selling bonds when their value is increasing.
To achieve higher expected returns, it's extremely important that you ignore most of the financial media. It feeds you a daily grist of "financial psychics" pretending to have the expertise to pick winning stocks, time the market, and select "hot" fund managers. Once you understand that the "success" of such forecasts is most likely attributable to luck (and cherry picking their data after the fact), and not to skill, you'll be well on your way to capturing the market returns that are yours for the taking.
More Money Doesn't Mean Greater Happiness
Over the years, I've dealt with thousands of investors who were intensely focused on improving their returns. Understandably, many were concerned about having enough money to retire with dignity, if at all. I have been struck, however, by the number of wealthy and successful people I've met with an insatiable desire to increase their net worth, even though they'd already achieved financial success by any objective measure.
These people share one common characteristic. They are fundamentally unhappy. They believe increasing their net worth will make them happier. When they find it doesn't, instead of looking for the root causes of their unhappiness, they double down on their efforts to accumulate more assets.
I confronted the issue of trying to attain a higher level of happiness in my own life. When I achieved financial security, I found it didn't actually increase my happiness. I still felt there was no real purpose in my work or my life. I was trapped in an endless grind, with no "happiness payoff."
Shiny Objects, Unhappy People
My happiness breakthrough came when I started writing the "Smartest" series of investing books. They've been read by hundreds of thousands of investors all over the world. One was even translated into Chinese. I started getting emails from readers telling me how my books changed their lives. Some told heart-wrenching stories about how they were victimized by their brokers and advisers. As a result, I found a purpose in my life that transcended my self-interest. The realization that I touched people's lives in a positive way has made me a much happier person, content with my life and very grateful for it.
%VIRTUAL-pullquote-I touched people's lives in a positive way, which has made me a much happier person.%You wouldn't think it would be necessary to extol the virtues of being happy. There is ample evidence that happiness is positively linked to living a longer life, and even to having an improved immune system. Much has been written about how to achieve happiness. But a good start is by focusing on positive relations with others, and on demonstrating genuine empathy. You can try using these 25 science-backed ways to be happy.
Achieving financial security is a very worthy goal. Doing so at the expense of your own happiness is a flawed plan. Fortunately, you can have both.
Dan Solinis the director of investor advocacy for the BAM Allianceand a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is "The Smartest Sales Book You'll Ever Read."
10 Financial Rules You Should Break
A Better ROI? Simple. But More Money Still Can't Buy This...
This is the granddaddy of them all. Start to type "emergency" into Google (GOOG), and the first suggestion is "emergency fund." The rule is to make sure you have six month's of living expenses tucked away in cash in case you losefyour job or suffer a financial setback. Of course it's important to have a financial safety net, but when you earn virtually nothing on your cash, this rule can cost you. For example, if six months of living expenses for you is $25,000, you'd be sacrificing close to $1,000 of income a year by keeping this money in a checking or money market account.
For years, I've broken the mold on this financial rule by telling clients they shouldn't have their emergency fund in cash. Instead, choose a short-term bond fund that pays 3 percent or higher for your safety net. If you need the money quickly, you can easily sell the fund and get access to the cash. If you don't need the cash –- and these emergency fund accounts are rarely used –- you can still make money on the assets.
Not so fast. There are many good reasons to contribute to a 401(k), such as tax savings, tax-deferred growth and a possible employer match, but there are also good reasons not to contribute as well. Don't blindly dump money into your 401(k) if you don't have an emergency reserve of some sort and there is a chance you will be laid off. It is taking longer for most to find a job, so if you think you may be out of work, make sure you have the resources to pay rent and buy food until you land a new job.
Also, if your employer doesn't provide a match and you are in a low-income tax bracket, it may make more sense to pay the tax now (since you are in a low tax bracket) and invest in a Roth individual retirement account instead. Use this 401(k) vs. Roth IRA calculator to crunch the numbers.
You cannot cut your way to wealth. Too many people and financial advisers focus on trimming expenses when they should be focused on the other half of the equation -- income. I'm a proponent for living within one's means, but too often that creates an artificial barrier or ceiling. "This is what I make, so I have to cut back to save more," is often the thought process. Rather than living within your mean, work on increasing your means.
There are many ways you can make more money, including asking for a raise, boosting your skills –- your human capital –- and getting a promotion, starting a side project in the after-hours or going back to school and starting a new career. What you make today is not necessarily what you can make tomorrow. Cut unnecessary expenses and then use your energy to increase your income.
You should only save for your children's education if you can afford it. That means when you're on track to having enough assets for your retirement. Assuming you have the retirement assets and now want to save for college, most advisers will recommend a 529 college savings account.
Not so fast. These 529 accounts have some real advantages, such as tax-free growth of contributions if they are used for approved higher education expenses. This tax-free growth is a big benefit. However, if you withdraw money from this account and do not use it for approved higher education expenses, the gains will be subject to ordinary income tax and a 10 percent penalty.
The big risk is if you fully fund your child's college education but he or she decides to not go to college, drops out, finishes early or goes to a less expensive school. You have the ability change the beneficiary to another qualifying family member without penalty, but if you have just one child, there may not be anyone you can transfer the funds to. You would then have to liquidate the account and pay the tax and penalty. If you are undeterred and still want to pay for your child's college education, start with a small contribution into the 529 and fund up to a maximum of 60 percent of the cost in case one of the above scenarios occur.
The average age of cars on U.S. roads is 11.4 years. So if you're average, then it may make sense for you to buy a car -– especially a car a year or two old –- instead of leasing. However, if you do not intend on driving the same car for over a decade, a lease may be a much better option. A new study by swapalease.com found it was better to lease than buy based on its criteria. And under certain circumstances, you may be afforded a larger business deduction with a lease compared to a purchase.
The certified financial planner designation is the gold standard when it comes to financial planning. I wouldn't think of hiring a financial planner if they weren't a CFP practitioner. However, just because you are working with a CFP doesn't mean you shouldn't research your adviser, his or her areas of expertise and how he or she charges. The CFP tells you he or she has advanced training in areas related to tax, investing and retirement planning; has passed a comprehensive and difficult exam; and has agreed to adhere to a high code of ethics.
The onus is on you to know what you need and to make sure your CFP financial planner can deliver. Don't get lulled into thinking that just because he or she have three letters after his or her name that he or she has been screened. Ask tough questions before you trust your money to anyone -– even a CFP.
Most financial pundits will advise taxpayers to have just enough taken out of their paycheck so when April 15 comes around, they will neither owe money nor receive a refund. The rationale is if you get a refund from the Internal Revenue Service, it means you paid too much in over the year -- and the government has had use of your money without paying you any interest. Keep the money and invest it yourself is the theory.
'Again, that's the theory, but reality is much different. It all comes down to psychology. I look at paying a bit more to the IRS as a forced and automatic savings account. Sure you won't earn interest, but human nature tells us you probably won't save the money anyway. There is a greater chance you will squander $100 a paycheck then if you receive a $2,400 check from the IRS. One approach takes a plan and discipline each month to save and invest while the other doesn't. A check from the IRS isn't an interest-free loan; it is an automatic savings plan.
Nobody wants to endure an IRS audit, but too often I see honest and ethical taxpayers avoid claiming certain deductions or taking certain positions that are completely legitimate because they fear it will increase their chances of an audit. First, your chances of being audited are small –- about 1 in 104 chance. If your return doesn't include income from a business, rental real estate or farm, or employee business expense deductions, your chances are even smaller -– 1 in 250. Second, if you and your tax preparer are not crossing the line, you have little to worry about. In fact, thousands of taxpayers get a check from the IRS at the end of the audit. Don't let a small chance of an audit keep you from taking advantage of every tax strategy for which you qualify.
Do what you love, and you'll never have to work a day in your life, or so the saying goes. It sounds good and feels good, but it's not necessarily true. Sometimes –- often, actually –- doing what you love can be a great hobby but not a good career. There are a lot of things I enjoy that I'll never make a dime doing. A better approach is to find something you enjoy, are good at and that you can get paid to That is the financial trinity you should aspire to find because it ties your interests with your skills with the marketplace
Follow this rule, and I'll send you straight to detention. We know college costs are soaring, and we don't want to bury our kids in college debt, so most parents prioritize college saving over retirement saving. Big mistake. If worse comes to worst, Junior can get a loan, work while in school or go to a less expensive school. Basically, Junior has decent options, and you have tough choices.
If you haven't saved enough for retirement, you are stuck. There's very little you can do other than slash your expenses, work longer or both. Save for your own retirement first. That's the financial rule you should follow. If you have amassed so much wealth when your children head off to college that you can afford to help them, go for it. If you haven't, you'd be doing your kids a disservice by jeopardizing your own retirement by paying for their tuition.