From Fidelity

Key takeaways

  • Creating a financial plan can help you make better decisions about investing and saving.

  • It’s important to stick to your plan, even when financial markets are turbulent.

Investing is not about “getting rich” or “playing the market.” It’s an essential part of achieving financial wellness. That means being able to meet your needs and the needs of those who depend on you as well as being able to set and achieve goals that go beyond merely being able to pay your bills and manage debts like mortgages, credit cards, and student loans.

These 6 steps can help you increase your investing success and achieve financial wellness, even when financial markets seem unfriendly.

1. Start with a plan

Creating a financial plan can provide the foundation for investment success. The financial planning process can help you take stock of your situation, define your goals and figure out practical steps to get there.

Financial planning doesn’t have to be fancy or expensive. You can do it with the help of a financial professional or an online tool. Either way, making a plan based on sound financial planning principles is an important step.

A plan is one service that financial professionals frequently offer their clients.

There is some evidence that families who work with financial professionals are better prepared to meet long-term financial goals.

2. Stick with your plan, even when markets look unfriendly

When the value of your investments falls, it’s only human to want to run for shelter. But the best investors don’t. Instead, they maintain an allocation to stocks they can live with in good markets and bad.

The financial crisis of late 2008 and early 2009 when stocks dropped nearly 50% might have seemed a good time to run for safety in cash. But a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during that time were far better off than those who headed for the sidelines.

In the decade following the start of the crisis in June 2008, those who stayed invested saw their account balances — which reflected the impact of their investment choices and contributions — grow 147%. That’s twice the average 74% return for those who fled stocks during the fourth quarter of 2008 or first quarter of 2009.

While most investors did not make any changes during the market downturn, those who did made a fateful decision with a lasting impact. More than 25% of those who sold out of stocks never got back into the market and missed the gains that followed.

If you get anxious when the stock market drops, remember that’s a normal response to volatility. It’s important to stick with your long-term investment mix and to have enough growth potential to achieve your goals. If you can’t tolerate the ups and downs of your portfolio, consider a less volatile mix of investments that you can stick with.

3. Be a saver, not a spender

While it’s easy to get caught up in the ups and downs of the market, it’s also important to think about how much of your income you are putting away for the future. Saving early and often can be a powerful force when it comes to making progress toward long-term financial goals.

As a general rule, Fidelity suggests putting away at least 15% of your income for retirement, including any employer match.

Of course, that number is just a starting point, for some people it will be lower and for some people it will be higher. But regardless, there is evidence that saving more and starting earlier help people reach long-term goals.

Dedicated savers of all ages had higher median scores but the differences were particularly large for younger savers who had more time to put away money during their careers.

4. Be diverse

One key foundation of successful investing is diversification (owning a variety of stocks, bonds and other assets), which can help control risk.

Having an appropriate investment mix, giving you a portfolio that delivers growth potential with a level of risk that makes sense for your situation, may make it easier to stick with your plan through the ups and downs of the market.

Diversification cannot guarantee gains, or that you won’t experience a loss, but it does aim to provide a reasonable trade-off between risk and reward. You can not only diversify among stocks, bonds, and cash, but also within those categories.

Consider diversifying your stock exposure across regions, sectors, investment styles (value, blend, and growth), and size (small-, mid-, and large-cap stocks). For bonds, consider diversifying across different credit qualities, maturities, and issuers.

5. Consider low-fee investment products that offer good value

Savvy investors know they can’t control the market, but they can control costs. A study by independent research company Morningstar® found that, while by no means guaranteed, funds with lower expense ratios have historically had a higher probability of outperforming other funds in their category—in terms of relative total return, and future risk-adjusted return ratings.

6. Don’t forget about taxes

Another habit that may help investors succeed is keeping an eye on taxes and account types.

Accounts that offer tax benefits, like 401(k)s, IRAs, and certain annuities have the potential to help generate higher after-tax returns. This is what investors call “account location” — the amount of money you put into different types of accounts should be based on each account’s respective tax treatment.

A related concept is called “asset location” — the practice of putting different types of investments in various types accounts, based on the tax efficiency of the investment and the tax treatment of the type of account.

While taxes alone should never drive your investment decisions, you may want to consider putting your least tax-efficient investments (for example, taxable bonds whose interest payments are taxed at relatively high ordinary income tax rates) in tax-deferred accounts like 401(k)s and IRAs.

Meanwhile, more tax-efficient investments (for example, low-turnover funds, like index funds or ETFs, and municipal bonds, where interest is typically free from federal income tax) are usually more suitable for taxable accounts.

The bottom line

Investing can be complex, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and be aware of taxes, you will have adopted some of the key traits that may lead to success.


About LRPC’s Monday Morning Minute

Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in sustainable investment strategies for retirement plans that incorporate Socially Responsible Investment (SRI) factors and Environmental, Social and Governance (ESG) elements. LRPC currently has contracts in place to provide consulting services on more than a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or or visit the firm’s website at Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.