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What Are the Four Principles of Wise Long-term Wealth Management?

What is a fiduciary financial advisorInvesting can be an emotional — and overwhelming — endeavor. A number of shiny objects can lure you in the wrong direction, like prematurely jumping on mistakes in the market, managing active mutual funds as your primary strategy, or looking for fast results. To avoid investment mistakes, consider these four principles of wise long-term wealth management, as written about in my book Money Secrets: Keys to Smart Investing, to help shape your financial plan.

1. Patience and a Long-term Approach

As I wrote in Money Secrets, “When you approach investing as a lifelong process, financial markets become your ally rather than your adversary.”

Investing for short-term gains is a short-sighted strategy.. Investors might make decisions based on current stock prices with hopes they will perform well in a short period. What these investors may not realize is the potential for loss is greater when using this strategy.

Historically speaking, in any given month the average stock will fall in value about 40 percent of the time. However, the probability of a loss drops over time:

  • 25 percent over a year
  • 19 percent over five years
  • 7 percent over 10 years
  • Less than 5 percent over 20 years

Armed with this knowledge, reshape your investment strategy thinking: it’s a marathon, not a sprint. If you want to avoid losses, think of your investments as purchases that you’ll hold on to for the long haul. Your money will then have the potential to grow over time.

2. Balancing Risk and Return Methodically

Remember, it is impossible to have a high rate of return without taking some risks. But, risks don’t equate to carelessness either.

Disciplined investors balance risk and return in a way that captures the expected returns of each underlying asset class. If you’re unsure how to do this, it’s wise to consult with a professional. For example, at Wealth Legacy Institute, we work with our clients to develop a LIFE Plan. Through the creation of this financial plan, we:

  • Discover: Your goals, attitudes, values and preferences
  • Design: A path forward based on the information provided
  • Make Good: Put the plan into action
  • Grow: Continue to monitor your plan, make adjustments accordingly and watch your money grow.

This exercise allows us to assess your current situation, and understand what is needed to reach your ideal retirement (or other financial goals), and understand what that means for your risk tolerance and capacity. In other words, Do you have enough? Will you have enough? What is enough?

3. Use a Multifactor Model for Investing

Multifactor investing is a strategy that allows investors to “look below the surface” when analyzing investments. In other words, if you are going to take on risk, you want to get paid for that risk exposure.

The process incorporates six factors of return:

  1. The market: Invest in equities, which have higher expected returns than bonds over time
  2. The company size: Invest in small companies, which outperform large companies over time
  3. The relative price: Purchase value overgrowth
  4. The expected profitability: Invest based on higher expected profitability
  5. The term: Buy bond funds with shorter time frames
  6. The credit quality: Buy high-quality bond funds

By allocating your portfolio among the six factors, your exposure to risk is calculated, balanced, disciplined and markets will work for you.

If you work with a wealth management advisor, ask if he or she has access to Dimensional Fund Advisor funds. DFA actually wrote the book on multifactor investing, and access to DFA can be a significant advantage for you. Want to learn more about the multifactor model for investing? Check out the book Money Secrets for more details on the process.

4. Use a Fiduciary Financial Advisor

Regardless of the success you’ve had managing your financial life, don’t underestimate the complexities of investing. Research shows that individuals without proper training, who tackle investments on their own, may yield lower returns over the long run than if they were to work with a professional.

In fact, According to DALBAR®, an independent third-party research firm, people who take responsibility for their stock and bond investments generate returns that are on average 50 percent lower than the typical market index.

This means over twenty years, the average investor with a $100,000 portfolio would have earned just $129,890. By comparison, the S&P 500 earned $384,560—a difference of $254,670.

By teaming with a fiduciary financial advisor, you can trust that you’re working with someone who has your best interests in mind at all times and in all transactions, working to provide you the low cost, globally diversified return on your money to help you reach your financial milestones with confidence and peace of mind.

Making an investment in yourself

A wise wealth management strategy has overarching principles, but it will look different for each person because everyone has unique financial goals and life values. That’s why it can be useful to leverage a fiduciary advisor to help create a customized financial plan that fits your personal needs and goals.

2020 Denver Retirement Guide

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