Key Takeaways
Just holding annuities or a portfolio of CDs is not investing. You’re essentially putting money into savings to get the highest yield.
Understand that markets work, that risk and return are related, and that starting early is the best way to achieve compound growth.
Do you know if your personality type makes you a do-it-yourselfer, validator, or delegator?
If you need help, work with a CFP® or NAPFA member because they’re duty-bound to be fiduciaries.
Recently I ran into an acquaintance whose 70-something parents had an entire portfolio of CDs and whole life insurance. I have another successful associate who resisted for years as I tried to convince him to participate in his company's 401(k) retirement plan. Meanwhile, our children’s school district requires every student to take a financial literacy course during their sophomore year of high school. Sounds great, but when my sons recently went through the program, they did nothing more than participate in a stock-picking contest. That’s gambling, not investing and you might as well bus the kids to the casinos in Atlantic City.
Not one of the examples above demonstrates proper financial literacy. If investment management is not your profession, you will likely fall into one of three personality types when it comes to investing:
(a) Do it yourselfer.
(b) Validator.
(c) Delegator.
No type is better or worse than the other. However, people who know their personality type well are most likely to succeed in their financial planning. If you have the knowledge and skill to invest, you may be successful as a do-it-yourselfer. However, if you don’t have the knowledge, skill, or confidence to invest on your own, you may want to see if you’re a validator or delegator. Validators may have some success because they’re realistic about their limitations. However, delegators often have the best results because they realize how working with a comprehensive wealth manager allows them to benefit from the manager’s knowledge, skill, and experience.
The rest of the population is not participating in growing wealth and saving properly for retirement with the resources they have. Just holding annuities or a portfolio of CDs is not investing. You’re essentially putting money in the bank to get the highest yield.
I’ve found this approach is based on three fundamental problems:
1. Getting started can be challenging.
2. It's easy to feel overwhelmed by information, leading to "Analysis Paralysis."
3. Misinformation creates uncertainty about whom to trust.
To secure the best financial guidance, seek a trusted and knowledgeable professional, ideally a Certified Financial Planner (CFP®) or National Association of Personal Financial Advisors (NAPFA) member. These fiduciaries prioritize clients' interests, avoiding product sales or compensation for specific recommendations. They collaborate with clients, focusing on education and aligning investment strategies with each client's goals and risk tolerance, rather than what's most profitable for the advisor’s firm.
When it comes to financial literacy, the three key points I would emphasize to young people and the broader population are as follows:
1. The importance of starting early for compound growth.
2. That investment markets work.
3. Risk and return are related.
Let’s explore each one at a time.
1. It's Important To Start Early For Compound Growth. The earlier you can start saving the better. For young people, if they start saving just a few hundred dollars a month for retirement in their twenties, that money will grow substantially more than if they wait until their mid-thirties or later to start saving.
For instance, if two young people save just $100 a month for retirement, but one starts at 25
and the other at 35, the earlier saver will have nearly twice as much by age 65 assuming a modest 8% compound growth rate. An extra 10 years of saving means that the earlier saver will have about $349,000 in their retirement plan, while the later saver will have just $149,000 by the time they are 65. The earlier saver’s balance is nearly double the later saver’s despite contributing only $12,000 more of their own money.
2. Markets Work. If you put in $100 in a CD or money market, you’re just earning “yield” from the bank, which historically, is about the same as the rate of inflation (roughly 3%). All you’re doing is maintaining purchasing power at best. You're never going to grow your wealth. Instead, suppose you invest your money into a company (i.e., stock) or a basket of companies (e.g., mutual fund or ETF), where their objective is to grow the company and make profits. In that case, the historical rate of return for the past 50 years is about 8% to 9% annually. That means your money doubles every eight or nine years, despite all the market ups and downs. Compare that to the historical average of 3% on CDs, meaning your money would take about 24 years to double.
3. Risk And Return Are Related: The trendlines above are straight-line calculations for illustrative purposes only. But, again, despite all the peaks and valleys in the daily markets, the long-term trends are surprisingly consistent (and in your favor if you stay disciplined). That’s another reason to collaborate with an advisor; they can prevent you from taking your money out of the market during volatile times and derailing your long-term plan. If you let your emotions get the better of you, it’s almost impossible to know when to get back into the market and research shows you’ll most likely miss the recovery. As you can see, by investing early and taking some volatility risk, you end up in a much better place. Remember, this is only $100 per month. See these other articles on how a comprehensive planning firm helps with your confidence giving you the comfort to invest:
Conclusion
Most of the nation has much to learn about financial literacy, so Novi will keep learning as much as possible and share that wisdom with you. Whoever you choose to guide you, make sure they’re from a firm that takes the time to understand your situation. Make sure they apply years of knowledge and experience to provide you with a long-term plan designed specifically for you by a fee-only financial planner and NAPFA member.
If you or someone close to you is unsure about the advice you’re receiving contact us any time to discuss. We’re happy to help.
ROBERT B. DUNN, CFP® is the President and Managing Partner of Novi Wealth
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