Studies show that Americans think of themselves as financially savvy, but in actuality, financial literacy has been declining.
Between 2009 and 2018... the amount of people who could correctly answer most questions about interest rates, inflation, bond prices, financial risk and mortgage rates dropped — from 42% to 34%.
That “clear trend of declining financial literacy” is one of the worrying signals in a three-year study from the FINRA Investor Education Foundation, the educational arm of the nonprofit organization regulating the brokerage industry.
So, how confident are you in your financial decisions? Are you making smart investments based on your current situation, or are you just following advice you heard about years ago?
(side note - we recorded an After The Paycheck episode last year on "Myths of Conventional Financial Wisdom". If you haven't watched it yet, we highly recommend it!)
As a financial advisory firm that has been serving clients for more than two decades, we hate to see hardworking Americans make financial mistakes that could have been avoided.
Over the years, these are the most common financial mistakes we see.
One mistake we see too often is a concentrated (or non-diversified) portfolio. Non-expert investors may think their portfolio is diversified when in reality, they’re holding multiple accounts with the same asset allocation.
A well-diversified portfolio can protect you from undue risk while maximizing returns, so it’s important to have your portfolio analyzed by a professional for proper diversification.
Along these lines, investors who try to time the market never come out on top. (Okay, maybe there is a one in a million—or 100 million—chance of this strategy working. But there are much better strategies with much safer odds.)
If you keep bouncing in and out of the market, your returns will suffer in the long term. For example, if you sold your investments in March after the steep drop due to COVID-19, you probably missed the recovery and significant gains that came with it. Money in the market should be left in the market. If you’re uncomfortable with the volatility, your portfolio is probably too aggressive.
Additionally, we see investors make mistakes as they get closer to retirement. Your asset allocation should shift as you move through different life stages. It’s okay—and even optimal—for your portfolio to be more aggressive while you’re young, because there’s plenty of time for your investments to recover from any market losses.
But as you get closer to retirement, you have less time to wait for recovery. Although you may be tempted to want growth spurts before you start accessing your retirement savings, you’ll want to shift your assets into less aggressive positions. You’re going to need that money much sooner.
Also, people spend decades saving for retirement and positioning their assets to maximize growth. But they seem to forget about the income withdrawal planning that needs to happen as they actually enter retirement. Not having an income plan upon retirement or knowing where consistent income is going to come from can jeopardize your retirement and cause stress that you don’t need as you adjust to this transition.
When it comes to insurance, you don’t want to wait until you need it and then wish you had it. Accidents can happen to anyone at any time, and not carrying adequate life insurance and disability insurance could have devastating consequences.
It is heartbreaking when vulnerable family members find out their spouse or parent wasn’t carrying adequate insurance. In worst-case scenarios, homes are foreclosed on, family businesses have to be sold, or bankruptcy is declared.
You can avoid these devastating consequences by purchasing adequate life and disability insurance before the worst happens.
Estate Planning Mistakes
And finally, failing to have a comprehensive estate plan can place undue burdens on grieving family members. If you pass away without an estate plan, the state you live in will determine how your assets are distributed. The court’s allocation decisions may not align with your wishes.
Your family will have to pay expensive probate fees and court costs as the government determines what to do with your estate. And probate processes are public information, meaning that creditors or even estranged relatives could have access to information regarding your wealth, and challenge your family’s rights to it.
An estate plan ensures that your assets are allocated to the family members or close friends that you’ve chosen. An estate plan will also execute charitable donations you plan to make, business succession plans, and guardianship designation if both you and your spouse should unexpectedly pass away.
How You Can Help Avoid Financial Mistakes
Ultimately, all these mistakes can be avoided by working with a wealth management specialist, one that you trust and one that acts in your best interest at all times.
Personally, we pride ourselves on taking care of all our clients’ concerns. Our 365 Retirement Plan process is designed to create a personal relationship with you, taking the time to truly understand your unique personal and financial situation.
Just as no two people are alike, we believe no two retirement plans should be, either. We'll take the time to create customized strategies to help you pursue your retirement goals.
Call (617) 630-8787, find time on our calendar below, or contact us online to request a 15 minute conversation with us to discuss your situation.