How To Be Your Own Investment Hero

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There’s possibly nothing more admired by the human species than the heroism of doing your own thing. The new idols of today are the men and women behind thousands of articles sharing their stories on how they became their own heroes. And broke boundaries while at it.

Not all heroes are in the limelight. Often the greatest acts of heroism are in the small gradual things that we do that eventually lead up to massive success.

“I have never been especially impressed by the heroics of people convinced they are about to change the world. I am more awed by those who struggle to make one small difference.”
Ellen Goodman

In light of this, what better way to be heroic than in your finances right?

Meet Nick Holeman, a Financial Planning Expert at Betterment. I had the pleasure of having a delightful conversation with him as he shared some key insights on how anyone can become their own investment hero.

First Things First do we still need traditional Financial Advice to succeed in investing?

There’s definitely something to be said about having an Financial Expert that you can call and meet up with several times a year. However, technology has really advanced, allowing people to be able to get the kind of expert advice that they can’t afford and previously weren’t able to get. Traditional advisors typically have high minimums. They won’t let you walk in the door unless you have maybe a million dollars. Young investors now are in a great position to be empowered.  To be able to use technology and roboadvisors and the internet. Much more so than they have in the past.

Now I just want to tackle some theories that have prevailed over time about investing. As young people we’re always told you know, start early, time is your friend etc. But with the 2008 crash some of us saw people who’d invested for a long time suddenly lose a great deal of what they’d invested. So do you think this advice is still relevant?

Absolutely. Start as early as you can, saving as much as you can for as long as you can. The thing with this approach is there a few things that you need to learn. The first is how much risk you’re taking with your investment. If you have a short term need don’t invest aggressively. For example I wouldn’t advise any of my clients then who were about to retire to invest 100% in stocks. That’s probably the largest goal when you are starting early. It’s to control your risk.

Take the quiz to find out how much risk you should be taking

Secondly control your behavior. The only people that lost money in 2008 are the people that sold too early. The stock market has recovered and has actually  surpassed where it was in 2008. And has continued to reach all time highs this year.

So those are the two main keys for this advice to be effective. Control your risk and don’t panic when the market goes down.

And in light of this what should my thought process be as I invest? Am I investing to get rich and be the next Warren Buffett, or is investing at this stage just a retirement sport? Or both?

Before you even begin investing you need to ask yourself: Why am I investing? What are my goals. And stating that “it’s cause you want to be a millionaire” is not specific. Without a specific target, you don’t have anything to really aim for. And you can’t plan for when will you need the money, what type of withdrawal will it be. Will you be pulling it all out at once?  Or will you be pulling it out in installments over time? I think the first step in investing is to clearly define what your goals are in terms of a target amount and a time horizon. Then prioritize your different goals. For example a safety net fund should probably have a higher priority than a Tesla that you want to buy. It all starts with your goals.

Secondly, control what you can control. So you can’t control the market movements day in and day out. But you can control your risk. You can control the fees that you pay. You can control your taxes to some extent. And you can control your behavior. Over the long run, those 4 things are going to determine whether you are going to achieve your financial goals much more so than trying to time the market. Or predicting when the next hot stock is going to pop. Focus on what you can control.

But how do I as an investor navigate risk as I set my goals so my investment strategy isn’t just a pie in the sky wish-list?

If you have any shorter term goals, you definitely shouldn’t be taking as much risk. And this is just because we don’t know exactly what’s going to happen tomorrow, next week or next year with the market. Over the long run they do trend upwards, but it’s not a straight line as I’m sure everybody knows. And when you have short term goals, you don’t have time to recover from a downturn. So making sure your investment strategy isn’t pie in the sky is all about managing your risk.

What you need to understand as an investor is that if you have a short term goal. Maybe 2-5 years out, the majority of your account balance is going to come out from your savings, not from any growth that comes from the investments. Simply because you don’t have enough time for that compounding to really take effect. So instead of trying to jack up the risk because you can’t afford to save as much, if you can somehow afford to put in an extra $100 dollars a month, you’ll actually end up in a much better situation than you would be by trying to stretch yourself too thin. Taking on more risk than you should.

What Kind of Investor Are you?: Take the quiz

How do I eliminate my fear of risk?

You don’t have to jump right into the deep end. I tell a  lot of my new and inexperienced investors that maybe you should go in 70% stocks for this particular goal. But that doesn’t mean that you have to take all of your cash right now and dump it into the stock market. It can be a gradual process and there are two benefits to that. The first is that it’s more behavioral and it will allow you to not panic quite as much when you’re getting investing. It will help you feel safe that you have some money in your cash investments. That will help you reach your goals for longer. And you’ll be able to stay the course longer too.

There are many investors who promote investing in businesses through buying their stocks, but making sure that it’s businesses that you know and whose products and services you regularly consume. Given the risks vs. rewards of this approach, would you recommend this?

I generally don’t recommend that. Investing in what you know is a common belief out there in the investing world. For example I work in the financial world. Does that mean that I should only invest in financial services stocks? No. That would be way too risky.

Rather than investing in what you know. It’s better to have knowledge in what you invest.

That means do a little homework in what you’re actually putting your money into. That doesn’t mean that you have to research each and every individual stock that you buy.

When I’m doing my homework. What should I look out for?And if we talk investing in IPO stocks, what are the key things that I should look out for as a young investor to ensure that I’m making the right decision?

Whenever you’re looking at any type of investment, there are a few things that you should always look out for. The first is which asset class is that investment. The second is to understand how the investment is going to be taxed. That will depend on two things. Namely what kind of account it’s invested in. And what kind of growth you should expect from that account. That’s things like, capital gains, or is it going to be more bond interest that’s usually taxed at higher rates.

If it’s a stock that has dividends, is it going to be a US stock that has qualified dividend status meaning that it will be taxed at a lower rate. Or is it an international company that will not benefit from that lower rate. So the type of tax treatment for that type of investment is going to be another very important point to consider.

And why should I consider what type of investment it is? Is this linked to the returns somehow?

This is because you should ideally take a long term diversified approach. With any investment, you don’t want to put all your eggs in one basket. And something that a lot of investors don’t realize is they might think they’re being diversified, when really they’re not. I’ve had a lot of customers come up to me and say “I have 20 different stocks. I feel like I’m diversified.” But they’re all US Large Cap stocks, which for the most part tend to move up and down with each other. That does not mean that your portfolio is diversified. You’re much better off if you bought 10 US stocks, and 10 International stocks. That will give you a lot more diversification than just 20 US stocks for example. So that’s why it’s really important to understand exactly what type of investment you’re purchasing.

And I know that having a support structure around you as an investor is important. Getting expert advice on a legal and accounting etc. basis is the reason why many great investors are as great as they are. How do I create that system around myself starting out and on a limited budget?

Yes, investing is only one portion of your financial planning. There are definitely legal and estate planning matters that do come up. And also tax issues and insurance issues. There are a lot of other areas that you need to make sure you have covered. At Betterment, we work with a lot of external advisors in all of those areas. Many of them have varying fee structures. A lot of them charge hourly which can be a very affordable option for many customers starting out.

“The 4 most dangerous words to an investor are ‘This time it’s different‘”

Lastly as professional in investing yourself, what’s the best advice regarding money that you’ve received, and what advice can you give to anyone reading this today?

When I first started in the world of Financial Planning, one of my bosses who was great showed me this chart. And it was a historical chart dating back to about the early 1900’s, and it showed the sum of the returns since the. There were all these markers on the chart and I didn’t know what they were at first. He looked at me and he said, “The 4 most dangerous words to an investor are ‘This time it’s different‘”.

Then he walked me through the chart. And each point on the chart was a significant historical event that everybody thought would cause the market to crash. Whether it was World War 1 or World War 2, JFK assassination, time and time again people have said, “This time it’s different” or “This time the market is going to crash and it’s not going to recover.” That advice has continued to be wrong time and time again. So instead of thinking this time it’s different, I would recommend anyone to just stay the course, have faith in the market, control your risk and control your behavior. Again focus on what you can control. This time it will probably NOT be different.

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Founding Editor of The Money Fam| Energy Enthusiast- Mastering Petroleum Engineering | Nerd Rocker-Fulbright Scholar

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