Stock Advisors & Stocks: Learn How to Smartly Invest Your Money

Have you ever heard someone lamenting they did not buy and hold stock in Microsoft, Apple, Amazon, or Tesla when those stocks were cheap? A lot of people invest in the stock market in hopes of making their money work for them, but over the long haul, it is rare to find people who do extremely well at investing in stocks. There are people who get mediocre results, people who lose their shirts, and of course, those who are “scarred forever from winding up at zero” to quote Kenny Rogers in his song The Gambler.  This article is about investing in stocks, safe stocks vs. high-risk stocks, choosing stock advisors, and the challenges and risks associated with stocks. It will also cover some of the reasons why some people choose participating whole life insurance as a safe “form of investment”. 

The Steps to Investing in Stocks

There are so many ways to invest in stocks today it’s like the menu at the Cheesecake Factory – the options go on and on.  One of the ways people invest in the stock market today is by investing in a Mutual Fund.  Mutual Funds are a pool of many people’s money that have been conglomerated for the purpose of investing. People choose this option for convenience because the individual investor in a mutual fund does not have to think much about the investments they might be making because someone else will manage their money.  While this may be convenient, profits for the individual investor will take a serious hit from the fees that are charged by the company that manages the mutual fund. Watch this video for an example of how a seemingly cheap 1% management fee can affect an investment.

When it comes to investing many people know to expect a higher risk for a higher potential reward.  Unfortunately, many people find out the hard way that higher risk does not mean a higher potential of reward. Losing money by seeking a higher potential reward, and subsequently taking higher risks, is common and something that many people have personally experienced.

If you are investing in stocks with help from a stock advisor you might hear the term “risk tolerance.”  Risk tolerance is a mighty-big thing in the world of financial planning.  Your risk tolerance score is basically how much money you can afford to lose in your investments according to whoever decided on the formula for risk tolerance. 

Financial planners will recommend that you invest according to your risk tolerance score. A more important metric than risk tolerance would be loss tolerance.  How much money are you willing to lose? If you have money that you are not willing to lose, put that money in a place where you get guaranteed growth on it even though a guaranteed growth rate is less than a potential investment return.

Warren Buffet has done extremely well with investing, maybe better than any other individual in the world, and he has 2 rules. Because of his success as an investor, when he speaks about investing, I listen.  Here are Warren Buffet’s two rules about investing:

  1. Don’t lose money
  2. Don’t forget rule number one

Personality has a huge bearing on how someone goes about investing in stocks. Some people wade in cautiously other people jump in and try to figure things out as the current carries them along. Both approaches have the potential to do well or wipe out.

For someone who is serious about investing well and doing it the right way, here are some considerations to make.

How much to invest?

Some financial planners may suggest that you invest at least 10-15% of your annual income.  Let’s say you set aside 15% of your income for investing. Then what? How do you invest it? Do you put it all in stocks or do you put it into other investments?  If you listen to a stock advisor, they may advise you to use the “100 minus your age rule”. This rule dictates that by subtracting your age from 100 you will find the percentage of your portfolio that you should keep in stocks. For example, if you’re 25 and you want to use the rule of “100 minus your age” to determine the stock allocation for your investment portfolio, you will subtract your age (25) from 100 like this 100-25 = 75 to find that according to this rule 75% of your portfolio should be in stocks. You may be doing the math in your mind already and noticing, according to the rule, the older someone gets the less they should have in stocks.  Arguments in favor of using this rule to determine stock allocation point out that the younger someone is the more time they potentially have at their disposal to wait for a market correction to recover because “they can afford to wait.” 

The continuation of this logic would be that older people do not have time to wait around for their portfolio to recover because they will want to live off the money. Therefore, they should have a smaller stock allocation, so they are exposed to less market risk. In the financial planning world, you would say older people have a lower risk tolerance. A few years have gone by since the “100 minus your age” rule has been conceived, however, and the times have changed.  Some funds now use 110 or even 120 minus your age as the new “rule” in an attempt to boost people’s earnings in their investment portfolio.  This may be a sign that the “100 minus your age” rule isn’t working out as well in reality as it did on paper.  So if you are considering how much to invest here are some questions to answer for yourself:

  • What is my “loss tolerance”?
  • How much money am I willing to lose in hopes of getting this return?
  • Is my investment allocation financially affordable and comfortable?

Choose where to invest

Investing in areas where you have understanding, or better yet expertise gives you an automatic advantage.  If you have read the book credited with creating more millionaires than any other book in print, you might be nodding your head in agreement with that statement.  The book is The Richest Man In Babylon by George Clason.  In this book, there is a story of a man who wants to become wealthy. This man hears about an opportunity to buy gems cheaply, import the gems into his own country, and sell them for a profit.  The man who knows where the gems are and how to get them is a bricklayer, and he takes the money and goes to buy the gems.  When they get the gems back, they discover they have been swindled. The people who sold the “gems” to them actually sold them colored bits of glass. The lesson of this story is neither the main character nor the bricklayer had enough understanding, and certainly no expertise, in dealing with gems, so they paid dearly to exhibit their ignorance.

In just over a decade of working in the financial industry, I have seen people lose their shirts in investments where they do not have adequate understanding nor expertise. Let’s take real estate investing as an example because it’s a popular wish-list item for wannabe investors.  Some people do very well in real estate investing. Other people get cleaned out. Just because one person does well doesn’t mean that another person will do relatively well also. Don’t go headlong into real estate investing if it’s not something you already know a lot about. If it is something you are interested in, fine, first acquire an understanding about the ins and outs of real estate investing; talk with people who do it well, not just pitch it well.  As you gain understanding, you will be a better judge of whether real estate investing is “where it’s at” for you. This goes for any type of investment: stocks, bonds, private loans, joint ventures, government qualified plans, and retirement plans.

Now back to stocks. Stocks are a low barrier-to-entry investment and something a lot of people try. 

There is more than one way to invest in stocks. You can buy the stocks individually, or you can buy into funds. Electronically traded funds or mutual funds. 

It could be said that funds allow you to buy small bits of many different stocks in a single purchase. Some people refer to mutual funds as a “safe stock” because they are diversified portfolios of companies that lessens your risk of volatile changes. However, they don’t have the upside potential of  “high-risk” stocks. Mutual Funds are designed to be long-term investments.  Funds tend to weather financial storms rather well, but they aren’t going to set any speed records when it comes to growth. For the serious fund investor, Jack Bogle’s book Don’t Count On It contains a wealth of information which could serve to reduce what you have to learn by personal experience.  

Individual stocks may show some speed by yielding large gains rather quickly, but they are seen as a higher-risk stock, and rightly so.  We all know that generally speaking, higher potential return equals higher risk.  Individual stocks are undoubtedly high-risk stocks because the money gained or lost will depend entirely on one company’s stock fluctuation. It is possible to build a more diverse portfolio of individual stocks, but that will require more money and more time to manage it. There is a chance that you pick a stock that pays off big, but the odds of individual stocks making you rich in a short amount of time are very slim.

Focus on the long-term

Whether it’s a “safe stock” or a “high-risk stock” that has captured your attention as an investor, it is a good practice to think about the long-term effects of your investment decisions.  Do you want to chance making a lot of money fast, or do you want to play it safer and aim to accumulate more money over a longer period of time, without the risk of losing your portfolio?  When you know what you ultimately want, investment decisions can become easier because if an investment does not fit your long-term goals, it’s easier to say no and move on.

Manage your portfolio

Managing a portfolio is exciting to some people and daunting to others. For many people, it seems attractive to just pay the fee to have someone else manage their portfolio. The decision to gain the understanding you need to manage your investment portfolio yourself or hire someone else to do it for you is more important than most people think.  If you think 1% is a reasonable management fee, watch this video. I would also encourage you to read the book Flash Boys by Michael Lewis.  This book is a page-turner, and it will open your eyes to how the stock market really works!  Most American’s don’t know what Michael Lewis reveals in this book. As you decide whether you will manage your portfolio or hire someone else to do it for you, you will probably find there are many different options for managing stock investments nowadays from apps and robo-advisors to financial planners and stock advisors. If you are leaning toward choosing a  stock advisor, do yourself a favor and read Lewis’ book first.

Choosing Stock Advisors

If you decide you’d like a stock advisor, you’ll want to be sure you choose the right advisor. Turns out one of the best is Orlando the cat, who successfully beat financial professionals in picking stocks by flipping his toy mouse onto a numbered grid. The numbers on the grid had been correlated with various stocks and the portfolio assigned to him was invested accordingly. Since Orlando seems to have retired immediately after his success as a stock picker, it is an unlikely prospect to obtain his services personally. You might be better off turning your search in a different direction.  A stock advisor often picks, manages, and makes recommendations for stock investments for their clients and typically charges a percentage based on the assets they manage (not the profits made) for clients. If you are searching for a stock advisor, here are some items to hopefully help you:

Interview your candidates

When you hire any kind of financial professional, whether it be a stock advisor or some other professional, consider yourself as the boss and the financial professional like your employee. To do your due diligence, you should thoroughly interview your candidate(s) to find out if they are the right hire for you to make. Hopefully, this list of questions will help you compile your own list of questions to ask in an interview with a stock advisor or any other financial professional.

  • Are you an active or passive investor?
  • How do you choose stocks?
  • Do you make commissions or kickbacks from any products or investments you recommend?
  • How much do you already know about stocks, and what do you still want to learn?
  • What kind of service do you provide?
  • What is your investment strategy?
  • Do you set investment goals? If so, what percentage of the time do you meet your investment goals?

Do a complaint check

Financial advisors are regulated by the SEC (Securities Exchange Commission), and people can file complaints against advisors whom they believe have acted inappropriately. To check and see if a licensed financial advisor has a formal complaint against them you can go to https://brokercheck.finra.org/. Looking at complaints is a lot like reading reviews. Just because there is a complaint against someone doesn’t mean the professional is worthless, but based on the number of complaints, or type of complaints, you may discover a landmine that helps you avoid trouble.  On the flip side, however, just because there is no complaint against a financial advisor, doesn’t mean they’re squeaky clean or honest as the day is long. In summary, use that website as a tool to help you make the right decision. 

Find out about costs

As mentioned above, usually stock advisors charge a percentage based on the assets they manage for clients. You’ll want to find out about this percentage and any other fees you may be held responsible for like account maintenance fees, platform access fees, etc. Jack Bogle, the author of Don’t Count On It and other books, does a great job raising awareness about how devastating the fees are in any investment portfolio. If you haven’t watched this video about how much money a 1% fee can take from you over time, you can watch it here. Knowing the costs ahead of time is important because Warren Buffett’s second rule of investing is: don’t forget rule number one, and rule number one is: don’t lose money!

Look at account access ease

Another important aspect to keep in mind is accessibility. How much control do you have over your investments? Can you make deposits and withdrawals easily, if needed? Is there an easy to use platform where you can see the status of your stock investments? These are important issues to consider whether you are doing the investing yourself or using a stock advisor.

The Challenges and Risks with Stock Investing

Stock investing is an ever-changing game that always has some form of risk associated with it even with so-called “safe stocks.” These inherent risks and constantly changing circumstances can hinder long term wealth growth. Many factors affect the stock market every day including the state of the economy, interest rates, inflation, unemployment – and the list goes on. 

Typical financial planning encourages you to put your money where there is a risk and you could lose it – think the stock market. The only actual plans where you can keep your money safe from loss are in certain bank products and specific life insurance contracts which legally guarantee that you won’t lose your money. Here’s a Wealth Talks Podcast episode about how you can build your wealth without all the risk.

Safe and Steady Builds Wealth

When people follow typical financial planning their finances suffer. At Life Benefits, we have a formula to help people keep more of the money they make and grow their wealth without losing money. The Life Benefits Formula® gives people the plan they need to thrive financially because we believe every person deserves the chance to be wealthy.

Our product of choice is a properly designed whole life insurance policy. Whole life insurance is not classified as an investment for legal purposes. It is recognized as a “form of investment” that many people might not think about when investing their money. Whole life insurance contracts aren’t based on earning a rate of return like stocks but rather on owning a continuously growing asset. Instead of you taking risk as you would in the stock market, the insurance company assumes your risk.  

Most people think life insurance is for your family after you’re dead, and it’s true your family can get a death benefit, but life insurance is not simply death insurance. Properly designed whole life insurance also has living benefits which include cash value accumulation, and this is what we use to help people protect and grow their wealth.

We specialize in designing and selling whole life insurance policies to help people keep more of the money they make, reduce their taxes, grow their wealth, and have financial peace of mind.

Owning life insurance doesn’t mean you can’t invest. Everyone who invests should also own life insurance because the guarantees and protection create a better outcome.

To see a whole life insurance policy illustration designed for you, or to learn more about how the Life Benefits Formula works, schedule an appointment here or call the office 702-660-7000.

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