Learning how to best invest your money can be daunting, as it can lead to error if you’re not talking to the right advisor. You can make a short-term decision based on what you might read or see on social media without the proper background information, and watch your savings shrink in a fraction of the time it took to earn and put it away.
There are many strategies for investing your nest egg that lead to greater returns with the right advisor, depending on your specific financial situation. Each individual case is different, and consulting an advisor when you decide to invest is always the best move. Financial advisors from Northern Virginia offer some expert pointers to consider before you talk to a financial advisor about diversifying your portfolio.
Investing In Small Companies
While many investors stick to the larger companies, investing in smaller companies is one way to diversify your portfolio while focusing on long-term investing. “In general, large companies pretty much act the same, which is why asset class investing, and diversifying among different asset classes, is so important,” says Jon Yankee, a partner and senior financial advisor at Reston’s Fox, Joss and Yankee, where he specializes in retirement plans and investment management. “You should diversify beyond the big companies, because history shows that small companies outperform large.”
If you have a longer period of time to see a return on your investment, smaller companies are the best choice. “For long-term investors, your time horizon should be 10, 15 to 20 years minimum,” says Yankee. “Remember the concept that risk and return are always related. Small companies have a better return over time than large companies. The corollary is that small companies are riskier than large companies. You should be able to have a time horizon that can withstand that risk.”
Maybe the recent market turbulence makes you wary of investing in smaller companies. Yankee says, “We just went through a ten-year period of underperformance for small caps. You have to be willing to stick through times like that, and if you do, you’ll get the bigger returns. … Investing in small companies in an investment portfolio is done, for most people, through mutual funds, in which there are different asset classes you can invest.”
Avoiding Rash Investment Decisions
As you watch your money grow, it might be tempting to invest in something that seems like a way to gain a quick return. J. Mark Joseph, Founder of Sentinel Wealth Management in Reston handles complex financial situations with a team of financial planners. “It’s a really challenging environment to be a good investor right now with social media,” he says. “On one hand, there’s never been a better time to be an investor with so many low-cost diversified investment vehicles [like cryptocurrency]. But there’s also never been a harder time to be a good investor. There’s so much temptation to be a speculator—which can help diversify — but the temptation to speculate is greater than I’ve ever seen in my career.”
These easy-to-find, quick-return vehicles make it tempting to think short-term and deviate from your long-term plan. “People get overly pessimistic—or overly optimistic—and they base their whole thinking on one event,” says Joseph. “And each event is consistent in the overweighting, but it adapts to the environment. In finance, it’s horribly dangerous—that’s when you start speculating more. Or you sell because you think the world’s ending.”
While there are many new investment opportunities that hit the market daily, a bit of structure goes a long way says Joseph. “That’s where rebalancing comes in. How can I put constraints in my life [so I can continue to] buy low and sell high? You have to create an environment where you’re not as susceptible to the changes and the market is challenging. People need to be good long-term investors [and avoid recency], which is speculating on the last 10 seconds.”
When it comes to choosing the right way to invest, Joseph offers a bit of advice: “The past is a perfect indicator of the past, not the future. [Long-term investing] is basically investing in the entire market and the idea that capitalism will continue and that the economy will keep going. That’s what you’re investing in.”
What We’re Feeling About our Finances
In 2021, a Gallup Poll was conducted that gauged Americans’ feelings about their finances. It showed that 57 percent of Americans felt their finances were getting excellent or good, significantly higher than the 49 percent who said the same at the start of the pandemic.
While unemployment was the most significant factor playing into our fears about the future in 2020, many reported reduced worry about meeting their basic needs, and worry about unemployment decreased—although it still continued to be a problem many face.
More of us Rate our Financial Situation Positively
At the time the poll was conducted, 46 percent of Americans said their financial situation was positive, nearly double the percentage of those who felt negatively. The positive feelings are related to income, with those making $100,000 or more reporting the most positive feelings.
Unemployment Remains a Problem
Seven percent of Americans say that unemployment is the most important problem in their family. Others mention taxes and the high cost of living as important factors. While low wages and “lack of money” were mentioned consistently as problems, the 10 percent who mentioned it was consistent with the usual annual trend.
Worry Over Cost of Basic Expenses Decreases
Concern about being able to pay monthly bills, housing costs, and credit cards has decreased from 2020 to pre-pandemic-levels. While the worry about having money for retirement has decreased, 58 percent of Americans say that they are still concerned about having enough money for retirement.
What Does This Mean?
Combined with reduced unemployment and the ongoing vaccine rollout, Americans feel better about their finances in general. This feeling is uneven across the board, with upper-class Americans in better spirits than younger and middle-income Americans.
Financial Planning Toolkit
The American Institute of Certified Public Accountants (AICPA) recommends all of these steps: engaging in tax bracket management, reducing exposure to the 3.8 percent Net Investment Tax and Internal Revenue Code Section 199A Limits, considering income shifting, performing Roth IRA Conversions, considering creating a Charitable Remainder Trust, maximizing contributions to retirement plans, considering an Internal Revenue Code Section 453 deferred installment sale, using tax-efficient investing, and considering a Charitable Lead Trust.
When it comes to your financial and estate planning, AICPA recommends getting acquainted with the changes made to tax law as a result of the CARES Act of 2020, the Consolidated Appropriations Act of 2020, the American Rescue Plan Act of 2021, and the Taxpayer Certainty and Disaster Relief Act of 2021. The changes made to tax law are the result of the many issues raised as a result of the pandemic.
The SBA Paycheck Protection Program resources include town hall meetings with information on legislative, tax, and loan forgiveness as part of the PPP. There’s also information and resources on how to apply for a Shuttered Venue Operators Grant, and the ability to register for ongoing AICPA town halls. The AICPA offers charts and checklists on its website with a host of information (aicpa.org).
Feature image, PCH.Vector/stock.adobe.com
This story originally appeared in our January issue. For more stories like this, subscribe to our monthly magazine.
