Music Mondays - Don't Fear the Reaper

My days as a "dumb blonde"

I have said this before, but despite the fact that my hair color is blonde, I have confidence that I am an intelligent woman, especially where business and finance are concerned. However, I did not always feel “smart blonde” when it came to investing my own money. In fact, one of the reasons why I became a financial advisor was that I felt ill equipped to handle my personal investments. Despite the fact that I worked in finance, and helped companies invest their money, I felt like a “dumb blonde” where personal investing was concerned. I had no idea what an ETF was and why asset allocation mattered. So, I was thrilled when I started working in wealth management, and I received investment training and knowledge that was truly world class. After months of training and testing, I was excited to finally “get it” and move forward with helping others invest their money wisely.

Peeking under the covers

One of the basic lessons in asset allocation is that depending on your age and goals, each person should own a percentage of stocks, bonds and cash (aka the assets). If you are younger or more "aggressive" you should have more stock, and if you are older or more "conservative" you should have more bonds and cash. No matter what your age or goals, though, every asset allocation model assigns a portion to stocks and the cash component is always the smallest wedge of the pie (no more than 30%). So you can imagine my surprise when literally every new client that I met typically had more than 50% of his or her assets in cash. WTF?!?! Despite the fact that these investors were earning close to 0% in their checking and savings accounts, my clients opted to use these bank products as “investment” options. I call this investment strategy the “mattress trade,” because you are essentially giving your money the same return you would receive if you just put it under your bed and called it a day.

Living in the Trees

So why did all of these clients have all of this money in cash? I can give you the answer in one word….Fear. Fear is defined in the dictionary as a "distressing emotion aroused by impending danger, evil, pain, etc., whether the threat is real or imagined". As a financial advisor, I witnessed firsthand an interesting dichotomy between “Wall Street” and “Main Street” as far as memory is concerned. Wall Street has a very short memory. Despite the fact that the financial markets imploded in 2008 and 2009, within less than 2 years, many of the same behaviors that led us to the crash (i.e. irresponsible trading and overextension of credit) had returned they just had different names. On the other side, you have "Main Street" who lived through the crash, saw their 401ks or other investments nearly wiped out and five years later, despite the fact that those accounts are higher than before, they still have not forgotten it. In fact, it is very difficult to “convince” them that situations have changed. Many have climbed up into trees, and have refused to come down. Even though the “threat” may now just be imagined, it doesn’t keep people from staying up in the trees with their cash.When I would discuss allocating more of my client’s money to stocks or bonds instead of cash, I would get the following reactions.*After getting these responses enough, I realized that many of my clients and other residents of “Main Street” fear investing almost as much as they would fear death or public speaking. And there are many reasons for these fears. If you are someone who falls into this category as well, please know you are not alone. Tomorrow, I am going to address the specific fear factors and how to overcome them to help you move forward with confidence in investing your own money. Until then, let me share with you some reasons why I think you need to overcome your fears of investing.

3 Reasons Why You Should Not Be Afraid to Invest

It Grows Your Money – Last week, the Wall Street Journal shared a great video comparing the returns investors would have received on $10,000 if they invested it for five years starting on March 9, 2009 which was the low hit by the Dow Jones Industrial Average during the financial crisis. It is an extreme example; however, if you invested your money in a broad stock index fund at this time and kept it invested, you would have grown your money to $30,871 while if you left your money in cash, you would have grown your money to $10,026.
It Protects Your Money – Inflation, or the rising price of goods and services, is a factor that many people don’t consider when thinking about investments because it is not always something we "feel," especially with its low levels in the U.S. in recent years. Right now, the average inflation rate is 2% (it is really around 1.5%, but I am keeping my math simple), which means that something that cost you $1,000 today, could cost you $1,020 in a year. If your money is in cash, this $1,000 will become $1,005 in a year. Which means you would have “lost” $15 to inflation. However, if you invest your money in a conservative asset allocation model and earn 4% on that investment, your $1,000 will become $1,040. Which means you will beat inflation and “make” an additional $20.
It "Saves" Your Money – Even though my clients have access to their investment portfolios every day, they typically think of their investment portfolios as “difficult” to liquidate because it requires a multi-step process. Just like they do with their 401k or other retirement accounts, they auto-draft money to their investment accounts, and this money is “out of sight and out of mind” for them. Whereas, money that they keep in their bank accounts they feel they are more likely to spend because it is easier to access.