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The Four Fundamental Investment Rules

When it comes to investing, everybody’s got a strong opinion, a great idea, or an urgent recommendation.

Blue chip stocks. T-bills. Real estate. Cattle futures. Emerging markets. Baseball cards. Crypto. NFTs. Blah. Blah. Blah…. (Back in the 90s, some were advocating investing in “Beanie Babies”…remember that?)

Before we even think of investment specifics, it’s good to remember a few fundamental investment rules.

Here are four wise principles (they’re actually behaviors) that should undergird your investing:

1. Determine your investor profile.

Here we want to figure out how much risk is right for you and your portfolio. We want to see how aggressive or conservative you are when it comes to investing.

To do this, we ask questions like:

  • How much guaranteed income do you have?
  • How much money do you need in the short-term? (Typically, the more money you need in the short term, the less risk you can afford to take.)
  • How well do you sleep at night when the financial markets are doing crazy things?

But even better, we have clients take a Risk Tolerance Questionnaire (RTQ). (You can find it here: ChristyCapital.com/RTQ.)

This simple instrument has you look in the mirror, so to speak, and ask “How much risk am I willing to take? How much investment risk am I comfortable with?”

Your honest answers help us align what you do as an investor with who you are as an investor. Having investments that are tailored to your “investment style” is a much wiser strategy than trying to “time the market”—selling just before stocks pull back, and jumping back in immediately prior to stock prices rising.

Once you know your RTQ score, that is, how much risk you are willing to take, it’s time to look at the second investment fundamental, which is to…

2. Allocate your assets properly.

Here, based on your RTQ, we’re deciding how much of your money needs to be invested aggressively, and how much should be put into more conservative investments.

You want a plan conservative enough to cover all your spending needs for the next several years. But you also want it to be aggressive enough to beat inflation and help you reach your long-term spending goals.

But those aren’t the only considerations. We also need to allocate your money by tax status.

Having some money that is “non-qualified” (NQ) may benefit you. This is money that doesn’t have any fancy tax advantages. Only its capital gains growth is taxed, not the entire distribution. NQ money is great for short-term spending.

Having some “traditional” money may also benefit you. That’s money in your traditional TSP or IRA that you will pay taxes on later. (For the record, most people are “traditional heavy,” meaning most of their money is subject to whatever tax rates are in future.)

Another option is “Roth” money. This is tax-free money in your Roth IRA. As it grows, you can access it later tax-free (assuming you’ve had the account for five years and you don’t start taking distributions until you are 59 and ½).

Roth money has the most tax advantages, so most people want that to grow and not take distributions from it. However, if you ever need a large distribution all in one year, maybe to buy a car or pay off your mortgage, then for tax purposes, you may want to take it from Roth.

The key word here is diversification. Having your money spread out across different asset classes and diversifying it strategically for tax purposes is critical. It gives you more options. That’s why it’s a key to successful retirement planning.

Here’s the third fundamental principle of investing…

3. Re-allocate as needed.

When the stock market performs well, as it did from 2019-2021, your more aggressive investments can grow to the point that you’re no longer allocated the way you want to be. (Also, you may find yourself becoming a more conservative investor as you get older.)

This is where re-allocation becomes so important. And not just rebalancing your investments between aggressive and conservative funds, but also re-allocating based on tax status.

We said that most people are “traditional heavy” (i.e., they have most of their money in a traditional TSP or 401(k) or IRA).

If that’s you, and life throws you a curveball, you could be forced to take large distributions from your traditional accounts. When that’s your only option (because of inadequate planning), it can mess up your financial future by subjecting you to serious tax penalties.

But it doesn’t have to be that way. Part of your re-allocation may be to do some Roth conversions. That is, you take some of your traditional money and move it over to a Roth account. You’ll pay taxes now on whatever money you convert, but you’ll avoid taxes in the future when you begin taking distributions.

The trick here is to figure out how much to move each year. Do you want to move enough to get the heavy lifting done, but not so much that you move into a tax bracket you’re not comfortable with? This is where indecision can kick in. If you don’t really know what you’re doing, you can end up doing what so many people do–nothing!  This is where working with a financial planner can be so helpful.

What’s the fourth fundamental investment practice?

4. Don’t follow the crowd!

When people find out what we do, one of the first questions we get asked is, “What do you think the market is going to do?”

We always laugh. And individually we always answer, “How should I know? I’m a financial advisor, not a prophet!” We certainly watch for market indicators, and those can be helpful in making decisions about your money. But history shows us that market conditions can (and often do) change on a dime.

For that reason, we always discourage people from “going with the flow” or “following the crowd” when it comes to investing. Trying to guess when the market is going to rise or fall just doesn’t work. And sadly, on most days, the two motivations that drive “the crowd” are fear and greed. When people are controlled by either or both of those two passions—that’s when bad investments happen.

Successful investors don’t try to “time the market.” Instead, they focus on spending “time in the market.” They know that over the long haul, the market has performed very well.

In short, successful investors follow four fundamentals:

  1. They know who they are as investors. They understand their unique “investment temperament.”
  2. They allocate their assets based on that knowledge.
  3. Over time they re-allocate, consistent with who they are and what the market is doing.
  4. And finally, instead of going with the flow, they stay the course. Unlike the “crowd,” they aren’t swayed by irrational fears or offers that sound too good to be true.

Your money should be in a portfolio that is specifically designed to help you reach your goals. And since everyone has different goals, everyone’s portfolio should be a little bit different.

If you’d like to work with a financial planner who can help you make sure you’re following these four fundamentals—reach out to our team at Christy Capital Management.

Click the  Talk with an Advisor button and we will follow up and get you connected.

Or, if you just want to call and talk now with an advisor, our number is (866) 331-7749.

We’d love to hear from you. We can help you figure out the investment puzzle.

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