Given the number of conflicting sources of investment advice, it’s no wonder that so few investors are able to earn the returns required to reach their investment goals (source: DALBAR 2012). Investors are constantly bombarded with varying opinions about stock prices, the economy, the political situation, etc. and are given an almost limitless list of reasons why or why not to be invested in the capital markets. This stream of varied opinions leads to confusion that can be detrimental to achieving long-term goals.
To avoid this confusion, investors need to take a step back and focus on the things that really matter when trying to achieve long-term financial goals. More often than not, this has little to do with current market conditions or the state of the economy. Following these simple steps can improve your likelihood of achieving the things that are important to you:
1) Set your goals. It’s important to set realistic goals for your particular financial situation. This could be as straightforward as deciding which year you want to retire or as complicated as trying to determine how to fund a new business venture.
2) After setting your goals, take inventory of your current financial situation. Simply gather the data about your current financial situation. This includes details about your investments, liabilities, such as mortgages and car loans, taxes, insurance, and estate planning documents.
3) Next, determine the gap between the goal you set and your present financial condition. How large is that deficit? How long will it take to get there?
4) And last, refine your analysis. Once you have a basic understanding of your goal and your current financial condition, you can determine how to best bridge the gap between the two. It’s important to refine your analysis. Refining the analysis takes the form of making sure that inputs such as taxes, costs, and capital market return expectations are all considered.
At this point, it may make sense to get the help of a professional or to find a resource that enables you to conduct a very detailed analysis of your situation.
Performing steps one through three before engaging the services of an advisor or talking to your current advisor, while not entirely necessary, can help you by bringing clarity to your situation and by preparing you to more effectively discuss your current situation with that advisor. Taking these actions can dramatically improve the chances of achieving the goals which are most important to you.