How To Manage Your Portfolio Like A Pro – Part II

Where We Left Off Last Time ……..

We were discussing how the average person can learn to manage their money every bit as good, maybe even better, than the professional financial advisors.

Let’s pick up where we left off on what skills you need to learn to do so…….

Curb Emotions

Each investor has their own experience with money and most of the time it is an emotional experience.

Plus, the emotional experience can lead us to making the wrong action at the wrong time.

It can even be a rollercoaster of emotions when dealing with money. A euphoric high after learning your investments doubled in 6 months. Frustration when all your hard-earned money vanishes in a blend of expenses that were not kept track of. Even anxiety and depression when you are 2 years from retirement and looking forward to the good life when…. BOOM! The stock market just dropped 50% AND your kids need help to get through college.

How To Manage Money Like A Pro

It’s no wonder Warren Buffet often states that the difference between a bad investor and great investor is not intelligence but temperament.

Without a good temperament, anxiety can overwhelm you causing you to sell investments too quickly or to invest more conservatively than the financial conditions warrant.

There is also the flip side to anxiety: overconfidence. We are prone to assume that good things that have been happening will continue to happen for the foreseeable future. Overconfidence can encourage investors to mistake good fortune or good timing for financial skill.

It’s no wonder that our emotions can be a powerful impediment towards financial success.

Fortunately, we can learn to control our emotions. In fact, investors who can avoid fight or flight responses to market volatility are much more likely to be successful.

The main question is, how to control our emotions?

People can do the following things to navigate today’s a turbulent investment environment and control their responses to it.

Understand How Time Can Be Your Ally

Professional investors learn that time is a precious commodity and needs to be taken full advantage of. Inexperienced investors sometimes look for shortcuts and do not take the time to analyze financial statements and do their research.

Inexperienced investors also underestimate the time necessary to thoroughly review all the available information and will make snap judgments. Making snap judgments is one of the most common mistakes made by investors and one of the easiest to avoid.

Time is also a cure for volatility. Investors with long time horizons are less vulnerable to short-term volatility.

Remember, time is your ally not your enemy. Take the time to do your research and understand what you’re investing in and where your money is going.

Take A Pause

Because of the internet and social media there is wealth of information readily available at our fingertips. The result is markets move more rapidly than ever before. Overreaction to news and events can be hazardous to investment returns.

The most successful investors generally pause before giving in to fight or flight emotions. Instead, they channel that emotion into analysis before making a decision. A pause is a powerful thing. When in doubt pause, take a deep breath, and think it through.

Have A Margin of Safety

One of the keys to a healthy relationship with money and managing your money like a pro is having a margin of safety. As discussed in ESI Money, a margin of safety is giving yourself a buffer in case unforeseen events happen along the journey.

When it comes to managing money and money emergencies, it is always good to expect the unexpected.

How To Manage Money Like A Pro

If a big expense pops out of nowhere (i.e., your car’s transmission breaks), do you have the funds to cover it? If not, life can become a very tough struggle very quickly.

In general, people lack baking in a margin of safety to their finances and investments. An emergency fund is a prime example of a margin of safety. Let’s say you are laid off and have a family to take care of (been there and done that), without at least 6 months of expenses set aside your family could be in deep financial trouble.

Personally, I’m a conservative money manager. I’ve been burned in the past and plan on not repeating my mistakes in the future. That is why I prefer to have a large margin of safety which includes proper insurance coverage.

As I’ve said before, sometimes the best offense is a good defense. With a good defense, doors open that may have been previously closed and allows you to be more aggressive when an opportunity presents itself.

For example, back in 2016 we weren’t doing well financially. As I discussed before, we were buried in medical bills from my kids’ health issues. The problem was not only were we in debt, but we did also not have enough insurance coverage and did not invest enough in retirement.

At this time, I first heard of Bitcoin and thought about investing some money into it. It was at around $600 and felt like we couldn’t risk a few thousand on this new commodity. If it bombed, we would have been screwed financially even more so. Boy, I am still kicking myself for not doing it. Especially when as of this writing, Bitcoin is currently at around $23,000+ (GGRRrrrrr!! ☹).

Here are a few examples of applying margins of safety to your finances:

  • Having enough life insurance. To take care of your family (if you have one), you need enough insurance to cover at least 20X salary (preferably 30X salary). If single, it makes even more sense to get this amount of coverage now since it is WAY cheaper. Plus, you’ll have it if needed in the future at a much less expensive rate. Also, make sure you have a blend of term, universal life, and whole life coverage for a variety of reasons that I discussed in a previous article.
  • Multiple income streams. Most people only have 1 income stream: their job. Take it from me, if you get laid off and lose that income stream, life gets a whole lot tougher. Do yourself a favor and plan for this event to occur. Find other ways to generate additional income such as a side hustle (or two! 😊), dividend investing, or create a side business. Nothing feels better than knowing you have your living expenses covered no matter what happens in your life.
  • Large cash cushion. I mentioned before about having at least 6 months of expenses set aside in cold, hard cash just in case something bad happens. Sounds like a lot but really isn’t. I have a friend who is a real estate agent and lives on pure commission. He had to set aside a cash cushion to cover 12 months of expenses because a real estate agent can sometimes go months without getting a commission. Point is that you know what might happen, so it is better to be prepared than not.
  • Living within your means. There is a reason why the average person has over $5,000 in credit card debt….. people do not live within their means. Want to get ahead of others and build in a margin of safety to boot? Spend less than you make. Sounds simple and it can be if you practice some discipline.
  • Not withdrawing assets in retirement. A lot of plans have you withdraw a portion of assets each year during retirement. The problem with that strategy? What if an emergency comes up and you need a big chunk of money? What if you miscalculated your pay down strategy and start to fall short during retirement? Not withdrawing assets adds a large margin of safety to your retirement plan and allows a buffer if unexpected expenses occur.

I realize that so many margins of safety may seem extreme and a bit over-the-top, but I like options and having choices. Choices are good! To me, it’s a key part of a healthy financial life.

Minimize Fees and Taxes

The 3 big killers of retirement funds are inflation, taxes, and investment fees. Unfortunately, we cannot control inflation just manage it as best as possible with the right type of diversification that I explain in the next section. However, we have alot of control over how to invest our money to minimize taxes and fees.

For example, if you company offers a Roth 401K take full advantage of it. Nothing like taking money taxed at today’s record-low tax rates, investing it, watching it grow tax-free, and then withdrawing it tax-free. What a great deal! 😊

Same goes for a Roth IRA. Another great deal just like a Roth 401K but unfortunately can only invest a few thousand a year into it. Even this small amount can add big-time if invested properly.

When picking out index funds, keep an eye of the management fees being charged. Most are pretty cheap, less than 0.6%. However, keep in mind that even a change of a few tenths of a percentage can really add up over the life of your working years.

Think of it this way: if you have a choice of investing between 2 identically created index funds where one charges 0.05% investment fees and the other charges 0.25% investment fees which one would you choose?

Me, I’d choose the one with 80% lower investment fees because that is more money in my pocket. Just think about it.

Asset Allocation and Diversification – The Right Kind

Most professional money managers preach that a key to a successful retirement portfolio is asset allocation (percentage of assets in various investments) and diversification (types of investments).

I couldn’t agree with them more ….to a point.

How To Manage Money Like A Pro

Professional money managers want the average person to be invested in stocks, bonds, and index funds and nothing else. Want to know why? Because it’s what they know and what they can make a commission on.

You see, the dirty little secret, about hiring a professional financial advisor is that they make their fair share of money off of your investments in the form of commissions and fees charged whether you personally make money that year or not. This is why they give the advice we hear of so often. They get their cut of the action no matter what happens to you.

If you think this is the cost of doing business think again. Would you be surprised to hear that you could lose up to 75% of your hard-earned money from the fees and commissions charged by financial advisors?

Fear not, there is a solution. You can manage your funds just as good as any financial advisor, maybe even better.

Asset allocation and diversification are really important for ensuring that your portfolio survives the peaks and valleys of the economy and generates enough cash flow so you can live off the interest. The trick is to NOT do what the majority of the population is doing. To achieve superior results, don’t do what everyone else is doing.

While investing is stocks, bonds, and index funds is a major part of any portfolio, it shouldn’t be the only part. The reason for this is the stock market can experience periodic and huge dips that can easily wipe out 50% to 80% of your retirement fund.

Here is what a traditional portfolio for someone approaching retirement could look like:

Stocks – 20%

Index Funds – 40%

Bonds – 40%

A better way to do asset allocation and diversification is to also invest in alternative investments that negatively correlates to the stock market, provides cashflow, and hedges against inflation. This means that when stocks go down, the alternative investment either stays flat or goes up and vice versa.

Here is what that kind of portfolio could look like:

Stocks / Index Funds (includes Roth IRA’s) – 20%

Bonds – 10%

Real Estate (Physical or crowdfunded) – 30%

Precious Metals – 10%

Silent Partner In A Business – 20%

Permanent Insurance – 10%

The real estate could provide cashflow from rental income and is a great hedge against both stock market collapse and inflation. Being a silent partner in a business can generate cashflow from profits earned and hedges against stock market crashes. Permanent life insurance, if designed correctly, can also provide cashflow, hedge against stock market loss, and the income is tax – free! Finally, precious metals are always a good investment if worried about inflation increasing since usually the value of precious metals increases substantially when inflation occurs.

The possibilities are literally endless and is dependent upon what types of investments a person is interested in and meets their Investor DNA.

What’s Next?

So, there you have a 7-step process for becoming your own money manager. So, what do you think? Leave your comments here, I’d love to hear from you.

If you think it’s complicated to handle your own finances, think again. If I can learn to do it, so can you. All it takes is a little education, a plan, and some perseverance.

Until next time……..

Live The Life You Love, Want, and Deserve! 😊