Here’s How to Become a Disciplined Investor
Saving money is like exercising. Often when people start saving late in life, just like in exercising, they try to do too much too fast. When that happens, pain is often the result, and they quit.
When saving money, if you put away too much too fast and it hurts your lifestyle, you likely stop saving. In both situations, your health (financial and physical) is worsened.
What should you do to ease the pain? If possible, have money taken directly out of your paycheck so that you never see it, nor are you tempted to spend it. If your company has a retirement plan to which you can contribute, then this is often a good place to set aside the money for your retirement.
At a minimum, we encourage people to deposit at least the amount necessary to get the maximum match (if there is one) from the employer. Start with an amount that is modest and won’t diminish your standard of living. Just like exercising, you want to start gradually and work your way up.
As you become conditioned to not having the money to spend, it is important to increase the amount you set aside and to do so at regular intervals, say every six months. Most people, to be in peak form, should consider setting aside a minimum of 10 percent to 15 percent of their take-home pay for retirement. Remember, start small and build.
A new survey from TIAA-CREF found that 26 percent of 401(k) participants had not increased their contributions in the prior 12 months – and another 36 percent never changed their investment options since the day they began in the program. Some people choose to set aside a dollar amount into a plan, but that requires you to go in and change the dollar amount in the future. However, if you do it as a percent of your income, then when you get a raise or a bonus, more money goes into the plan automatically.
Once you do put money into a retirement plan, you don’t want to forget about it. Odds are your preferred asset allocation will shift away from the desired mix. Perhaps you want 60 percent stocks balanced against 40 percent bonds and cash, but the equity market booms and now you have 75 percent stock, which carries far too much risk for you. There are two ways to help put some of this on automatic pilot.
The first is to set up a good asset allocation plan out of the investments offered. Then, twice a year, automatically have the plan rebalance back to the proper percentages. The second option, if available, is to use a target date fund – often referred to as a lifestyle fund. With this kind offering, if you expect to retire in 2025 (the target date), for instance, the fund slowly decreases the amount of equities and increases the level of cash and bonds, as you get closer to your retirement date.
Even in these situations, however, you still want to review the investments at least annually with the plan’s advisor or your own personal advisor.
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