FIDELITY VIEWPOINTS
Key takeaways
Creating a financial plan can help you make better decisions about investing and saving.
It’s important to stick to your plan, even when financial markets are turbulent.
Fidelity can help you set goals and create a plan, regardless of how much money you have to invest.
Investing is not about “getting rich” or “playing the market.” It’s an essential part of achieving financial wellness. That means being able to meet your needs and the needs of those who depend on you as well as being able to set and achieve goals that go beyond merely being able to pay your bills and manage debts like mortgages, credit cards, and student loans.
These 6 steps can help you increase your investing success and achieve financial wellness, even when financial markets seem unfriendly.
1. Start with a plan
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At Fidelity, we believe creating a financial plan can provide the foundation for investment success. The financial planning process can help you take stock of your situation, define your goals and figure out practical steps to get there.
Financial planning doesn’t have to be fancy or expensive. You can do it with the help of a financial professional or an online tool like those in Fidelity’s Planning & Guidance Center. Either way, making a plan based on sound financial planning principles is an important step.
A plan is one service that financial professionals frequently offer their clients.
There is some evidence that families who work with financial professionals are better prepared to meet long-term financial goals. Fidelity’s Retirement Savings Assessment looked at thousands of American families to see how ready they are for retirement and found that a family who worked with an advisor had a median Retirement ScoreSM of 89, higher than the score of 81 for families who did not seek the help of an advisor. Of course, that higher score associated with an advisor could be due to other services that the advisor offered or differences in the families who sought out professional guidance.
2. Stick with your plan, even when markets look unfriendly
When the value of your investments falls, it’s only human to want to run for shelter. But the best investors don’t. Instead, they maintain an allocation to stocks they can live with in good markets and bad.
The financial crisis of late 2008 and early 2009 when stocks dropped nearly 50 per cent might have seemed a good time to run for safety in cash. But a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during that time were far better off than those who headed for the sidelines.
In the decade following the start of the crisis in June 2008, those who stayed invested saw their account balances—which reflected the impact of their investment choices and contributions—grow 147 per cent. That’s twice the average 74 per cent return for those who fled stocks during the fourth quarter of 2008 or first quarter of 2009. While most investors did not make any changes during the market downturn, those who did made a fateful decision with a lasting impact. More than 25 per cent of those who sold out of stocks never got back into the market and missed the gains that followed.
If you get anxious when the stock market drops, remember that’s a normal response to volatility. It’s important to stick with your long-term investment mix and to have enough growth potential to achieve your goals. If you can’t tolerate the ups and downs of your portfolio, consider a less volatile mix of investments that you can stick with.
3. Be a saver, not a spender
While it’s easy to get caught up in the ups and downs of the market, it’s also important to think about how much of your income you are putting away for the future. Saving early and often can be a powerful force when it comes to making progress toward long-term financial goals.
As a general rule, Fidelity suggests putting away at least 15 per cent of your income for retirement, including any employer match. Of course, that number is just a starting point, for some people it will be lower and for some people it will be higher. But regardless, there is evidence that saving more and starting earlier help people reach long-term goals. Fidelity’s Retirement Savings Assessment looked at dedicated savers, individuals who were putting away more than 10 per cent of their income, and found that they had a Retirement Score of 99.
This table shows the retirement score for people of different ages, saving for retirement.
This data reflects the median scores for the total population of surveyed households with income less than US$100,000.
On the other hand, the median score for a person saving less than 10 per cent was 68. Dedicated savers of all ages had higher median scores but the differences were particularly large for younger savers who had more time to put away money during their careers.
4. Be diverse
Fidelity believes one key foundation of successful investing is diversification (owning a variety of stocks, bonds and other assets), which can help control risk.
Having an appropriate investment mix, giving you a portfolio that delivers growth potential with a level of risk that makes sense for your situation, may make it easier to stick with your plan through the ups and downs of the market.
Diversification cannot guarantee gains, or that you won’t experience a loss, but it does aim to provide a reasonable trade-off between risk and reward. You can not only diversify among stocks, bonds, and cash, but also within those categories. Consider diversifying your stock exposure across regions, sectors, investment styles (value, blend, and growth), and size (small-, mid-, and large-cap stocks). For bonds, consider diversifying across different credit qualities, maturities, and issuers.
Fidelity’s Retirement Savings Assessment shows that investors whose asset mix is on track seem better prepared for retirement. People who were on track had a median score of 87, while people whose investment mix was off track had a score of just 77.
5. Consider low-fee investment products that offer good value
Savvy investors know they can’t control the market, but they can control costs. A study by independent research company Morningstar® found that, while by no means guaranteed, funds with lower expense ratios have historically had a higher probability of outperforming other funds in their category—in terms of relative total return, and future risk-adjusted return ratings.
Fidelity has also found that trading commissions and execution vary greatly among brokers, and the cost of trading affects your returns. Learn more about using price improvement for trading savings.
6. Don’t forget about taxes
Another habit that may help investors succeed is keeping an eye on taxes and account types.
Accounts that offer tax benefits, like 401(k)s, IRAs, and certain annuities have the potential to help generate higher after-tax returns. This is what investors call “account location”—the amount of money you put into different types of accounts should be based on each account’s respective tax treatment. A related concept is called “asset location”—the practice of putting different types of investments in various types accounts, based on the tax efficiency of the investment and the tax treatment of the type of account.
While taxes alone should never drive your investment decisions, you may want to consider putting your least tax-efficient investments (for example, taxable bonds whose interest payments are taxed at relatively high ordinary income tax rates) in tax-deferred accounts like 401(k)s and IRAs. Meanwhile, more tax-efficient investments (for example, low-turnover funds, like index funds or ETFs, and municipal bonds, where interest is typically free from federal income tax) are usually more suitable for taxable accounts.
The bottom line
Investing can be complex, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and be aware of taxes, you will have adopted some of the key traits that may lead to success.
