As I am recording this, the Dow Jones Industrial Average stands at about 21,500. Higher than it’s ever been.
Is this good news or bad? The answer, of course, is yes…good news for the person who has been invested in the markets for the past five years. Five years ago the market was about 15,000. Not so good news for the person now wishing they’d gotten in “early.”
Unfortunately, that train has left the station.
I find that most people who try to time their investments to the ups and downs of the market rarely make progress. The “right time” never emerges from the fog in time to do them any good. They are left feeling a year or two late and many, many dollars short.
So how do you know it’s time to invest? Time for YOU to invest?
Stop looking at all the circumstances around you and start looking deep within…within your own financial life and aspirations.
It is my opinion that you should not invest one dime in the financial markets until you’ve taken care of these other aspects of your financial plan.
1. Protection. Protection means putting up safety nets that keep you from losing all you’ve worked for in the event of a financial catastrophe. This may involve insurance, legal documents, how you own things and where you own them. Work with knowledgeable professionals – licensed and experienced insurance agents, attorneys who specialize in asset protection and financial planners who can coordinate the mix.
I ask clients to imagine they could buy the insurance policy or construct the legal contract after the catastrophic event occurred. If you consider what you would want at that time, you realize that’s what you need to put in place now. Because anything else will leave you unhappy with the result.
2. Savings. You need to get in the habit of saving first, then spending what’s left over. You can start small, but don’t stay there. Work up to the place where you’re at least saving 15% of your income. At least. Do that until you’ve got about 50% of your annual income in a safe, accessible savings account. That could take you three to five years if you are starting from scratch. That’s OK. You’ve got time because you’re protected.
3. Spending plan. If you are saving the first 15% of your income, you can spend the rest on whatever you want. Just don’t spend more. Which brings us to….
4. Debt plan. Work to pay down expensive consumer debt. As your savings grow, borrow from yourself to buy expensive consumer items, but remember to pay yourself back (with interest!).
5. Investment plan. Remember – don’t take investment risks until you’ve taken care of all the above items. Investing is complicated, requiring a disciplined approach, a thick skin and a long-term view. Having all the prior pieces of your financial plan in place will give you “investment stamina.” You’ll avoid getting too excited about the highs, and you won’t be overly discouraged by the inevitable lows.
The secret is having a plan.
