Attend a horse race — perhaps at Santa Anita, Keeneland or Churchill Downs — and you will see some horses wearing blinders as they gallop down the track.
Those blinders keep the horses focused on what’s in front of them, allowing them to ignore anything that could distract from their primary goal — crossing the finish line ahead of the other horses.
One thing I’ve learned over my decades as a financial professional is that sometimes investors also wear blinders. Unfortunately, it’s not as beneficial for them as it is for a horse drawing cheers as it streaks down the final stretch.
In the case of investors, blinders blocking the view of the broader picture can prove costly. Here’s what I mean: Sometimes people see something in the news and they become focused on the ramifications — or perceived ramifications — of that one issue, making rash investment decisions as a result. They are blind to everything else. Right now, the issue that causes investors to don blinders could be the war in Ukraine. Or inflation. Or the supply chain. Or COVID.
But six months from now, a year from now — definitely at some point — these issues will fade and a whole new set will emerge. And for many people, it will be the same thing all over again as they become fixed on an event and let it affect their investment judgment and strategy.
When it comes to your financial plan, it’s important to take off those blinders so that you can remain disciplined and make decisions based on reason rather than emotion. This doesn’t mean you never make adjustments to your investment strategy. But it does mean that you think through those changes carefully.
To stay disciplined and keep yourself on track, here are seven areas you should address regularly:
1. Risk: Take the appropriate amount
Are you taking too much risk, putting your life savings in a precarious situation? Or could you be taking too little risk, missing out on opportunities to grow your portfolio? It’s important to assess how much risk you are taking with your investments and whether that risk is appropriate for your age, your needs and your goals.
2. Taxation: Think ahead
Are your investments unnecessarily creating additional tax liabilities for you? And what could tax rates be in the future when you start taking money out of your retirement accounts? People often assume their tax rates will go down when they retire, but that’s not necessarily so. Also, if a large portion of your retirement savings is in tax-deferred accounts, you will be paying taxes in retirement whenever you make a withdrawal, and that can add up. (We will discuss in a moment at least one thing you can do to make an adjustment there.)
3. Fees: Know what you’re paying
Financial professionals make their money through fees or commissions, and there’s nothing wrong with that. But you should know exactly how much they charge you and why. Too often people are unaware of how much they are charged — or even that they are being charged at all. It’s tough to make wise financial decisions if you don’t know all the variables at play, so ask about the fees connected to your investments.
4. Roth conversion: One might be right for you
Are you a candidate for a Roth conversion? As mentioned before, many people have their money stashed away in tax-deferred accounts, such as a traditional IRA or 401(k). When you begin to withdraw money from those accounts in retirement, you will pay taxes on the withdrawals. And once you reach age 72, you are required to withdraw a certain percentage each year whether you need to or not. But if you begin to convert those accounts to Roth accounts, your money will grow tax-free and your withdrawals won’t be taxed, as long as you follow the rules. You do pay taxes as you make the conversion, but at today’s tax rates, which may be lower than future tax rates.
5. Income planning: Don’t count on Social Security alone
Many retirees worry about running out of money, so it’s a good idea to create an income structure to help you avoid that. Social Security will provide a portion of that income, but not enough to live on. Many people no longer have pensions, so other options should be explored to generate that income. An annuity can be one option, but they aren’t for everyone. Bonds, CDs and dividend-paying stocks are among other alternatives. This is where your financial professional can help you determine what’s best for you and your circumstances.
6. Long-term care: Explore your options now
As we are living longer, long-term care will be a reality for many Americans. And it can be expensive. The median cost of a semi-private room in a nursing home is about $7,900 a month and an assisted-living facility costs about $4,500 a month, according to the Genworth Cost of Care Survey. If you find yourself or a family member in need of care, how will you pay for it? Medical insurance doesn’t cover long-term care and Medicare has significant limitations on what it pays for. One option is long-term care insurance, which can be expensive. Some life insurance policies have riders that allow them to be used for long-term care. Medicaid also pays for long-term care, but that’s only for people with little to no assets left. It’s worthwhile to develop your plan to pay for long-term care long before you actually need the care.
7. Wealth transfer: Define your giving goals
Many people like to leave something for their heirs or a favorite charity after they are gone, but it’s critical to do this in a tax-efficient manner. There are a number of ways to do so. As just one example, someone can inherit a Roth IRA tax-free, but that’s not the case with a tax-deferred IRA. Another example: Give some assets to your heirs as a gift while you are still alive. The IRS allows you to give as much as $16,000 a year to each individual without taxes kicking in.
By considering these seven factors, you can become a more disciplined investor and not one limited by blinders. Because here’s another thing my experience has taught me: The markets punish those who make knee-jerk reactions but reward those who remain disciplined.
Ronnie Blair contributed to this article.
Partner, Safeguard Investment Advisory Group, LLC
Reid Abedeen is the managing partner at Safeguard Investment Advisory Group, LLC. He holds California Life-Only and Accident and Health licenses (#0C78700), has passed the Series 65 exam and is an Investment Adviser Representative registered through the Financial Industry Regulatory Authority.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.