We are so excited to welcome Darren P. Wurz, MSFP, CFP® to discuss inflation and mistakes to avoid when investing. He is a Certified Financial Planner Professional with an MS in Financial Planning from Golden Gate University. As a fiduciary and fee only advisor, he is the author of The Lawyer Millionaire, available now through the American bar association. Darren specializes in working with attorneys, law firms, owners, and couples near retirement, providing comprehensive financial planning and active investment management.
What we cover in this episode:
- 01:46 – Risk and time
- 02:00 – What’s trending?
- 17:00 – Inflation and investment
- 25:15 – Investment mistakes to avoid
Risk and time
If you are really looking to get started with investing, the main thing to contemplate is, what is your timeframe? If retirement is 30, 40 years away, then you don’t need to worry necessarily about risk. Risk is really related to your timeframe. When you look at a long term chart of the market, you see this line that goes up and down over time so you really need to be concerned with just getting invested right away.
Now, if you’re closer to retirement, like 5 or 10 years away, it may be a little different for you. You may need to be a little bit more concerned about where and how you start investing. A great analogy is when you want to start exercising. If you go to the gym, you may see people doing some crazy things but you have to remember that the basics have always worked and that’s where you need to start. The same thing applies to investments; the basics have always worked and you don’t have to be concerned with starting off complicated, just start with the basics like buying the S&P 500.
There will always be mainstream media trends you see on the news, social media and other platforms, these are changing rapidly. You really want to try and avoid some of the fads and focus on the fundamental principles that work, the basics. One of the industries we know work great would be tech, and not necessarily the big tech companies that come to mind like Google or Facebook, but some of the smaller ones. This is because individual stocks can be much more difficult to predict and can be much less reliable in terms of performance since there are a lot of variables that come into play.
Other industries are energy, crypto and options trading. There has been an increased interest in options trading with Robinhood and other trading accounts. Options can work very well and can be very profitable but can also end up in a one hundred percent loss. Energy has been around for a long time but has also fallen off recently. Crypto is still a new industry and doesn’t have a history to look back on.
Things to consider when investing in trends is that the stock market has been around for hundreds of years and fads come and go. Although it is ok to speculate a little when deciding on investing in a new industry, you also have to be ok with losing what you invest since it comes with uncertainty and no history to back it up. When the market is in a positive trend, it is easier to meander in it until there is a sudden change. Something that worked two years ago may not work today.
Inflation and investment
The topic of inflation has always been around, but recently it is the subject of a daily conversation. Inflation is basically money losing value. The price of everything, including assets goes up and the value of money goes down. So when it comes to actual cash, the value of actual cash is decreasing and this can be a concern for those of you who are saving. This is why we speak about outpacing inflation.
When we talk about outpacing inflation, there are certain things that are brought up such as gold, commodities, physical assets and real estate. These tend to be good hedges on inflation and are recommended to have in your overall portfolio of investments. The thing with inflation is, commodities tend to make money on the front end so all the money to be made in commodities may have already been made because that adjustment may have already happened. Getting into commodities now could be good if the inflation saga continues; but if inflation is peaking, you may be getting in too late. This is why it is good for these to be in your portfolio as a component of your overall strategy for the long term, not something you run to and jump in when it’s hot.
Ultimately stocks have historically been the best hedge against inflation. This is because we don’t need to keep pace with inflation, we need to outpace inflation. With the stock market down right now, it may be one of the greatest times to invest because it will rebound and lead to accelerated growth. Stocks keep pace with inflation because they are an asset that increases value with inflation.
Investment mistakes to avoid
The first and biggest mistake is not having a plan at all. You need to make sure you understand how you’re invested and why you’re invested that way. You need to think about risk and about how much the market can go down. There are two components to risk tolerance. There is your risk capacity, which is basically your timeframe. If you have got a long timeframe, you can take more risk than if you have a short timeframe.
The second component is risk attitude. When the market is high, everyone is very risk tolerant until it drops. This is when people start panicking and maybe psychologically can’t handle it. So you really have to think about these things when starting off in investing; whether or not to be aggressive or a little more conservative.
A good example of this is to think of your investment portfolio going down by half. If you have $100,000, can you handle it if you see this go down by 50%, losing $50,000. If you can handle the thought of that, then maybe go a little bigger or all in when investing. If you can’t handle the thought of it, then figure out what you are ok with seeing be lost and scale it back to that number. Really understanding what you are invested in and making sure it lines up with the amount of risk you are able to handle, is a huge concern people overlook.
Another big mistake people run into is deviating from your plan based on emotions; that is a really big setup for disaster. There has been a ton of interesting psychological studies when it relates to investments. We are human beings and money can be a very emotional subject and studies show that most people are not capable of making good decisions when there’s a lot of volatility. So having a system of rules, a system of mathematical rules that dictates how you manage your investment and when to make changes is important. You have to be very disciplined and you have to remind yourself in difficult times why you have the strategy you do and why you’re going to stick to those rules.
A third mistake to avoid would be, don’t stop putting money in your investments just because you see the market’s going down. People sometimes don’t want to put any more money into their investment because they aren’t making anything, when the exact opposite is true, you want to keep putting money in at a time like this. You may even want to put more money in at a time like this because you’re buying in at a discount. You just have to keep in mind that the market will start to recover before the economy does.
The topics of inflation and investments can be discussed forever, especially considering they are ever changing. Darren reemphasizes to “…make sure you have a strategy that you’ve thought about in terms of risk and the reward, don’t make emotional decisions, and the basics work…If people can follow those things they will be successful and you just gotta stay focused on the long term outcome and don’t allow the short term ups and downs to let you get off course.” We always want to remind you to consult a professional when seeking advice for your finances.