The Value of a Long Term Plan
I’m often asked, “Where should I invest my cash if I plan to make a large purchase in two years?” My answer is always, “ Make a long term plan to help avoid market crashes. Put it in your savings account so you know it will be there when you need it.”
Sure, you could get a bit more interest in a CD or similar cash vehicle, but this industry has far too many high-yield products that aren’t as safe as they appear. This is evidenced in the Financial Crisis, when many were wiped out by their “cash investments.”
Who are the successful investors?
Truly successful investors understand there is no free lunch, but if you set your cash aside for a long time in the right strategy, it will likely have a strong payoff. I’m talking about long-term investors: people who won’t use their investment funds for 5, 10, 20 or more years.
Using a trendy strategy might work for some time, but eventually the markets change, and those trendy strategies often suffer losses much greater than the gains made.
Check the founding date of your favorite actively managed fund. It’s likely after 2009. That’s because the hot strategies fund managers used before the crash caused their funds to implode on impact. I’m not saying so many funds went to zero, but their performance in one year was bad enough to wipe out the gains of previous years.
Factors of a successful portfolio and a long term plan:
- Always be well-diversified.
- Invest only in highly liquid securities
- Buy and hold. Once you have a strategy you know will work, stick with it.
How can you manage your liquidity?
Expanding on Point #2 above, if you’re always liquid enough to pay your bills, you will never go bankrupt. Not losing is the first step to winning. The only way you can do this is to first know what your cash flows are.
Offset future expenses with future income
When calculating your negative future spending, it’s important to include future income. If large future purchases are dependent on jumps in your future income (stock vesting, bonuses, raises, etc.), don’t include them as future spending items. You’ll use the extra cash that comes in—if it arrives. If it doesn’t, you won’t make the purchase.
Future spending items only include what you plan to purchase regardless of the economy’s bumps and struggles.
Examples of future spending items:
- Your child’s college expenses
- Your daughter’s wedding
- Helping your son with his first home purchase
- Home renovations (those that are required)
- Extra travel during sabbatical or retirement
Be sure your investment strategy will work in all seasons
Your investment strategy has to work over time. By “work” I don’t mean that it always goes up. In fact, I believe you have to ride down the markets to enjoy the greater upswings that net a great return over the long run.
In other words, a working strategy always comes back when the market does. Do what has always worked instead of what might be working just now.
Once you have a long term plan that can survive future bumps and crashes, you’ll become a true long-term investor and be on the road to financial success!
As fiduciaries, we’ve taken an oath to prioritize your financial well-being above all else. We’ll treat you with the honesty and integrity you’d expect from someone with whom you are entrusting your future
Joseph Vecchio, CPA, CFP®, MBA, the founder of Shore Financial Planning, started his investment career in 1998 as a professional trader/money manager on wall street. He believes in a passive investing style founded on academic evidence.
Joe takes pride in protecting people from financial predators and helping them make smart financial decisions. We will provide you peace of mind through conflict-free, value-added financial, and tax advice.