Sunday, February 22, 2009

Put Away Money and Forget About It But Remember It, Too

Tip #75 - Put Your Money Away And Forget About It, But Remember It, Too. As you start building up your savings, you will need to manage your money. Did you put it in the right investment? Are there different accounts out there that are better? Are there the same types of accounts out there that earn more money?

There are some people who become so enamored with their money that they check their accounts each and every day. They check the balances of their savings accounts; they check the prices of the mutual funds they own; and they calculate their net worth (what you own minus what you owe) more often than some people shower. Then there are others who take a financial advisor’s advice on where to save money. And they put money in various investment accounts and do not bother to look at their statements ever. They don’t keep track of how much is in each account. And they may not even remember or quite understand where their money is located.

Which way of these is the better? Should we track our savings every day? Or should we put our money away and forget about it until we need it? Of course the answer is both.

First, we should be knowledgeable about where we put our money. If you are taking a financial advisor’s advice about where to park your money, make sure you understand every last bit about the investment – the risks involved, how much you are earning, what fees there are with the investment, and any penalties it has for early withdrawal. If you are investing your money yourself, then you should know all of these things as well. Once you understand the investment and are comfortable with the type of investment it is (money market account, mutual fund, CD, etc.), and you believe you have shopped around gotten the best rate for that type of account, then put your money in it and forget about it.

But re-evaluate it, too. Not every day. Not even every month. The most often you should be re-evaluating your accounts is once every three months. Every six months is fine, too. And at minimum, you should look at them at least once per year. It really is not necessary to look at these accounts everyday. If you do, you will end up micromanaging the accounts and second-guessing what investments you made when you were investigating where to put your money. By micromanaging them, you may get caught up in the daily fluctuations of the market and make bad decisions based on that. However, If you don’t manage the accounts at all, you may become so ignorant of what is going on in the economy and how your accounts are faring, that you may not be taking advantage of opportunities out there.

For example, suppose Joe Worker, age 32, after talking to some knowledgeable people at work decides to buy a stock mutual fund for his retirement account in a 401(k). He makes this decision because retirement is about 30 years away and he’s comfortable taking some risk with this money since it will be put away for the long term. He commits $1,200 in it per year. After he puts the money in this mutual fund, he gets a bit nervous because he’s never invested in an account that could lose money before. So what does he do? He checks the newspaper every day to see how the mutual fund is performing. Or every morning he goes online and signs into his account to see how much money is in it. And on the days he sees that there is more money in it than the day before he is happy! And on the days it is less, he is tempted to move that money out of this ‘risky’ account and put it in a money market account. What is wrong with this behavior is that Joe is now being influenced by the daily fluctuations of the stock market and is not thinking long term anymore. Remember, when he was level-headed and making the decision of where to put the money, he realized that he will not need this money for 30+ years. He knew at that time that what is important is how the stock market will do over 30 years’ time, not what it is doing on a daily basis this year. But now Joe is looking too closely at his account.

On the other hand, Susie Homemaker, age 40 put money away for a new car she plans to buy in 3 years. She put her money into a money market account earning 2% interest. She was advised by her friend that this was a safe place to put money that she will need in the relative short-term. She looks into two banks in town and picks the one with the better rate. She puts her money there and forgets all about it because she’s not really interested in investments. She’ll get the money when she needs it. A year later, however, interests rates have gone up, and while her money market account’s rate's have gone up, too, the bank across town is offering new customers an even better rate than Susie is getting. But Susie misses out on this offer because she has no interest in investments and in her mind she has put her money away to not be seen again until 3 years down the road. Susie is not actively managing her account at all and missed out on a good opportunity to make more interest on her account while having the same risk.

There is a fine line between how much managing of your accounts is too much and how much is not enough. You want to make smart decisions based on what is going on around you, but on the other hand, you don’t want to be influenced by day-to-day fluctuations. You have to find the right balance between being aware of what your money is doing, but not making decisions based on a temporary change. Strike the right balance on how much time to devote to reevaluating your investments. If you made good decisions in the first place (safe investments for the short term, investments with more risk for the long term), then I think between every 3 months to once a year should be often enough to re-evaluate where you parked your money.

In Real Life (IRL) – I relayed my story of how I first got involved in mutual funds. I was in my early 20’s and was convinced by my dad and brother that this was the way to go for my long-term money. What I didn’t tell you was that I became in love with this mutual fund. This was the early 1990’s and stocks and mutual funds were performing through the roof. At about the same time that I investment in my first mutual fund, a friend at work invested in one, too. We had so much fun checking our accounts. Everyday at work we would check the newspaper to see how our accounts performed. We made spreadsheets predicting how much money we would have if our accounts continued to perform at 15% per year for the next 20 years (ha, don’t we wish!). We both became obsessed with our accounts and the competition of which would do better. Fortunately, because it wasn’t going down, I wasn’t tempted to take the money out. But I was evaluating my investment entirely too often. How the money did on a daily basis was inconsequential. The money was long-term money, and all I really needed to be concerned about was whether this investment was right for a 30-year ride. I really didn’t need to reevaluate it more than every 6 months or every year. But I was new to investing and that’s what I did.

I’d like to say I've grown up since then, and maybe I have. But the truth of the matter is I just got too busy. With three young children, I very rarely check on what my investments are doing these days. Yes, I know the stock market has tanked in the past year. Yes, I know the economy stinks and that we are in a ‘recession”. But it truly hasn’t affected where I put my investments so many years ago. I hardly ever check them, mostly because I’m too busy rather than because it’s the right thing to do. But it is the right thing to do. I am only 41 years old. What the stock market is doing today should not bother me because I am not retiring for about 20 years. I know I made the right allocations for my retirement fund based on my age and years until retirement. And I do look at those allocations at least once a year, usually twice. But that’s it. I forget about them for the most part. Overall, I don't pay attention to daily fluctuations in my accounts (okay maybe I peeked once or twice on particularly bad stock market days). In the end re-evaluating your investments just a few times per year is the best thing you could do for your money.


Anonymous said...

Sound advice. I'm about to turn 30 and I'm looking to throw some money into a mutual fund as well as my current 401(k). I do worry a bit, but it's reassuring to know those quarterly statements are about all I'll need to keep track of my investments.

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