Investors aren’t saving enough for retirement, aren’t always thinking long-term and often look to the past to predict the future. And those habits are among the factors hindering investors’ ability to grow their wealth, according to an informal survey of several Hartford-area financial advisors.
Sure, the economy has been rough and shifting tax and economic policies present opportunities and risks. But wise investment strategies start with having a plan, wealth advisors say.
One of the most common mistakes people make in growing their personal wealth is not saving enough for the future. Eliot Weissberg, a certified financial planner at The Investor Center in Avon, said many people don’t prioritize retirement ahead of other shorter-term objectives, such as college tuition for their children.
“I basically suggest that unless you’re a very high-wage earner, children, when they have to be resourceful, will be if they need to be,” Weissberg said. The alternative, he said, is “if you don’t save for retirement, you’re going to have to depend on your children in your old age financially.”
Timothy Suffish, senior vice president and head of equities at St. Germain Investments of Hartford and Springfield, said as a result of the credit crisis and recession, there was a reduction in spending. But Suffish said that’s not bucking the long-term trend.
“We as a society earn our paychecks and go out and spend it,” he said. “There’s been a shift over the past 30 years or so away from employer-defined benefit plans — i.e. pensions — towards defined contribution retirement plans like 401(k) s and 403(b) s. We are seeing participation pick up in those plans but we’re still not saving enough.”
Valerie Dugan, financial advisor with the Global Wealth Management Division of Morgan Stanley Smith Barney in Hartford, said the biggest roadblock to personal wealth management is the lack of a comprehensive strategy and plan.
“Most people do not have a plan in place that is comprehensive enough to deal with all aspects of their personal finances,” Dugan said. “Maybe they have their investments taken care of but lack a formal retirement plan, or maybe their estate plan is not in order.”
Dugan said a wealth management plan should cover all aspects of personal finances, including investment planning, retirement planning, education funding, estate planning, risk management as well as debt management.
“All components should be coordinated and work together to help achieve long term and short term financial goals and objectives,” she said.
When it comes to investing, having the appropriate asset allocation is essential, according to Jeffrey T. Cerutti, executive vice president and head of retail distribution at Virtus Investment Partners Inc. in Hartford.
“Everyone in the industry was schooled that diversification works, but in 2008, diversification didn’t work,” Cerutti said. “You have to start thinking outside the box. You have to incorporate more into your asset allocation mix.”
Cerutti said, if you ask any client what their risk is, they’re going to say protection of principle. “If that’s your definition of risk, diversification doesn’t always do it,” he said. “It doesn’t mean it’s not going to work going forward, but I think that was a life lesson.”
While investors tend to look at the past to try to predict the future, advisors don’t recommend it as a strategy.
“(Investors don’t want to be) driving in the rear view mirror, always looking at what happened and assuming that’s what will happen in the future, which is certainly not the case,” Weissberg said. “They need to look forward.”
Suffish agreed, saying that emotions played a role during the credit crisis and recession, as money came out of the stock market on a very consistent basis.
“There are lots of legitimate reasons for doing that — you’re buying a house or you need the money to spend on school tuition — but a lot came out because of nervousness regarding what we had been through,” Suffish said. “I’m not trying to minimize the fear people felt, but making dramatic changes to your investment strategy, which should be a long-term strategy based on your age and risk tolerance, usually has detrimental effects on the long term success of that strategy.”
Christian Fragoso of Wells Fargo Advisors in East Hartford said investors can’t rely on what the public says and the media exploits.
“Their reactions are usually based on fear and incorrect information,” Fragoso said. “People should base their decision on facts and the plan they have in place.”
Indeed, studies have shown that emotions play a significant role in investing. A study conducted by financial services market research firm Dalbar found that when investors are left to their own devises, they buy and sell at exactly the wrong time. The study compared the overall return of U.S. equity markets with the actual average return of equity mutual fund investors.
“While the U.S. equity markets returned an average annual 8.2 percent over the 20-year period ending in 2009, the average equity mutual fund investor only realized annualized returns of approximately 3.17 percent,” Dugan said. “The average investor tends to buy high and sell low.”
Many advisors also warn against investing in fads or the hot item of the moment.
“Whether it’s jumping on precious metals, energy or agricultural commodities, the fad of the day tends to see huge run-ups and then they go crashing down in flames,” Suffish said.
“The easy sale is the wrong sale,” Cerutti agreed. “If it’s too easy to sell to a client or yourself, you shouldn’t do it.”
Investors are encouraged to find a financial advisor that is properly trained and experienced to help guide them.
“I think the background of the person is important, what kind of education they have is important, but moreover, the sophistication that they use for the client can put them in the appropriate vehicle based on their risk tolerance,” said Daniel J. Munroe, partner at Capital Management Group in Simsbury and a financial professional for AXA Advisors.
Munroe said reputable financial advisors can recommend variable annuities, which are considered “living benefits.” “The market goes up and down, but over time, this variable annuity will grow,” he said. “At the time when you want to take money out of it, it puts a guarantee that you can take withdrawals at a net positive cash value, to make sure that you don’t outlive your money and you get a guaranteed income stream.”
Above all, investors should allow their advisors to be flexible with their portfolios, according to Cerutti.
“A good financial advisor is more of a psychologist,” he said. “He has the ability to hold your hand and keep you in things when things get ugly.”
Still, investors should check their portfolios often.
“Diversify your portfolio to minimize risk,” Fragoso said. “Make sure everything ties into your goals and objectives, and review your plan semi-annually or annually.”
