What makes rich people rich? Looking at the type of expenditure of different income groups in the United States, it is clear: Savings. The real difference between the rich and the poor is that the rich spend a large portion of their income on savings (pension and insurance) and education.
Source: WSJ, Department of Labor,
When creating wealth, conserving wealth, and passing it on to the next generation is the key to financial success, it is surprising that less than 20% of Americans have a written plan when it comes to investing and even retiring. [1].
The paradox of human behavior is that we are perfectly rational and able to plan a big event in our lives, but this is usually forgotten when it comes to investing. In fact, you’ll find that only one-third of investors have a written plan that guides their investment strategy and retirement plan.
Why a plan?
The world of investment is a hard jungle, a world of muddy waters where the most intelligent and most organized people survive and prosper while the rest are lost. A written plan shortens our normal response to something as emotional as money. It prevents us from absorbing our gut feelings and emotions. Instead of following Paul’s mentality which may lead you to make a prudent investment decision, a plan will force you to stick to a reasonable strategy which is bound by basic investment policy. Some of the hardest things you need to overcome when investing are:
1) Fear of failure
2) The tendency to continue with a certain approach because you started it
3) Personal issues such as relationship problems at home
It is also important to point out the root causes of investors falling victim to the market and losing their valuable funds:
1) Excluded data and statistics confuse investors to invest in a structurally unhealthy company or financial instrument
2) Overconfidence Some investors think they are invincible and they can always lose the market.
3) Everyone wants to be seen as a champion, a successful general who can lead an army to victory. It can help you make investment decisions that are not based on rational thinking but on your desire to influence your friends, colleagues or family members.
By writing an investment plan and following what it actually says, you will dramatically increase your chances of winning and increasing the size of your nest egg or investment portfolio. Here are some simple steps you can take to begin the process of preparation for mediation and to avoid the stereotypes and stereotypes.
1. Set up specific and realistic goals
For example, instead of saying you want enough money for a comfortable retirement, think about how much money you need. Your specific goal may be to save you 500,000 by the age of 65.
2. Calculate how much you need to save each month
If you had to save $ 500,000 at age 65, how much would you need to save each month? Determine if this is a realistic amount for you to set aside each month. If not, you may need to adjust your goals.
3. Choose your investment strategy
If you save for long-term goals, you may choose a more aggressive, high-risk investment. If your goals are short-term, you can choose a less risky, conservative investment. Or you may want to take a more balanced approach.
4. Develop an investment policy statement
Create an investment policy statement for your investment decision. If you have an advisor, your investment policy statement will outline the rules you want your advisor to follow for your portfolio. Your investment policy statement should:
Specify your investment goals and objectives,
Describe strategies that will help you achieve your goals,
Describe your return expectations and time horizons,
Include details about how much risk you are willing to take,
Creating an investment portfolio of your portfolio is an indication of the type of investment and how much money you need to be accessible, and
Specify how your portfolio will be monitored and when or why it should be rebalanced.
A smart investor with a written plan and strategy has already won half the battle without making a single financial decision. By implementing the plan and adhering to the rules of management, the smart investor will avoid the problems caused by the emotions and behaviors of the people and ultimately win big.