When it comes to your finances, it’s never hard to find reasons to worry. Lately, a rising drumbeat of recession warnings has given cause for anxiety, sending many people scurrying to take a more defensive investment position than is warranted by their long-term goals.
Although it’s tempting to try to time the market like this, it’s a reaction that risks doing serious damage to long-term returns and your achievement of retirement planning goals. The atmosphere right now is primed to ensnare these market-timers, just as it would be if conditions seemed to point to a prolonged boom or a market bottom.
We’re all prey to this instinct — the “fight-or-flight” reaction has been a part of our survival mechanism since the Stone Age. Even the most confident, successful professionals can fall victim to financial pitfalls if they’re not careful. This is why it’s crucial to have a long-term investment plan and a trusted adviser who you can regularly check in with. Many industrious professionals have found their success through hard work and trusting their gut, and they’re used to being proven right. This confidence can sometimes create blinders to their own financial situations.
There are reasons why this type of high achiever can be more financially vulnerable than they appear, especially during volatile times for markets.
These professionals tend to be Type-A personalities who aren’t content to be average; they like to hit home runs in whatever they’re doing. It’s a personality trait that made them successful in their career, but can open up unseen pitfalls when it comes to investing. Someone of this profile might be more vulnerable to buying into high-risk, high-reward investment schemes that too often result in a loss of capital. I myself have had high-earning clients who’ve pulled money out of a balanced long-term strategy to chase these wins, despite consulting to do otherwise, some of which turned out to be losing scenarios for them.
On the less dramatic end of the spectrum, the simple desire to always win can draw individuals toward picking investments that “promise” high rewards but which often come with debilitatingly high fees in the fine print. When markets get volatile, this type of investor may get irritated if his or her investment adviser sits tight instead of making lots of trades. It can be hard for a person accustomed to taking action to accept that sticking to their long-term strategy is the best approach in these scenarios.
Investors can save a lot of time and stress by establishing a long-term risk profile and appropriate strategy and sticking to it. Once it’s set, there’s less of a tendency to feel the need to make a knee-jerk reaction to market moves. Naturally, it’s expected, and necessary depending on the circumstance, to check in with your adviser and an occasional rebalancing of your portfolio is appropriate when particular holdings become over- or underweighted.
One other item that high-earning professionals may need to carefully consider is their cash flow to ensure they’re saving enough. Once one has hit a certain level of income, common expenses such as the monthly cable or phone bill stops becoming a worry, and a budget may also go by the wayside.
The hidden trap with this is that often earnings can get sucked up by the lifestyle inflation that comes with prestigious jobs. They’ve worked hard to get where they are and the beautiful home, sports cars, extravagant vacations, and country club memberships that go along with it start to appear more desirable and attainable. There is no shortage of justifications for these purchases — if your career relies on building a network with other successful people, that membership might look necessary, not extravagant.
And because they don’t always follow a budget, these high-earners sometimes have little to no idea of their cash flow picture. It can then come as a shock when a financial adviser runs projections that show they’re off-track in funding a retirement that would allow them to maintain the lifestyle to which they’re accustomed throughout retirement. That becomes an even greater risk if their lifestyle has changed and their expenses have increased in tandem, but their savings plan was originally created based on a more conservative lifestyle and spending habits.
Often, the necessary adjustments can be fairly small, and don’t need to take a big toll on lifestyle, especially if the individual still has a lot of earning years ahead. It could be as little as adopting tax strategies like maxing out 401(k) contributions or creating a personal balance sheet and reviewing it annually. It’s also essential for people who fit this profile to take a holistic approach to their finances that covers often overlooked elements such as estate planning and insurance. For instance, a surgeon who suffers a broken arm or wrist risks losing their primary income source without an appropriate insurance policy in place. Or, a newly remarried divorcee needs to review and update their beneficiaries to ensure they’re designated to the right spouse. You’d be surprised how often a former spouse is still listed as a beneficiary unintentionally.
Regardless of where you fall on an income scale, you’ve worked hard to get there. It makes sense, then, that you work just as hard to stay there and put a financial plan in place to support your short- and long-term goals.
Jaime Eckels is a relationship manager at Plante Moran Financial Advisors.