When Linda’s husband Steve was finally ready to retire eight years ago, she thought they would have decades of visiting grandchildren ahead of them. Unfortunately, a few months after his retirement, Steve was working at the family’s fishing cabin by himself when he had a heart attack and died. Linda was shocked and devastated. Steve had no history of heart problems, and just had received a clean bill of health from his doctor a few months back at his last visit.
Steve’s death left Linda to contend with the family finances. While Linda had always managed the day-to-day finances of the family such as paying bills and balancing the checkbook, she had left a lot of investment decisions to Steve. In fact, she didn’t know anything about how their money was invested, or the terms of Steve’s military pension.
That’s why Linda decided to ask a financial advisor that advertised in her local newspaper for help. She thought that his years of training and experience would mean that he would be able to invest her life savings in a way that would guarantee she could keep doing the things she loved. She wanted enough money to visit her grandchildren (who now lived three states away), go out to lunch with her friends from church, and most importantly, stay in her house.
Three years later, however, Linda was visiting a non-profit financial counselor that she had access to through her husband’s veteran’s organization. She was going months at a time without paying some bills, and she had just missed her first mortgage payment after 25 years of on time payments.
How could everything have gone so wrong in less than a year?
As Linda’s counselor reviewed her accounts, she realized that there were several mistakes that Linda made that could have been avoided.
Don’t trust a financial advisor with everything. Within four months of Steve’s death, Linda put nearly asset she had with the new financial advisor. The advisor convinced her that it would be better if he was able to control everything so that the investments wouldn’t conflict with each other. The truth is that it was better for him if Linda let him control and earn commissions off as much money as possible.
In Linda’s case, this meant that her advisor not only gained control of all of her retirement savings, but was also controlling her monthly pension and Social Security checks.
2. Understand what your money is invested in. Every person should be able to explain to someone else how their money is invested. In Linda’s case, she had no idea what her advisor put her in. She just went along with his suggestions. That meant she had no idea if they were good or bad.
3. Understand how much your advisor is making. Commissions and fees can cost more than dips in the market. Linda’s advisor was taking nearly 8% on some of her accounts. That meant that she was losing thousands of dollars a year.
In Linda’s case, her advisor had invested everything in several high risk stock funds. The commissions were outrageous, and Linda had no idea why her money was in these funds. When the funds started performing poorly, her advisor told her not to take money out of the accounts while she waited for the market to come back. While this can be good advice, it was bad for Linda because it meant that she had no money to live off of.
Fortunately, Linda was able to move her accounts away from the bad advisor. On her own, she decided to pay off her remaining debt, reducing her monthly expenses to the point where she could live off of her pension benefits and Social Security. With her remaining money, she invested in government bonds and a stock fund. Together, her fees were very low, and she was able to make enough to fund travel and presents for her grandchildren.
Linda sought help when she missed a mortgage payment and her advisor wanted her to remortgage her house to get enough money to keep the lights on. Most people don’t have that option. They have to manage their money on their own. If that sounds like you, follow these rules to avoid Linda’s issues.
Invest a portion of your portfolio conservatively. Low-risk bonds or cash can be a good way to protect the money that is essential. If you’re already retired, you should also strongly consider paying off your debt. While this isn’t typically considered an investment, it eliminates your risk of default. It also ensures that you won’t need as much monthly income. That can give you the flexibility to invest in higher-risk funds. While you can’t invest too much of your portfolio this way, you need to have some hedge against risk.
Stick to simple investments. While there are plenty of ways to invest your money, you need to have investments that you completely understand. Specifically, you should know their risks and how they generate profit. As you become more educated about financial markets, you can increase the complexity of your portfolio.