7 Things Your Financial Advisor Wishes You Knew

By Brittany Lyte on 2 February 2016 3 comments

The cat's out of the bag: You don't need boatloads of money to invest like the super rich — you just need to understand the ins-and-outs of investing well enough. And who better than financial advisors to share the secrets that can help you succeed as an investor? Read on for the coveted tricks of the trade that your financial advisor wishes you already knew. (See also: Investment Advice You Should Never Hear From Your Financial Advisor)

1. Start Early and Stick With It

Believe it or not, the best time to start investing is during your 20s. Yes, it's true that you probably won't have much money to speak of during these years, as you're just getting your feet wet. Nonetheless, your 20s are the ideal decade to start building your wealth, because the compounding power of time is on your side. You may not have access to much in terms of disposable income during these years, but odds are that you have access to something. Even if the spare change you have to work with totals no more than $100 a month, invest it. By the time you're ready to retire, you well may have racked up close to $200,000, assuming a 6% return.

2. Think Long-Term

Generally speaking, wealth generates slowly. So don't pass up opportunities to win small gains. The road to riches will have ups and downs, but there will always be ways to turn around your losses. The trick is to create and maintain a financial safety net, and play within those means. It will take time to build. But your safety net should ultimately be large enough to cover the risk you take on. It's true that big risk leads to big rewards. But it's important to refrain from taking on any risk that's bigger than your safety net. As your safety net grows, you'll be able to shoulder increasingly bigger risks responsibly.

3. Don't Panic

You're playing the long game, remember? Ignore Wall Street's daily temper tantrums. Avoid knee-jerk investments. And, above all, know your risk tolerance. The market recovers from even the biggest of crashes. Just keep your eye on the end game, and don't put all your eggs in one basket. Selling during a market panic is a financial mistake most advisors warn against.

4. Watch Out for Fees

There are few certainties in the world of investment — one of them is fees. Brokerage fees. Financial advisory fees. Investment service fees. Think of them as money out the window. And, while largely unavoidable, it is indeed within your power to monitor the fees you're paying for investment products and services and make sound decisions based on them. A good advisor will help you minimize these, by selecting low-fee investments and avoiding trading too frequently. The less you spend on fees, the more money you'll have invested that's actually working for you.

5. Don't Get Suckered by Big Names

Don't invest in companies simply because they are well-known as great companies. Invest in those that are great companies and also have stock shares selling at a great price. A good advisor knows that ideally, you want the stocks you buy to be under-priced — or at least priced fairly. This will give you the leeway you need to actually turn a profit.

6. Max Out Your Retirement Contribution

You can now invest more money into your 401K than ever. The IRS last year raised the maximum limit to $18,000, plus another $6,000 in annual catch-up contributions if you're older than 50. That means you could save for retirement while saving thousands on federal income taxes. But most Americans won't take advantage of it. In 2013, just 12% of folks with 401K plans contributed up to the maximum limit. Even if you can't afford to make the maximum contribution, you can still reduce your taxes by boosting your contribution by any amount. Investing in your 401K may not be sexy. But it's smart. And if your employer matches your contribution, you've just doubled your money.

7. Bolster Your Investment Income

The average American worker pays $16,000 a year in federal and state income and payroll taxes. That's a huge and (largely) unavoidable tax burden of 31%! But there's another type of income — investment income — that's generally taxed at a lower rate than employment income. Investment income is also exempt from state and local taxes, which means you can rack up significant savings if you live in a high-tax state or municipality. It can be intimidating to think that a significant portion of your total income can be derived from investments. But even if you start small, over time, it can.

How many of these truths do you stick to?

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Michelle

Is there a calculator that can see how much taxes you can save by increasing your 401K deduction?

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Guest

Search for "ira calculator".

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Guest

I'm a young adult in my 20's with a steady job. I'm still trying to balance repayment of student loans, etc. Where do begin with investing? I want to start soon and not let time pass me by.