Investment News: Balancing Risk, Returns, and Peace of Mind

I hope you had a wonderful holiday season. Now that the hustle and bustle of the season has passed, it’s an excellent time to revisit some important aspects of your financial planning. If you haven’t yet, it might be a good time to bring your family up to speed on your estate plan. Estate planning isn’t just about safeguarding your legacy; it’s also about ensuring your loved ones are prepared in the event of an emergency. If you are an executor or trustee for someone else, it’s equally important to be aware of their estate plan to avoid surprises down the road.

One crucial takeaway is that financial and estate planning is an ongoing process that benefits from regular family discussions. Whether you’re the one making the decisions or the person tasked with carrying them out, communication is key to making the process smoother for everyone involved.

Life Happens: Balancing Work and Personal Responsibilities

This past holiday season wasn’t the most enjoyable for my family as we encountered some unexpected challenges. These real-life moments remind us that while planning is essential, life has its own plans sometimes. The ability to adapt to life’s ups and downs, whether personal or financial, is crucial. We took a quick trip to Florida, but due to unforeseen circumstances, our stay was short. This disrupted my usual routine, and I appreciate your understanding as I work to balance personal commitments and the responsibility of keeping our appointments and reviews on schedule.

While juggling a busy work schedule and personal responsibilities, I’m fortunate to have a strong team in place. This past year has been exceptionally busy due to the significant rise in interest rates, which has led to increased demand for financial planning services. We’ve even brought in a new Junior Advisor, Andrew, to help lighten the load. Andrew has passed his Series 65 exam and is well on his way to sitting for the Certified Financial Planner™ (CFP®) exam. I’m confident that with Andrew’s dedication, he’ll continue to grow and provide valuable assistance to our clients.

The Importance of Working with a Certified Financial Planner™

When it comes to managing your finances, working with someone who has the right credentials can make a world of difference. The CFP® designation is not just a title—it represents a high standard of education, ethics, and expertise. As Andrew works toward earning his CFP® certification, I’m reminded of the challenging nature of this profession and the rigorous qualifications that set apart those who hold this designation.

Only 64% of individuals who take the CFP® exam pass on their first attempt. Those who succeed have not only studied extensively but often come from backgrounds in finance, law, or accounting. This ensures that CFP® professionals bring both technical knowledge and practical experience to the table. In an industry filled with financial advisors, it’s important to know you’re working with someone who is truly qualified to guide you through life’s financial complexities.

The Power of Compound Interest

One of the foundational concepts in financial planning is compound interest, which Albert Einstein famously called “the eighth wonder of the world.” Understanding how compound interest works is essential to building long-term wealth. Let’s break down this concept using two real-life examples from funds I frequently recommend: the Aker Focus Fund (AKREX) and the Vanguard Wellesley Income Fund (VWINX).

The Aker Focus Fund (AKREX), an aggressive growth fund, has averaged 14.88% returns over the past 14 to 15 years. If you had invested $10,000 at its inception, your investment would have grown to $69,700 today. On the other hand, the Vanguard Wellesley Income Fund (VWINX), which is more conservative, yielded a 7.33% return over the same period. Your initial $10,000 investment would now be worth $26,900.

The lesson here is that different funds offer different risk-return profiles, and balancing these within your portfolio is key to long-term financial success. While AKREX offers potentially higher returns, it also comes with greater volatility. For many, it might not be worth the emotional stress that comes with market fluctuations, especially with large sums of money invested. That’s why I recommend diversifying your portfolio—balancing aggressive funds like AKREX with more conservative options like VWINX can provide growth while preserving peace of mind.

Time and Patience: The Compounding Effect Over Decades

To really drive home the power of compound interest, consider this: If you had invested $100,000 at a 5% annual return, your investment would grow to $198,000 over 15 years. If you had only earned 1.5%—the kind of rate we were seeing a few years ago—that same $100,000 would only have grown to $123,000. The difference becomes even more dramatic over longer periods. After 25 years, that 5% return turns $100,000 into $392,000, whereas the 1.5% return results in just $151,000.

The lesson is clear: The higher the interest rate and the more time you give your investments to grow, the greater the potential for wealth accumulation. But it’s important to dial in to the level of risk you can tolerate. Some individuals panic during market downturns, as seen in 2008 or during the early months of the COVID-19 pandemic. If you’re prone to panic, it’s crucial to have a balanced strategy so you don’t make emotionally driven decisions that could significantly impact your financial future.

Stay on Top of High Interest Rates

Finally, with today’s high-interest-rate environment, many of you are wisely taking advantage of competitive rates offered by banks, fixed annuities, and fixed-index annuities. However, it’s important to stay proactive, as interest rates will likely fluctuate in the coming years. Regular portfolio reviews ensure that you continue to get the best rates and stay aligned with your long-term financial goals. When interest rates eventually decrease, it’s vital to adapt your strategy to make the most of what the market has to offer.

Conclusion: Stick to Your Plan and Let Compounding Work for You

In the end, successful financial planning comes down to having a strategy that balances growth with risk management, and then sticking to that strategy over time. While market fluctuations and life’s challenges may sometimes tempt you to deviate from your plan, remember that time and compound interest are powerful tools that can help secure your financial future. Stay disciplined, keep your portfolio balanced, and ensure you are regularly reviewing your financial situation as market conditions evolve.