5 Retirement Mastery Principles

Top 5 Retirement Mastery Principles

One perk that has come from working with savvy, well-seasoned investors over the years has been gaining valuable insights from their life stories. Hearing about their highs, their lows and everything in between that life can serve us while we are persevering to build families, businesses, and a retirement nest egg.

After listening to hundreds of stories, it has become apparent that savvy, well-seasoned and comfortably retired individuals seem to make investment decisions using a handful of principles.

While mastering retirement looks and feels very different for each and everyone one of us, the following five (5) principles come from observing some of the greatest investors in modern times turn their retirement savings into family wealth lasting for generations.

1. Use the herd to your advantage

2. Know your money personality

3. Understand what risk tolerance really means

4. Leverage time to your advantage

5. Create a guide based on these principles

There is a famous quote from Warren Buffett about investing that says, “It is best to be fearful when others are greedy and greedy when others are fearful.”

The “others” in Warren’s mind, is what we term “The Herd”.

Invest long enough and you’ll find that markets will ebb and flow from moments of fear to moments of euphoria. This is how financial markets shift from bull to bear markets. It is also how emotions of “The Herd” transfer through financial assets like a continuum from fear to greed traveling through phases of despondency, optimism and thrill, as you can see here.

Warren Buffett is essentially suggesting investors that can keep this continuum in mind over long periods of time (AKA: Play long ball) with a willingness to be patiently contrarian when extremes develop in emotions and prices, on both sides of the continuum, tend to manage the risks associated with investing much better than short-term thrill seekers.

There is an art and a science to mastering this process and, for most investors, it can take years to recognize where markets and economies may be within this continuum. Luckily for you, we can save you a lot of time and energy as we have been tracking and gathering data on these ebbs and flows for over two decades and apply it to each of the models we manage for our clients.

If you are interested in seeing how you can use the herd to your advantage, check this video out.

Know Your Money Personality

Let’s have a little fun with ourselves; let’s talk about our money personality.

Yes, we all have a money personality—our relationship with money and investing. It’s complex and it’s twisted—mostly because most of us have learned our money behaviors from our parents.

Yeah, we know. But, before we get too depressed thinking about that, let’s transition and talk about some popular money personalities and how they may influence our money decisions.

There are many money personalities. In most cases, a mix of personality traits influenced our decisions surrounding money, with one or two personality types being the dominant motivators supported by a couple of background personality traits. The combination of these traits forms our money personality. Here is an image of a few of the more dominant money personalities.

Let’s expand on a couple of popular money personalities so you get a better understanding. Starting with the one personality that might feel the current pinch of inflation more than others – Sarah Saver.

Sarah Savers shy away from risk because their priority is “don’t lose money.” Sarah Savers are more interested in reaching their goals by saving money and living within their means as opposed to taking risks. This can mean the investment vehicles that attract Sarah Savers are lower risk, which usually means lower expected returns as well.

As a result, the personal finances of a Sarah Saver will be more susceptible to changes in inflation and interest rates compared to other money personalities that are more comfortable with risk taking.

On the other side of the spectrum is Mr. Big. For Mr. Big, risk is a thrill and finding opportunities is the highest priority. “Never stop” is often their mantra. Mr. Big is the one who is quick with money and seems to be in the right place at the right time.

It’s important to remember, Mr. Big can also be susceptible to big losses. This can make emotions like “fear of missing out” (FOMO) a potential kryptonite to the longer-term plans for personalities that are dominated by traits of Mr. Big. For this reason, Mr. Big personalities benefit greatly by remembering how to “Use the herd to their advantage”.

In between Sarah Saver and Mr. Big, there is a spectrum that includes money personalities stretching from Vigilant Virgil to Arthur the Avoider. Each has their own motivations.

If you are intrigued and curious to know more about your money personality, visit here for more info: Money Personality Quiz

Understand What Risk Tolerance Really Means

If there is one word related to investing that has the potential for being the most misunderstood, it would be “risk.”

Many times when someone hears the word risk, they think, “no thanks, not for me.” However, not all risks should be viewed the same. That’s because everyone has their own risk capacity, or comfort level.

One of the best ways we have seen savvy investors become comfortable with risk is by visualizing the amount of risk on a scale of 1 to 10, as you can see in this example.

As you can see, the left side of the scale starts with the most conservative investors at number 1. This individual may only invest in real estate by owning their home and they may have a savings account at the bank and that is about the extent of their investing life.

On the other side of the spectrum, at number 10, is the aggressive investor that has the whole enchilada. They’ve got real estate that they live in, they’ve got real estate that they rent out, they’ve got commodities, stocks, bonds and they do a little trading. They likely manage their portfolios to be diversified and strategic.

Between these extremes, we find where various personalities may land as a number on a scale from 1 to 10. You can manage the risk of a portfolio by adjusting the investment diversification up and down this scale.

Viewing risk from this perspective can help investors understand what risk really means as a tool for achieving financial goals.

Leverage Time To Your Advantage

One key trait we have observed in successful investors, like Warren Buffett, has been their ability to embrace risk while leveraging time.

A starting point for this can be creating a diversification that divides assets into buckets, or time horizons, based on the time frame those funds might be needed for a specific goal. Here is a possible example of this type of asset allocation:

As you can see in this example, we have created a few buckets based on time frames. As we extend the time frame of the bucket, we can extend the risk of that bucket can as well. This is where the value of leveraging time can be very helpful.

With longer term time frames, we might add elements of strategy, tactics and dividend harvesting to a portfolio that may help us achieve financial health and independence a little sooner than just being a passive investor in an index or target date fund.

For example, our long-term bucket may be where we focus on investing into higher quality dividend paying investments. Doing this can help leverage time by harnessing the strengths of compound interest, plus we get paid to wait.

The art of this process is being able to view our finances in terms of time buckets. The science of this process is knowing which percentages of our portfolio we should divide into the different time frames. This helps guide us in determining how much risk we should take within that bucket and in our entire portfolio.

The combination of these four (4) investing principles, Using The Herd To Your Advantage, Understanding Your Money Personality, Visualizing Risk On a Scale and Leveraging Time To Your Advantage lead to the most important part of investing in the Red Zone – Having a plan.

Create A Guide Based On These Principles

Having a plan or guide when making financial decisions is key to having a higher level of confidence in those decisions.

In the industry, we call an investment plan that entails these four (4) principles an “Investor Policy Statement” (IPS). We can tell you from experience when an IPS is in alignment with your money personality, your risk tolerance and time frame, you’re well positioned to use the herd to your advantage. This is especially true when emotions and asset prices find themselves on the extreme edges of historical norms, which is how you can master retirement and possibly create wealth for generations to come.

To get access to the Smart Guys Guide to Investing visit: https://www.quiverfinancial.com/the-smart-guys-guide